The network was designed and implemented by Iran’s political leadership, which recognized as early as 2011 that the country needed to set up a system of sanctions-evading finance to withstand international pressure to curb its nuclear program, according to diplomats and officials as well as senior Iranian officials.

Bank statements and corporate documents reviewed by The Wall Street Journal show that HSBC Holdings PLC and Standard Chartered PLC, two of the largest banks in the world by assets, were among a slew of institutions that provided services to companies that handled banned trade on behalf of major Iranian exporters.

U.S. sanctions imposed under the Trump administration to coerce Iran into a nuclear and security deal prohibit international banks from managing accounts for Iranian companies. Violators risk a range of penalties under U.S. and local laws and international anti-money-laundering regulations, including billion-dollar fines and the loss of access to the dollar and the world’s most important financial market. Those sanctions are intended in part to cut Iran off from the global reserve currencies vital for trade and a stable economy.

Yet the transactions conducted through international banks have provided a critical release valve from the U.S. financial pressure. They have bought Iran time to advance its nuclear program even while negotiations were under way to revive the 2015 nuclear deal that imposed limits on Iran’s nuclear development in return for relief from sanctions. Former President Donald Trump withdrew the U.S. from the deal in 2018 and reimposed sanctions in hopes of pushing Iran into a tougher pact. President Biden has kept the sanctions in place during the talks.

The Biden administration on Thursday took a step toward tightening the pressure against Iran by levying sanctions against several firms in the United Arab Emirates and China that the Treasury Department said were front companies for Tehran’s state-owned energy giants.

According to documents and Western officials, Iranian-controlled foreign exchange houses outside the country set up proxy companies and bank accounts for them. Through those companies and their bank accounts, sanctioned Iranian companies sell their oil and other goods to foreign purchasers, receiving dollars, euros and other foreign currencies. Iranian importers then use those funds to pay for goods the country needs to keep the economy afloat. An electronic clearinghouse run by Iran’s central bank settles those currency trades between Iranian exporters and importers.

Western intelligence officials have no evidence that the banks are complicit in permitting the sanctioned Iranian transactions. But senior bank compliance officers said companies registered outside of Iran that secretly maintain bank accounts for Iranian companies could escape controls meant to catch money laundering.

Iran’s ability to circumvent the West’s blockade on its financial system shows the limits of global financial sanctions at a time when the U.S. and European Union have sought to use their economic might to punish Russia for its invasion of Ukraine. Russian Transport Minister Vitaly Savelyev said in late March that Moscow wanted to learn from Tehran’s sanctions-evasion efforts, as the Western pressure campaign created a shortage of parts and grounded scores of commercial aircraft.

“Russia is guided by Iran’s experience,” Mr. Savelyev was quoted as saying in Russian and Iranian state-run news services.

The Journal reviewed financial transactions for scores of Iranian proxy companies in 61 accounts at 28 foreign banks in China, Hong Kong, Singapore, Turkey and the U.A.E. totaling several hundred million dollars. Western intelligence officials say there is evidence of tens of billions of dollars of similar transactions secretly conducted throughout the global financial system. Senior U.S. officials have repeatedly warned in recent months the U.A.E, Turkey, China and other nations must crack down on sanctioned Iranian transactions or risk their own penalties.

“Iran is very sophisticated in its [sanctions] circumvention infrastructure,” said a senior compliance officer at a major global bank. “They’ve got the technology, the skills, the people, and the state sponsorship behind that.”

Iran’s sanctions-evasion system evolved from a set of policies established in 2014 under Supreme Leader Ali Khamenei, as part of an effort to armor the Iranian economy against foreign pressure campaigns.

Key to the “Resistance Economy,” as the effort was named, was the establishment of a financial system that would enable foreign trade and international finance to continue even if those sectors were sanctioned.

The mechanism and its apparatus are managed by the elite Islamic Revolutionary Guard Corps, the Central Bank of Iran, and other government institutions, according to senior Iranian officials, Iranian government websites, and the Western officials.

