Last summer, writer and blogger Hiyam Al-Khuzai claimed in a tweet that the fight against corruption required an end to currency auctions, oil smuggling and for the government to assert firm control on ports and border offices. This statement puts forth the poorly known issue of currency auctions in Iraq, a shady business on the edge of legality that costs billions of dollars to the government every year.

Since Saddam Hussein’s downfall in 2003 following Iraq’s invasion by the United States, the country’s socialist economy has been under the influence of the free market. Nonetheless, Iraq’s economic system remains hybrid: a synthesis between the two opposed models.

Following the liberalization of Iraq, the government lost control over the economy, a phenomenon exacerbated by the weakening of the State institutions and the domination of Iraqi politics by local actors under the protection of regional and international actors, but who were in search of income and . 

The liberalization process also required to have Iraqi businessmen, private banks, and trading institutions to be included. To stimulate the private sector, the U.S. occupation forces decided that the country’s currency should be pegged on the U.S. dollar, but at lower rates in order to help companies benefit from exchange rates in order to trade with the rest of the world. However, influential political parties and businessmen with close ties to them were exhausting the central bank’s initiative to support their private businesses.

These political forces all rely on their personal military branches, or militias, employed to impose their control over various aspects of life in the country. In the last decade, these militia-parties have instrumentalized their domination to enact laws and legal procedures to reinforce their sources of income.

And little by little, this system of maladministration drained Iraq’s economy through trafficking operations that affected the “currency”, not to mention allegations of illegal trafficking such as the smuggling of medicine and many other types of merchandise.

A major example of Iraq’s finance draining revolves around the manipulation of exchange rates. The Iraqi Central Bank used to sell the US dollar for 1119 Iraqi dinars (IQD) while the exchange rate in the street was around 1220 dinars. The trick occurs when influential party officials buy their dollar at the bank and benefit from a different exchange rate than on the local market.

The phenomenon of currency smuggling in Iraq considerably spread since the Central Bank applied a policy of auctioning foreign currencies. Possibility was made to buy currency at reasonable prices compared to neighboring countries and to use this money as they pleased instead of reinvesting it in the local market. 

The Committee for Parliamentary Integrity declared that the volume of money funnelled outside of Iraq through illegal trafficking amounts to about 350 trillions Iraq dinars (roughly 240 billions US dollars).

Inflation and currency manipulation

On December 19th, 2020, minister of Planification, Mr. Khaled Battal announced the devaluation of iraqi dinar, bringing its value from 1190 to 1450 IQD for one dollar in order to confront the lack of cash flow in the country. The unprecedented crisis is the result of an economic crisis stemming from the COVID-19 pandemic as well as record low oil prices. But the reason behind Iraq’s lack of cash flow can be found elsewhere. 

Member of Parliament Riyad al Masoudi confirmed the fact that influential political parties have engaged in smuggling of foreign currencies outside the country through banking shell companies he called “dakakin” (shops in Arabic).

“Iraq suffers from many structural problems both internal and external, the latter being represented by foreign influence in our country”, Mr. al Masoudi declared, adding that the country is highly dependent on its oil production and exportation for its budget: “93% of our revenues come from the oil industry, which explains why we are so dependent on the oil’s price on international markets.”, he explained. 

The MP added that the real money originating from investment is really little while part of that amount ends up in the pockets of corrupt individuals because of disloyal political practices, of international interference as well as because of the corruption of individuals. He also stressed the fact that the Central Bank is selling currency, which is an abuse of language: “The correct way of describing this practice would be to say that the Central Bank is buying iraqi dinars and delivering sums through auctions.”, he noted.

The profits made through this process are important, which prompted the greed of many political figures that established banks across the country in order to be evolved in the process of currency auction trafficking. “There are more than 75 private banks across the country” according to Mr. Al-Masudi. 

Further describing the scheme, Mr. al Masoudi added that the artificial competition created to buy and smuggle dollars outside the country cost no less than 350 billion dollars to the country. “That’s 28% of all sums sold to the Central Bank that are smuggled illegally outside Iraq in countries such as Turkey, Iran, Lebanon, Jordan, the United Arab Emirates, Egypt, European countries and the United States.

