In a startling revelation by the Wall Street Journal, a US-created banking system in Iraq is suspected of facilitating the transfer of billions of dollars to Iran and its allied terror groups, potentially circumventing international sanctions. The Wall Street Journal reports that this system, established after the 2003 US invasion of Iraq, allowed Iraqi banks to wire money internationally through the Federal Reserve Bank of New York without disclosing specific recipients. While these allegations are still under investigation, US officials believe that this oversight lapse may have provided a financial pipeline to sanctioned entities and terrorist organizations.
According to US officials, as much as 80% of daily wire transfers, amounting to over $250 million, were untraceable. A significant portion of these funds is believed to have reached Iran's Islamic Revolutionary Guard Corps (IRGC) and associated terror groups, including Hamas and Hezbollah, involved in the current war with Israel. The war began with Hamas' deadly attack on Oct. 7, an assault that resulted in approximately 1,200 Israeli deaths, mostly civilians, and the taking of 240 hostages, including children.
The system's vulnerabilities came to light when Ali Ghulam, a prominent Iraqi banker, had his three banks blocked from dollar transactions by US authorities in late 2022. Brian Nelson, former under secretary of the Treasury for terrorism and financial intelligence, told the Wall Street Journal, "It's been important for Treasury to ensure those funds are not diverted in support of the Iranian regime."
Audits revealed that Ghulam's banks alone sent $3.5 billion outside Iraq in just six months, primarily in large round-dollar amounts to a handful of obscure companies in the UAE. These transactions raised red flags for potential money laundering activities.
The implications of this financial pipeline extend beyond Iraq. US officials have expressed concern that some of these funds have supported groups like Hamas in Gaza and Hezbollah in Lebanon, both designated as terrorist organizations by the US. These groups have been engaged in ongoing conflicts with Israel for years, contributing to heightened tensions in the Middle East.
In response to these findings, the US has banned about two dozen Iraqi banks from conducting dollar transactions and pushed for stricter controls. Iraq is now working to establish direct relationships between Iraqi banks and correspondent banks, bypassing the need for transactions through the Central Bank or Federal Reserve.
A pilot program has been initiated where four Iraqi banks process dollar transfers through Citigroup, following standard international regulations. This move aims to reduce illicit transactions while maintaining Iraq's ability to conduct international trade.
Despite these efforts, Nelson warned that Iran continues to seek ways to abuse the international financial system. "Iran continues to seek to abuse the international financial system not only in Iraq, but throughout the region, and frankly wherever they have the opportunity to do so," he told the Wall Street Journal.
The US crackdown has substantially reduced the illicit dollar transactions by Iraqi banks, US officials and Iraqi bankers said. The Fed still handles some transfers from Iraqi banks but only after the recipients of the dollars are verified by K2, US officials said. The Iraqi central bank plans to eventually route all Iraqi wire transactions through international banks, instead of the Fed.
The alleged misuse of the Iraqi banking system underscores the complex relationship between financial networks and regional conflicts. If proven, the suspected funneling of billions of dollars to Iran and its proxies, including Hamas and Hezbollah, could have significantly bolstered their capabilities in waging war with Israel. As the situation in Gaza unfolds, US policymakers and international observers are intensifying their focus on identifying and potentially dismantling these financial pipelines. The challenge ahead lies in striking a delicate balance between maintaining Iraq's legitimate access to international banking and implementing robust measures to prevent funds from reaching sanctioned entities and groups designated as terrorist organizations.
