US steps up financial and diplomatic pressure over 'illicit money' in Iraq

The United States is intensifying efforts to disrupt illegal financial networks in Iraq, aiming to stop illicit US dollar smuggling to Iran, which violates Washington's sanctions on Tehran.

US envoy Mark Savaya emphasised recent high-level meetings with the Department of the Treasury and the Office of Foreign Assets Control (OFAC) regarding banking reforms, enhanced monitoring of suspicious financial activities, including money laundering and terrorism financing, and the implementation of new sanctions targeting threats to Iraqi state authority.

These renewed initiatives coincide with escalating diplomatic tensions, as Baghdad responds to recent US actions concerning two Iraqi diplomats. Although Iraq's foreign ministry asserts that these measures do not constitute formal expulsions, it reaffirms the country's commitment to maintaining a stable partnership with Washington.

"Today, I met with Deputy Secretary of the US Department of the Treasury and officials from OFAC to address key challenges and reform opportunities across both state-owned and private Iraqi banks. We focused on strengthening financial governance, compliance, and institutional accountability," stated Savaya, the US envoy to Iraq, in a statement posted on X, formerly Twitter.

"We agreed to conduct a comprehensive review of suspected payment records and financial transactions. These involve institutions, companies, and individuals in Iraq linked to smuggling, money laundering, and fraudulent financial contracts and projects that finance and enable terrorist activities."

He indicated that the discussions focused on imposing additional sanctions on groups and individuals that threaten Iraq's financial security and independence. Savaya characterised US–Iraq relations as strong.

Diplomatic sources in Baghdad reported to Al-Araby Al-Jadeed, The New Arab's Arabic-language sister website, that the US State Department requested the departure of two Iraqi diplomats, granting one of them 48 hours to leave. A senior official stated that the diplomats were declared 'persona non grata' and that Iraq's ambassador in Washington, Nazar Khairallah, was notified. The identities of the diplomats and the reasons for their removal have not been disclosed; both were stationed at the embassy in Washington and the consulate in Texas.

Consequently, Baghdad is seeking clarification from Washington regarding what it perceives as an atypical action in the bilateral relationship, raising questions about whether the United States is adopting a more stringent approach toward Iraq.

In its initial official statement, Iraq's foreign ministry indicated that it is monitoring US actions and engaging with American officials to obtain additional information. The ministry also criticised inaccurate media reports concerning the timing and circumstances of the diplomats' departure.

Iraqi government officials clarified that this action does not constitute a legal or diplomatic expulsion, but rather reflects a US decision to terminate a diplomat’s assignment. One Iraqi diplomat is expected to remain in the United States until the end of the month.

The foreign ministry reiterated that Iraq's relationship with the United States is based on mutual respect and shared interests and is maintained through established diplomatic channels. Iraq possesses over $100 billion in reserves, primarily held in the United States, and relies on US cooperation to safeguard its oil revenue and financial operations.

On 2 September, the US State Department announced new sanctions targeting companies and vessels accused of smuggling Iranian oil under the guise of Iraqi origin. Waleed al-Samarra'i was identified as a principal individual involved in the operation.

The Iraqi Oil Marketing Company (SOMO) has categorically denied any involvement in smuggling or mixing crude oil at its ports or within Iraqi waters. The company affirms its commitment to transparency and strict adherence to export regulations.

In October, the US Treasury Department announced actions against individuals and companies accused of assisting Iran in circumventing sanctions. These entities were also alleged to have engaged in weapons smuggling and corruption within Iraq.

Sanctioned individuals include Aqeel Muftin Khafeef Al Baidani, head of Iraq's National Olympic Committee, and his brother Ali Muftin Khafeef Al Baidani. Washington alleges that they operated a bank connected to the Iranian Revolutionary Guards Corps (IRGC), which the United States designates as a "terrorist organisation".

According to the US Treasury, the brothers transferred funds to IRGC-affiliated Iraqi militias, including Kataeb Hezbollah. They are further accused of laundering substantial sums for Iran, smuggling oil and drugs, and leveraging Aqeel Muftin's official position to facilitate corruption.

In 2024, Iraq's central bank, acting as the nation’s financial regulator, prohibited eight local commercial banks from conducting transactions in US dollars as part of broader efforts to combat fraud, money laundering, and other illicit uses of the currency.