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Maintain Tight Banking Controls on Iraq to Defund Iran

U.S. Dollars. Image: Creative Commons.
Image: Creative Commons.

Iraqi Foreign Minister Fuad Hussein arrives in Washington, D.C., on Friday to, according to a White House statement, “ensure that Iraq’s economy is delivering for the Iraqi people.” Translation: The Iraqi delegation wants the U.S. Treasury and Federal Reserve Bank of New York to relax recently imposed stringent rules on Iraq’s dollar transactions. President Joe Biden should politely decline the request and deny Iran a massive funding source.

The New York Fed has been enforcing tighter controls over Iraq’s dollar transactions starting last November. Since the fall of dictator Saddam Hussein in 2003, Iraqi banks were not required to provide information on the destination of their international wire transfers. Besides not “delivering for the Iraqi people,” Iraq’s loose banking system became rife with corruption with billions in money-laundering enriching nefarious actors.

As a result of the new regulations “80% or more of Iraq’s daily wire transfers…have been blocked because of insufficient information,” according to the Wall Street Journal, exposing the extent of the financial rot endemic in Iraqi institutions. Inflation for basic necessities, such as eggs, bread and cooking oil, have spiked. Iraq’s currency has devalued 10% in three months.

For nearly 20 years, the United States had given Baghdad great leeway in making its economic and political reforms having midwifed its struggling democracy. But exempting Iraq from standard global banking compliance rules has severely retarded Iraq’s transition into a sound and modern economy and undercut our tens of billions of aid investment to get the country on track.

Worse, it has allowed the Islamic Republic of Iran to pilfer billions of dollars from state coffers through phony transactions and use these funds to finance their terrorist operations abroad while evading international sanctions. No surprise then that, according to the Journal, the most vociferous critics of the new regulations are Iran’s allies, who denounce the U.S. for “[using] the currency as a weapon to starve people.”

Iran’s proxy militias in Iraq, known as the Popular Mobilization Front, have served as linchpin enforcers of Tehran’s parasitic relationship with Iraq, threatening violence, including murder, to anyone that dares challenge them. PMFs are so entrenched that they are allocated $2 billion per year from the state budget and have Members sitting in Parliament. This is in addition to the billions more they accrue through a variety of criminal activities.

Past attacks on U.S. Embassy facilities have been launched by PMF militias, paid for by Iraq’s finance ministry. As Iran has become a major antagonist in Russia’s aggression against Ukraine through its armament sales and may soon possess nuclear weapons, it is high time to cut Iran’s umbilical cord to Baghdad.

The timing is also right. Neither Iran nor the PMFs are popular in Iraq, and they may be at their most vulnerable point. They routinely discriminate and abuse minority Sunnis in their own towns and villages. Iraq’s religious minorities that were nearly wiped out by ISIS’s campaign of terror still struggle to return home, harassed and extorted by PMFs who use their lands as critical smuggling routes for illegal arms, illicit drugs and contraband to support Iran’s allies across the region. For the majority Shia in whose religious name Iran and the PMFs bully, resentment runs deep.

In 2019, mass protests broke out in the Shia heartland, birthed by rampant government corruption and frustration at seeing the country’s billions in oil revenues disappear. Iranian consulates and PMF offices bore the brunt of Shia anger and were burned to the ground. The protests forced the prime minister to resign, and new elections were called. The 2021 parliamentary elections proved disastrous for the PMFs who lost two-thirds of their seats. With U.S. military forces now numbering only 2,500, Iran’s allies are denied that convenient scapegoat for Iraq’s many problems.

The ensuing crisis prompted Iraq’s current Prime Minister Mohammed al Sudani to dispatch a delegation to the White House to ask for a six-month moratorium on the new policy. But to relax the Fed’s banking rules now would be equivalent to throwing Iran and their Iraqi proxies a financial lifeline.

Moreover, these compliance measures offer Iraqis renewed hope that their corrupted banking sector can assume the wealth-generating role that banks naturally play. As such, President Biden should side with the Iraqi people, defend our vital national security interests, and just say no.

Max Primorac is Director of The Heritage Foundation’s Allison Center for Foreign Policy Studies. He served twice at U.S. Embassy Baghdad for the U.S Department of State and the U.S. Agency for International Development.

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Max Primorac is Director of The Heritage Foundation’s Allison Center for Foreign Policy Studies. He served twice at U.S. Embassy Baghdad for the U.S Department of State and the U.S. Agency for International Development.