How Iran’s Ghost Fleet Sidesteps U.S. Sanctions

The “ghost fleet” phenomenon—and the black market it enables—points to the larger success of Iran, Russia, China, and other Western adversaries in working together to evade economic sanctions. Their increased collaboration in this effort is an enduring foreign policy challenge for the U.S.—and indeed for the next president. 

The U.S. and its allies have tried to choke off Iran’s oil exports, which provide revenue to fuel the regime’s activity at home and across the region. U.S., European Union, and United Nations sanctions target Iran’s oil and gas exports and its petrochemical industry and also cut Tehran off from the global banking system—largely excluding it from making international money transfers or accessing foreign reserves. The Trump administration imposed most of these sanctions in 2018 after the U.S. withdrew from the Joint Comprehensive Plan of Action (JCPOA), an Obama-era agreement lifting sanctions on Iran in return for limiting its nuclear program. 

The Biden administration has, for the most part, continued with these unilateral penalties, although critics accuse President Joe Biden of lax enforcement. Early in Biden’s presidency, the administration seemed to be inching toward renewing a nuclear deal with Iran—with sensitive negotiations perhaps putting a damper on aggressive sanctions enforcement. Later, others suggested the administration was avoiding fully enforcing the existing sanctions for fear such moves would raise commodity prices during a period of high inflation. 

The Iranian regime is almost entirely dependent on its oil production: Up to 70 percent of the government’s revenue comes from oil exports—and those numbers have been rising, perhaps in part because the regime is figuring out how to avoid getting caught in the sanctions web. In 2019, oil production sat at less than 2 million barrels of oil a day, but by 2023, that figure had gone up to 3.5 million, representing an increase of roughly $40 billion in total revenue and record levels of total production.

Despite the West’s efforts, Iran has managed to sidestep sanctions with a scheme that sounds like something out of a Tom Clancy novel. “Iran’s ghost fleet, as well as a whole host of black market forces, are what allows the Islamic Republic to earn revenues from two critical sources even while being subject to sanctions—and those sources are crude oil sales and petrochemical sales,” Behnam Ben Taleblu, a senior fellow at the Foundation for Defense of Democracies, told TMD.

How does a ghost fleet work? The normal process for transporting oil by cargo freight is fairly straightforward. All cargo ships are registered—or “flagged”—under a specific nation, whose regulations they are subject to. This isn’t necessarily the same nation as that of the company that owns the vessels. For example, an American company might flag one of its vessels under the Marshall Islands, which has more lenient regulations. The ship would be registered in the Marshall Islands, pay taxes there, and be subject to the legal code of the Marshall Islands—even if it never visits there. Then, governed by its “legal nationality” alongside the International Law of the Sea, the vessel is free to ply its trade.

Iran’s dark fleet takes advantage of this legal system. Vessels will “flag-hop,” or switch a given ship’s flag multiple times—a task often accomplished with shell companies, ownership changes, and physical modifications to the vessel. Operated by front companies linked to the Iranian government, these ghost ships take advantage of the fact that some countries have extremely limited capacity to keep track of ships registered under their flags and to conduct inspections, enabling the vessels to move oil around the world undetected.

United Against Nuclear Iran, a New York-based, nonprofit advocacy group, is one of the main sources of information on suspected ghost ships registered in countries like the Cook Islands. The chaotic and decentralized nature of ghost fleets make it extremely difficult for countries to determine who, exactly, is transporting oil. 

In 2021, two ships whose flags were registered to the Cook Islands were removed from the country’s flag registry after it was revealed they had been illicitly transporting Iranian oil. One of the ships had allegedly been flying the flag of the Comoro Islands through most of 2020 and switched its flag to the Cook Islands once it came under suspicion of picking up crude oil from an Iranian island. It subsequently hopped to the flag of the Federated States of Micronesia and then to a Samoan flag, making it difficult for these small countries to track their movements. 

On Friday, the Treasury and the State Departments issued new sanctions—as part of the U.S. response to Iran’s October 1 ballistic missile attack on Israel—that target some of these ships. The new designations target 16 entities and 23 vessels, dubbing them “blocked property” for their role in enabling illicit Iranian oil sales, funding weapons programs, and underwriting Iranian proxies like Hezbollah. The sanctions can also result in penalties on those who do business with any of the designated ships or entities.  

But who are Iran’s customers? There’s essentially only one: China. Beijing purchases approximately 90 percent of Iranian oil exports, while the other 10 percent is sent to Iranian allies like Venezuela and Cuba, either in barter or as economic aid. 

