.jpg)
Iranian shadow banking faces growing crackdown under new sanctions
27 May 2026
US regulators are widening their focus to dismantle opaque structures used to bypass global financial oversight
Image: gorodenkoff/stock.adobe.com
US regulators pursue Iranian shadow banking networks
On 19 May, the US Department of the Treasury’s Office of Foreign Assets (OFAC) ‘designated’ Amin Exchange, a prominent Iranian foreign currency house, and linked front companies over their role in supervising hundreds of millions of US dollars in payments for sanctioned Iranian banks. Amin Exchange was accused of laundering money for designated Iranian banks and state-run businesses through a network of front companies in the United Arab Emirates, Turkey, China, and Hong Kong. This enforcement is part of a sweeping wave of US sanctions; 10 designations in total have been issued against Iranian-linked entities, as part of Operation Epic Fury since April 2026. Iran’s rahbars, private management companies and currency exchange houses that skirt conventional banks through broad webs of overseas shell and front firms in high-risk jurisdictions have been directly targeted. The US Treasury is explicitly moving to cut off Iran’s shadow banking operations, along with oil profits, and military procurement networks as part of its maximum economic pressure campaign on Iran.
Becki LaPorte, principal, AML strategy and innovation, Finscan explains that highly engineered state- sponsored systems, more dangerous than a collection of bad actors is revealed by the OFAC designations for Operation Economic Fury,
“Rahbar companies managing thousands of overseas shell entities and coordinating across multiple jurisdictions with Iranian exchange houses and state-controlled banks, have moved the equivalent of tens of billions of dollars through the international financial system.
“Several entities are directly tied to former Iranian central bank officials and organisations controlled by the Supreme Leader’s Office. This is institutional financial crime operating at scale. The geopolitical risk is that these networks simultaneously fund the Islamic Revolutionary Guard Corps’ operations, proxy payments, and illicit oil sales.
La Porte warns these entities thrive in gaps between regulatory regimes. aAnd while gaps continue, the architecture will rebuild around any single enforcement action.
The sanctions reflect how supervisory bodies have shifted to explicitly addressing the enablers of illicit capital, and wider structures facilitating sanctions evasions such as shadow fleet rather than just traditional banks. OFAC blocked 19 oil and petrochemical ships which it says have generated hundreds of millions in profits. The move intends to paralyse revenue created from illegal petroleum trade, and diminishes the regime’s finance streams for weapon development.
On 11 May 2026, Treasury designated 12 individuals and entities tied to the transaction of Iranian oil to China. It followed the Treasury sanctioning three Iranian foreign currency exchanges and their linked front companies on 1 May 2026. Additionally, 35 entities and persons were designated by OFAC on 28 April 2026, for their supervision of Iran’s shadow banking network.
The sophistication, breadth, and global reach of this NBFI system is highlighted by use of sanctions by the US against 35 entities with alleged links to the Iranian shadow banking system professor of law, Nicholas Ryder, Cardiff University, comments.
“This clearly illustrates the unprecedented threats to the global financial system caused by the current geopolitical risks within the Middle East. This also illustrates that the Iranian shadow banking system will be able to withstand the consequences of being sanctioned by the US Treasury Department.”
The US Treasury froze almost US$500 million in cryptocurrency linked to the regime, disturbing efforts to generate Bitcoin-backed shipping insurance and alternative payment, responding to modern evasion techniques,
These enforcement adds to more than 1,000 sanctions imposed on Iran since February 2025. The US Treasury has described the Islamic Revolutionary Guard Corps as using these shadow banking channels to connect to the global financial system to receive funds for illegal oil transactions, and funnel payments to Iran’s terrorist intermediaries.
Shadow banking today
Shadowing banking, or non-bank financial intermediation (NBFI), has rapidly grown to be worth over US$256 trillion, a 2024 Financial Stability Board (FSB) report found — double the speed of the banking sector in the same year. While NBFI traditionally largely revolved around non-banking lending, it has expanded to a more complex realm of bank-related activities that operate outside the conventional banking environment. NBFIs make up over half of global financial assets. For sanction enforcement it has expanded the list of illicit actors to target from offshore intermediaries, front companies, crypto rails, opaque investment vehicles, and shipping or payment frameworks sitting outside traditional monitoring. While non-bank financial intermediation generally encompasses legal financial activities, its absence of regulatory supervision and transparency generates significant risks, and in some instances aids illicit endeavours.
Iran-linked shadow banking and money laundering operations have evolved over the past decade, La Porte explains: “A decade ago, Iran-linked shadow banking relied on relatively crude shell company chains and hawala networks. What we are dealing with today is categorically different, in that financial crime has become more of a managed service.
“Three forces have driven this evolution: the internationalisation of shell company infrastructure across key financial centers simultaneously; the weaponisation of legitimate trade flows through trade-based money laundering; and the professionalisation of enabling networks, where lawyers, accountants, and company formation agents provide the legal veneer that makes these structures sustainable. However, the compliance frameworks chasing financial crime are still largely designed for the previous generation of the threat.”
