(Baghdad) When the United States and Iraq implemented strict new currency rules, the intention was to stem the illicit flow of dollars to people targeted by U.S. sanctions on Iran, Syria and Russia, as well as terrorist organizations and money launderers.

But in a country whose economy relies primarily on cash, these changes have created unexpected difficulties for ordinary Iraqis who need dollars for legitimate business or to travel abroad. Dollars have become scarce, and the cost of Iraqi dinars at some local currency dealers has increased.

Long queues form early in the day outside money changers' shops, where Iraqis planning to travel outside the country show up, often with plastic bags full of dinars, which banks at outside the country do not accept. It has become difficult to find a money changer who still has dollars. And those who have them burn out quickly.

“I have no more dollars,” said a foreign exchange dealer, Abu Ali, last week in his shop in the Karrada district of Baghdad.

PHOTO JOAO SILVA, THE NEW YORK TIMES

People wait at a licensed foreign exchange dealer in Baghdad to exchange Iraqi dinars for U.S. dollars, February 22, 2023.

New currency rules, developed under a U.S.-Iraq agreement, require greater transparency regarding transfers of dollars held as foreign currency reserves for Iraq to a currency account. the Federal Reserve Bank of New York. They came into force at the end of last year.

The deal is part of a long-delayed modernization of Iraq's financial system, which is beginning to conform to rules followed by most countries and calls for greater transparency in international financial transactions.

Crucial transfers

Every day, the Central Bank of Iraq facilitates the withdrawal of a large sum of dollars from its account at the New York Fed. These transfers are crucial because in Iraq's largely cash-based economy, only a few businesses accept credit cards and almost no ordinary Iraqi has one. Even bank accounts are a rarity.

Some of the money is transferred on behalf of Iraqi companies to pay for goods from abroad. Some of the money is destined for exchange offices and banks to be distributed to Iraqis traveling abroad.

But there have been few electronic fingerprints to help U.S. officials determine whether some of those transfers ended up in the hands of parties targeted by U.S. sanctions.

PHOTO JOAO SILVA, THE NEW YORK TIMES

A woman waits outside a licensed currency exchange in Baghdad where people exchange Iraqi dinars for U.S. dollars.

Concerns date back to shortly after the 2003 US invasion of Iraq.

At the time, U.S. authorities attempted, unsuccessfully, to establish the chain of custody of billions of dollars carried in cash into the country over several years. In one case, $1.2 billion from Iraq was found in a Lebanese bunker with no trace of how it got there, according to an investigation by the New York Times in 2014.

The U.S. Treasury wanted to ensure that dollars were not being sent, in violation of U.S. law, to fronts or agents of sanctioned parties or terrorist entities. In testimony to Congress in 2016, for example, a senior Treasury official cited three sanctioned groups known to be active in Iraq: Al-Qaeda, the Islamic State armed group, and the Lebanese Hezbollah militia backed by Iran.

With the Islamic State armed group taking control of northern Iraq in 2014, the latter seized a branch of the Iraqi central bank. These concerns have become more urgent.

The situation shows the need for greater transparency in dollar transfers to Iraq, according to a U.S. Treasury official, who asked not to be named because he is not authorized to speak to reporters.

After Iraq finally defeated the Islamic State in 2018, Iraqi and American bankers and the Treasury began discussing a new system for money transfers.

New system

Under the new regulations, individuals and businesses requesting wire transfers of dollars must disclose their own identity and the identity of the person ultimately receiving the money. This information is then reviewed by an electronic system as well as experts from the Iraqi central bank and the New York Fed before the payment is made.

The new system allows banks around the world to carry out automatic checks on money transfers from Iraq to other countries, said Ahmed Tabaqchali, chief strategist at Asia Frontier Capital's Iraq fund.

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

The rejections created a shortage of dollars, which sharply increased their cost for Iraqis with legitimate needs, Ahmed Tabaqchali added.

Since 2003, there have been two Iraqi dinar rates for purchasing dollars: an official rate established by the Iraqi central bank and an unofficial street rate, which is higher. And when dollars are scarce, the street price goes up.

After the new currency rules took effect, the amount of dollars entering Iraq daily declined sharply – on some days it fell by almost 65%, from $180 million to $67 million – compared to the period before the rules were implemented, according to daily money flow figures published by the Iraqi central bank.

The inflow of dollars has since resumed, but it is still often less than half of what it was before the new system was put in place.

It is unclear how much of the drop in dollars is attributable to illicit recipients who have now stopped requesting money because they do not want to make the declarations required by the new rules or because the Iraqi central bank or the New York Fed rejected their requests.

“I wouldn't blame the nearly 90 percent drop on fraud,” said Douglas Silliman, president of the Arab Gulf States Institute in Washington and a former U.S. ambassador to Iraq. “Maybe it's 45% fraud and 45% incompetence or just not knowing how to deal with the new regulations. »

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