Iraq is Listed on Europe’s List of High-Risk Countries in Money Laundering Crimes: Reasons and Consequences

EPC | 29 Sep 2020

While the government of Mustafa al-Kadhimi is struggling to ensure that the salaries of employees, retirees, and beneficiaries of the social protection network continue to be paid after the sharp decline in public treasury revenues due to the decline in oil prices under the pressure of the coronavirus outbreak, its efforts received a severe blow following the reinclusion by the European Union (EU) in May 2020 of Iraq in the list of high-risk countries for money laundering and terrorist financing, along with North Korea, Iran, Afghanistan, Syria and Yemen. This step would have negative economic and financial repercussions for Iraq.

An ideal environment for money laundering

In the post-2003 US invasion phase, Iraq constituted a fertile ground for the emergence of money laundering networks that have benefited from the repercussions of the radical change of the political regime and the accompanying political, economic and security chaos fuelled by the feverish competition between political factions and representatives of the ethno-sectarian components for possession of the largest possible amount of power and influence, which would facilitate the exploitation of state resources and the collection of funds that found their way abroad through organised and politically-covered money laundering operations. This was the main reason behind the disruption of control mechanisms over the movement of funds and trade with other countries in light of a state of overall openness to the global economy.

Despite the creation of several regulatory bodies, such as the Federal Commission of Integrity (CoI), offices of general inspectors in government ministries, agencies and institutions, as well as the Federal Board of Supreme Audit (FBSA), the Directorate of Economic Crimes at the Ministry of the Interior, and the Economic Security Department at the National Security Agency, all of those bodies have been unable to combat this phenomenon due to the political interventions that have taken insecurity and sectarian warfare as a cover and an excuse to evade for more than a decade the pressure by the World Bank (WB) and global financial institutions that have repeatedly threatened to put Iraq on the blacklist if it does not enact a law to combat money laundering, which was not done until 2015 when Parliament passed Law No. 39 on Anti-Money Laundering and Counter-Terrorism Financing, which provides for the establishment of the Anti-Money Laundering and Counter-Terrorism Financing Council, which is granted wide powers, as well as the formation of an office within the Central Bank of Iraq (CBI) called the Office of Anti-Money Laundering and Countering Financing of Terrorism.

The first report of the Basel Anti-Money Laundering (AML) Index in 2012 had ranked Iraq in sixth place among the worst countries in the field of combating money laundering. This called for the EU in July 2016 to place Iraq on the list of countries that do not apply international standards. While the EU, in a goodwill gesture, removed Iraq from its blacklist in 2018 even as it ranked first in the Basel AML Index report for 2017 as the most dangerous country in the field of money laundering, the Iraqi government failed to take advantage of this opportunity to improve the country’s image by taking steps in the direction of easing the concerns of its international partners.

Sources of money laundering

Over the past years, the money laundering trade in Iraq has been fueled by several sources, the most important of which are the following:

1. Investment budgets: these were allocated by successive Iraqi governments after 2003, with estimates ranging from 300 to 500 billion US dollars, for the purpose of rehabilitating the infrastructure and developing public facilities. They were a major source of profit for the ruling parties through the allocation of corrupt contracts and tenders to fake, unqualified or incompetent companies in return for huge commissions believed to be no less than a fifth of the value of each contract. Those contracts were often executed in a non-conforming manner or had their periods of delivery extended for additional years on the pretext of security instability.

2. Oil smuggling: in addition to the fact that southern oil export platforms remained without metres until the end of 2017 and to the use of the ullage (outage) method to measure the volume of oil tankers’ loads, which used to cost Iraq thousands of barrels of oil in each shipment for every centimetre that is unaccounted for, the oil pipelines extending between the fields and the ports, which operate to this day without metres, including at the level of oil fields, secondary pumping stations and refineries, continue to be the favourite target for the theft of crude oil and its derivatives. Such practices are estimated to account for between 100,000 and 250,000 barrels per day of Iraqi oil production, in addition to other aspects of administrative corruption in calculating the quantities of oil entering and leaving the refineries. In the central and northern regions, the oil fields and oil smuggling networks that used to finance Daesh (IS) after the fall of the city of Mosul in mid-2014 continue to operate as usual, albeit for the benefit of the pro-Iran Shiite militias, and in cooperation with the Kurdish parties that are themselves active in smuggling the oil produced in the Kurdistan Region. This accumulates the huge amount of money that needs to be laundered in order to facilitate its integration into the global financial system.

3. Drug smuggling and arms trade: after the US invasion, local drug consumption has become one of the most profitable and fastest growing businesses due to the involvement therein of Shiite militias and armed clans, especially in Basra Governorate which is witnessing a fierce struggle over the monopoly of the routes to smuggle them from Iran into Iraq, which is often manifested as armed clan conflicts.