Ryder notes: As this system has matured in the last two decades it has created vulnerabilities for money laundering which enabled criminals to move the illicit proceeds of crime through financial systems which are less regulated. This could include for example offshore financial centres and front companies which can be used to hide the origin of the proceeds of crime. It is important to note that money laundering continues to evolve, and financial criminals will continue to exploit a wide range of vulnerable and new markets.”
Dr Illaria, says it is not just that shadow banking has increased in numbers of cases but in the sophistication of the system. “We don’t talk about layering anymore — basically splitting the money into different bank accounts. Or different people carrying the money into another jurisdiction, it’s much more about setting up trust, setting up shell companies using multiple jurisdictions transactions where we have money that goes from one country to another.
“Multiple jurisdictions are involved, to make sure we distance ourselves from the source of the capital. It has become more sophisticated, because criminals adapt.”
She says criminals try to adapt to work around the existing regulatory framework, and heavily employ intermediaries which grey the areas between legitimate and illegal activities and transactions.
NBFIs have more tools at their disposal now, she says. “There is an increase not necessarily in the typologies of money laundering through shadow banking, but simply in the techniques. Like crypto for instance, is a new tool at their disposal.
“Criminals have evolved, but they also have better knowledge. They are helped by professional enablers and intermediaries that might not realise they are money launderers or as part of a criminal organisation. They turn a blind eye to what is happening or they get compensated or a fee or a benefit from being involved or facilitating the transactions.”
Caught in the crosshairs
Asset servicers inadvertently play a critical operational role in the global shadow banking system, acting as the structural pipelines for global wealth. Their primary role of overseeing corporate structure for clients, processing transactions, and storing securities means they often sit adjacent to illicit capital, and frequently come into contact with sophisticated money laundering and kleptocracy. Omnibus accounts and complicated custody systems, for example, can expose firms to anti-money laundering (AML) blind spots, enabling the layering of illicit assets to go unfound. Omnibus accounts create nested risk through combining assets from various investors into a single account. Ultimate Beneficial Ownership (UBO) blind spots occur due to a custodian usually only knowing who intermediary is, not the UBO of the underlying clients. The asset servicer can be unaware of sanctioned entities due to their dependence on the intermediary to carry out Know Your Customer (KYC) checks.
Alternative structures in private equity and hedge funds have less liquid, customs assets, and convoluted capital call mechanism. Consequently, this comparative absence of public market scrutiny enables the underlying economic beneficiaries and counterparties to remain hidden. Illicit actors use Special Purpose Vehicles (SPVs) across numerous, opaque jurisdictions to legally create space between illegal profits from the perpetrators. This results in fund administrators having to resolve complex multi-level AML checks across varying guidelines.
Transfer agents sit on the front of investor onboarding, and are burdened by inconsistent regional KYC standards. Additionally, when transfer agents interact with fund-of-funds or wealth platforms functioning as introducing brokers, they are not always dealing with the true investor, generating a verification gap. As a result agents must certify AML data from third parties running under separate regulatory frameworks. Corresponding banking and settlement systems handle considerable daily volumes through borders at fast speeds. Corrupt actors often try to use the large volume of these cross-border settlements to add illegal money with valid financial streams, intending to conspicuously incorporate them in the financial landscape inconspicuously.
FinCEN identified US$9 billion of Iranian shadow banking activity travelling through international US correspondent accounts in 2024. The actors used multi-layered corporate frameworks across numerous countries to hide the money’s origin. The Treasury found these funds were linked to a wide network of Iranian exchange houses, and offshore front companies, used to avoid sanctions, launder cash, and sponsor military and terrorist programs. Shell companies, only listed on paper with no purposeful business activities, transferred roughly US$5 billion in 2024. Scores of overseas oil firms that appeared as Iranian front companies, including oil firms headquartered in the UAE and Singapore, moved roughly US$4 billion in 2024. FinCEN traced approximately US$707 million to multitudes of shipping firms, thought to carry sanctioned Iranian oil and petrochemicals, with the majority of companies based in Iraq, UAE, or Hong Kong.
Through directing regulatory action against logistical and financial enablers, supervisory agencies are raising the cost of evasion and revealing the wider network to international secondary sanctions.
La Porte, describes the foundational risk for asset servicers and custodians handling cross-border flows linked to high-risk jurisdictions is opacity around beneficial owners, who are the ultimate controllers of assets concealed behind nominee structures across weak-disclosure jurisdictions.
“The Rahbar networks OFAC just designated are a masterclass in how that opacity is operationalised. Beyond ownership, key exposures include unverified correspondent AML controls, commodity-linked flows where price volatility masks trade-based money laundering, and geographic risk creep where high-risk exposure grows incrementally without triggering re-evaluation.
“Red flags to watch include fund routing through intermediary jurisdictions with no apparent business rationale, frequent counterparty substitution mid-transaction, payment structures inconsistent with commodity market norms, and documentation discrepancies coinciding with route or port-of-discharge changes. “The post-crisis ‘unwinding’ window, when backlogs clear quickly, is an acute compliance vulnerability that asset servicers should already be planning for.”
Ryder explains: “The key exposure risks would be potential criminal, civil and regulatory sanctions for not complying with the domestic anti money laundering legal reporting obligations. The liability could extend to both the individual and the company they are employed by depending on the domestic anti money laundering enforcement strategy.”
