US bars 14 Iraqi banks in crackdown on Iran dollar trade

Fourteen private Iraqi banks have been blocked from buying US dollars from the Central Bank of Iraq as part of a US Treasury Department crackdown on the smuggling of dollars to Iran by way of the Iraqi financial system.

The banks have been barred from buying the US dollar through the "foreign currency auction window", known as the dollar and wire auctions.

This is an officially approved mechanism to cover the foreign currency needs of public and private banks and commercial enterprises, and ensures these institutions are able to fund their financial activities and foreign trade.

The US move is part of a broader effort to prevent Iran from depleting Iraq's dollar currency reserves, via phony or falsified import transactions conducted with inflated invoices or fraudulent financial transfers.

"These actions help limit the ability of bad actors seeking to launder US dollars, profit from the exploitation of money owned by the Iraqi people, and evade US sanctions," US State Department spokesman Vedant Patel said July 27.

Patel noted that corruption poses a challenge for Iraq's banking sector, and that the US and Iraqi governments are working together to tackle this challenge.

Trading in dollars by buying them from Iraq's foreign currency auction window at the official rate and reselling them on the "parallel" or "black market" to traders and suppliers at a higher price is a source of rampant corruption.

Iran's allies have exploited the banking system to their own ends.

Central Bank standards

The ban on dollar transactions stemmed from an audit of money transfers made by the listed banks over the past year, according to the Central Bank of Iraq.

The Central Bank of Iraq works with the US Treasury to implement Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) initiatives.

Under this partnership, an "electronic platform" was developed to ensure the integrity and accuracy of money transfer transactions in all aspects, according to international standards and practices, the Central Bank said.

Since the end of last year, additional restrictions have been imposed on requests for the dollar to trace its route, including the creation of a comprehensive database on customers and ultimate beneficiaries of currency purchases.

This includes information on whether the parties involved met the requirements of disclosure of the commercial or financial activity with compliance documents and certificates.

Under the restriction procedures, 80% of financial transfers to entities and individuals were blocked because of either violations or non-compliance with the established legal requirements.

Following financial investigations, the first US list of barred banks was released in November, naming four private Iraqi banks that were denied participation in currency auctions.

Money shops

When the first list came out, the 14 banks were "warned" that they would be included on a second list if they failed to correct their situation, economist Abdul Rahman al-Mashhadani told Al-Mashareq.

They were given enough time to comply but failed to do so, he said, and today they are accused of violating the rules and norms of financial transactions.

Border crossing and airport security authorities recently arrested individuals who held "dozens of credit cards" issued by the listed banks that they were trying to smuggle out of the country.

They apparently intended to use them to withdraw money in dollars.

The banks, which experts describe as "money shops", also fueled the parallel market by providing financing to traders to import goods from countries that are under international sanctions, such as Iran.

These actions have adversely affected the value of the Iraqi dinar.

Traders "buy the dollar at whatever price to finance their foreign trade, which leads to an increase in demand for it and its scarcity in the market", al-Mashhadani said.

Many "traders and others" do not buy dollars via the official auction window to avoid having to deal with the money transfer compliance requirements, he said.

This leads to an increase in the dollar's exchange rate against the dinar on the black market, according to the Central Bank.

Suspicious transactions with Iran

Iraq remains largely dependent on "importing the commodities it needs" from abroad, specifically from Iran, al-Mashhadani said.

The value of the Iraqi private sector's imports from Iran is estimated at between $8 and $10 billion annually, he said, "which is a huge number".

Around 25% of Iraq's foreign trade is financed through the parallel market, and Iran gets the lion's share of it. Over the past three months, the value of non-oil imports has totaled about $2.3 billion.

A large part of this trade involves "suspicious transactions" that end up smuggling dollars into Iran's coffers.

Some banks are accused of using money transfer companies and the hawala system (informal networks) in the Middle East to avoid scrutiny.

But dozens of commercial and state-owned banks that participate in the currency auction are conducting their financial activities normally and in compliance with the controls and regulations.