China is far from dependent on Iran: While China imports almost three-quarters of the oil it consumes, Iran-sourced oil represents only around 15 percent of China’s total imports. Russia—another country facing myriad Western sanctions—is the largest source of oil for China, supplemented by a variety of Middle Eastern and African sources.

The appeal of Iranian oil lies not in its abundance but rather in its price. The sanctions are a black mark on Iranian exports, depressing demand and, therefore, the price. Iran also discounts the commodity even further as a way to compensate for the complex workarounds needed to purchase the oil. The payoff for China is clear: In 2023, it was estimated that it saved $10 billion by buying oil at record rates from Russia, Iran, and Venezuela—all at a steep discount.

But even if Iran is taking a proverbial bath on the oil that it sells, it is still able to use the limited profits to fund the regime’s projects—but not before cleaning up its cash with sophisticated international money laundering schemes. In 2023, the Financial Times reported that Lloyds and Santander UK, two of the largest banks in the United Kingdom, had provided accounts to British front companies that were in actuality owned by the Petrochemical Commercial Company, which is controlled by the Iranian state. Funds were transferred from Iranian entities in China to U.K.-based accounts to avoid sanctions and allow the money to be moved. The cash was then used to fund the Iranian Revolutionary Guard Corps and proxy militias in the Middle East.

Hong Kong—previously a bastion of well-regulated financial institutions fully integrated into the Western monetary system—also has become a hub of sanctions evasion, Iranian and otherwise. Access to its financial institutions has become a key part of “sanctions busting,” or evading international sanctions. As China has steadily eroded the enclave’s semi-sovereign status since 2019, the financial center has become less of a safe entry for Western companies into China and more of a conduit for Chinese infiltration of Western institutions. “The West has to look very differently at Hong Kong post-2019, both as a sanctions-busting jurisdiction as well as a potential forward deployment in the international financial system,” said Taleblu. 

“Third countries”—neither Iran, the seller, nor China, the buyer—have become a key part of Iranian sanctions evasion. Both Singapore and Malaysia have played host to companies enabling the shipment of Iranian oil and the movement of ill-gotten funds—and Malaysian companies have faced U.S. sanctions.

Just as China is giving Iran a hand in avoiding the Western dragnet, Tehran—in addition to providing Russia with lethal aid—also has helped Moscow avoid the worst of the theoretically crippling sanctions the West applied in the aftermath of the invasion of Ukraine in February 2022. “Russia quickly becomes even more sanctioned than Iran” in 2022 after the invasion, Iulia Joja, a senior fellow at the Middle East Institute and director of its Black Sea Program, told TMD. “And then they have the choice: Are they doing this alone, or are they cooperating?” Iran was more than happy to oblige, Joja said, giving Russia technical advice to set up its own ghost fleet and even potentially lending it ships during those initial months. 

So do these new sanctions represent a step forward in combating Iranian oil exports? “I would classify what [the Biden administration has] done now as necessary but not sufficient,” Taleblu said. “The fact that designations are important does not necessarily mean they are impactful. Because there’s no doubt about the U.S. capability. There’s a doubt about the will to continue to play this shell game over time.”

But even if sanctions are tightened on Iran and Russia, that’s only half the job: Their biggest customer, China, would also have to be integrated into the strategic vision of the United States and its allies to make Iran and Russia feel the bite. “The main enabler is China; neither Iran nor Russia would be able to do so well and to survive so well or maintain their war efforts—whether we’re talking about the Middle East or about Ukraine—if they wouldn’t have China’s help,” said Joja. The Biden administration has sanctioned some Chinese firms, but the effort has been relatively piecemeal.

Taleblu thinks that the next administration, whether Republican or Democrat, will be better positioned than many previous presidencies to begin implementing a more comprehensive strategy. “This will be a test for the next U.S. president,” he told TMD. “How can you take advantage of this bipartisan or even, dare I say, nonpartisan policy consensus on getting tough on China? To thread that needle through the Iran oil sanctions enforcement, what Chinese financial institutions do you have to go after?” 

But all sanctions on the Middle Kingdom risk incurring Chinese retaliation and carry costs—administrative, financial, and logistical—of their own. When the winner of next month’s election is inaugurated in January, he or she will have to decide whether and how to confront cooperation among Iran and the U.S.’s other chief rivals. 

“What Iran and Russia are trying to do, the havoc that they’re wreaking in their respective regions and areas of concentration, they do that with very, very little money,” said Joja. “The money is only coming from China.”

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Should the U.S. be placing more aggressive sanctions on China for buying Russian and Iranian oil?