Banks in Iraq used the U.S. system to divert funds to Iran

A recent audit of the Iraqi financial system revealed misuse of a system created by the United States to facilitate international transfers. Iraqi banks took advantage of this system, which initially had fewer controls than standard international banking methods, to illegally transfer money. This allowed large sums of money to be sent to recipients associated with sanctioned groups and terrorist organizations.

During the U.S. coalition in Iraq, a system was established to facilitate international money transfers from the Iraqi central bank to the New York Federal Reserve. This system had fewer controls than those used in standard global bank transfers.

Suspicious transactions

Audits by K2 Integrity found that, before a ban was imposed in 2022, Iraqi banks associated with banker Ali Ghulam sent $3.5 billion out of Iraq in six months. This money was transferred to a few companies in the United Arab Emirates, all with accounts in a single bank in Dubai.

Reports showed that the funds were moved in large round sums, an unusual pattern in legitimate business transactions. In addition, these funds were redistributed to 163 recipients, many of whom were difficult to identify and appeared to be part of a suspicious network.

The companies in the United Arab Emirates that received the money were unknown and did not appear to have the capacity to handle the volume of goods to justify the payments. The associated invoices were vague and lacked the necessary documentation to verify the imports.

Iranian connections and illicit activities

Some of the money transferred went to sanctioned groups, including Iran's Islamic Revolutionary Guard Corps (IRGC) and anti-U.S. militias. Although Ali Ghulam claimed that round amounts were a feature of the scheme, it emerged that much of the money may have ended up in Iran.

Ghulam had had ties to Iran and Tehran-backed groups. Although these connections were not fully verified, Ghulam reportedly sent more than $1 billion to Iran in 2021 and also smuggled cash and bullion to Iran, Syria, and Lebanon.

Remedial measures and challenges

To combat these abuses, U.S. authorities have imposed stricter measures. The Federal Reserve has implemented a pilot program in which dollar transfers from Iraqi banks are processed through Citigroup, which verifies the legitimacy of transactions before approving them. In addition, the Iraqi central bank is working to redirect all transfers through international banks, avoiding direct use of the Federal Reserve.

Despite these efforts, former Deputy Treasury Secretary Brian Nelson warned that Iran continues to attempt to abuse the international financial system throughout the region. Reforms must continually adapt to meet these challenges and prevent the global financial system from being used for illicit activities.