A legal monster born in 2003 started growing until it now eats up the majority of Iraq’s income from oil. About the masters of banking in Iraq.

After the First Gulf War in 1991, for the first time in Iraqi history, Saddam Hussein’s regime allowed for the formation of private banks. From 1992 until the end of the Ba’ath Party regime, 17 banks of this type were established. 

However, up untilthe invasion and occupation of Iraq in 2003, the former Iraqi regime prevented these banks from conducting international transactions, including payments, money transfers and letters of credit. 

The beginning  

On November 28, 2003, these restrictions on banks were lifted. The Central Bank of Iraq allowed private banks to process international payments, money transfers, and letters of credit in foreign currencies. This measure came in the wake of other moves – described at the time as important – to modernise the Iraqi banking system which included, for example, the establishment of a new national currency, and the launch of daily foreign currency auctions by the Central Bank. 

According to an announcement from the Coalition Provisional Authority (CPA) which was headed by the American civilian governor of Iraq at that time, Paul Bremer, , Iraqi private banks were to be managed by “highly qualified and experienced bankers who previously worked in the Central Bank of Iraq as well as in the state-owned Rafidain and Rasheed banks.” 

These private banks drew up contracts with several international banks to arrange lines of credit in preparation for processing international payments, remittances and letters of credit. 

On June 21^st 2004, representatives from Iraqi banks met with US and international experts from the financial sector in New York and Washington DC. At the time the CPA claimed that the meeting “was convened so we can learn about the latest methods of banking, and to establish links with potential US partners in the US business sector.” The US Trade and Development Agency was the official sponsor of this meeting. 

The visit also included meetings with the Federal Reserve Bank of New York, the North American Arab Bankers Association (ABANA), the International Banking Federation (IBFed), the US Department of the Treasury, the International Monetary Fund (IMF), the World Bank, and the International Finance Corporation. 

The idealistic language in the statements and press conferences of the time did not reflect what was happening on the ground. Since 2003, the Iraqi banking system has become a black hole, swallowing hundreds of billions of dollars over a period of 21 years. This regime still presides over Iraq’s financial market and manipulates the Iraqi economy by controlling the purchase of the dollar via the currency auction, recycling it and then smuggling it abroad. This practice takes many forms, commanding cash, counterfeit bills, and the parallel market, which currently controls the exchange rate between the US dollar and the Iraqi dinar. 

This control is extremely harmful to the Iraqi economy, which is manipulated by private and government banks, making it easier for private banks to dominate the financial ecosystem. Those who control Iraq’s broader systems are the ones who direct and own those very same banks, i.e., political parties with armed wings. Influential figures, also protected by weapons, have built financial empires on the ruins of the Iraqi financial system. 

The former Iraqi Finance Minister, Ali Allawi, said that there are currently 30 billionaires in Iraq, who were suddenly flush with money after 2003. He spoke despairingly about reforming the financial and banking system, saying the country was run by a “deep state.” The executive state is simply there to execute. 

Outbreak 

The Iraqi banking system and its monetary policies have undergone significant and dangerous transformations since 2003. The most important took place between 2013 and 2014, when the Central Bank of Iraq granted licenses to establish banking companies. Before 2013, there were 385 banking companies in Iraq. Within one year in 2013, 2000 licenses were granted. These companies used to use the currency selling window to buy dollars with fake invoices. In 2014, Iraq passed the Islamic Banking Law, which allowed these banking companies to become Islamic banks. The Central Iraq Bank halted the issuing of licenses. 

That year, Iraq had 36 Islamic banks. After the Islamic Banking Law was enacted, the number rose to 81. 

The second paragraph of Article One of the Islamic Banking Law stipulates that it is permissible to establish an Islamic bank in accordance with the provisions of Companies Law No. (21) of 1997, Public Companies Law No. (22) of 1997, and Banking Law No. (94) of 2004, provided that it includes its internal articles of association and bylaws and is committed to practicing permissible banking activities without giving or taking interest. By which it means that these activities are in accordance with banking transactions that do not conflict with the provisions of Islamic Sharia, whether in the realms of accepting deposits and providing other banking services or of financing and investment. 

In Article Four, the law first details the capital required to establish an Islamic bank. “The upfront capital of any Islamic bank may not be less than (250) two hundred and fifty billion dinars (approximately $191 million US), provided that (100) one hundred billion dinars (approximately $76 million US) of it is paid upon establishment, and is paid in three equal payments from the date of granting the license. The bank may raise the minimum in accordance with Banking Law No. (94) of 2004.” 

