Democrats slam Tether’s ‘pervasive’ role in Iran shadow banking

Senate report targets Tether and Iran

Senate Democrats think Tether’s USDT stablecoin is helping Iran evade U.S. sanctions, while Tether thinks it lost $64 million due to yet another U.S. bank scandal.

On Monday, the Democratic members of the U.S. Senate Permanent Subcommittee on Investigations (PSI) issued a report titled Tethered to Terrorism: Crypto & Iran’s Shadow Banking Network. The report claims “Tether’s role in Iranian shadow banking is unprecedented and pervasive,” and USDT is allowing the Islamic Republic to “prop up the regime and sustain its regional security threats.”

The PSI Dems did a forensic analysis of 847 digital wallets that were either sanctioned or targeted for seizure due to their links to Iran and its regional proxies. The report claims 84% of these wallets have “transacted exclusively, or nearly exclusively” in USDT.

The report cites $603 million in USDT being processed over four years, spanning 2021-2025, by two sanctioned Iranian oil smugglers. The funds flowed through a network connecting Iranian financial institutions with Iranian proxies Hezbollah in Lebanon and the Houthis in Yemen. The report likens this network of money launderers, unregulated exchanges, and other intermediaries to “digital versions of hawala networks that have long concerned national security officials.”

Twisting the knife, the report claims evidence of Iranian-linked transactions involving USDC, the second-largest stablecoin issued by Tether’s U.S. rival Circle, “was extremely limited in the Subcommittee’s analysis, appearing only in a few transactions by the sanctioned Iranian exchange Shelbit.”

The report calls into question “the adequacy, or indeed even the existence, of Tether’s efforts to proactively investigate clear signs of Iranian shadow banking using USDT.” The report also questions “the extent to which Tether acts on such clear indicators of illicit finance by its business partners, including Binance and Chinese-founded exchanges.”

While the report acknowledges that “in some instances” Tether will respond to sanctions and designation orders, “these efforts still appear uneven and inconsistent.” Regardless, “Iran remains undeterred in its continued use of Tether,” and the company’s “unhurried approach to blacklisting sanctioned wallets raises grave questions about the adequacy of the company’s oversight and anti-money laundering measures.”

The Wall Street Journal reported that the PSI Dems had referred their report to officials at the Department of Justice and Treasury.

In June, the PSI sought input from Tether regarding its handling of transactions involving Iranian entities and sanctioned exchanges. The PSI said Tether acknowledged receipt of their request, then basically ghosted them.

Tether defends compliance efforts

Tether found its voice Monday, not by responding to the PSI, but by issuing a press release touting it having “supported nearly $550 million in Iran-linked USDT freezes as U.S. expands sanctions campaign.” The release said Tether had “reaffirmed its longstanding cooperation with U.S. and international law enforcement” efforts to disrupt Iran’s sanctions-evasion networks.

Tether’s PR largely focuses on this year’s freezing actions, which ramped up once the U.S. bombing campaign against Iran ran out of steam and the Treasury Department sought additional ways to make Iran squeal.

Tether declared its willingness to work “in close alignment with law enforcement, not through words but through action and precise, real-time support.” Tether CEO Paolo Ardoino claimed the company “has consistently demonstrated that USDT is not a haven for sanctioned actors, terrorist organizations or criminal networks.”

That wasn’t always the case, as Tether once claimed its hands were tied when it came to freezing certain wallets. And both Tether and Circle have been publicly criticized for failing to act in a timely manner in freezing tokens stolen by hackers.

In response to U.S. law enforcement directions, Tether has also frozen USDT linked to pig butchering scammers, whose preference for USDT was reflected in stats showing USDT played a role in 84% of pig butchering scams. Some scammers recently tried to use U.S. courts to get Tether to unfreeze over $42 million worth of their USDT.

The PSI report says Tether’s “deep connections to the Trump Administration … raises questions as to whether Tether has received lax enforcement and lenient oversight over its anti-money laundering obligations from relevant authorities.”

Those deep connections include Howard Lutnick, U.S. Commerce Secretary and founder of Cantor Fitzgerald, the Wall Street firm that claims to custody the ~$115 billion in U.S. Treasuries currently backing up issued USDT. Tether reportedly loaned money to a trust benefiting Lutnick’s children when their father was forced to divest his Cantor holdings to join Trump’s cabinet.

There’s also Bo Hines, the former White House Crypto Council director, who was appointed CEO of Tether’s U.S.-facing division one year ago. Tether U.S. has issued USAT, which the company claims will be compliant with America’s GENIUS Act governing stablecoin usage, leaving USDT free to remain noncompliant.

