Iraq Asked for $1 Billion in Cash. This Time, Washington Said No. | Mint
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Business News/ Politics / Iraq Asked for $1 Billion in Cash. This Time, Washington Said No.
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Iraq Asked for $1 Billion in Cash. This Time, Washington Said No.

wsj

The U.S. is trying to cut off the illicit flow of dollars through Iraq to Iran, but Baghdad says it needs the money from its oil sales.

Iraq’s oil industry has helped the country amass dollar reserves in excess of $100 billion at the New York Fed.Premium
Iraq’s oil industry has helped the country amass dollar reserves in excess of $100 billion at the New York Fed.

BAGHDAD—Iraq is seeking a special shipment of $1 billion in cash from the Federal Reserve Bank of New York, but U.S. officials have withheld approval, saying the request runs counter to their efforts to rein in Baghdad’s use of dollars and halt illicit cash flows to Iran.

Since the U.S. invasion of Iraq two decades ago, the U.S. has supplied $10 billion or more a year to Baghdad on semimonthly cargo flights carrying massive pallets of cash, drawn from Iraqi oil sales proceeds deposited at the Fed. In Iraqi hands, the bank notes have become a lucrative source of illicit dollars for powerful militias and corrupt politicians, as well as for Iran, U.S. officials say.

In making a request for an extra shipment of $1 billion, Iraq says it needs the cash to help prop up its stumbling currency. After the U.S. denied Iraq’s initial appeal last month, the Central Bank of Iraq last week submitted a formal request, which the Treasury is still considering, a senior Iraqi official said.

The behind-the-scenes wrangling highlights Baghdad’s unique dependence on the dollar and the little-known system for supplying it with prized U.S. currency. A vast amount of dollars flows through loosely regulated Iraqi banks and currency-exchange shops, which U.S. and some Iraqi officials say are rife with fraudulent transactions and money laundering. Since last November, Washington has banned 18 Iraqi banks from dealing in dollars and adopted stricter rules for electronic dollar transfers from its banks.

Treasury officials told the Iraqi central bankers that sending a large extra shipment is contrary to Washington’s goal of reducing Iraq’s use of U.S. bank notes in favor of more easily traceable electronic transactions, Iraqi officials said. U.S. officials have said there is strong evidence that for years some of the dollars going to Iraq have been smuggled to Iran in cash, as well as to Turkey, Lebanon, Syria and Jordan.

“The U.S. continues to support Iraq with U.S. dollar bank notes and has not restricted" access to ordinary Iraqis and businesses, a Treasury spokeswoman said about the Iraqi cash request. “We will continue to work with our CBI colleagues," she said, referring to the Central Bank of Iraq. The U.S. supports Iraqi steps to “promote the use of the local currency inside of Iraq," she added.

The initial U.S. refusal angered some Iraqi officials, who say they asked for the additional $1 billion in their own funds because the country’s cash reserves had dropped after Washington’s attempts to restrict the dollar flow set off panic buying of greenbacks and hoarding of dollars by exchanges, the officials said.

Since July, Iraq’s unofficial currency-exchange rate has jumped to 1,560 dinars to the dollar, up from 1,470 dinars, raising import prices and alarming Iraqi officials ahead of provincial elections scheduled for December. The official exchange rate is 1,300 dinars to the U.S. dollar.

Iraqi officials with ties to powerful militias deeply involved in dollar transactions have denounced new restrictions imposed by Washington, calling them an infringement on Iraqi sovereignty.

“The American side is making excuses to not give Iraq its legal, legitimate money," said Moeen Al Kadhimi, a member of the Iraqi Parliament on the finance committee and of the Badr Organization, a Shiite militia group closely aligned with Iran.

The Central Bank of Iraq didn’t respond to a request for comment about the requested dollar shipment.

Dawood Abed Zayer, the head of the Iraqi National Business Council, a trade association, said the central bank’s request for additional dollars is a precautionary step. “So it will have enough cash to step in and control the ups and downs of the market," he said.

The decision to flood Baghdad with dollars during the decadelong U.S. occupation was intended to stabilize an Iraqi economy that had all but collapsed after decades of sanctions and a short but ruinous invasion. Iraqi banks had few if any correspondent relationships with international banks that would have allowed them to obtain dollars through commercial channels.

To get the cash circulating, Iraqi officials and U.S. advisers in late 2004 devised the so-called “dollar auction," a daily sale of U.S. currency by the Central Bank of Iraq at a fixed rate to Iraqi banks and money-exchange shops for the local currency, the dinar. The dollars were in turn resold at the higher market rate, generating quick profits.

The system has remained largely unchanged ever since, but it has fueled corruption and rampant money-laundering, U.S. and Iraqi officials say. In addition to the cash delivered via cargo flights, the Fed has for years disbursed a far larger amount—as much as $40 billion a year—in wire transfers on behalf of Iraqi banks to foreign banks, mostly in Dubai, ostensibly to pay for imports.

Efforts going back years by multiple U.S. administrations to disrupt the flow of illicit dollars have fallen short—in part because cutting off dollars risked plunging Iraq’s economy into turmoil.

In 2020, the last time Iraqi cash reserves were running low after a devaluation of the dinar, the U.S. granted a request to send in additional bank notes. In return, Baghdad agreed to look at long-term reductions in cash shipments and other steps to curtail illicit dollar flows, an Iraqi official said.

The latest request came amid a flurry of meetings between Iraqi and U.S. Treasury officials, including Iraqi Prime Minister Mohammed Al Sudani, who met in New York on Sept. 18 with Undersecretary Brian Nelson and a week earlier in Baghdad with Assistant Secretary Elizabeth Rosenberg, who oversees efforts against terrorist financing.

After Rosenberg’s meetings with Sudani and Iraq’s central bankers, the Treasury said that Iraq and the U.S. “agreed to continue working together and take positive steps toward meaningful and lasting reforms that will raise Iraq to international standards and prevent fraud, sanctions evasion, terrorist financing and other illicit activities."

Iraqi officials say they are running short of bank notes because the central bank had to pump more dollars into the Iraqi economy earlier this year after the market rate for exchanging dollars to dinars moved sharply higher in response to the U.S. crackdown on the flow of dollars out of Iraq.

Tighter rules on wire transfers adopted by the Fed and the Central Bank of Iraq last November led to 80% or more of Iraq’s daily dollar wire transfers, which previously totaled more than $250 million a day, being blocked in January and February because of insufficient information about the funds’ destinations or other errors, according to U.S. and Iraqi officials and official Iraqi government data.

In response, the Central Bank of Iraq loosened rules on banks’ use of prepaid cash cards, allowing them to buy dollars at the lower official rate to load them onto the cards. The move led to banks putting billions of dollars on the cards, which have been smuggled out of the country in vast numbers and redeemed for dollars outside Iraq, according to Iraqi authorities.

To conserve dollars, the central bank has reduced the amount of cash sold at the official exchange rate in the daily auction to banks and exchange houses by 30% or more and issued new rules aimed at requiring use of the dinar for many domestic transactions.

In another move sought by the U.S., central-bank officials have said in recent weeks that they plan to phase out dollar cash withdrawals from Iraqi banks by early next year.

Iraqi officials declined to say how low their cash reserves have dropped. Iraq’s overall dollar reserves at the New York Fed total over $100 billion largely from oil sales, but the Iraqi central bank in the past kept more than $1 billion in cash in its vaults in Iraq.

Two regular cash shipments of U.S. dollars are still scheduled for later this year, Iraqi officials said.

Write to David S. Cloud at david.cloud@wsj.com

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