US warns banks of sanctions risk over China’s ‘teapot’ refinery that handles Iranian crude oil

The U.S. Treasury Department on Tuesday warned financial institutions that they could face sanctions if they do business with Chinese refineries that process Iranian crude oil.

In a statement, the Treasury Department urged financial institutions to avoid facilitating transactions involving independent refineries known as “teapots” that import Iranian crude oil, as they could be subject to sanctions.

The Treasury noted that China buys about 90% of Iran’s oil exports, with the Teapot refinery accounting for the bulk of imports.

“This revenue ultimately benefits the Iranian regime, its weapons program, and its military. Some Chinese teapot refineries use the U.S. financial system to conduct dollar-denominated transactions and procure U.S. products,” the Treasury Department added.

It also called on the agencies to “conduct enhanced due diligence” on transactions involving China-based refineries, particularly those in Shandong province, and other Asia- and Middle East-based companies involved in the oil supply chain from Iran to China.

U.S. Treasury Secretary Scott Bessent said on the X show that the Treasury Department “will continue to apply maximum pressure, and any person, vessel or entity that facilitates illicit flows into Tehran risks U.S. sanctions.”

Bessent said Iran’s main export terminal on The Hague Island would “soon reach storage capacity”, which could force Iran to cut production and result in a loss of about $170 million in revenue per day.

The move comes as the US government aims to cut off sources of revenue to Iran as part of the “maximum pressure” campaign imposed by US President Donald Trump in February, weeks before the war with Iran began.

Last week, the United States sanctioned Hengli Petrochemical (Dalian) Refinery, one of China’s largest teapot refineries, for being one of Iran’s biggest customers for crude oil and petroleum products.

Four other Teapot refineries were also sanctioned. The Ministry of Finance also expanded the dragnet to include port terminal operators in Shandong province and logistics service providers related to Iranian oil transportation.

Iranian crude oil is typically transported to China’s Teapot refinery using a “shadow fleet” of tankers. A tanker is a licensed vessel that manipulates location data to avoid detection.

Many cargoes involve multiple transfers from shore to ship, sometimes using derelict vessels that are no longer operating in the Persian Gulf or the Straits of Malacca to obscure their origins.

In some cases, Iranian crude oil may be blended with supplies from other countries or relabeled with counterfeit documents to further conceal its origin, most commonly known as ‘Malaysian Blend,”’ the Treasury said.

The warning comes less than a month before President Trump’s planned visit to Beijing to discuss trade and investment.

In a meeting with Iranian Foreign Minister Abbas Arakchi last week, Chinese Foreign Minister Wang Yi said Beijing opposed “abuse of force and illegal unilateral sanctions.”

The US and Iranian governments are currently adhering to an indefinite ceasefire announced by President Trump, but tensions remain high. Iran has not yet reopened the Strait of Hormuz, but the US maintains a blockade of Iranian ports.

—CNBC’s Anniek Bao and Evelyn Cheng contributed to this report