The United States has threatened to impose sanctions on Chinese banks if they are found to be involved in handling money from Iran’s oil trade payments, marking a sharp escalation in efforts to tighten financial pressure on Tehran.

The warning came after the US military began blocking ships linked to Iranian trade from docking at the country’s ports on Monday, in an operation that was initially perceived as a broader blockade of the Strait of Hormuz. 

Besides, US President Donald Trump has also stepped up diplomatic pressure on Beijing to ensure China does not supply Iran with weapons. He said on social media that Chinese President Xi Jinping agreed not to send weapons to Iran. 

Taken together, Washington’s financial sanctions threats, maritime restrictions and political pressure are expected to significantly curb Iran’s ability to access Chinese financing and supplies. Trump said it’s likely that the US and Iran would make a long-term ceasefire deal next week. 

On Wednesday, US Treasury Secretary Scott Bessent said in a media briefing that the US has warned a number of banks in various jurisdictions of the potential imposition of secondary sanctions for handling transactions related to Iran.

“Two Chinese banks received letters from the US Treasury,” he said. “I’m not going to identify the banks, but we told them if we can prove there is Iranian money flowing through your accounts, then we are willing to put on secondary sanctions.”

US media reported that the letters cited Treasury Department evidence that Iran routed roughly US$9 billion in 2024 through US correspondent accounts using networks of front companies, with activity concentrated in Hong Kong, Oman and the United Arab Emirates (UAE).

“I am writing to alert you that Treasury believes that a portion of these transactions, as well as additional transactions after 2024, were processed from banks you supervise through their US correspondents on behalf of direct customers linked to Iran,” according to the letter. 

The Treasury Department urged the jurisdictions’ monetary regulators to work with banks under their supervision to identify and halt any Iran-related financial activity, including transactions routed through front companies or other evasive structures, citing significant illicit finance risks.

It added that the information had also been shared with US banks providing correspondent services so they could apply enhanced scrutiny to such transactions.

New anti-sanctions rules

In June 2021, China passed the Anti-Foreign Sanctions Law to bar individuals and companies from complying with US and other foreign sanctions within its jurisdiction. At the time, Chinese media said the framework could be extended to Hong Kong by adding it to the Basic Law’s Annex III.

However, Beijing did not implement it as some Hong Kong banks said the law would place them in a difficult position between Chinese and US regulatory demands.

In October 2022, Chief Executive John Lee said Hong Kong would not enforce sanctions imposed by the US, adding that such measures against him and other officials had been dismissed. He said Hong Kong would continue to handle overseas capital in accordance with its own laws.

In practice, major banks in Hong Kong have complied with US sanctions because they need to retain access to the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network for international settlements. They have closed accounts linked to US-sanctioned individuals, including Lee and Secretary for Security Chris Tang, without disclosing any reasons.

On April 13 this year, Chinese Premier Li Qiang signed a State Council decree introducing new rules to counter what Beijing calls unlawful extraterritorial jurisdiction by foreign states. With immediate effect, the regulations: 

• allow Chinese authorities to assert jurisdiction over relevant activities where a sufficient connection to China is established;
• create a “malicious entities” list targeting foreign organizations and individuals involved in enforcing such measures;
• prohibit any organization or individual from complying with or assisting in the enforcement of these measures;
• allow affected Chinese citizens and companies to file lawsuits, with government agencies providing guidance and support.

Wen Wei Po, a pro-Beijing Hong Kong newspaper, said the new rules would extend protection to Hong Kong-based Chinese enterprises.

“While the regulations are drafted for the mainland, it would be unreasonable to exclude Hong Kong companies. In practice, authorities should apply the rules based on overall legislative intent rather than narrow technical boundaries,” the article said, citing an unnamed legal expert. “There is no need to overly focus on technical boundaries in how the provisions are applied.”

“If businesses choose to seek state protection, the government has the means to provide it. As long as they are Chinese enterprises, they fall within the scope of protection, and the new rules offer clearer and stronger legal backing,” the expert said. 

Zhou Mi, senior researcher at the Chinese Academy of International Trade and Economic Cooperation, said the new regulations mark a more coordinated and institutionalized phase in Beijing’s push to counter what it sees as foreign long-arm jurisdiction.

“The framework has direct implications for Chinese companies seeking to defend their interests overseas,” he said, citing cases such as forced management changes at Nexperia, a Netherlands-based semiconductor firm, and US pressure on TikTok to divest assets and hand over data as examples of such measures.

“The launch of the new rules comes at a timely moment, as US actions in the Strait of Hormuz have crossed into what China defines as unlawful extraterritorial jurisdiction,” a Shandong-based columnist says. “Interference with third-country vessels, including Chinese ships, and disruption of legitimate trade interests fall within the scope of China’s countermeasures under the regulations.” 

He said that, as energy security is crucial to the Chinese economy, it is legitimate for China to use both legal tools and naval capabilities to safeguard its national development interests.

Some observers say that Hong Kong banks could face penalties from Chinese or US authorities if they don’t take sides in geopolitical conflicts. 

Underground supply chain

Over the past two years, the US has sanctioned a number of Chinese firms for supplying electronic components and technologies to Iran that support its military, drone and missile programs. In 2023 and 2024, it has also sanctioned many Hong Kong- and Shenzhen-based individuals and companies for supplying Russia’s Military Industrial Base with electronic parts.

Media reports pointed to covert payment channels using Hong Kong as a hub to settle China’s underground trade with heavily sanctioned countries such as Russia and Iran. These transactions have reportedly relied on alternative financial mechanisms, including Chinese currency, cryptocurrencies, precious metals and gemstones.

On April 11, the Wall Street Journal reported that Hong Kong has for years served as a key financial hub helping Iran withstand US sanctions, with authorities in Washington struggling to shut down a network that has facilitated billions of dollars in trade. 

The report said Hong Kong’s low-cost, rapid company registration system has enabled dense shell-company networks to process payments and obscure the origins of funds, with billions linked to Iran’s shadow banking system flowing through the city, making it a leading offshore node after the UAE.

Read: US Hormuz blockade, tariffs jolt China

Follow Jeff Pao on X at @jeffpao3