4. Border crossings: until the beginning of July 2020, the land, sea and air border crossings remained completely outside the authority of the state due to the control thereon of the traditional and militia-type Shiite powers, let alone the crossings of the Kurdistan Region whose government has refused since 2003 to enable the federal government to supervise them pursuant to the Constitution. This costs the public treasury losses estimated at between 5 and 10 billion dollars annually as a result of the customs evasion and organized smuggling that are practiced there.

Methods of money laundering

The daily currency auction – i.e. the mechanism adopted by the CBI to control the exchange rate of the Iraqi dinar at the limit of 1,200 dinars to the dollar by providing the needs of the market, merchants and importers of the US dollar – remains the major channel used by the political parties and militias to launder suspicious funds through banks and bureaux de change associated with those parties and militias, which have permanently gained preference to participate in the auction despite the violations that were recorded against them, mainly the presentation of forged import permits on behalf of the merchants who were supposed to have bought the dollars from them, and the transfer of huge sums of money of unknown origin in favour of fictitious foreign financial institutions. One of those operations was demonstrated in CBI documents dated 2014, which were revealed by the Baghdad Today News Agency website, whereby the amount of 1.8 billion dollars was ordered to be transferred from a national bank to a Jordanian bank without verifying the identity of the amount’s owner or the recipient, given that when approached by the Office of Anti-Money Laundering at the CBI, the Central Bank of Jordan could not confirm whether the amount has reached the relevant Jordanian bank.

This sheds some light on the reasons for the doubling in the volume of dollar sales to nearly 60 billion dollars annually, despite the fact that the total commercial exchanges announced by Iraq’s trading partners barely reach the threshold of 40 billion dollars. This means that at least one third of Iraqi financial transfers go to servicing money laundering operations. This has been alluded to by the former president of the FBSA Abdel Basset Turki al-Hadithi between 2004 and 2014 when he emphasised that the Iraqi economy’s needs in terms of foreign currency transfers do not exceed 500 million dollars per week, and any dollar more than that is currency smuggling and money laundering.

Serving Iran and its proxies

While over the past years numerous accusations have been made against political actors of exploiting state resources and seizing public funds and smuggling them abroad, the unspoken truth is that Nouri al-Maliki, the Iraqi Prime Minister between 2006 and 2014, was the most prominent player in the depletion of the country’s resources in the service of the schemes of Lebanese Hezbollah, whose envoy in Baghdad Muhammad Kawtharani led efforts to persuade the Shiite leaders to renew the mandate of the leader of the State of Law Coalition at the head of the Iraqi government in 2010, turning Iraq into a base for Hezbollah’s economic activities and the epicentre of money laundering by international mafias with which it has business relations in the framework of its foreign operations in Latin America. This used to take place quietly until the outbreak of the Syrian Revolution, which accelerated the plan to control the CBI by dismissing its governor Sinan al-Shabibi on charges of corruption in 2012, and assigning the FBSA President Abdel Basset Turki to run it on an ad interim basis, despite the obvious conflict of interests between the two positions. Subsequently, the volume of the CBI sales of the US dollar increased significantly and unjustifiably, in conjunction with the influx of Iraqi Shiite militias to fight alongside the Syrian regime.

This step inaugurated the era of the control of the Cell of Dr. Ali al-Mumin (who is described as the historian of the Islamic Dawa (Call) Party), including Muhammad Kawtharani, Adnan Kawtharani and Yassin Majeed. The Cell dominated the Iraqi financial sector through "controlling the licenses of banks and bureaux de change in Iraq and the large money transfer companies in the shadow war between Iran on one side and the US and its allies on the other side”, leading to the “misuse of the resources of the Ministries of Agriculture, Industry, Transport, Communications, Immigration and the Displaced in the government of Adel Abdul Mahdi”. In addition, the Cell sought to “consolidate its authority in Iraq in cooperation with the Revolutionary Guards and the Iraqi loyalist factions represented by Sheikh Abu Safi Mahmoud al-Rubaie, who is affiliated with the economic office of the Asaib Ahl al-Haq (Leagues of the Righteous) militia, and also the spokesman for its political bureau, in addition to Member of Parliament (MP) Ahmad al-Asadi, spokesman for the Fatah Coalition, headed by Hadi al-Amiri who is close to Iran, and a leader of the Badr Organisation, Abdul Karim Younis Ailan (Abu Maryam al-Ansari) (former Minister of Municipalities), and the leader in the Iraqi Hezbollah Battalions Bassem al-Majidi”, as was revealed by a report attributed to the security expert Husham al-Hashemi, who was assassinated in Baghdad early July 2020.

On the other hand, companies affiliated with Lebanese Hezbollah are known to have previously obtained profitable government contracts in the fields of construction, communications and logistical services for international oil companies operating in Iraq, in addition to its other investments in tourism, luxury restaurants, hotels and light food industries, and its entry as a partner in a large number of shopping centres in the capital Baghdad. These are sub-owned by Shiite political and militia figures. Well-informed insiders on the Iraqi market agree that these are merely facades for laundering other illegal activities, given that they provide services at unreasonable prices according to local standards.

