When US President Barack Obama announced last month that he was barring a Baghdad bank from any dealings with the US banking system, it was a rare acknowledgment of a delicate problem facing his administration: For months, Iraq has been helping Iran skirt the economic sanctions imposed on Tehran because of its nuclear program.
The little-known bank singled out by the US, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former US and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of US dollars at a time when sanctions are squeezing its economy.
The Obama administration is not eager for a public showdown with the government of Iraqi Prime Minister Nouri al-Maliki over Iran just eight months after most US troops have withdrawn from Baghdad.
Still, the US has held private talks with Iraqi officials to complain about specific instances of financial and logistical ties between the countries, officials said. In one instance, when US officials learned that the Iraqi government was aiding the Iranians by allowing them to use Iraqi airspace to ferry supplies to Syria, Obama called al-Maliki to complain. The Iranian planes flew another route.
In response to questions from the New York Times, the US Department of the Treasury’s Under Secretary for Terrorism and Financial Intelligence David Cohen provided a written statement saying “we will pursue, and are actively pursuing, efforts to prevent Iran from evading or international financial sanctions, in Iraq or anywhere else.”
Yet some current and former US and Iraqi officials and banking and oil experts say that Iraqi government officials are turning a blind eye to the large financial flows, smuggling and other trade with Iran. In some cases, they say, Iraqi officials, including some close to al-Maliki, are directly profiting from the activities.
The treatment the Elaf Islamic Bank has received in Iraq since it was named by Obama suggests that Baghdad is not only allowing companies and individuals to circumvent the sanctions, but also not enforcing penalties for noncompliance.
Iraqi banking experts said last week that the bank was still allowed to participate in the Central Bank of Iraq’s daily auction at which commercial banks can sell Iraqi dinars and buy US dollars. These auctions are a crucial pathway for Iranian access to the international financial system. Western officials say that Iran seeks to bolster its reserves of US dollars to stabilize its exchange rates and pay for imports.
Iraqi and US officials with knowledge of Iraqi banking practices say Iranian customers are able to move large amounts of cash through the auction to regional finance centers and then onward to the international market.
While Iraq has tried to impose more stringent reporting requirements that might pick up illegal transfers, officials with knowledge of the Iraqi banking industry say that banks, hawala houses — an unofficial global network of money traders — and their Iranian customers are finding ways around them, often by forging documents that make it look as if the money transfers are legitimate.
Thanks to Iraq’s growing oil revenue, the Central Bank of Iraq has about US$60 billion in foreign exchange reserves with which to meet the insatiable demand for US dollars. However, the new flight of US dollars out of Iraq is prompting widespread criticism of the central bank and the Iraqi government.
The accusations of high-level Iraqi government involvement in sanctions-busting have roiled Iraqi politics and invariably reflect on al-Maliki, since many Iraqi officials now say that he has taken effective control of the Iraqi central bank.
Several US and Iraqi banking and government officials also say that Iranian organizations have gained effective control over at least four Iraqi commercial banks through Iraqi intermediaries. That gives Iran direct access to the international financial system, supposedly denied to Tehran by the sanctions.
Even as the US has moved to tighten the vise against Iran this summer, the al-Maliki government has openly sought to enhance its already deep economic and political ties with Iran. Trade between Iraq and Iran has been growing rapidly ever since the US-led invasion that toppled former Iraqi president Saddam Hussein, and it is now estimated to be about US$11 billion a year. Among other openly acknowledged forms of trade, Iraq has contracts to buy large amounts of electrical power from Iran.
Two weeks ago, an Iraqi delegation that included the deputy prime minister and top officials from the ministries of finance and trade and the central bank met in Tehran with their Iranian counterparts for talks about furthering economic ties.
An Iraqi government spokesman, Ali al-Dabbagh, said in a telephone interview that Iraq “is not intending to break any rules,” but added that “we also have good relations with Iran that we do not want to break.”
Iraqi officials publicly expressed concerns earlier in the year that their large volume of trade with Iran might place them in violation of the sanctions, and they said they would seek a sanctions waiver. Afterward, US officials privately told the al-Maliki government that Iraq would not be found to be in violation of the new Iran sanctions, a former senior US official said.
Whatever help Iraq has given Iran, the sanctions have put considerable pressure on Tehran. Iran’s oil exports have dropped by about 40 percent because of the latest round of sanctions, while Iraq’s own oil production has been surging. US officials say that if aiding Iran was a priority of the Iraqi government, Baghdad would not be so eagerly ramping up oil production to fill the void left by Iran.
Still, clandestine trade has been increasing, and the Iraqi government has done little to stop a highly organized effort that provides financial benefits to Iraqi political parties and political leaders, according to US and Iraqi oil traders and experts.
Iraqi fuel oil, acquired by smuggling operations with close connections to political leaders at extremely low prices with the help of government subsidies, is being smuggled from Iraq through Kurdistan and into Iran. US and Iraqi oil experts say they believe that at least some Iranian oil is finding its way to Iraqi ports for export.
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