Tuesday, November 17, 2015

Central Bank Of Iraq Tries To Deal With Fraud In Dollar Exchanges

In November 2015 the Central Bank of Iraq began handing out fines to private banks that were fraudulently buying dollars. Since 2012 there have been stories of all kinds of illegal and questionable activities going on with the country’s currency exchanges ranging from Iran and Syria using the auctions to get around international sanctions, to gangs and private banks using them to make money, to the Islamic State financing itself via them. The Central Bank’s move appeared to come after warnings by the United States. At the same time, due to the interference by politicians and the rampant corruption within the country these punishments are unlikely to stop these practices.

The Central Bank of Iraq recently started going after private banks that had manipulated currency exchanges. 27 banks were accused of using fake and incomplete documents to send $45 billion out of the country from 2013-2014. That came just days after parliament’s finance committee said that billions of dollars had been smuggled out of Iraq by banks and financial companies since 2006. Ahmed Chalabi, the head of the committee who recently passed away, was said to be investigating this matter and had evidence against 29 fake companies accusing them of taking $4.2 billion out of Iraq. The committee asked the Trade Ministry to look into 32 trading companies as well. For the last several years there have been repeated warnings from domestic and foreign sources that Iraq’s dollar exchanges were being used for a number of nefarious means.

The United States for example was one country that warned the Central Bank about its auctions. The Federal Reserve and Treasury Department, which are responsible for sending U.S. dollars to the country told the Central Bank at the end of 2014 that currency was being bought by Iranian banks that were under sanctions and by the Islamic State. These concerns led the U.S. to stop delivering dollars to Iraq in the summer of 2015 to push the Central Bank to revise its practices.  This was not the first time the Americans brought up these issues either. In 2012 Washington asked Baghdad to tighten its currency sales because it thought Iran and Syria were using them to get around international restrictions. In response, the Bank issued rule changes twice that year on buying dollars. Since Iraq is dependent upon the United States for the majority of its hard currency it could not ignore this prodding, and probably helped lead to the fines being issued. The question is whether the recent crackdown will make much of a difference because the 2012 moves were not effective.

One reason why tougher regulations on the currency auctions have not worked is because of political interference. The former deputy head of the Central Bank for example, recently told the Wall Street Journal that political parties tried to remove officials at the bank and put their loyalists in office. In 2013 parliament found evidence that Iraqi politicians were interfering with dollar auctions. The year before, Prime Minister Nouri al-Maliki had the governor of the Central Bank Sinan Shabibi removed on corruption charges. (1) Shabibi had tried to remove three senior Bank officials with connections to Maliki’s Dawa Party for money laundering, but the premier blocked him, and the charges against Shabibi were made by Maliki loyalists in parliament in what many saw as a power grab. Given the weak state of institutions in Iraq, ones like the Bank are always open to pressure by the ruling elite with the removal of Shabibi being the most blatant. Politicians and their allies were also accused of profiting from the auctions, which gave them added incentive to make sure that nothing substantively changed with them.

There are many reasons why Iraq’s dollar auctions have exploded in recent years. At the start of 2012 Shabibi reported that there was a 40-50% increase in demand for dollars. That continued to go up with the U.S. sending $3.85 billion to Iraq in 2012 and then $13.66 billion by 2014. One major reason why more dollars were being bought was that businesses use them to buy imports. In 2012 the economy was growing with a rise in oil prices, driving up the requirements for hard currency to buy more foreign goods to meet demand. A second reason was that in 2012-2013 companies were said to be afraid that the dinar was losing value and so began investing in dollars instead. Third, Iraqi banks do not carry out many traditional banking activities like giving loans or letters of credit. What they began to do in 2012 was buy dollars at government auctions and then resell them for a profit. Fourth, Iraq is rife with organized crime syndicates who were believed to be doing the same thing, buying up dollars and selling them using fake documents. The manager of Rafidain Bank, one of Iraq’s two main state run institutions was quoted in Al Hayat in 2012 that international criminal rings were coming to Iraq for its dollar exchanges because it was so easy to manipulate the system with the help of private banks. (2) Gangs (3) and the Islamic State (4) were accused of using counterfeit Iraqi dinars to buy dollars. Iran was also believed to be using fake dinars in Iraqi auctions to acquire hard currency since it was under sanction. All of these actors showed just how lucrative Iraq’s exchanges had become by 2012. It also highlighted how weak Iraq’s regulators and the Central Bank were to stop the nation from losing a huge amount of dollars each month.