Based on this law, Iraq’s ruling political parties dropped all hesitation in engaging the state treasury and its financial resources – through the currency selling window – and the phenomenon of fake invoices became the monster that today eats up what Iraq earns from selling its oil. 

Control 

Iraq maintains a balance of approximately $113 billion in foreign reserves at the Federal Reserve Bank of New York. The Iraqi state has several accounts there, including the Ministry of Finance’s current account, which is the largest and receives payments from oil export sales. The Central Bank of Iraq also has an account there and uses it for three main reasons: 

• The first: to settle loans and payments made to and from other Iraqi government entities such as the Ministry of Finance or the Commercial Bank of Iraq. 
   

• Second: to provide access to dollars that the Central Bank transfers to Iraq, and then arrange their transfer to importers who need payments in dollars. 
   

• Third: To make payments for actual dollar transfers from the Federal Reserve Bank’s East Rutherford operations center in New York, which then delivers the cash via the US Air Force to Baghdad. 

Since 2015, the Central Bank of Iraq has transferred between $5 and $7 billion per month to Iraq. Approximately 90 percent of this amount is transferred electronically, while the rest is transferred in actual cash. 

Iraq’s economy depends on a fixed peg of the Iraqi dinar to the US dollar. This is because oil sales are taken as revenue in dollars, while public expenses such as salaries are paid in Iraqi dinars. 

Because Iraq is a major importer of foodstuffs and goods, the cost of these goods in the local markets rises when the dinar weakens against the dollar, while profits remain in dinars, raising the cost of living. 

When the Central Bank of Iraq set an official foreign currency exchange rate of 1,460 Iraqi dinars per dollar in the 2021 budget, the parallel market was supposed to sell the dollar at a price of 1,470 dinars. However, coordinating that market met with difficulties due to restrictions imposed on the access of individuals and dollars. 

The US Federal Reserve has expressed its concern about three main issues, namely: 1) the ability of what it classifies as terrorist organisations to finance themselves and launder money through the Rafidain Bank, 2) the illegal transfer of US dollars to other countries, in particular  Iran, Turkey, Lebanon, Syria, Jordan, Egypt, and the United Arab Emirates, and 3) the laundering of money resulting from corruption through external financial transfers. 

According to a source in the Prime Minister’s Office, the US ambassador provided Mohammed Shiaa al-Sudani, Iraq’s current Prime Minister, with conclusive evidence on how some transfers have reached Hezbollah in Lebanon and other entities linked to the Iranian Revolutionary Guard (IRG). 

The source quoted one of the examples provided by the US ambassador, which was a $100 banknote marked in New York before being shipped to Iraq, that was tracked as it moved from Baghdad to Beirut to eventually settle in a company controlled by Lebanon’s Hezbollah, which is on the international sanctions list. 

The biggest complaint from the Federal Reserve is addressed specifically to private banks owned by individuals subject to US sanctions, who buy dollars and then arrange to transfer them to parties linked to Iran. Import companies also provide fake invoices through which they pay dollars to companies that then transfer them to other countries. 

The Federal Reserve asked the Central Bank of Iraq to exclude certain banks from the process of purchasing dollars, which it complied with. However, some banks found a way to circumvent this ban. 

There are about 20 banks that buy US dollars from the Central Bank and do not fully disclose the details of final transfers or customers. These are the most problematic. For example, Al-Huda Bank is considered the largest buyer of dollars, taking about 50 percent of the total auction sales of the Central Bank, at times. This bank is owned by Hamad Al-Moussawi, who has ties to the State of Law coalition which was formed in 2009 by Iraqi PM at the time Nouri al-Maliki, from the Islamic Dawa party. The US Treasury Department imposed sanctions on that bank at the end of January 2024. The other bank is Al-Bilad Islamic Bank, which changed its name to Erbil after the United States imposed sanctions on its owner, Aras Habib Karim, due to what Washington said were “his links to the Iranian Revolutionary Guard.” 

In addition, the four banks owned by Ali Ghulam were excluded from the daily currency auction. They had a close connection to the Iraqi Middle East Investment Bank, but it is believed that Ghulam sold them and bought shares in others that have licenses to buy dollars. 

While others have avoided scrutiny, they have recently made moves to reduce their purchases of dollars, such as Tamkeen Al-Hasnawi, owner of Mosul Bank and a businessman with ties to the Sadrist movement, who is believed to be linked to the theft of tax deposits, or what has become known as the “theft of the century.” 