Dr Zavoli, says it is a major risk for asset servicers or firms to be sanctioned, or linked to a specific group of criminals organisations or a high-risk jurisdiction where there are problems like the Iranian sanction example.
“Second to be used as a channel, obviously for money laundering, but also for terrorist financing activities. The picture is never small. It’s not just about me and my friends and my transaction or pool of clients but it’s much bigger. It’s not even just the sector, it might be the whole economy, it might be the security of the whole country.
Thirdly Dr Illaria says reputation of damage which is a much stronger deterrent than any sanction, any prosecution that might come years later, that might be difficult to prove: “Reputational damage is real and it is immediate. So if you are in the headlines of a newspaper linked to money laundering, there will be reputational damage that has a financial cost for you that is higher and worse, than any prosecution or sanction.”
Dr Zavoli says there are so many red flags to look out for, including: use of very complex entities like shell companies, trust entities based in high-risk jurisdictions, frequent changes in ownership and the structure of the company, and the involvement of a politically exposed person.
“Transactions that are across multiple jurisdictions, transactions where there is a very quick turnaround, money moving quickly from one account to another, from one jurisdiction to another, for no real reason, clients and customers reluctant to give you information, so they are not fully transparent.”
Geopolitical risk
Supervisory bodies are broadening their focus, approaching operational intermediaries such as correspondent banks, shipping managers, and freight forwarders as systematic enablers and are being met with explicit penalties, rather than just the end-actors. There is increased inter-coordination between OFAC and FinCEN, with the latter majorly using systemic compliance data, issuing targeted advisories on shadow banking concerns, and requiring financial institutions to label front companies.
The US economic campaign against Iran was elevated to its highest level, with its implementation of designations against Iran-tied individuals, shipping vessels, and illegal oil-smuggling, and shadow banking operations. Non-US entities complicit in toll payments, enabling Strait of Hormuz passing, or engaging in Iranian trade are being warned they will be blocked from the US financial network. FinCEN has emphasised digital assets, decentralised finance, and opaque foreign exchange houses are being used by the IRGC and linked shadow procurement operations.
On 11 May the FinCEN Advisory provided global financial institutions with a list of red flags to identify and declare suspicious actions linked to dual-use component procurement and Iranian oil smuggling.
The supervisory body issued a warning for financial institutions to spot money laundering operations linked to the IRGC, labelling four core methods IRGC evades sanctions including: commodity sales and misrepresentation of commercial activity, use of exchange houses and layered corporate structures, use of facilitators and other service providers, and digital asset infrastructure.
Secretary of the Treasury Scott Bessent, commented: “Iran’s shadow banking system facilitates the illicit transfer of funding for terrorist purposes.
“As the Treasury systematically dismantles Tehran’s shadow banking system and shadow fleet under Economic Fury, financial institutions must be alert to how the regime manipulates the international financial system to wreak havoc.”
Regulators eyeing AML blind spots
Regulators are proactively reviewing AML guidelines in an effort to address shadow banking. They have moved from prioritising regular KYC to real-time risk reduction. Supervisory agencies are dissembling convoluted corporate layering employed to mask the UBOs. The use of offshore SPVs, non-transparent shell entities, and nominee directors is being heavily reviewed to target corporate anonymity blind spots. Trust firms, service providers, and administrations are progressively being held responsible for cross-checking the underlying origins of the structures they oversee. Authorities are punishing inconsistency and siloing of compliance data across the economic environment. With core AML data kept separate between custodians, administrators, traditional banks, shipping firms, and digital asset platforms, regulatory bodies are calling for holistic, cross-sector data structures to trace funds through these traditionally fragmented networks.
Regulatory bodies such as FinCEN are focusing on decentralised finance being incorporated into illegal state and shadow banking. Cryptocurrencies and stablecoins are progressively being employed as major settlement layers, compared to isolated assets, strongly linking decentralised tech to traditional shadow banking. In FinCEN’s warning it described stablecoins and virtual assets being weaponised by sanctioned actors such as Iran, to circumvent the conventional correspondent banking network. Authorities are progressively underdoing the mechanisms and logistical faces that hide illegal cross-border transactions and are zeroing in on ship-to-ship transfers, fake invoices, and commodity mispricing. The US Treasury and partners are concentrating on tackling misleading shipping activities and shadow fleets that are employed to bypass financial sanctions.
Current AML coordination is significantly lacking and what little exists is structurally mismatched to the threat, La Porte remarks. “Frameworks like the Financial Action Task Force were built for a world of discrete, jurisdiction-specific transactions. Today’s shadow networks are engineered to span multiple legal systems simultaneously, rotate through front companies faster than any static watchlist can track, and exploit weak beneficial ownership transparency in key transshipment jurisdictions.”
Existing frameworks are not keeping pace with the risk, La Porte notes.
“The reforms that would make the most material difference are not more rules, but rather, faster designation and de-listing cycles, harmonised beneficial ownership registers with cross-border access, and real-time intelligence sharing at the correspondent banking level. The goal should be a system that is dynamic, not just comprehensive.”
