An Iraqi delegation is arriving in Washington on Wednesday. Its members are desperate for U.S. help in alleviating a crisis threatening Iraq’s national currency, the dinar. The Biden administration should turn a deaf ear.
For over a decade, Iraqi politicians have abused their easy access to U.S. dollars to steal from their people on a historical scale. Even more threatening, successive Iraqi governments have colluded with Iran’s Islamic Revolutionary Guard Corps, the IRGC, to circumvent U.S. sanctions and funnel billions to finance Iran’s nuclear program, terrorism, and regional aggression. Until Iraq cracks down on these activities, Washington should refuse any further complicity in what may be the world’s largest money laundering scheme — one that endangers the U.S. financial system and American lives.
The dinar crisis started last November after the U.S. imposed stricter due diligence on foreign transactions serviced by Iraqi banks. Since then, up to 80% of transactions reviewed by the U.S. Federal Reserve have been rejected for fears of diversion to Iran, dramatically restricting Iraq’s access to dollars and prompting a steady decline in the dinar’s value. At the heart of the fraud is a mechanism run by Iraq’s central bank known as the “dollar auction.” The auction is a process instituted by the U.S. in 2004 to allow Iraqi banks to access dollars at preferred rates to finance badly needed imports. The dollars come from an Iraqi account at the New York Fed through which Iraq’s substantial oil revenues are routed.
But it didn’t take long for Iraqi politicians, Iran, and other bad actors to corrupt the process. Using their control of Iraqi banks and border authorities, a network of front companies, and forged documents, they quickly made massive fake dollar transactions the norm. Import costs were outrageously inflated. Often, transactions existed only on paper — no goods ever arrived in Iraq, while millions of dollars were wired to shadowy foreign accounts.
Sadly, the U.S. government has long known of these abuses. As far back as 2012, a special Pentagon inspector general noted that up to 80% of the auction’s dollar sales were tied to illegal transactions being diverted abroad. In 2015, Washington even temporarily restricted the flow of dollars to stop the diversions, but relented when Baghdad protested and agreed to cosmetic reforms. In 2020, reporter Robert Worth wrote the definitive account of how the Iraqi state was still operating as one giant money laundering concern, with the dollar auction at its core.
Constantly worried about Iraq’s stability, U.S. officials generally looked the other way rather than risk throwing Iraq into crisis by limiting access to its enormous dollar reserves. But the price has been high. Iraq is today one of the world’s most corrupt countries, its people impoverished. And tens of billions of dollars have flowed to Iran, financing the malign behaviors of one of America’s most dangerous adversaries.
It’s impossible to know the full extent of the damage, but the raw numbers are staggering. Over the past decade, dollar auction sales seem to have averaged around $200 million a day, or $1 billion per week. Evidence from the Pentagon in 2012 and the Fed today agree that the vast majority of it has persistently been diverted for illicit purposes, with the IRGC a major beneficiary. In Worth’s 2020 expose, expert estimates suggested the total funds absconded abroad might reach $300 billion. Whatever the exact amount, the Iraqi people have likely had more of their national wealth stolen than any country in history.
With Iran bearing down on becoming a nuclear power and its lethal drones killing innocents in Ukraine, the Biden administration — to its credit — has gone further than its predecessors in finally demanding an end to the hemorrhaging of Iraqi dollars to Iran. The question now is whether it can sustain that stance in the face of Baghdad’s squeals for relief.
One point worth highlighting: Iraq’s new central bank governor, Ali Al Allaq, will join this week’s delegation visiting Washington. Allaq is no stranger to the job, having held it from 2014 to 2020 during the worst days of the auction’s abuse. It was Allaq who in 2015 convinced U.S. officials to reverse course and resume the massive flow of dollars by promising reforms that had zero impact on the diversion of money to the IRGC. Allaq returned to the job last month in the hope of staging an encore performance. He’s again promising tougher anti-money laundering efforts if the Fed turns the tap of unrestricted dollars back on.
As the saying goes, fool me once, shame on you; fool me twice, shame on me. This time when Allaq comes calling, Washington should hold the line until it knows for certain the IRGC’s Iraqi lifeline has been cut for good.
John Hannah, the Randi and Charles Wax Senior Fellow at the Jewish Institute for National Security of America, was national security adviser to Vice President Dick Cheney. Joel Rayburn, director of the American Center for Levant Studies, served as the U.S. special envoy for Syria during the Trump administration.
Originally published in Washington Examiner.