Significance and implications

Following the decision of the European Commission (EC), Iraqi Foreign Minister Fuad Hussein issued a statement expressing his surprise at the inclusion of Iraq on the list of high-risk countries in money laundering and terrorist financing. He recalled the measures taken by Iraq during the past two years, whereby Iraq is considered to have met all the conditions for removal from the blacklist. However, the state of denial, which was disclosed by the minister’s statement, reveals a number of indications, the most important of which are the following:

1. Money laundering has been rooted in the structure of the political system, as one of the aspects of financial corruption that has put Iraq at the top of the list of the most corrupt countries in the world.

2. Money laundering is of strategic importance in relation to Iran’s plans to secure financial support for its allies and proxies in Syria, Lebanon, Yemen and Bahrain, by taking advantage of Iraq’s uncertain situation from the perspective of the US administration, which does not seem to be in the process of a complete breakup with Baghdad, pending the maturity of the elements of internal Iraqi rejection of the Iranian hegemony over the country.

3. The lack of will by the transitional government headed by Mustafa al-Kadhimi to open the door to this discussion due to the involvement in money laundering operations by all Shiite, Sunni and Kurdish actors that are either supportive of his government or neutral or not opposed to it, especially the Kurds who lost nearly 1.5 billion dollars of smuggled oil revenues from the Region due to the bankruptcy of Lebanese banks.

4. The underdeveloped tax and banking systems in Iraq, which makes it difficult to keep pace with the movement of funds, verify their owners, and settle their tax position.

5. The lack of a legal cover to follow up on people who show manifestations of wealth that are not commensurate with the jobs and businesses they carry out, or do not match the prices of services and goods they sell, especially if these are less than the cost price or do not even cover the transport costs, such as fruit and vegetables imported from Iran, as happened in June 2020 when Iraq imported 70 million dollars’ worth of Iranian tomatoes, even as Iraqi farmers in the Kurdistan Region were throwing their produce into the streets because there was no one to buy it.

6. The lack of clear controls for the banks and bureaux de change that are selected to participate in the hard currency auction, especially those that do not provide actual banking services and whose records are fraught with violations.

7. Failure by regulatory and judicial institutions to track the people whose CBI data reveal that they transferred billions of dollars with forged import permits, such as Hamad al-Moussawi, owner of the Al-Huda Bank, who is close to the leader of the State of Law Coalition Nouri al-Maliki, and who was referred to by former Finance Minister Hoshyar Zebari without mentioning his name, when he spoke of a person’s transfer of 6.5 billion dollars to banks in Jordan during the period of the second Maliki government.

8. The great influence that the loyalist factions, and their backer Lebanese Hezbollah, have come to enjoy within the government institutions, which makes it difficult to stop the money laundering operations that they practice inside Iraq and that are linked to various illegal activities, from the smuggling of oil, drugs and weapons to kidnappings and the imposition of royalties on businessmen and investors, especially in the Sunni provinces.

As for the repercussions, the European decision would harm Iraq’s political and financial reputation, which would lead to the financial transfers from the EU countries to Iraq being subjected to more stringent and more bureaucratic terms, which would in turn raise the costs of insurance and transfer. It would also reduce Iraq’s credit rating to below B-, which would negatively affect its appeal for European and even foreign investments, and its access to loans and grants from European and international institutions. These effects would compound the economic crisis that Iraq is facing, and would increase the suffering of the Iraqi people.

Conclusion

  • In May 2020, the EU re-placed Iraq on the list of high-risk countries in money laundering and terrorist financing. This step would amount to subjecting financial transfers from the EU countries to Iraq to more stringent conditions, and reducing Iraq’s credit rating to below B-, which would negatively affect its appeal for European and even foreign investments, and its access to loans and grants from European and international institutions.
  • Illegal funds are drawn from investment budgets, oil, drugs and weapons trafficking, and customs evasion. Most money laundering operations are done through the daily currency auction. At least one third of Iraqi remittances go to the service of money laundering operations.
  • One of the reasons for the spread of the money laundering phenomenon is the underdeveloped tax and banking systems in Iraq, and the lack of a legal cover to trace people who show manifestations of wealth that are not commensurate with the jobs and businesses they perform, the lack of clear controls over the banks and bureaux de change selected to participate in the hard currency auction, and the failure of the regulatory and judicial institutions to trace the people whose CBI data show that they transferred billions of dollars with forged import permits.
  • Money laundering operations are of strategic importance to Iran’s plans to secure financial support for its allies and proxies in Syria and Lebanon. The great influence that the loyalist factions have come to enjoy within the ruling institutions makes it difficult to stop those operations.

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