It is challenging to understand the overall effectiveness of the international anti-money laundering system and its coordination in terms of tackling cross-border money laundering networks, Ryder argues.
“Part of the difficulty here is that unlike the counter terrorism financing provisions that were implemented following the terrorist attacks in September 2001, which are binding on every member of the United Nations by virtue of Chapter 7 of the UN Charter, the same level of application does not apply to the global anti-money laundering systems.”
“The effectiveness of AML coordination will largely depend on efforts by the leading members of the financial action task force to counter the threat of cross-border money laundering networks.”
Tightening AML enforcement
Supervisory bodies are strengthening their implementation of AML rules, with asset servicers and shadow banking networks the key focus. Asset servicers are required to shift from reactive compliance programs, to integrated risk management structures to mitigate compliance blind areas. They are being demanded to improve network analytics through enacting graph-based screening to locate hidden beneficial ownership layers, linked shell companies, and abnormal fund velocity through sophisticated fund structures.
Additionally there is a need for them to change to ongoing UBO verification, using cross-border corporate registries and adverse media screening to thwart the exploitation of proxies. They must boost sanctions surveillance frequency, change yearly or quarterly static screening with real-time screening to keep on top of fast changing sanctions lists, and not face evasion penalties. Additionally, they should integrate specialised monitoring for trade-based money laundering and cross-border convergence risks, especially tracing digital asset trails that link with traditional funds.
Furthermore, they must carry out rigorous vendor risk assets on outsource compliance instruments, data providers, and fund administrators to minimise gaps in supply-chain security.
They should also better cross-functional AML governance, dissemble silos between fraud, cyber, and conventional AML networks. They must build holistic, real-time intelligence sharing, and escalation rules across compliance departments such as custody, treasury, and cyber teams
La Porte says asset servicers should begin with an honest assessment of screening quality to future-proof their AML and compliance frameworks.
“The starting point has to be an honest assessment of screening quality. Many asset servicers are still running name screening processes that are high on false positives and low on genuine intelligence, which generates alert volumes that exhaust compliance teams without meaningfully reducing risk. That is not a sustainable model when the threat environment is moving at the speed we are seeing today.
“This requires a shift from reactive, batch-based screening to continuous, automated screening that can match against updated sanctions lists in real time, with the precision to distinguish genuine risk from noise. That means investing systems with matching capabilities that can catch transliteration variants, aliases, and name permutations — the exact techniques used by Rahbar-linked entities to evade detection.
After screening quality, governance is also important, La Porte explains, as compliance must be embedded in onboarding, not appended to it.
“Critically, there is no one-size-fits-all answer. A custodian handling sovereign wealth mandates carries a different risk profile to one servicing emerging market fund flows, and screening configurations need to reflect that.
“The ability to fully customise screening parameters to an institution’s specific risk-based requirements is what separates a genuinely effective program from a compliance checkbox. The technology exists to do this well. The question is whether firms have the organisational will to modernise before a regulatory action forces their hand.
Ryder states: “The most important aspect that asset providers can do is to comply with all levels of the anti-money laundering legal framework including the customer due diligence, know your customer rules and the enhanced due diligence rules. Furthermore, it is of paramount importance that the employees within the asset service providers are trained to comply with the domestic regional and international anti money laundering standards.
ALM needs to be a serious activity taken seriously, Dr Zavoli, comments. She says checking the source of funds or clients and customer due diligence should be done not just as a tick the box exercise but out of genuine desire for the sector to not be infiltrated by criminals, or tainted by issues such as reputational damage for firms or the sector by being involved in money laundering.”
“Try to maximise the use of resources that are available, guidance from supervisors and AML agencies, but also that you have a robust internal anti-money laundering policy. You cannot expect that everything is covered by the government or by AML agencies and entities.
“You need to do your part and really invest in personnel that are properly trained with IT resources that are able, including AI, to detect possible red flags and dodgy transactions. Ensure that internally you have a robust system in place to protect yourself, so it’s not just a responsibility to the sector, but to protect yourself and your vulnerability.”
Enablers of illicit capital targeted
The recent US Treasury enforcement and May 2026 designations directed at Iran-based Amin Exchange, front companies and 19 oil tankers, and April 2026 actions against 35 shadow banking enablers highlight how supervisory bodies are broadening their focus to explicitly addressing the enablers of illicit capital.
Regulators are viewing operational intermediaries such as correspondent banks, shipping managers, and freight forwarders as systematic enablers, rather than just the end-actors, and meeting them with explicit penalties.
These enforcement actions show supervisory bodies are using secondary sanctions and concerted international efforts to dismantle Iranian-tied shadow banking and are targeting blind spots in multi-jurisdictional supply chains to halt widespread designation evasion.
As shadow banking becomes more institutionalised the challenge for AML is not only identifying the corrupt entities but locating the underlying systems that facilitate them. NBFIs in Iran have increased the sophistication of their operations to a broad network of shell companies, front business, and illegal exchange houses. OFAC is employing cross-border network tracing to dissemble these evasion paths. FinCEN has distributed more stringent financial trend advisories and examinations targeted at the Islamic Revolutionary Guard Corps that penalise fintechs and small banks for KYC compliance negligence.