Mr. al Masoudi claims that this traffic of currency led to creating obscene wealth in the hands of few individuals and political groups. This process of “bleeding” Iraq’s budget from its US dollar currency continues as of today. The MP declined to identify any of the individuals or groups directly involved in this process. 

Militias flex muscles to deter accountability

Private banks belonging to influential political parties involved in smuggling of strong currencies (such as dollars, pounds, euros that are usually used to make international transactions) are not registered in the names of party leaders or actual owners, but instead under the names of other people to cover corruption operations. 

The Red Line recorded the existence of nine private banks run by major political parties. Most of these banks are Iranian-backed  and engage in currency smuggling. Iranian-backed factions have taken advantage of the auction to support the sanctioned Iranian economy.

Reinforcing the case against Iran-affiliated parties and their military branches involved in currency smuggling, the paramilitary group called Rabu’allah (God’s people) paraded on March 25th 2021 and threatened Iraqi Prime minister Mustafa al Kadhimi in an attempt to dissuade him from exposing the members involved in smuggling operations. Reinforcing the dinar means more trade capacity/smuggling of currencies with Iran. This is the underlying reason for Rabu’Allah’s demonstration back in March.

Rabu’allah, considered an extension of another important militia (Kataeb Hezbollah), itself being affiliated with the Popular Mobilization Units (PMU), launched their parade to 

outpace Lieutenant General Ahmed Abu Ragheef, the intelligence officer from the ministry of interior in charge of anti-corruption, which was about to arrest 12 influential individuals accused of murder and smuggling of currency in Iraq.

The militia parade was an act of intimidation that brought forth an inaccurate agenda such as the demand to ensure a low dollar exchange rate and the approval of the federal budget. But in the process, the armed group threatened the Prime minister not to expose the names or arrest those responsible for the currency trafficking, according to an intelligence officer who declined to have his name mentioned. 

The threat on Mr. al Kadhimi was successful since no arrests were made against the political factions involved in currency trafficking activities and money laundering. 

Even if these calls by undisciplined forces manage to reduce the dollar’s exchange rate, the ultimate beneficiary will be Iran. An economic expert speaking under the condition of anonymity explained that the lowering of exchange rate does not favor Iraqis as much as it favors neighboring countries, including Iran. The banks linked to the Iranian-backed militias have been facing difficulties in purchasing dollars. Their campaign to lower the dollar in comparison to the Iraqi dinar can thus be seen as a way to increase their currency trading capacity with Iran.The expert added that currency auctions will rise back to their previous amounts: roughly 200 million dollars per day. “Iran gave the green light to its militias in Iraq to show off their might in Iraqi streets not for the love of Iraqi citizens, but because their own interest was at stake.”, he concluded. 

In a post on his personal facebook page, writer and blogger Saleh al Hamdani noted that despite the economic crisis Iraq is currently facing, and the government’s incapacity to provide the necessary funds to pay salaries in full, money trafficking remains a thriving activity. “No political decision and no custom office will ever block this business”, he wrote. 

It became clear that this illegal activity was orchestrated by influential political parties who contributed to the opening of private banks working in the shadows to smuggle large amounts of currency outside of Iraq. According to legal consultant Muhammad Anooz, smuggling operations have swallowed enormous amounts of money and considerably drained the Iraqi economy due to all the false and delayed projects that mobilize the State’s budget but lead nowhere. Indeed, the Iraqi government has had a number of development projects such as schools, hospitals or residential buildings suspended while the funds invested were never seen again. The victims always remain the same: the Iraqi citizens.

Mr. Anooz explained that the direct method of transferring contraband currency is to use bags, as was the case for the ministry of Defense Hazim Shaalan in Iraq’s first government after 2003.

In light of these facts, Mr Anooz described the Iraqi situation as highly dangerous, noting that governmental institutions in charge of managing finance and cash such as the Central Bank, the ministry of Finance and their monitoring authorities do not have any taskforce or coordination between them.

The law as a solution

Lawyer and legal expert, Muhammad Abdul Amir stressed that it was imperative to treat the issue at its roots, which implies the implementation of the Iraqi custom law n° 23 of 1984. Article (194) of the law precisely indicates what type of sanctions are planned for acts of smuggling (up to life sentence, or six times the amount of the smuggled goods. “We do not find any engagement by the competent authorities on these matters”, declared Mr. Abdel Amir. 