A representative of Iran’s mission to the United Nations rejected allegations that “Iranian entities” were engaged in money laundering, but said “it is to be reminded that Iran has every right, in accordance with international law, to break the illegal and unjust sanctions against its people.”

HSBC maintained an account in Hong Kong for a company called Scofield HK Ltd., which was registered in 2019 in Hong Kong, according to corporate and banking records reviewed by The Journal. In July 2020, Scofield agreed to sell 198 metric tons of a petrochemical product used in plastic manufacturing to an Indian buyer that agreed to pay $170,000 into Scofield’s HSBC account. 

A virtually identical invoice reviewed by The Journal issued the same date and carrying the same invoice number, buyer information, product code, quantity, sales quote and more lists the seller as Persian Gulf Petrochemical Industry Commercial Company.

The U.S. Treasury Department has described Tehran-based Persian Gulf Petrochemical as Iran’s largest petrochemical company, and has sanctioned the company for its alleged financial support of the Islamic Revolutionary Guard Corps’s engineering conglomerate. Scofield acted as a proxy for Iranian companies, according to the Western officials, maintaining accounts at other banks, including the Industrial and Commercial Bank of China. ICBC didn’t respond to requests for comment.

Meanwhile, as recently as January 2021, a Hong Kong branch of Standard Chartered held U.S. dollar and euro denominated accounts for two Hong Kong companies that handled trade for the National Iranian Tanker Co., according to Western intelligence officials and bank documents reviewed by The Journal. That company, a subsidiary of the National Iranian Oil Company, transports the country’s oil and other petroleum products.

A Standard Chartered spokesman said the bank can’t comment on its clients or relationships but was “committed to adhering to the highest standards of compliance.” A spokeswoman for HSBC said the bank “is committed to combating financial crime and complying with all applicable sanctions laws.”

Other banks that handled trade for Iranian firms include Commercial Bank of Dubai, founded by a former prime minister of the U.A.E. and ruler of Dubai, and the Abu Dhabi Islamic Bank, according to documents and Western intelligence officials.

The Abu Dhabi Islamic Bank said in a statement that it doesn’t comment on individual clients, but “ADIB takes all compliance matters extremely seriously and works tirelessly to adhere to them, including by making the most thorough checks prior to opening any account.”

The bank in late 2020 shut down an account held by a firm suspected of transacting sanctioned trade for Iran’s National Petrochemical Co., according to a person familiar with the matter.

Commercial Bank of Dubai didn’t respond to requests for comment.

The clandestine system of proxy companies conducting banned trade through banks outside Iran’s borders enables Tehran to keep its economy functioning. Iran’s international trade is forecast to hit a record $220 billion this year, according to the IMF, even though most is barred by international sanctions. That suggests the banks’ compliance systems are failing to block the bulk of Iran’s activities, according to current and former Western officials.

Although some banks screen potential clients and review more than a billion transactions a month, companies working on behalf of Iranian importers and exporters set up multiple accounts across several institutions and it can take banks six months to a year to detect, evict and report them to law enforcement, banking compliance officers said.

U.S. and local laws and international anti-money-laundering rules require financial institutions to vet their clients and transactions and report any suspicious transactions to authorities such as the U.S. Treasury Department’s Financial Crimes Enforcement Network. Authorities largely rely on the financial institutions to enforce anti-money-laundering rules because they constitute the infrastructure through which the money flows.

If those firms fail to detect and disrupt money laundering—because of complicit employees or inadequate vetting systems—they are liable for a range of penalties that include fines, loss of access to reserve currencies, sanctions and criminal charges.

“We work vigorously to counter sanctions evasion,” Secretary of State Antony Blinken said on Thursday after the Treasury Department imposed sanctions on individuals and firms it alleged were fronts for an Iranian oil smuggling operation. The U.S. says much of the revenue generated from the state’s sale of energy products and other exports finances its military, weapons programs and foreign militia acting as Iranian proxies.

“We will not hesitate to target those who provide critical support for the [Islamic Revolutionary Guard Corps] or Hezbollah and facilitate their access to the international financial system,” he said.