According to a source in the Central Bank of Iraq, bank officials are under pressure from politicians, including those linked to Muhammad al-Halbousi (former Speaker of Parliament), Nouri al-Maliki (former Prime Minister), Muqtada al-Sadr (leader of the Sadrist movement), Hadi al-Amiri (leader of the Badr Organization and former Minister of Transport), and Qais Al-Khazali (leader of Asaib Ahl al-Haq) and others, to approve banking licenses and allow the purchase of dollars without obstacles. 

Influence 

The Central Bank has gone through many changes in appointments and structures and was also a victim of the political monster that has devoured everything in this system. 

The senior employees with the most influence over the decisions of the Central Bank can be easily classified along with their political affiliations. They can be divided into several blocs although the most influential are the State of Law coalition, the Sadrist movement and the Hikma movement. 

Bank owners make deals with politicians to gain protection in exchange for a share of the profits. The Iranian regime also makes deals with these bankers to provide dollars. A fee is applied to each dollar transfer, ranging from between 2 and 20 percent depending on volume and market conditions. This smuggling network operates through remittances (which are now facing challenges) and through the actual cash route. 

Exchange companies buy up most of the cash dollars in Baghdad. This leaves less in circulation which in turn raises their price. These money exchangers then smuggle the dollar through Kurdistan to Turkey, Syria, and Iran. 

A source from within the Central Bank of Iraq said that Ali Ghulam and the other bankers deliberately kept the dollar amounts they owned, releasing very little, to continue benefiting from the exchange difference between the price sold in the Central Bank and the price sold in money exchange shops. This has enabled them to achieve a profit ranging between 10 and 20 percent on every dollar sold, because they purchased at 1,460 dinars (before the decision to change its price to 1,320 dinars) and sold at a price ranging between 1,550 and 1,650 dinars. 

A rough estimate based on the above gives an amount ranging between $1.5 – $2 billion monthly, which is also smuggled or purchased illegally, benefiting countries such as Iran and other associated entities. This circumstance has clearly changed, with profits having decreased significantly. The total though still amounts to hundreds of millions of dollars, after the US Federal Reserve’s measures related to the SWIFT system were implemented. 

Private banks finance political blocs and armed factions on an ongoing basis and enjoy the protection of the blocs that finance them. It seems that these blocs are consistent in their dividing up and establishing of their banks for this purpose. 

Auction 

The Central Bank offers private banks, importers and exchange companies two ways to obtain dollars. The first is through electronic transfers, which allow banks and companies to purchase dollars or settle payments to suppliers and creditors. This amounted to approximately $260 billion between 2015 and 2020. The second method is the cash purchase of dollars, which totaled about $40 billion between 2015 and 2020. 

The Central Bank allows almost all private banks, importers and companies to obtain dollars or request payment to creditors. In the past, the process was simple. The Central Bank would save dollars when submitting invoices or other documents, then begin the auditing process after making transfers. But as of November 1^st, 2022, the US Federal Reserve began implementing a new auditing process that requires all details and documents to be audited and approved – by both officials of the Central Bank of Iraq and the US Federal Reserve – before making transfers. 

By the time December 2022 had arrived, this had led to a 90 percent decline in Iraqi Central Bank transfer activity, meaning banks and businesses had more difficulty accessing dollars. 

The second track, cash purchases, was also affected, but to a far lesser degree since the auditing system was not significantly changed. Through this route, the Central Bank grants licenses to companies that want to purchase dollars. 

There are more than 2,000 exchange companies that have a license from the Central Bank of Iraq, 249 of which received an A rating from the Central Bank, 81 received a B rating. A company classified as A can obtain $1.8 million per week, while a company classified as B can buy $750,000 a week. 

The Central Bank of Iraq provides daily data on the amount of dollars it sells, electronically or in cash. Before the changes were made by the Federal Reserve, the daily selling rate reached around $250 million in October 2022, before falling to less than $50 million in January, then rising to about $100 million, until it returned to the current threshold of $250 million. 

The same source at the Central Bank explained that the US Federal Reserve’s concerns were legitimate, and that the Central Bank has been aware of the problematic transfers for many years. However, it has done little to stop them due to the political power of the private banks that buy dollars. 

Recently, the Central Bank deprived 8 banks from participating in the auction for selling dollars, due to their non- implementation of its procedures and controls. This may be a message to the US Federal Reserve, that there is a new methodology at the Central Bank for banks that resist the banking system planned for Iraq. A system which is designed to reduce currency smuggling and prevent the US treasury from withholding its dollars.