The Central  Bank makes weekly auctions worth billions of dollars at official prices to companies tied to political parties. By calculating the difference between the dollar’s value and its equivalent on the market, we notice how these parties realize tremendous profits while instrumentalizing legal ways of extracting money from the government’s coffins.

Mr. Haider Hammoud al-Husseini, the chief of the Chamber of Commerce of Najaf (161 km south of Baghdad), discussed an official statement from the Central Bank: “In a single auction at the Central Bank of Iraq, 44 billion dollars were sold. The auction was organized to “import merchandise to the Iraqi market and stabilize the Iraqi currency to prevent inflation”. Even if the volume of importations stated by the Central Bank statistics were correct, they did not even exceed 18 billion dollars. Where did the remaining 26 billion dollars go? 

Evidently, they were smuggled out of Iraq through the accounts of corrupt and influential people”, Mr. al Husseini claimed. The Najafi Chief of chamber of Commerce also added that in its current form, currency auctions benefit a large number of private banks and provide them with massive income with which they can counter any interruption of financing, not to mention that the rate difference is important between the Central Bank and private ones. “The reason behind the existence of this system is the lack of political stability”, he analyzed.

Mr. Al-Husseini explained how the smuggling routes in Iraq contribute to disrupting the local economy. “There are 10 unofficial passage points in the North of Iraq through which most of the raw materials are smuggled in. These materials compete with the Iraqi industry and are not submitted to the same requirements of quality standards”. 

Smuggled merchandise provoked the closure of most of Iraq’s factories while thousands of Iraqis lost their jobs because of it. In Najaf, the owner of a currency exchange office shared his view on the banking system in his country, under the cover of anonymity: “Each one of these banks related to a powerful party or leader engages in money laundering: they give fake payment advices to the Central Bank for goods while the civil servants close a blind eye or are coerced to comply.”

The government’s decision to devalue the Iraqi dinar in December is a reckless and inhumane decision that directly impacts the poor. According to the UN, Iraq’s poverty rate jumped from 20% to over 30% in less than three years, a phenomenon further increased by the global COVID-19 crisis.

Sabotaging the Iraqi economy

The devaluation of Iraq’s dinar, coupled with the smuggling of currency affects the entire national market and the production in the sector. 

Mr. Ali Al-Adhari is director general of Al-Bahrani Poultry Company, a private company. His assessment concurs with Mr. Al-Husseini’s views that smuggled goods have led to the closure of most Iraqi factories. “imported industrial and dietary goods pushed most private Iraqi businesses to bankruptcy because they are cheap and abundant”, he claimed. “Politicians are to blame because they prioritise their own interest and that of foreign countries before their own people or our national production”. According to the industrialist, in the span of two years, all poultry, all animal food companies as well as all fish farms were closed in central and southern governorates except for his own and two other companies (Haditha and Safa companies) in 2013.

According to Mr. Al-Adhari, there were 1700 textile manufacturing companies in Iraq before 2003, alongside 10 000 poultry farms, 300 industrial slaughterhouses and hundreds of companies and factories employing hundreds of thousands of Iraqis nationwide. “Just in the poultry business, 1.750 million iraqis used to be employed and have since lost their source of income”. The businessman again blamed local politicians for having prioritized their interest while engaging in currency smuggling and importing goods and food (in strong currency) and other materials that could be produced locally.

Currency smuggling is a crippling, endemic phenomenon hard to control. Iraq’s “Deep State” structure, which is the alliance of political and non-state armed groups serving their personal interests as well as foreign powers’, created a system that robs Iraq of its wealth.

Iraq’s situation remains locked. Radical reforms have been long awaited from State institutions under popular supervision. Reforms that could prevent anyone from becoming exceedingly wealthy at the expense of other citizens. Iraq has been under a quasi-totalitarian regime for three decades before being invaded by the United States who claimed they would bring prosperity and freedom to Iraqis. Yet, this promise was never fulfilled for any normal iraqi citizen.

VIAAbdul Karim Saleh

Ali Al-Jubouri