Targeting Iran, US Restricts Flow of Dollars to Iraq, Causing Pain
BAGHDAD (AP) — For months, the United States has restricted Iraq’s access to its own dollars, trying to crack down on what Iraqi authorities describe as rampant money laundering that benefits Iran and Syria. Iraq is now feeling the crisis, with a drop in the value of its currency and public anger against the prime minister.
The exchange rate for the Iraqi dinar has jumped to around 1,750 dinars to the dollar at exchange houses in some parts of the country, compared to the official exchange rate of 1,460 dinars to the dollar.
In Baghdad, exchange houses were closed on Thursday, while the Kurdistan Regional Government banned exchange houses in Sulaimaniyah from making transfers.
Mustafa Al-Karawi, a member of the parliamentary budget committee, told the state news agency that the central bank “must comply with the requirements of the Federal Reserve to…reduce the shortage of foreign exchange in the country.” He said that new internal procedures would be put in place to improve access to the currency, while a delegation of Iraqi officials will travel to the US for negotiations next Friday.
The devaluation has already sparked protests. If it persists, analysts said, it could challenge the mandate of the government formed in October after a year-long political deadlock.
The dinar’s deterioration comes despite Iraq’s foreign exchange reserves at an all-time high of around $100 billion, buoyed by rising global oil prices that have generated higher revenue for the oil-rich nation .
But accessing that money is a different story.
Since the US invasion of Iraq in 2003, Iraq’s foreign exchange reserves have been housed at the US Federal Reserve, giving Americans significant control over Iraq’s supply of dollars. The Central Bank of Iraq requests dollars from the Fed and then sells them to commercial banks and exchange houses at the official exchange rate through a mechanism known as a “dollar auction.”
In the past, daily sales through the auction often exceeded $200 million per day.
The vast majority of the dollars sold at the auction appear to go toward buying goods imported by Iraqi companies, but the system has long been porous and easy to abuse, several Iraqi bank officials and politicians told The Associated Press.
US officials confirmed to the AP that they suspected the system was being used to launder money, but declined to comment in detail on the allegations or the new restrictions.
For years, large amounts of dollars were transferred out of the country to Turkey, the United Arab Emirates, Jordan and Lebanon through “grey market trade, using fake invoices for overpriced items,” a financial adviser to the Iraqi prime minister said. , speaking on condition of anonymity because he was not authorized to discuss the matter publicly.
The inflated bills were used to launder dollars, most of them sent to Iran and Syria, which are under US sanctions, prompting complaints from US officials, he said.
In other cases, currency is smuggled across land borders under the protection of armed groups who take a portion of the cash, said Tamkeen Abd Sarhan al-Hasnawi, chairman of Mosul Bank’s board of directors and first deputy of the League of Private Banks of Iraq. He estimated that up to 80% of the dollars sold through the auction went to neighboring countries.
“Syria, Turkey and Iran used to benefit from the auction of dollars in Iraq,” he said.
A member of one of the Iran-backed Iraqi militias, speaking on condition of anonymity because he was not authorized to speak publicly on the issue, said most Iraqi banks are indirectly owned by politicians and political parties who have also used the dollar auction. in your benefit.
Late last year, the Fed began to impose tougher measures.
Among other steps, at the request of the US, the Central Bank of Iraq began using an electronic system for transfers that required entering detailed information about the intended final recipient of the requested dollars. One hundred central bank employees have been trained by the Fed to implement the new system, the prime minister’s financial adviser said.
“This system started rejecting transfers and invoices that used to be approved by the central bank,” he said. “About 80% of the transactions were declined.”
The number of dollars sold daily at the auction plummeted to $69.6 million on January 31, from $257.8 million six months earlier, according to Central Bank records. Far less of the dollars also go towards buying imports, up to around 34% from 90%.
Even when transactions are approved, it takes up to 15 days for banks to get the funds instead of two or three days, Hasnawi said.
Unable to obtain dollars at the official price through banks, he said, traders turned to the black market to buy dollars, causing the price to rise.
In November, the Central Bank of Iraq added four new banks to the list of those prohibited from dealing with dollars. Two US officials confirmed that the Fed requested the blocking of the four banks on suspicion of money laundering. They spoke on condition of anonymity because they were not authorized to comment on the case.
A spokesman for the New York Fed declined to discuss the specific actions taken with respect to Iraq. But the Fed said in a statement that it applies “a robust compliance regime” for the accounts it owns. The statement said that this regime “evolves over time in response to new information, which we collect in the regular course of monitoring transactions and events that may affect an account and in communication with other relevant US government agencies.”
The system of keeping Iraq’s oil revenues in the Federal Reserve was originally imposed by UN Security Council resolutions after Saddam Hussein’s ouster from Iraq in 2003 by the US-led invasion. Iraq later chose to maintain the system to protect its revenue against potential lawsuits, particularly in connection with Iraq’s invasion of Kuwait in the 1990s.
The new US restrictions come at a time of heightened tensions between the US and Iran. Negotiations on a nuclear deal are faltering. Washington has imposed new sanctions and condemned Iran for cracking down on protesters and providing drones for Russia to use in Ukraine.
Additionally, in Iraq, allegations that more than $2.5 billion in Iraqi government revenue was embezzled came to light in October. by a network of companies and officials of the country’s tax authority
The case “drew (US) attention to the scale of corruption in Iraq” and how corruption can benefit Iran and other parties hostile to the US, said Harith Hasan, head of the Iraq unit. at the Emirates Research Center, an Abu Dhabi-based think tank.
The new Iraqi prime minister, Mohammed Shia al-Sudani, who came to power through a coalition of Iranian-backed parties, does not have a strong relationship with the US that could have allowed him to soften the implementation of the new financial measures, They have said.
Al-Sudani has downplayed the current devaluation as “a temporary issue of bargaining and speculation.” He replaced the governor of the Central Bank and instituted measures aimed at ensuring the supply of dollars at the official exchange rate.
Al-Hasnawi said that the recent government measures will not stop the financial bleeding. If the current situation persists, he said, “within a year, most banks will go bankrupt” and there is likely to be mass civil unrest.
“This US pressure impacts the Iraqi street in a clear way, and we don’t see clear solutions so far,” he said.
AP writers Samya Kullab in Baghdad and Christopher Rugaber in Washington contributed to this report. Sewell reported from Beirut.