How Iran's Shadow Oil Economy Fuels Militias and Evades Sanctions

Iran’s most crucial weapon in maintaining its influence across the Middle East and supporting militant groups like Hamas, Hezbollah, and the Houthis is money. Beyond purchasing weapons and propping up its economy, the regime channels substantial funds to train and rearm these militias. While many believe that years of international sanctions would limit Iran’s resources, Supreme Leader Ali Khamenei is not short on cash, warns The Economist. In fact, Iran is funneling tens of billions of dollars annually from illicit oil sales into secret bank accounts worldwide.

This immense stash of money has been used to finance major operations, including Hamas's attack on Israel last year, Iran’s supply of drones to Russia for the war in Ukraine, and its controversial nuclear program. With tensions escalating, this hidden fortune could soon ignite an even greater crisis. To understand how Iran continues to amass such funds, one must examine the operations behind its oil industry.

When the Trump administration reinstated an embargo on Iran six years ago, the country’s crude oil exports plummeted. However, by September of this year, Iran’s oil exports had surged twelvefold, reaching 1.8 million barrels per day. According to The Economist, these sales brought in $35-50 billion last year alone, with an additional $15-20 billion from petrochemical exports.

Iran’s ability to smuggle oil through hundreds of tankers and launder billions of dollars through the global banking system is a complex operation. The U.S. keeps a close watch on banks, even foreign ones, that process dollar transactions. But despite these challenges, Iran has devised a sophisticated network to get paid and move vast sums of money undetected. The Economist spoke to individuals with inside knowledge of Iran’s oil dealings and corroborated these findings through independent sources.

What emerged was a detailed picture of Iran’s extensive shadow financial system, which stretches from its oilfields to digital bank vaults around the world. China, Iran’s primary oil customer, plays a critical role, while global banks and financial hubs are unwittingly involved as essential cogs in this system. According to a source familiar with Iran’s secret financial accounts, by July, Iran had accumulated $53 billion, 17 billion euros, and smaller sums in various currencies stored in foreign accounts.

Iran is subject to some of the harshest U.S. sanctions, designed to cripple its economy and deter its nuclear ambitions and terrorist financing. These sanctions make it difficult for Iran to access or circulate U.S. dollars, as most transactions must eventually pass through an American bank. Nonetheless, The Economist reveals that with selective enforcement, determination, and assistance from willing international partners, Iran has found ways to circumvent what amounts to a global embargo.

Many of the tactics used by Iran bear a striking resemblance to those employed by drug cartels—recycling dirty money into legitimate-looking businesses and using shadowy enterprises to launder illicit funds. The system operates through a combination of rigid rules and outright threats. While most oil-exporting nations rely on state-owned companies to manage their crude sales, Iran has taken a different approach. The National Iranian Oil Company (NIOC) holds a monopoly over oil production, but its Switzerland-based subsidiary, Naftiran Intertrade Company (NICO), manages much of the foreign trade. Increasingly, Iranian ministries, religious organizations, and pension funds are granted their own rights to sell oil independently. “It’s almost medieval,” remarked a former U.S. official. “Those in power are given pieces of the kingdom.”

In a country where hard currency is scarce, crude oil has become a substitute for cash. Last year, Iran’s budget authorized the armed forces to sell $4.9 billion worth of oil on their own. Loyalists to the regime also benefit—$3.6 billion in oil was distributed to select individuals in 2022 as a reward for their service. The Islamic Revolutionary Guard Corps (IRGC), particularly its elite Quds Force, also profits handsomely from these operations. In 2022 alone, Quds earned $12 billion from oil sales. These various factions within Iran all operate their own independent sales networks.

Often, front companies are set up to manage these transactions. According to the U.S. Treasury Department, one such company, Sahara Thunder, handles oil sales for Iran’s armed forces while pretending to be a private entity. Additionally, Iran relies on third-party intermediaries, such as the Turkish company ASB, for international deals. But Tehran demands guarantees—ASB had to transfer 51% of its shares to the IRGC’s Quds Force when it began working with them, according to a leaked contract.

The challenge for these sellers is finding buyers. Although China purchases 95% of Iran’s crude exports, its state-owned companies are wary of handling the oil directly. Instead, three or four Iranian front companies are tasked with securing buyers. Documents obtained by The Economist show that firms like Litamos International Limited and Haosi Trade Limited handled such sales until 2021, when they were dissolved. Chinese brokers then step in, supplying small, independent refineries—known as “tea makers”—that have been cleared by the state to process Iranian crude.

Once a buyer is secured, a formal contract is drawn up, typically between two companies. The pricing generally follows Brent, the global oil benchmark, but with a discount of $10 to $30 per barrel. While U.S. dollars are preferred, euros, Emirati dirhams, and yen are sometimes accepted as alternative currencies.

What many of these contracts avoid mentioning is the true origin of the oil. It is often falsely labeled as Iraqi, Malaysian, or Omani crude. The real source is confirmed only in confidential letters, with “IRANIAN oil” emphasized in capital letters.

There are over 100 shell companies involved in this operation, according to The Economist. Iranian agents track every stage of the transaction, with key decisions relayed to senior officials who may disguise themselves with pseudonyms, like an IRGC commander who referred to himself as “Roger” in WhatsApp messages. Fake certificates of origin and fabricated documents are common in these dealings.

Iran’s ability to sidestep global sanctions and fund its military operations, including support for militant proxies, is a testament to its intricate and vast shadow oil economy. Through determined efforts, covert channels, and the complicity of international actors, Iran continues to move billions of dollars across the world, enabling its ambitions despite being under a near-global embargo.

By fLEXI tEAM