Asset servicers are facing demands to improve their UBO tracing and supply chain auditing capabilities, as regulators now review concealed transactional activities, such as illegal ship-to-ship transfers and toll payments.
On 19 May, the US Department of the Treasury’s Office of Foreign Assets (OFAC) ‘designated’ Amin Exchange, a prominent Iranian foreign currency house, and linked front companies over their role in supervising hundreds of millions of US dollars in payments for sanctioned Iranian banks. Amin Exchange was accused of laundering money for designated Iranian banks and state-run businesses through a network of front companies in the United Arab Emirates, Turkey, China, and Hong Kong. This enforcement is part of a sweeping wave of US sanctions; 10 designations in total have been issued against Iranian-linked entities, as part of Operation Epic Fury since April 2026. Iran’s rahbars, private management companies and currency exchange houses that skirt conventional banks through broad webs of overseas shell and front firms in high-risk jurisdictions have been directly targeted. The US Treasury is explicitly moving to cut off Iran’s shadow banking operations, along with oil profits, and military procurement networks as part of its maximum economic pressure campaign on Iran.
Becki LaPorte, principal, AML strategy and innovation, Finscan explains that highly engineered state- sponsored systems, more dangerous than a collection of bad actors is revealed by the OFAC designations for Operation Economic Fury,
“Rahbar companies managing thousands of overseas shell entities and coordinating across multiple jurisdictions with Iranian exchange houses and state-controlled banks, have moved the equivalent of tens of billions of dollars through the international financial system.
“Several entities are directly tied to former Iranian central bank officials and organisations controlled by the Supreme Leader’s Office. This is institutional financial crime operating at scale. The geopolitical risk is that these networks simultaneously fund the Islamic Revolutionary Guard Corps’ operations, proxy payments, and illicit oil sales.
La Porte warns these entities thrive in gaps between regulatory regimes. aAnd while gaps continue, the architecture will rebuild around any single enforcement action.
The sanctions reflect how supervisory bodies have shifted to explicitly addressing the enablers of illicit capital, and wider structures facilitating sanctions evasions such as shadow fleet rather than just traditional banks. OFAC blocked 19 oil and petrochemical ships which it says have generated hundreds of millions in profits. The move intends to paralyse revenue created from illegal petroleum trade, and diminishes the regime’s finance streams for weapon development.
On 11 May 2026, Treasury designated 12 individuals and entities tied to the transaction of Iranian oil to China. It followed the Treasury sanctioning three Iranian foreign currency exchanges and their linked front companies on 1 May 2026. Additionally, 35 entities and persons were designated by OFAC on 28 April 2026, for their supervision of Iran’s shadow banking network.
The sophistication, breadth, and global reach of this NBFI system is highlighted by use of sanctions by the US against 35 entities with alleged links to the Iranian shadow banking system professor of law, Nicholas Ryder, Cardiff University, comments.
“This clearly illustrates the unprecedented threats to the global financial system caused by the current geopolitical risks within the Middle East. This also illustrates that the Iranian shadow banking system will be able to withstand the consequences of being sanctioned by the US Treasury Department.”
The US Treasury froze almost US$500 million in cryptocurrency linked to the regime, disturbing efforts to generate Bitcoin-backed shipping insurance and alternative payment, responding to modern evasion techniques,
These enforcement adds to more than 1,000 sanctions imposed on Iran since February 2025. The US Treasury has described the Islamic Revolutionary Guard Corps as using these shadow banking channels to connect to the global financial system to receive funds for illegal oil transactions, and funnel payments to Iran’s terrorist intermediaries.
Shadow banking today
Shadowing banking, or non-bank financial intermediation (NBFI), has rapidly grown to be worth over US$256 trillion, a 2024 Financial Stability Board (FSB) report found — double the speed of the banking sector in the same year. While NBFI traditionally largely revolved around non-banking lending, it has expanded to a more complex realm of bank-related activities that operate outside the conventional banking environment. NBFIs make up over half of global financial assets. For sanction enforcement it has expanded the list of illicit actors to target from offshore intermediaries, front companies, crypto rails, opaque investment vehicles, and shipping or payment frameworks sitting outside traditional monitoring. While non-bank financial intermediation generally encompasses legal financial activities, its absence of regulatory supervision and transparency generates significant risks, and in some instances aids illicit endeavours.
Iran-linked shadow banking and money laundering operations have evolved over the past decade, La Porte explains: “A decade ago, Iran-linked shadow banking relied on relatively crude shell company chains and hawala networks. What we are dealing with today is categorically different, in that financial crime has become more of a managed service.
“Three forces have driven this evolution: the internationalisation of shell company infrastructure across key financial centers simultaneously; the weaponisation of legitimate trade flows through trade-based money laundering; and the professionalisation of enabling networks, where lawyers, accountants, and company formation agents provide the legal veneer that makes these structures sustainable. However, the compliance frameworks chasing financial crime are still largely designed for the previous generation of the threat.”
Ryder notes: As this system has matured in the last two decades it has created vulnerabilities for money laundering which enabled criminals to move the illicit proceeds of crime through financial systems which are less regulated. This could include for example offshore financial centres and front companies which can be used to hide the origin of the proceeds of crime. It is important to note that money laundering continues to evolve, and financial criminals will continue to exploit a wide range of vulnerable and new markets.”
