(Baghdad) When the United States and Iraq implemented tough new currency rules, the intent was to stem the illicit flow of dollars to those under US sanctions on Iran, Syria and Russia, as well as to terrorist organizations and money launderers.
But in a country whose economy is largely based 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 turn up, often with plastic bags full of dinars, which the banks at the outside the country do not accept. It has become difficult to find a money changer that still has dollars. And those who have them are quickly exhausted.
“I’ve run out of dollars,” currency trader Abu Ali said last week at his shop in Baghdad’s Karrada neighborhood.
PHOTO JOAO SILVA, THE NEW YORK TIMES
People wait at an authorized currency exchange dealer in Baghdad to exchange Iraqi dinars for US dollars on February 22, 2023.
New currency rules, crafted as part of a U.S.-Iraq agreement, require greater transparency regarding transfers of dollars held as foreign exchange reserves for Iraq to an account of the Federal Reserve Bank of New York. They came into force at the end of last year.
The agreement is part of a long-delayed modernization of the Iraqi financial system, which is beginning to conform to the 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 predominantly cash-based economy, only a few businesses accept credit cards and almost no ordinary Iraqis have 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 US officials determine whether some of those transfers ended up in the hands of parties under US sanctions.
PHOTO JOAO SILVA, THE NEW YORK TIMES
A woman waits outside an authorized exchange office in Baghdad where people exchange Iraqi dinars for US dollars.
Concerns date back to shortly after the US invasion of Iraq in 2003.
At the time, US authorities attempted, unsuccessfully, to establish the chain of custody of billions of dollars transported in cash in 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 US Treasury wanted to ensure that dollars were not sent, in violation of US law, to fronts or agents of sanctioned parties or terrorist entities. In congressional testimony 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 militia Hezbollah backed by Iran.
With the takeover of northern Iraq by the Islamic State armed group in 2014, the latter seized a branch of the Iraqi central bank. These concerns have become more urgent.
The situation points to the need for greater transparency in dollar transfers to Iraq, according to a US 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 US 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 whoever ultimately receives 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 payment is made.
The new system allows banks around the world to perform automatic checks on money transfers from Iraq to other countries, said Ahmed Tabaqchali, chief Iraq fund strategist at Asia Frontier Capital.
“In short, the system increases the visibility of red flags,” he said.
The rejections have created a shortage of dollars, which has greatly increased their cost to Iraqis with legitimate needs, Ahmed Tabaqchali added.
Since 2003, there have been two Iraqi dinar rates for buying dollars: an official rate set by the Iraqi central bank and an unofficial rate on the street, which is higher. And when dollars are scarce, the street price goes up.
After the new monetary rules came into effect, the amount of dollars entering Iraq daily fell sharply – on some days it was down almost 65%, from $180 million to $67 million – compared to the period before the rules were implemented, according to daily cash flow figures published by the Iraqi central bank.
The inflow of dollars has since resumed, but 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 decline in dollars is attributable to illicit recipients who have now stopped asking for the 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 demands.
“I wouldn’t blame this nearly 90% drop on fraud,” said Douglas Silliman, president of the Arab Gulf States Institute in Washington and former US ambassador to Iraq. “Maybe it’s 45% fraud and 45% incompetence or just not knowing how to deal with new regulations. »