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 dollars, trying to stamp out what Iraqi officials are calling rampant money laundering benefiting Iran and Syria. Iraq is now feeling the pinch as its currency depreciates and public anger backfires on the prime minister.
The exchange rate for the Iraqi dinar has risen to around 1,680 per dollar on street exchanges, compared to the official rate of 1,460 per dollar.
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 depreciation comes even as Iraq’s foreign exchange reserves are at an all-time high of around $100 billion, inflated by soaring global oil prices that have boosted revenues for the oil-rich nation.
But access to that money is another story.
Since the US invasion of Iraq in 2003, Iraq’s foreign exchange reserves have been housed with the United States Federal Reserve, giving the Americans significant control over Iraq’s dollar reserves. The Iraqi central bank requests dollars from the Fed and then sells them to commercial banks and bureaux de change 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 are said to be used to buy goods imported by Iraqi companies, but the system has long been leaky and easily abused, several Iraqi bank and political officials told The Associated Press.
US officials confirmed to the AP that they suspect the system was used for money laundering, but declined to comment on the allegations or the new restrictions.
For years, large amounts of dollars were transferred to Turkey, the United Arab Emirates, Jordan and Lebanon through “grey market trading using fake invoices for overpriced items,” a financial adviser to the Iraqi prime minister said on condition of anonymity because he was not authorized to discuss the matter publicly.
The inflated bills were used to launder dollars, with most of them being sent to Iran and Syria, which are under US sanctions, prompting complaints from American officials, he said.
In other cases, the currency is smuggled across land borders under the protection of armed groups who take some of the cash, said Tamkeen Abd Sarhan al-Hasnawi, chief executive of Mosul Bank and first deputy of the Iraq Private Banks League. 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 dollar auction in Iraq,” he said.
A member of one of the Iran-backed militias in Iraq, who spoke on condition of anonymity because he was not authorized to speak publicly on the issue, said the majority of Iraq’s banks are indirectly owned by politicians and political parties, who would also have used the dollar auction to their advantage.
Late last year, the Fed began imposing tighter measures.
Among other things, at the request of the US, the Iraqi Central Bank began using an electronic system for remittances, which required entering detailed information about the intended ultimate 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 has started rejecting remittances and bills that were earlier approved by the central bank,” he said. “About 80% of transactions were declined.”
The daily dollar amount sold at the auction fell to $69.6 million on Jan. 31, from $257.8 million six months earlier, according to central bank records. Far fewer of the dollars also go to buying imports, from 90% to about 34%.
Even if transactions are approved, it takes banks up to 15 days to receive the money, instead of two or three days, Hasnawi said.
He said traders were unable to get dollars through the banks at the official price and turned to the black market to buy dollars, causing the price to rise.
In November, the Iraqi central bank added four new banks to the list of banks banned from trading in dollars. Two US officials confirmed that the Fed had requested the four banks be frozen on suspicion of money laundering. They spoke on condition of anonymity as they were not authorized to comment on the case.
A New York Fed spokesman declined to discuss the specific actions being taken in relation to Iraq. However, the Fed said in a statement that it enforces “a robust compliance regime” for the accounts it maintains. The statement said that this regime “evolves over time in response to new information we collect as part of our regular monitoring of transactions and events that may affect an account and in communications with others relevant.” US Government Agencies”.
The system of keeping Iraqi oil revenues with the Fed was originally imposed by UN Security Council resolutions after the 2003 US-led invasion of Iraq toppled Saddam Hussein. Later, Iraq chose to keep the system in order to protect its revenues from potential lawsuits, particularly related to 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 have stalled. Washington has imposed new sanctions and condemned Iran for cracking down on protesters and providing drones to Russia to operate in Ukraine.
In Iraq, too, allegations came to light in October that more than $2.5 billion in Iraqi government revenues had been embezzled through a network of companies and officials from the country’s tax authority
The case “draw[the US]attention to the extent of corruption in Iraq” and how corruption can benefit Iran and other parties hostile to the US, Harith Hasan, head of the Iraq unit at the Emirates Research Center, said Abu Dhabi-based think tank.
New Iraqi Prime Minister Mohammed Shia al-Sudani, who came to power via a coalition of Iran-backed parties, does not have strong ties with the US that would have allowed him to tone down implementation of the new fiscal measures, Hasan said.
Al-Sudani has downplayed the current devaluation as “a temporary problem of trade and speculation”. He replaced the governor of the central bank and initiated measures to secure a supply of dollars at the official rate.
Al-Hasnawi said the government’s latest actions would not stop the financial bleeding. If the current situation continues, he said, “most banks will file for bankruptcy within a year” and mass unrest is likely.
“This US pressure is clearly affecting the Iraqi streets and we are not seeing any clear solutions as of yet,” he said.
AP reporters Samya Kullab in Baghdad and Christopher Rugaber in Washington contributed to this report. Sewell reported from Beirut.