Dr Illaria, says it is not just that shadow banking has increased in numbers of cases but in the sophistication of the system. “We don’t talk about layering anymore — basically splitting the money into different bank accounts. Or different people carrying the money into another jurisdiction, it’s much more about setting up trust, setting up shell companies using multiple jurisdictions transactions where we have money that goes from one country to another.
“Multiple jurisdictions are involved, to make sure we distance ourselves from the source of the capital. It has become more sophisticated, because criminals adapt.”
She says criminals try to adapt to work around the existing regulatory framework, and heavily employ intermediaries which grey the areas between legitimate and illegal activities and transactions.
NBFIs have more tools at their disposal now, she says. “There is an increase not necessarily in the typologies of money laundering through shadow banking, but simply in the techniques. Like crypto for instance, is a new tool at their disposal.
“Criminals have evolved, but they also have better knowledge. They are helped by professional enablers and intermediaries that might not realise they are money launderers or as part of a criminal organisation. They turn a blind eye to what is happening or they get compensated or a fee or a benefit from being involved or facilitating the transactions.”
Caught in the crosshairs
Asset servicers inadvertently play a critical operational role in the global shadow banking system, acting as the structural pipelines for global wealth. Their primary role of overseeing corporate structure for clients, processing transactions, and storing securities means they often sit adjacent to illicit capital, and frequently come into contact with sophisticated money laundering and kleptocracy. Omnibus accounts and complicated custody systems, for example, can expose firms to anti-money laundering (AML) blind spots, enabling the layering of illicit assets to go unfound. Omnibus accounts create nested risk through combining assets from various investors into a single account. Ultimate Beneficial Ownership (UBO) blind spots occur due to a custodian usually only knowing who intermediary is, not the UBO of the underlying clients. The asset servicer can be unaware of sanctioned entities due to their dependence on the intermediary to carry out Know Your Customer (KYC) checks.
Alternative structures in private equity and hedge funds have less liquid, customs assets, and convoluted capital call mechanism. Consequently, this comparative absence of public market scrutiny enables the underlying economic beneficiaries and counterparties to remain hidden. Illicit actors use Special Purpose Vehicles (SPVs) across numerous, opaque jurisdictions to legally create space between illegal profits from the perpetrators. This results in fund administrators having to resolve complex multi-level AML checks across varying guidelines.
Transfer agents sit on the front of investor onboarding, and are burdened by inconsistent regional KYC standards. Additionally, when transfer agents interact with fund-of-funds or wealth platforms functioning as introducing brokers, they are not always dealing with the true investor, generating a verification gap. As a result agents must certify AML data from third parties running under separate regulatory frameworks. Corresponding banking and settlement systems handle considerable daily volumes through borders at fast speeds. Corrupt actors often try to use the large volume of these cross-border settlements to add illegal money with valid financial streams, intending to conspicuously incorporate them in the financial landscape inconspicuously.
FinCEN identified US$9 billion of Iranian shadow banking activity travelling through international US correspondent accounts in 2024. The actors used multi-layered corporate frameworks across numerous countries to hide the money’s origin. The Treasury found these funds were linked to a wide network of Iranian exchange houses, and offshore front companies, used to avoid sanctions, launder cash, and sponsor military and terrorist programs. Shell companies, only listed on paper with no purposeful business activities, transferred roughly US$5 billion in 2024. Scores of overseas oil firms that appeared as Iranian front companies, including oil firms headquartered in the UAE and Singapore, moved roughly US$4 billion in 2024. FinCEN traced approximately US$707 million to multitudes of shipping firms, thought to carry sanctioned Iranian oil and petrochemicals, with the majority of companies based in Iraq, UAE, or Hong Kong.
Through directing regulatory action against logistical and financial enablers, supervisory agencies are raising the cost of evasion and revealing the wider network to international secondary sanctions.
La Porte, describes the foundational risk for asset servicers and custodians handling cross-border flows linked to high-risk jurisdictions is opacity around beneficial owners, who are the ultimate controllers of assets concealed behind nominee structures across weak-disclosure jurisdictions.
“The Rahbar networks OFAC just designated are a masterclass in how that opacity is operationalised. Beyond ownership, key exposures include unverified correspondent AML controls, commodity-linked flows where price volatility masks trade-based money laundering, and geographic risk creep where high-risk exposure grows incrementally without triggering re-evaluation.
“Red flags to watch include fund routing through intermediary jurisdictions with no apparent business rationale, frequent counterparty substitution mid-transaction, payment structures inconsistent with commodity market norms, and documentation discrepancies coinciding with route or port-of-discharge changes. “The post-crisis ‘unwinding’ window, when backlogs clear quickly, is an acute compliance vulnerability that asset servicers should already be planning for.”
Ryder explains: “The key exposure risks would be potential criminal, civil and regulatory sanctions for not complying with the domestic anti money laundering legal reporting obligations. The liability could extend to both the individual and the company they are employed by depending on the domestic anti money laundering enforcement strategy.”
