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The U.S. Warning and Sanctions: A Direct Shot at Iraq’s Oil SectorThe U.S. has threatened to impose sanctions on Iraq’s state-owned oil marketing company, SOMO, and to freeze approximately $350 million in Iraqi revenue held in U.S. accounts if Baghdad does not address the smuggling operations and sever ties with Iran-aligned armed groups.
This alert was reported by Iraqi media outlets, highlighting the Biden administration’s intent to disrupt Iran’s ability to evade international sanctions through proxy networks. Just days prior, on July 3, 2025, the U.S. Treasury Department announced a new round of sanctions against a diverse array of entities and vessels involved in Iran’s shadowy oil trade. These measures target not only Iran’s “shadow fleet”—a collection of aging tankers used to transport sanctioned oil—but also an Iraq-based smuggling ring led by Iraqi-British businessman Salim Ahmed Said. Said’s network, operational since at least 2020, has reportedly generated billions in revenue for Iran and its proxies by blending Iranian crude with Iraqi oil and selling it under false pretenses.
The sanctions also extend to Hezbollah-linked financial institutions, such as Al-Qard Al-Hassan, which has facilitated millions in transactions benefiting the militant group. This dual focus on oil smuggling and terrorism financing reflects the U.S. view that these activities are interconnected, with proceeds from illicit oil sales bolstering Iran’s support for groups like Hezbollah and various militias in Iraq.
How the Smuggling Operation Works
Once in Iraq, it is blended with legitimate Iraqi crude at facilities managed by companies like VS Oil Terminal FZE, often with the complicity of local officials who authenticate the falsified shipments. Forged documents then label the mixture as purely Iraqi oil, allowing it to be exported to buyers in the West, Asia, and beyond. Estimates suggest this network alone has smuggled volumes worth at least $1 billion annually since 2022, diverting funds to Iran and its allies.
Payments are often returned to Iran in hard currency via overland routes, further evading financial tracking. Involved vessels include the DIJILAH, MOLECULE, and FOTIS, among others, many of which are flagged under jurisdictions like the Marshall Islands or Cameroon to obscure ownership.
Iraqi officials have responded by planning to summon the Oil Minister for questioning in parliament, but denials from implicated companies, such as VS Tankers, indicate potential legal pushback.
Baghdad has also clamped down on some smuggling routes, but critics argue these efforts are insufficient given the deep entrenchment of Iran-backed militias in Iraq’s oil sector.
Ties to Iran and Broader Implications for Global Energy Markets
Of particular concern is the potential for this blended oil to reach U.S. refineries, funding terrorism while violating sanctions. Iraq has become a top OPEC supplier to the U.S., with California refineries playing a key role in processing imported crude.
While no direct evidence confirms Iranian-origin oil has been sold explicitly into California via these Iraqi channels, accusations persist that smuggled blends may inadvertently—or knowingly—end up in U.S. facilities, including those in the Golden State, due to the opacity of the supply chain
Looking Ahead: Sanctions’ Impact and Iraq’s Dilemma
For Iran, the crackdown aims to choke off vital funds amid its nuclear ambitions and regional proxy wars.
As energy markets watch closely, the U.S. push signals a zero-tolerance policy on sanctions evasion. Iraq now faces a precarious balancing act: curb smuggling and militia ties without alienating Iran, its powerful neighbor. Failure to act could invite broader economic isolation, while success might pave the way for greater energy independence and stability in the region.
