Treasury Warns Banks of Sanctions Risks Tied to China’s ‘Teapot’ Refineries and Iranian Oil Trade

Key Takeaways

• Treasury Flags Teapot Refinery Risks: The U.S. Treasury warned that China-based independent “teapot” refineries—primarily in Shandong Province—pose significant sanctions risks due to their role in importing and refining Iranian crude oil.
• China’s Dominant Role in Iranian Oil Trade: China purchases approximately 90 percent of Iran’s oil exports, with teapot refineries accounting for the majority of these imports, generating revenue for the Iranian regime and its military activities.
• Clear Compliance Expectations for Banks: Financial institutions are urged to implement risk-based controls, conduct enhanced due diligence on China-based refinery transactions, and reinforce sanctions compliance expectations with correspondent banks.
• Sophisticated Evasion Tactics Highlighted: Treasury identified the use of front companies in Asia and the UAE, intermediary brokers, and a “shadow fleet” employing deceptive shipping practices such as ship-to-ship transfers and falsified documentation.
• Escalating Enforcement and Secondary Sanctions Risk: Since March 2025, multiple teapot refineries have been designated, and Treasury signaled it is prepared to deploy secondary sanctions against foreign financial institutions that continue supporting Iran-related activities.

Deep Dive

The U.S. Department of the Treasury is cautioning financial institutions about growing sanctions exposure linked to China’s independent “teapot” oil refineries, underscoring their continued role in importing and refining Iranian crude.

The Office of Foreign Assets Control (OFAC) said these smaller, privately operated refineries (concentrated largely in Shandong Province) remain a key conduit for Iranian oil entering global markets. China purchases roughly 90 percent of Iran’s oil exports, with teapot refineries accounting for the majority of those imports.

That flow of crude, Treasury warned, ultimately provides revenue to the Iranian regime, supporting its military and weapons programs. At the same time, some of these refineries have interacted with the U.S. financial system, including through dollar-denominated transactions and the procurement of U.S. goods, increasing the risk of sanctions exposure for financial institutions involved in related transactions.

The alert lays out a clear set of expectations for banks and other financial firms. Institutions are urged to implement risk-based controls to avoid facilitating transactions involving designated teapot refineries or others that may be importing Iranian oil. They are also encouraged to conduct enhanced due diligence on transactions tied to China-based refineries, particularly those in Shandong, and to communicate sanctions compliance expectations clearly to correspondent banking partners.

Treasury’s warning builds on enforcement actions that have been gathering pace since March 2025. During that period, OFAC has designated multiple China-based teapot refineries that have collectively processed billions of dollars’ worth of Iranian-origin oil, placing them within the scope of U.S. sanctions authorities.

Beyond identifying the risk, the alert offers a window into how the trade continues to operate. Treasury points to a network of evasion tactics designed to obscure the origin of Iranian oil and complicate detection. These include the use of front companies in Asia and the United Arab Emirates, intermediary brokers that act as middlemen, and a “shadow fleet” of tankers employing deceptive shipping practices.

Such practices can involve ship-to-ship transfers, falsified documentation, and manipulation of vessel identity data. In some cases, oil is blended with supplies from other countries or relabeled to disguise its origin, making it more difficult for compliance systems to flag.

The department also stated that enforcement pressure is unlikely to ease. Financial institutions have been put on notice that Treasury is prepared to use the full range of its authorities, including secondary sanctions, against foreign banks that continue to support Iran’s oil trade.

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