Dr Zavoli, says it is a major risk for asset servicers or firms to be sanctioned, or linked to a specific group of criminals organisations or a high-risk jurisdiction where there are problems like the Iranian sanction example.
“Second to be used as a channel, obviously for money laundering, but also for terrorist financing activities. The picture is never small. It’s not just about me and my friends and my transaction or pool of clients but it’s much bigger. It’s not even just the sector, it might be the whole economy, it might be the security of the whole country.
Thirdly Dr Illaria says reputation of damage which is a much stronger deterrent than any sanction, any prosecution that might come years later, that might be difficult to prove: “Reputational damage is real and it is immediate. So if you are in the headlines of a newspaper linked to money laundering, there will be reputational damage that has a financial cost for you that is higher and worse, than any prosecution or sanction.”
Dr Zavoli says there are so many red flags to look out for, including: use of very complex entities like shell companies, trust entities based in high-risk jurisdictions, frequent changes in ownership and the structure of the company, and the involvement of a politically exposed person.
“Transactions that are across multiple jurisdictions, transactions where there is a very quick turnaround, money moving quickly from one account to another, from one jurisdiction to another, for no real reason, clients and customers reluctant to give you information, so they are not fully transparent.”
Geopolitical risk
Supervisory bodies are broadening their focus, approaching operational intermediaries such as correspondent banks, shipping managers, and freight forwarders as systematic enablers and are being met with explicit penalties, rather than just the end-actors. There is increased inter-coordination between OFAC and FinCEN, with the latter majorly using systemic compliance data, issuing targeted advisories on shadow banking concerns, and requiring financial institutions to label front companies.
The US economic campaign against Iran was elevated to its highest level, with its implementation of designations against Iran-tied individuals, shipping vessels, and illegal oil-smuggling, and shadow banking operations. Non-US entities complicit in toll payments, enabling Strait of Hormuz passing, or engaging in Iranian trade are being warned they will be blocked from the US financial network. FinCEN has emphasised digital assets, decentralised finance, and opaque foreign exchange houses are being used by the IRGC and linked shadow procurement operations.
On 11 May the FinCEN Advisory provided global financial institutions with a list of red flags to identify and declare suspicious actions linked to dual-use component procurement and Iranian oil smuggling.
The supervisory body issued a warning for financial institutions to spot money laundering operations linked to the IRGC, labelling four core methods IRGC evades sanctions including: commodity sales and misrepresentation of commercial activity, use of exchange houses and layered corporate structures, use of facilitators and other service providers, and digital asset infrastructure.
Secretary of the Treasury Scott Bessent, commented: “Iran’s shadow banking system facilitates the illicit transfer of funding for terrorist purposes.
“As the Treasury systematically dismantles Tehran’s shadow banking system and shadow fleet under Economic Fury, financial institutions must be alert to how the regime manipulates the international financial system to wreak havoc.”
Regulators eyeing AML blind spots
Regulators are proactively reviewing AML guidelines in an effort to address shadow banking. They have moved from prioritising regular KYC to real-time risk reduction. Supervisory agencies are dissembling convoluted corporate layering employed to mask the UBOs. The use of offshore SPVs, non-transparent shell entities, and nominee directors is being heavily reviewed to target corporate anonymity blind spots. Trust firms, service providers, and administrations are progressively being held responsible for cross-checking the underlying origins of the structures they oversee. Authorities are punishing inconsistency and siloing of compliance data across the economic environment. With core AML data kept separate between custodians, administrators, traditional banks, shipping firms, and digital asset platforms, regulatory bodies are calling for holistic, cross-sector data structures to trace funds through these traditionally fragmented networks.
Regulatory bodies such as FinCEN are focusing on decentralised finance being incorporated into illegal state and shadow banking. Cryptocurrencies and stablecoins are progressively being employed as major settlement layers, compared to isolated assets, strongly linking decentralised tech to traditional shadow banking. In FinCEN’s warning it described stablecoins and virtual assets being weaponised by sanctioned actors such as Iran, to circumvent the conventional correspondent banking network. Authorities are progressively underdoing the mechanisms and logistical faces that hide illegal cross-border transactions and are zeroing in on ship-to-ship transfers, fake invoices, and commodity mispricing. The US Treasury and partners are concentrating on tackling misleading shipping activities and shadow fleets that are employed to bypass financial sanctions.
Current AML coordination is significantly lacking and what little exists is structurally mismatched to the threat, La Porte remarks. “Frameworks like the Financial Action Task Force were built for a world of discrete, jurisdiction-specific transactions. Today’s shadow networks are engineered to span multiple legal systems simultaneously, rotate through front companies faster than any static watchlist can track, and exploit weak beneficial ownership transparency in key transshipment jurisdictions.”
Existing frameworks are not keeping pace with the risk, La Porte notes.
“The reforms that would make the most material difference are not more rules, but rather, faster designation and de-listing cycles, harmonised beneficial ownership registers with cross-border access, and real-time intelligence sharing at the correspondent banking level. The goal should be a system that is dynamic, not just comprehensive.”
It is challenging to understand the overall effectiveness of the international anti-money laundering system and its coordination in terms of tackling cross-border money laundering networks, Ryder argues.
