How Iran used a secret Chinese financial mechanism to circumvent sanctions and buy military equipment

Two high-ranking Iranian sources and three people familiar with the matter told Reuters that this arrangement enabled Tehran to circumvent sanctions imposed on its oil sales and purchase goods worth billions of dollars, including military equipment.

According to the sources, this mechanism has provided a financial lifeline to Iran in recent years and has also helped China, the world's largest crude oil importer, retain access to discounted Iranian oil, while protecting banks and companies that export to Iran from international scrutiny or sanctions.

The sources explained that Iran used this arrangement to purchase medicines, vehicles, and communications equipment from China, without the manufacturers dealing directly with Tehran. The mechanism was also used at least once last year in contracts to supply Iran with air defense equipment worth millions of dollars, without providing details of these transactions or independent confirmation from Reuters.

The sources said that a buyer working on behalf of state-owned Chinese oil trader Zhuhai Zhenrong was depositing hundreds of millions of dollars a month with a mysterious China-based financial entity known as Zhou Xin. The deposits covered purchases agreed upon with a Hong Kong-registered company linked to the National Iranian Oil Company. Zhou Xin would then send the money to Chinese exporters and companies building infrastructure in Iran.

The sources indicated that about 70% of Iranian oil revenues managed by Zhou Xin are allocated to infrastructure projects, while the rest goes to special-purpose vehicle accounts used to pay money to companies that supply goods to Iran, which is a vehicle managed by two entities: a company working on behalf of the Chinese Ministry of Commerce and another linked to the Central Bank of Iran, according to what was confirmed by the two Iranian sources close to the decision-making circle.

Reuters was unable to find any record of a financial institution named Zhou Xin in Chinese corporate registries, or of companies mentioned as acting on behalf of the Chinese Ministry of Commerce and the Central Bank of Iran.

At a time when the National Iranian Oil Company, Zhuhai Zhenrong, the Central Bank of Iran, and the Chinese Ministry of Commerce did not respond to requests for comment, while the Chinese Ministry of Foreign Affairs said that it was “not aware of the situation described,” stressing its opposition to illegal unilateral sanctions.