The Dems’ willingness to question the administration’s alleged disinterest in policing Tether could prove more consequential should the Dems do well in November’s midterm elections. Reuters recently reported that Democrats are already planning to probe Trump family members’ business deals, including their highly lucrative crypto ties, if they regain the majority in either legislative chamber.

Armed with subpoena power, Dems could extend those probes to Lutnick and Cantor, who reportedly hold a 5% stake in Tether as a consequence of its T-bill custody deal.

Department of Justice targets processor Capstone

On September 24, The Information reported that the Department of Justice had seized bank accounts belonging to Capstone Ltd, a Montana-based payment processor helping to move money on behalf of both Tether and its sister company, the Bitfinex exchange. The accounts were seized in early April.

The DoJ filed a forfeiture complaint targeting a total of $84.2 million, most of it in Capstone-controlled accounts at Wells Fargo and JPMorgan Chase banks. The total also included nearly $1.2 million worth of USDT in Capstone’s possession. Federal Bureau of Investigation agents raided the homes of Kotaro Shimogori and Mary Jeanne Thompson, the husband-and-wife team believed to be Capstone’s owners.

The DoJ accuses Capstone of operating without the necessary money-transmitting permits and misrepresenting the nature of its operations to the banks cited above by claiming it was an ‘IT services company’ when it opened the accounts.

Funds flowing through Capstone accounts were linked to an “impersonation fraud” scam preying on elderly victims. The scam involved calling seniors and pretending to be credit card company staff, alerting them to unauthorized purchases. The victims would then be asked to ante up more cash to assist the investigation.

The day after a victim’s funds arrived in Capstone’s Chase account, a similar amount would be sent as USDT to a foreign counterparty. The DoJ alleges that fraud proceeds were commingled with a larger illegal money transmitting operation for a ‘Dominica Bank’ on behalf of an unspecified ‘cryptocurrency company’ and an affiliated ‘cryptocurrency exchange.’

On September 25, the Financial Times outed Tether and Bitfinex as the two unnamed firms in the complaint on whose behalf Capstone had made payments to “hundreds of individuals and entities.”

Capstone also held an account at Citi, but it was closed in May 2025 due to “identified anti-money laundering concerns.” Capstone subsequently moved $65 million to Wells Fargo.

Over $700 million passed through the Wells Fargo account between March and December 2025, some of it used to purchase U.S. Treasuries. Excluding T-bills, about $337 million was paid out via this account, “almost two-thirds” of which “appeared to go to hundreds of individuals on behalf of [Tether and Bitfinex].” Most of these individuals were based outside the U.S.

A Capstone lawyer said the company “denies any wrongdoing and plans to challenge the government’s civil asset forfeiture complaint and its allegations.”

Capstone allegedly moved money at the direction of Dominica-based EQIBank, which specializes in online payments. Capstone started doing business with EQIBank in August 2024.

In June, EQIBank filed a motion for the return of its property, saying it “was led to believe by Capstone personnel that it was properly registered and maintained relationships with multiple U.S. banking institutions.” EQIBank also claims the frozen Capstone funds “constitute roughly 80% of [EQIBank’s] monetary assets” and warned that it “faces a liquidity crisis and cannot operate much longer without access to at least some portion of these funds.”

The FT reported that Tether’s investment adviser took a stake in EQIBank and suggested last year it could take a larger stake if EQIBank could facilitate the “successful opening of at least one bank account” for Tether at Singapore’s leading consumer bank DBS.

Tether and Bitfinex told the FT that they are EQIBank “customers” but have “no knowledge of the fraudulent conduct by Capstone alleged by the DoJ.” The companies said their assets held at EQI are “limited.”

Tether issued a statement saying the company’s holdings at EQIBank amounted to “less than 0.034% of the assets of the group,” but didn’t specify a precise dollar amount. Based on the total assets in Tether’s Q2 reserve asset attestation as of June 30, that fraction would amount to ~$64 million. For what it’s worth, the cash portion of Tether’s Q2 assets was $40.3 million, down $67 million from the cash pile reported as of March 31.

This incident is a vivid illustration of the difficulties Tether has had in establishing U.S. banking rails. It could also reflect why Tether keeps so little of its reserve assets in cash held in bank accounts.

Tether has declined to seek licensing under the European Union’s Markets in Crypto Assets regulatory scheme in part due to the rules requiring large stablecoin issuers to keep up to 60% of their reserves in cash in EU bank accounts.

As one online observer noted, while Tether enjoys a T-bill custody relationship with Cantor Fitzgerald, Tether “has lacked a reliable high-volume on-ramp/off-ramp bank, because any sensible bank that looks at the business says that it looks like a very large money laundering front.”