“Part of the difficulty here is that unlike the counter terrorism financing provisions that were implemented following the terrorist attacks in September 2001, which are binding on every member of the United Nations by virtue of Chapter 7 of the UN Charter, the same level of application does not apply to the global anti-money laundering systems.”
“The effectiveness of AML coordination will largely depend on efforts by the leading members of the financial action task force to counter the threat of cross-border money laundering networks.”
Tightening AML enforcement
Supervisory bodies are strengthening their implementation of AML rules, with asset servicers and shadow banking networks the key focus. Asset servicers are required to shift from reactive compliance programs, to integrated risk management structures to mitigate compliance blind areas. They are being demanded to improve network analytics through enacting graph-based screening to locate hidden beneficial ownership layers, linked shell companies, and abnormal fund velocity through sophisticated fund structures.
Additionally there is a need for them to change to ongoing UBO verification, using cross-border corporate registries and adverse media screening to thwart the exploitation of proxies. They must boost sanctions surveillance frequency, change yearly or quarterly static screening with real-time screening to keep on top of fast changing sanctions lists, and not face evasion penalties. Additionally, they should integrate specialised monitoring for trade-based money laundering and cross-border convergence risks, especially tracing digital asset trails that link with traditional funds.
Furthermore, they must carry out rigorous vendor risk assets on outsource compliance instruments, data providers, and fund administrators to minimise gaps in supply-chain security.
They should also better cross-functional AML governance, dissemble silos between fraud, cyber, and conventional AML networks. They must build holistic, real-time intelligence sharing, and escalation rules across compliance departments such as custody, treasury, and cyber teams
La Porte says asset servicers should begin with an honest assessment of screening quality to future-proof their AML and compliance frameworks.
“The starting point has to be an honest assessment of screening quality. Many asset servicers are still running name screening processes that are high on false positives and low on genuine intelligence, which generates alert volumes that exhaust compliance teams without meaningfully reducing risk. That is not a sustainable model when the threat environment is moving at the speed we are seeing today.
“This requires a shift from reactive, batch-based screening to continuous, automated screening that can match against updated sanctions lists in real time, with the precision to distinguish genuine risk from noise. That means investing systems with matching capabilities that can catch transliteration variants, aliases, and name permutations — the exact techniques used by Rahbar-linked entities to evade detection.
After screening quality, governance is also important, La Porte explains, as compliance must be embedded in onboarding, not appended to it.
“Critically, there is no one-size-fits-all answer. A custodian handling sovereign wealth mandates carries a different risk profile to one servicing emerging market fund flows, and screening configurations need to reflect that.
“The ability to fully customise screening parameters to an institution’s specific risk-based requirements is what separates a genuinely effective program from a compliance checkbox. The technology exists to do this well. The question is whether firms have the organisational will to modernise before a regulatory action forces their hand.
Ryder states: “The most important aspect that asset providers can do is to comply with all levels of the anti-money laundering legal framework including the customer due diligence, know your customer rules and the enhanced due diligence rules. Furthermore, it is of paramount importance that the employees within the asset service providers are trained to comply with the domestic regional and international anti money laundering standards.
ALM needs to be a serious activity taken seriously, Dr Zavoli, comments. She says checking the source of funds or clients and customer due diligence should be done not just as a tick the box exercise but out of genuine desire for the sector to not be infiltrated by criminals, or tainted by issues such as reputational damage for firms or the sector by being involved in money laundering.”
“Try to maximise the use of resources that are available, guidance from supervisors and AML agencies, but also that you have a robust internal anti-money laundering policy. You cannot expect that everything is covered by the government or by AML agencies and entities.
“You need to do your part and really invest in personnel that are properly trained with IT resources that are able, including AI, to detect possible red flags and dodgy transactions. Ensure that internally you have a robust system in place to protect yourself, so it’s not just a responsibility to the sector, but to protect yourself and your vulnerability.”
Enablers of illicit capital targeted
The recent US Treasury enforcement and May 2026 designations directed at Iran-based Amin Exchange, front companies and 19 oil tankers, and April 2026 actions against 35 shadow banking enablers highlight how supervisory bodies are broadening their focus to explicitly addressing the enablers of illicit capital.
Regulators are viewing operational intermediaries such as correspondent banks, shipping managers, and freight forwarders as systematic enablers, rather than just the end-actors, and meeting them with explicit penalties.
These enforcement actions show supervisory bodies are using secondary sanctions and concerted international efforts to dismantle Iranian-tied shadow banking and are targeting blind spots in multi-jurisdictional supply chains to halt widespread designation evasion.
As shadow banking becomes more institutionalised the challenge for AML is not only identifying the corrupt entities but locating the underlying systems that facilitate them. NBFIs in Iran have increased the sophistication of their operations to a broad network of shell companies, front business, and illegal exchange houses. OFAC is employing cross-border network tracing to dissemble these evasion paths. FinCEN has distributed more stringent financial trend advisories and examinations targeted at the Islamic Revolutionary Guard Corps that penalise fintechs and small banks for KYC compliance negligence.
Asset servicers are facing demands to improve their UBO tracing and supply chain auditing capabilities, as regulators now review concealed transactional activities, such as illegal ship-to-ship transfers and toll payments.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
