Rules to curb illicit dollar flows create unintended hardship for some Iraqis

BAGHDAD – When the United States and Iraq recently enacted tough new international banking rules, the intent was to curb the illicit flow of dollars to criminal actors and money launderers, including those helping groups in Iran and Syria.

But in a country with a mostly cash economy, the changes have resulted in unintended hardships for ordinary Iraqis who need dollars to travel abroad. Demand for dollars has increased and the cost of Iraqi dinars at some local currency dealers has skyrocketed.

Long lines form early in the day outside moneychangers, where Iraqis wanting to travel abroad often show up with plastic bags filled with dinars, which banks outside the country won’t accept. Finding a money changer that still has dollars is not easy these days. And those who go out early.

“I’m out of dollars,” said a foreign exchange dealer, Abu Ali, at his shop in Baghdad’s Karrada neighborhood last week.

The new rules, elaborated in an agreement between the United States and Iraq, require greater transparency regarding wire transfers of dollars held in an account at the Federal Reserve Bank of New York as foreign exchange reserves for Iraq . They came into force at the end of last year.

The deal was part of a long-delayed modernization of Iraq’s financial system as it begins to align with the rules most countries follow and adapt to demands for greater transparency in international financial transactions.

But some Iraqi traders and others who used to be able to make dollar payments via international wire transfers have been unable or unwilling to comply with the stricter transparency requirements. So they turn to money changers and create the greater demand for dollars on the Iraqi street, which drives up the price in dinars.

Every day, the Central Bank of Iraq facilitates remittances from its New York Fed account on behalf of Iraqi businesses and individuals to pay for goods coming from outside Iraq. The transfers are critical as few companies have international bank accounts.

Separately, an amount of cash is sent to the Iraqi Central Bank for currency exchange and banks, for distribution mostly to Iraqis traveling abroad.

Until the new rules were introduced, there were few electronic footprints that US officials could use to track whether some of the transfers ended up in the hands of criminals.

For example, an Iraqi party might require a dollar wire transfer to be sent to a bank in another country, such as the United Arab Emirates, to pay for goods being imported into Iraq. But the UAE account could also be used to move dollars outside of Iraq to launder money or supply a sanctioned party. Therefore, more information was needed to ensure such transactions are legitimate.

Concerns that dollars could fall into the wrong hands receded shortly after the 2003 US invasion of Iraq. At the time, American authorities were primarily concerned with cash transfers, but the US Treasury Department later turned its attention increasingly to wire transfers.

The Treasury Department wanted to ensure that dollars sent by wire were not sent to fronts or agents for sanctioned parties or criminal organizations in violation of US law. In a 2016 congressional testimony, for example, a senior Treasury Department official mentioned three groups targeted by sanctions known to be active in Iraq: al-Qaeda, the Islamic State, and the Iran-backed Lebanese militia Hezbollah.

With the takeover of northern Iraq by the Islamic State in 2014, it seized a branch of the Iraqi central bank, and those concerns became more pressing. The situation underscored the need for more transparency in dollar transfers.

After the Iraqis finally defeated the Islamic State in 2018, Iraqi and US bankers and the Treasury Department began discussing a new system for remittances.

Under the new regulations, both individuals and businesses requesting dollar transfers must disclose their own identities and the identity of whoever ultimately receives the funds. This information is then verified by an electronic system and by experts from the Iraqi Central Bank and the New York Fed before the payment is made.

The new system will allow banks around the world to automatically verify money transfers from Iraq to other countries, said Ahmed Tabaqchali, chief strategist of Asia Frontier Capital’s Iraq fund.

“In short, the system increases the visibility of warning signals,” he said.

Now many requests are being rejected, said Mudher Salih, a former deputy governor of Iraq’s central bank and now fiscal policy adviser to Iraq’s new prime minister, Mohammed Shia al-Sudani. Sometimes, he said, that’s because of suspect identities, but sometimes because many Iraqi companies don’t have the necessary licenses to import goods or aren’t properly registered as trading companies, and therefore violate Iraqi law.

The denials have created greater demand for dollars from Iraqi moneychangers, greatly increasing their costs to Iraqis with legitimate needs, he added.

Since 2003, there are two Iraqi dinar rates for buying dollars; an official rate set by the Central Bank of Iraq and an unofficial street rate which is higher. And when dollars are tight, the street price goes up.

The difference between the two creates hardships for Iraqis like Janna, a mother of four. She said she was saving to buy a refrigerator and had her eye on a German model that cost about $250. In October that was the equivalent of 320,000 dinars. Today, due to the shortage of dollars, the refrigerator would cost 375,000 dinars.

“It’s more than I can afford,” she said.

After the new electronic funds transfer rules came into effect, the amount of daily remittances sent to Iraq dropped sharply — by almost 65 percent on some days, from $180 million to $67 million — compared to before the implementation of the rules, according to the daily remittance numbers released by the Iraqi central bank.

Since then, transfers have increased, but they are still often less than half what they were before the new system was introduced.

It’s not clear how much of the decline in remittances is due to illegal recipients.

“I wouldn’t attribute the nearly 90 percent drop to fraud,” said Douglas Silliman, president of the Arab Gulf States Institute in Washington and a former US ambassador to Iraq. “Maybe it’s 45 percent cheating and 45 percent incompetence or just not knowing how to navigate the new regulations.”

Yasmine Mosimann contributed a report from Baghdad.