Recent revelations have shed further light on significant issues facing the embattled Middle Eastern nation of Iraq with respect to its growing role as a major player in cross-border money laundering activity and the international ramifications that could soon follow.
Last year, Global RADAR reported on actions taken by the United States Treasury Department against Iraq in order to address the tangible risks its inadequacies in the realm of AML/CFT compliance pose to the integrity of the international financial system. In spite of economic sanctions taken against the Republic and a significant uptick in oversight by the American government over Iraq since 2022, financial crime has for years run rampant within their central bank, with fraud, money laundering, and sanctions evasion efforts being seen on behalf of its counterpart, Iran. As such, the United States government has been pressing the Iraqi financial sector for several years to improve their safeguards to better detect illicit financial activity – specifically those related to currently imposed economic sanctions against regional threats – in order to limit funds being funneled to sanctioned entities for use in funding terrorism activity and other destabilizing activities. Given the country’s ongoing failures, the U.S. ultimately moved to increase pressure on the embattled Republic by blacklisting 14 Iraqi banks in July of 2023, effectively barring them from engaging in U.S. dollar transactions. In the time to follow, the Treasury has also identified other banks operating with risks that require immediate remediation given their propensity to be used as tools for money laundering.
Unfortunately, the private banking boom and the subsequent supervisory authority needed to avoid widespread illicit activity across the nation and beyond appears to have become too much for the Iraqi government to handle. While prominent government officials have vowed to continue fighting against the corruption and crime that have historically plagued their financial sector, to date the actions backing these statements have come few and far between. Of the over 70 private banks seen across Iraq, nearly one-third of these firms have already found themselves on U.S. sanctions lists. Yet while the U.S. government has called on Iraq’s central bank to address these developments and put the clamps on illicit finance within their jurisdiction, limited traction has been made in this regard. As such, the U.S. Treasury is now having to explain how an Iraqi financial system essentially developed from the ground up by their own government has worked to the specific advantage of one of our most potent foes in Iran and its network of terrorists.
In January of 2024, the U.S. Treasury issued a press release in which they outlined abuses within the Iraqi financial sector and how they were taking action to address it. They chose to highlight one bank, Al-Huda, for the focus of the press release. Al-Huda is an Iraqi bank that was said to be a conduit for terror financing and primary concern for the Financial Crimes Enforcement Network (FinCEN) of the Treasury. “Iraq has made significant progress in rooting out illicit activity from its financial system, but unscrupulous actors continue to seek to take advantage of the Iraqi economy to raise and move money for illicit activity,”2 said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson at the time. “By identifying Al-Huda Bank as a key money laundering channel for destabilizing terrorist activity by Iran, proposing a special measure that will sever its correspondent banking access, and imposing sanctions on its owner, we can help protect the Iraqi financial system and its legitimate businesses, as well as the international financial system, from abuse by Iran and other illicit actors.”2
Upon reading the January press release, one might assume that problem in Iraq was strictly affecting Al-Huda Bank and perhaps sanctioning them would solve the problem. However, it has become apparent that the corruption in Iraq’s banking sector is much more rampant than the Treasury has led the public to believe. In a bombshell story published by the Wall Street Journal this past week, it was revealed that hundreds of millions – if not billions of dollars have been sent to various global terror groups from a list of over two dozen Iraqi banks over the years. What is worse is that they wired this money through the Federal Reserve Bank of New York without disclosing who the recipients were.1
U.S. officials have linked illegal financial activity in Iraqi banks directly to funding provided to arms of the government of Iran as well as its military allies such as the IRGC’s Quds Force, with Iraqi operatives utilizing front companies and falsified invoices to circumvent sanctions that block Iran from the global financial system.1 The American government has been paying particular attention to Iraq’s so-called dollar auction, where the central bank requests dollars from the U.S. Federal Reserve before selling them to commercial banks, which in turn sell to businesses in their import-dependent economy, with over $200 million being auctioned on a day-to-day basis.The issue with this process lies in the fact that large sums of money were long being illegitimately acquired by groups who would provide fake invoices before ultimately smuggling large volumes to neighboring countries, many of which are already subjected to heavy U.S. sanctions (i.e. Iran). According to U.S. officials, up to 80% of daily wire transfers through Iraqi banks, amounting to $250 million, were untraceable. A sizable chunk of these funds are believed to have reached Iran and its terrorist partners; some of these partners being Hamas in Gaza who are currently in conflict with Israel, as well as Hezbollah in Lebanon. What makes these findings even more troubling is the fact that the U.S. Central Intelligence Agency (CIA) had warned about Iraq’s corrupt banking system back in 2012, but the Obama administration in office during this period took no action to thwart further sanctions evasion efforts of this nature. This inaction lasted a full decade until the issue became to significant to sweep under the rug any longer – with the U.S. federal government’s excuse for their lack of action being a fear of strangling the Iraqi financial sector with too many regulations.3 Interestingly, the Treasury Department has no issue with over-regulating financial service providers across the United States, but foreign markets with ties to terror financing is where they draw the line.
Given that Iran is heavily sanctioned for its nuclear program and radical Islamic terror financing, they rely on beating the system in order to stay afloat financially. Instead of further constricting any additional revenue streams available to Iran for buying and developing weapons or financing the militia groups it supports, the U.S.’s ad hoc financial system created for Iraq after the U.S. invaded the country in 2003 ultimately proved to to work to the direct benefit of Iran by excluding arguably the most important safety check in any international banking operation: divulging the specific recipients of funds being wired out. As such, an unimpeded outflow of lifeblood in the form of hundreds of millions of American dollars has been sent to a country who is in turn using those funds to directly harm the U.S. and its allies.
Playing catch-up over 10 years later, the Treasury has issued more sanctions against more Iraqi banks. They are also choosing to again put their faith in the stagnant Iraq central bank by teaming with the entity to end all Federal Reserve transfers for Iraqi banks by the end of the year. To supplement these changes, the Treasury has instituted a new pilot program in which four Iraqi banks process dollar programs through Citigroup in which the American financial services staple will be responsible for screening the transactions and verifying the recipients. This kind of says it all, does it not? Even the U.S. federal bureaucracy itself trusts the private sector to do its job better than it can. Nevertheless, in spite of these sweeping changes, Iran will undoubtedly continue its efforts to milk precious funds from Iraqi banks to fund its destabilizing activities moving forward. Time will tell however if the Treasury’s changes will ultimately help to protect American interests on the global scale.
Citations
- Cloud, David S. “Iraqi Banks Used U.S.-Created System to Funnel Funds …” The Wall Street Journal, 8 Sept. 2024.
- “U.S. Treasury Takes Action to Protect Iraqi Financial System from Abuse.” U.S. Department of the Treasury, 29 Jan. 2024.
- Cloud, David S. “WSJ News Exclusive | Iraq Economy Reels as U.S. Moves against Money Flows to Iran.” The Wall Street Journal, 19 Jan. 2023.
