US Sanctions on Iran Meet China's Shadow Banking System

In August, US Treasury Secretary Scott Bessent declared an 'economic D-Day' against Iran, promising 'the single greatest financial offensive ever marshaled against an adversary.' The Trump administration's goal is to isolate Iran financially, but this effort relies heavily on China, a strategic rival of the US. To succeed, foreign financial institutions must monitor and police their own customers.

China's large banks, such as the Industrial and Commercial Bank of China (ICBC) and the Bank of China (BOC), are not the main challenge for the Trump administration. These banks maintain correspondent banking relationships with Western markets and value access to the dollar-based system. They have a strong incentive to limit their exposure to US sanctions.

The real challenge lies within China's smaller regional banks, which operate with minimal ties to Western markets. These banks are less dependent on the dollar-based system and may be more willing to engage in transactions that help Iran evade sanctions.

Iran's rahbar shadow-banking system processes 'tens of billions of dollars' worth of trade each year, much of it derived from oil sales. Chinese buyers can simply pay an offshore front company in renminbi, making compliance harder for banks to uncover hidden links to Iran in accounts and transactions.

The US Treasury is now pushing the investigative burden onto foreign banks, urging them to subject independent teapot oil refineries in China to enhanced due diligence. The Office of Foreign Assets Control has warned that the US government is prepared to use secondary sanctions against Chinese banks if they fail to comply with US regulations.