Targeting Iran, US tightens Iraq’s dollar flow, causing pain

BAGHDAD (AP) – For months, the United States has restricted Iraq’s access to its own dollar, seeking to end what Iraqi officials describe as rampant money laundering that benefits Iran and Syria . The crunch now hinges on Iraq, with its currency falling in value and public anger blowing back against the prime minister.

The exchange rate for the Iraqi dinar has risen to around 1,750 to the dollar at street exchanges in some parts of the country, compared to the official rate of 1,460 dinars per dollar.

In Baghdad, exchange houses were closed on Thursday, and the Kurdistan Regional Government banned exchange companies 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 “meet the requirements of the Federal Reserve to…reduce the shortage of hard currency in the country.” He said new domestic procedures would be implemented to improve access to currency, and a delegation of Iraqi officials will travel to the US for negotiations next Friday.

The devaluation has already sparked protests. If it continues, analysts said, it could challenge the mandate of the government formed in October after a year-long political stalemate.

The dinar’s decline comes even though Iraq’s foreign currency reserves are at an all-time high of about $100 billion, boosted by rising global oil prices that have brought increased revenues to the petroleum-rich nation.

But getting access to that money is a different story.

Since the US invasion of Iraq in 2003, Iraq’s foreign currency reserves have been deposited in the US Federal Reserve, giving the Americans significant control over Iraq’s dollar supply. 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 the “dollar auction”.

In the past, daily sales through the auction often exceeded $200 million per day.

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Apparently, the vast majority of the dollars sold at the auction are meant to go toward the purchase of goods imported by Iraqi companies, but the system has long been porous and easily abused, multiple Iraqi banking and political officials said. The Associated Press.

US officials told the AP they suspected the system was being used for money laundering 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 “gray market trade, using fake invoices for overpriced items,” which said a financial adviser to the prime minister of Iraq, speaking. on condition of anonymity because he was not authorized to discuss the matter publicly.

The inflated invoices were used to launder dollars, and most of them were sent to Iran and Syria, which are under US sanctions, which led to complaints from American officials, he said.

In other cases, the currency is smuggled across land borders under the protection of armed groups who take a cut of the cash, said Tamkeen Abd Sarhan al-Hasnawi, chairman of the board of the Bank of Mosul and the first representative of the League of Private Banks in Iraq . He estimated that as much as 80% of the dollars sold through the auction went to neighboring countries.

“Syria, Turkey and Iran benefited from the dollar auction in Iraq,” he said.

A member of one of the Iraqi-backed Iranian militias, who spoke on condition of anonymity because he was not authorized to speak publicly on the matter, said that most banks in Iraq are indirectly owned by politicians and political parties who have used the dollar auction too. for their benefit.

Late last year, the Fed began to impose tougher measures.

Among other steps, at the request of the United States, the Central Bank of Iraq began using an electronic system for transfers that required the entry of detailed information on the intended final recipient of the requested dollars. The Fed has trained one hundred Central Bank employees to implement the new system, the prime minister’s financial adviser said.

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“This system started rejecting transfers and invoices that used to be approved by the central bank,” he said. “About 80% of the transactions were being rejected.”

The amount of dollars sold daily at the auction fell to $69.6 million on January 31, from $257.8 million six months earlier, according to Central Bank records. Far fewer dollars are also going towards buying imports, down to about 34% from 90%.

Even when transactions are approved, it takes up to 15 days for banks to receive the funds instead of two or three days, Hasnawi said.

Unable to get 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 in dollars. Two US officials confirmed that the Fed requested that the four banks be blocked because of suspected 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 measures taken in relation to Iraq. But the Fed said in a statement that it operates a “robust compliance system” for the accounts it holds. The statement said that this regime “emerges over time in response to new information, which we collect during regular monitoring of transactions and events that may affect an account and in communication with other relevant agencies of of the US government.”

The system to keep Iraq’s oil revenues at the Fed was first imposed by United Nations Security Council resolutions after the 2003 invasion of Saddam Hussein by the US-led invasion of Iraq. Later, Iraq chose to retain the system to protect its revenue from possible lawsuits, particularly regarding Iraq’s invasion of Kuwait in the 1990s.

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The new US restrictions come with heightened tensions between the US and Iran. Nuclear deal negotiations are collapsing. Washington has imposed new sanctions and criticized Iran for its crackdown on protesters and for supplying Russia with drones for use in Ukraine.

Also, in Iraq, allegations surfaced in October that more than $2.5 billion in Iraqi government revenue had been embezzled. by a network of businesses and officials from the country’s tax authority

The case “brought (US) attention to the scale of corruption in Iraq” and how the corruption can benefit Iran and other parties hostile to the US, said Harith Hasan, head of the Iraq unit at the Emirates Research Centre. Abu Dhabi-based think tank.

The new prime minister of Iraq, Mohammed Shia al-Sudan, who came to power through a coalition of parties backed by Iran, does not have a strong relationship with the US that could enable him to implement the new financial measures, Hasan, to moderate. said.

Al-Sudani has downplayed the current devaluation as a “temporary issue of trade and speculation.” He replaced the governor of the Central Bank and measures were initiated to ensure the supply of dollars according to the official rate.

Al-Hasnawi said the government’s recent measures will not stop the financial crisis. If the current situation continues, he said, “within one year, most of the banks will declare bankruptcy” and there will likely be major civil unrest.

“This pressure from the US has a clear impact on the Iraqi street, and we don’t see clear solutions so far,” he said.


AP staff reporters Samya Kullab in Baghdad and Christopher Rugaber in Washington contributed to this report. Sewell reported from Beirut.


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