US banks called out as backdoor in Iran sanctions regime

Billions in Iranian funds flow through US correspondent accounts via shell companies and foreign banks

Century-old correspondent banking system serves as final clearing node for shadow finance networks

Experts say American banks cannot escape responsibility as Trump administration weighs enforcement limits

A billboard depicting US President Donald Trump is displayed on a building in Tehran, Iran. [Reuters]

The Trump administration has pushed sweeping sanctions aimed at cutting Iran off from the global financial system — but critics say the backdoor enabling those funds to keep moving is American banks themselves.

The Wall Street Journal reported Saturday (local time), citing Western officials and experts, that billions of dollars in Iranian funds move through US banks' correspondent accounts every year. Despite strict sanctions barring virtually any financial transaction involving Iran by individuals or institutions subject to US law, Iran has been circumventing the system through an elaborate shadow finance network to reach the US dollar payment infrastructure.

Iran's primary method is not to open accounts directly at US banks but to use overseas shell companies as fronts. Paper companies are established in Hong Kong, the UAE, China and elsewhere, and funds are moved through local financial institutions that maintain correspondent banking relationships with US banks.

Correspondent banking allows banks in different countries to process international transfers and settlements without maintaining direct branches in each other's jurisdictions. Because all dollar transactions worldwide must ultimately clear through US financial institutions, Iran can access the dollar payment network by routing funds through one or two foreign financial intermediaries — without ever dealing directly with a US bank.

When Iran obscures the true parties to a transaction by layering shell companies, money changers and foreign financial institutions, even the US bank that ultimately processes the payment may approve the transaction without knowing the funds are linked to Iran, the Wall Street Journal said.

One institution recently identified as having helped Iran access the US financial network is the UAE branch of Egypt's state-owned Banque Misr.

According to the US Treasury Department, the UAE branch of Banque Misr processed up to $1.8 billion for 103 entities potentially linked to Iran's shadow finance network through US correspondent accounts between January 2024 and June this year.

The Treasury said the branch held dollar correspondent accounts at three US banks but did not name them. Banque Misr's own website lists JPMorgan Chase and Citigroup among its correspondent banks.

The US government has since initiated proceedings to bar the UAE branch of Banque Misr from opening or maintaining correspondent accounts at US financial institutions.

The problem, however, is that such cases are not limited to a handful of institutions. The Treasury Department has estimated that roughly $9 billion in Iran-linked funds passed through US banks in 2024 alone.

The Trump administration recently launched Operation Economic Outcast to cut off Iran's funding at the source, demanding heightened scrutiny of Iran-related transactions from both domestic and foreign financial institutions.

Global financial institutions have also been warned that continuing to do business with Iran could result in their complete exclusion from the US dollar financial system through secondary sanctions.

The Treasury has also provided the financial sector with red flags for identifying Iranian shell companies — among them, UAE-based firms with opaque ownership structures, and Hong Kong-registered entities that use Chinese bank accounts and leave no traceable online footprint.

Yet the US government itself is wrestling with how far to extend sanctions against financial institutions used to process Iran's dollar transactions.

In practice, the Treasury chose a relatively measured response against the UAE branch of Banque Misr — restricting its access to US bank correspondent accounts rather than immediately imposing secondary sanctions.

Fully expelling a foreign bank from the US financial system risks not only threatening that institution's viability but also triggering cascading shocks to the bank's home economy and international financial markets.

Iranian banknotes are displayed at a currency exchange shop in Tehran, Iran. [AP]

The correspondent banking system is considered a cornerstone of international finance precisely because it allows cross-border payments to be settled without physically moving cash. When a foreign company sends dollars, a US clearing bank debits the sender's account and credits the recipient's account for the same amount, completing the transaction.

For US banks, correspondent banking is also a significant revenue source — generating not only fees but also deposit balances and opportunities to expand financial services to overseas clients.

Tightening sanctions on US financial institutions could therefore prompt them to scale back their correspondent banking operations altogether. The Wall Street Journal noted that such a move would burden the US financial industry and could diminish the role American banks play in the global financial network.

mokiya@heraldcorp.com