Baghdad will be under added pressure to crackdown on its exchanges and those who manipulate them, but the political situation may undermine that effort. With the decline in oil prices Iraq is not bringing in as many dollars as it used to, which means it cannot afford to have so many flow out of its coffers in auctions. At the same time, because Iraqi politicians use corruption to rule and see the state’s money as theirs for the taking their continued interference may stop any effective regime being established. Previous attempts to set up new rules for the auctions did not have any noticeable effect and the recent fines may not do anything either. That’s because those that are in charge of implementing them are always open to pressure by the ruling parties or threats and bribes from them or other actors like gangs and insurgents. That means business will likely continue as usual in Iraq’s exchanges.


1. Sowell, Kirk, “Inside Iraqi Politics No. 49,” 10/31/12

2. Al-Hassoun, Nassir, “Iraqi Central Bank Fighting Money-Laundering Problems,” Dar al-Hayat, 6/11/12

3. Khallat, Khudr, “Battle against counterfeit gangs before change in currency,” AK News, 4/9/12

4. Al-Summary, Yazn, “Counterfeit currency is leaving traders and customers out of pocket,” AK News, 2/22/12


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Al Arabiya, “’Billions of dollars’ smuggled out of Iraq during Maliki’s rule,” 11/9/15

Brosk, Raman, “Iraqi Central Bank accuses banks of “fraud” over hard currency sales,” AK News, 5/17/12

Glazer, Emily, Malas, Nour and Hilsenrath, Jon, “U.S. Cut Cash to Iraq on Iran, ISIS Fears,” Wall Street Journal, 11/3/15

Habib, Mustafa, “dinar woes: iraqi currency traders break Syria, iran sanctions,” Niqash, 5/17/12
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Harissi, Mohamad Ali, “Iraqi dinar casualty of Iran, Syria sanctions,” Agence France Presse, 4/12/12

Al-Hassoun, Nassir, “Iraqi Central Bank Fighting Money-Laundering Problems,” Dar al-Hayat, 6/11/12

Iraqi News Network, “Central Bank only fined banks that ran away with billions,” 11/11/15

Al-Jabbouri, Mahmoud, “Counterfeit currency threatens Diyala and the nation,” AK News, 2/21/12

Kami, Aseel and Chaudhry, Serena, “Iraq dinar hit by fallout from sanctions next door,” Reuters, 4/15/12

Khallat, Khudr, “Battle against counterfeit gangs before change in currency,” AK News, 4/9/12

Al Mada, “Al Mada exclusive to publish documents prepared by Chalabi before his departure,” 11/9/15

Mustafa, Karim, “Iraq’s current monetary crisis: bubbles or fleeting appearance of a deeper economic crisis?” Al Mowaten, 5/13/12

Peel, Michael, “Iraq bank moves to allay laundering fears,” Financial Times, 4/2/12

Sabah, Mohammad, “Former official of the Central Bank trial with 30 employees on charges of not being investigated,” Al-Mada, 6/18/13

Sami, Zeena, “Central Bank fails to stem Iraqi dinar’s weakening vis-à-vis the dollar,” Azzaman, 4/17/12

Al-Shaher, Omar, “Iraq’s Central Bank a Political Battleground,” Al-Monitor, 1/2/13
- “Questions About Practices Of Private Iraqi Banks,” Al-Monitor, 1/17/13

Shattab, Ali, “Iraqi politicians accused of meddling in Central Bank auctions,” Azzaman, 5/6/13

Sowell, Kirk, “Inside Iraqi Politics No. 49,” 10/31/12

Al-Summary, Yazn, “Counterfeit currency is leaving traders and customers out of pocket,” AK News, 2/22/12

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