How Iran Affords for Terrorism
In the context of a conflict with Israel, Iran would require substantial financial resources, not just for military needs but to sustain its economy and supply its proxy militias, such as Hamas and Hezbollah. A common belief is that years of sanctions have crippled Iran’s ability to generate revenue on the international stage. However, this assumption is far from accurate. Despite global sanctions, particularly from the U.S., Iran has mastered the art of bypassing financial barriers, amassing billions of dollars annually from illicit oil sales. This shadow economy has not only fueled attacks, such as Hamas's recent assault on Israel, but has also supported Russia's drone offensive in Ukraine and financed Iran’s nuclear ambitions.
The Mechanics of Iran’s Petro-Economy
To understand how Iran continues to generate such vast sums, one must first examine the country's oil exports. In 2018, when former U.S. President Donald Trump reinstated sanctions, Iran’s oil exports plummeted. However, since that time, these exports have surged to 1.8 million barrels per day by September of this year. Last year alone, oil sales generated between $35 billion and $50 billion for Iran, with another $15 billion to $20 billion coming from petrochemical exports. The complexity of smuggling oil and laundering money is staggering, especially under the scrutiny of the global financial system, where dollar transactions are monitored closely by American regulators. Despite these challenges, Iran’s covert financial networks have proven adept at moving, storing, and spending large sums of money.
Iran’s financial channels are largely hidden, thanks to the cooperation of its main oil buyer—China. The Chinese market provides a vast avenue for Iranian oil, while global financial hubs, often unknowingly, facilitate the laundering of billions. By July of this year, Iran had stashed approximately $53 billion and €17 billion (about $19 billion) in foreign bank accounts.
Sanctions, Loopholes, and Global Trade
Despite being subjected to some of the strictest U.S.-led sanctions, Iran’s oil and petrochemical exports continue unabated. These sanctions, which are intended to curb Iran’s nuclear ambitions and its support for militant groups, have severely limited Iran’s access to the international financial system, especially in U.S. dollars. Transactions involving U.S. currency are closely monitored, and many foreign banks are wary of dealing with Iran to avoid punitive measures from the U.S. government.
Nonetheless, Iran has found ways to skirt these restrictions. Through a network of front companies, covert operations, and deceptive paperwork, Iran has built a system that evades sanctions enforcers on a grand scale. In this illicit network, Iran's oil sales resemble the operations of a drug cartel, with complex routes and dummy corporations that mask the true origin of the oil.
Unlike other oil-exporting countries, where state-run giants typically handle exports, Iran’s National Iranian Oil Company (NIOC) does not maintain full control over sales. Instead, various government ministries, religious organizations, and even pension funds sell oil on their own, creating a fragmented system reminiscent of a feudal kingdom. Iran’s armed forces alone are authorized to sell billions of dollars' worth of oil, and the Islamic Revolutionary Guard Corps (IRGC) has its own substantial off-the-books operations. In 2022, the IRGC’s foreign wing, the Quds Force, reportedly earned $12 billion from oil sales.
Iran’s Buyers and the Global Network
China is the primary buyer of Iranian oil, with approximately 95% of exports flowing to its shores. However, Chinese state-run firms, wary of attracting sanctions, often avoid direct dealings with Iranian oil. Instead, several Iranian front companies manage sales to small, independent refineries in China, known as “teapots.” These refineries, authorized by the Chinese government, process Iranian oil, with much of it being falsely labeled as originating from other countries like Iraq or Malaysia.
Once a buyer is secured, formal contracts are drafted, specifying every detail of the sale except the true origin of the oil. These documents are meticulously designed to deceive sanctions enforcers, often masking the oil’s Iranian origins behind front companies and fake certificates of origin. Ships carrying Iranian oil also employ a range of tactics to avoid detection, including transferring cargo at sea, swapping transponders with other vessels, and using false tracking data.
The complexity of these operations extends to the movement of money. Payments for Iranian oil typically occur within 45 days of delivery, often involving China’s banking system. Iran’s shadow banking network is extensive, involving hundreds of front companies around the world that funnel money through seemingly legitimate businesses.
The Backbone of Sanctions Evasion
Iran’s shadow financial system is perhaps the most impressive aspect of its sanctions-busting operations. NIOC and other major oil companies have created financial departments that function like illicit banks, managing foreign payments for both the oil industry and the broader Iranian economy. These entities operate through a web of front companies, often named with generic, untraceable names like “Rainbow International” or “Glorious Global Limited,” based in global financial hubs like Hong Kong.
Many of these front companies are managed by Iranians with dual citizenship, who oversee accounts at banks around the world. Despite strict sanctions, these accounts can be found in major financial institutions in China, the UAE, Europe, and even in Western fintech companies. These banks and fintechs often process transactions without realizing they are dealing with Iranian front companies.
Iran’s funds are carefully tracked by its central bank, with all transactions recorded in internal ledgers. While Iran loses a significant portion of its profits—between 30% and 50%—due to the costs associated with sanctions evasion, the system remains resilient. When front companies are exposed, new ones quickly take their place, allowing Iran to continue its operations relatively unscathed.
Global Implications and Impacts
Iran’s ability to circumvent sanctions not only sustains its economy but also funds its geopolitical ambitions. Money from these illicit oil sales has supported militias in the Middle East, such as Hamas and Hezbollah, and has contributed to Iran’s nuclear program. It has also played a role in international conflicts, such as the supply of drones to Russia for its war in Ukraine.
While sanctions have had some success in limiting Iran’s oil revenue, they have also created an underground economy that enriches the regime’s loyalists and further isolates ordinary Iranian citizens. As Iran continues to develop nuclear weapons and stoke regional tensions, its shadow economy poses a growing threat to global stability.
The West’s challenge is not just in enforcing sanctions but in addressing the systemic vulnerabilities that allow Iran to thrive in the shadows. By tightening enforcement, scrutinizing international financial systems, and holding complicit banks accountable, the global community may stand a better chance of curbing Iran’s ambitions. Without such measures, Iran’s underground network will continue to operate, fueling conflicts and crises worldwide.
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