How is Iraq still a source of dollar smuggling to Iran and other neighbouring states?

Despite efforts by the Iraqi federal government and parliament to curb US dollar smuggling to Iran and other neighbouring countries, Iraq's economy continues to suffer from widespread illicit trade, including online transfers and cash smuggling across its borders.

Direct US dollar transactions to Iran are often facilitated through currency market offices in multiple Iraqi provinces, in which dollars are usually converted into Iranian Rial in Iraq's informal "black currency market" before being sent to Iran.

In February, then-US President Donald Trump signed an executive order, the National Security Presidential Memorandum (NSPM-2), ending a waiver that had allowed Iraq to buy gas from Iran to generate electricity. The order forms part of a broader US campaign to exert "maximum pressure" on Tehran, aimed at preventing Iran from developing nuclear weapons and countering its regional influence.

However, the sanctions have had unintended consequences for Iraq's energy and financial sectors. The US Secretary of State was tasked with tightening sanctions by revoking financial waivers, blocking Iranian oil exports, isolating Iran diplomatically, and preventing Tehran from exploiting Iraq's financial system and Gulf states to evade restrictions.

One significant consequence has been the surge in illicit cross-border dollar transactions. According to a Wall Street Journal report published in late May, Iraq's use of Visa and Mastercard for cross-border payments skyrocketed from around $50 million per month in early 2023 to an estimated $1.5 billion in April—a staggering 2,900 percent increase. US and Iraqi officials, along with documents reviewed by the Journal, indicate that Iraqi militia groups have exploited payment networks to channel dollars to themselves and to allies in Iran on an industrial scale.

"In terms of how the US dollar is being moved from Iraq to Iran, much of it is technically done through legal channels but under false pretences. Dollars are transferred abroad — often to the UAE or Turkey — ostensibly for trade purposes. These transactions are supported by invoices and documentation, but in many cases, the trade is fake," a well-informed source on the issue told TNA, on condition of anonymity.  "The goods are either overpriced, never delivered, or don't exist at all. Once the funds are outside Iraq, they're redirected and used to support Iran's financial system or brought back into the country in cash."

"The physical cash is typically flown into Iraq through Baghdad International Airport or smuggled across land borders. Iran-backed militias are heavily involved in these operations, either directly managing the logistics or providing protection and political cover. They also benefit from their control over exchange offices, customs routes, and sometimes even state institutions," the source added 

"Regarding the Trump administration: at this stage, there doesn't seem to be any immediate move to impose new restrictions, especially in light of the recent Israeli-Iranian conflict. The current strategy appears to be holding back on escalation, leaving room to assess whether there's a chance for some form of diplomatic settlement with Iran. So while pressure remains, the administration is not expected to act decisively in the short term," the source concluded. 

In a related development last year, the Central Bank of Iraq (CBI) banned eight local commercial banks from handling transactions in US dollars, citing concerns over fraud, money laundering, and currency misuse, according to an official CBI document obtained by TNA.

Meanwhile, pressure from US lawmakers on Iraq is mounting. Twelve Republican members of Congress have urged the Trump administration to designate Iran-backed militias in Iraq as "terrorist organisations", impose sanctions, and halt all US security assistance to Iraq as long as these groups remain officially part of the state.

On 7 February, Republican Representative Greg Steube of Florida announced his support for the initiative, joining Representative Joe Wilson of South Carolina. Their letter, addressed to Secretary of State Marco Rubio and National Security Adviser Michael Waltz, called for immediate action against militias aligned with Iran that are embedded within Iraq's official security forces. The lawmakers highlighted the nearly $3.5 billion in US humanitarian and development aid and an additional $7.9 billion in counter-ISIS programmes, questioning the militias' continued presence despite American support.

Separately, Iraq's Parliamentary Integrity Committee held a session on 15 April with the General Manager of Al-Rasheed Bank and several department heads, reviewing investigative findings related to discrepancies in customer bank card balances and accounting procedures. The committee also discussed the economic and technical feasibility of a comprehensive banking system contract, as well as a report by consultancy firm Ernst & Young. The bank's management agreed to provide written responses to all inquiries to support the committee's oversight.

TNA contacted several Iraqi lawmakers for comment on the issue, but they were unavailable.

For now, Iraq faces a complex battle to stabilise its economy and safeguard its financial systems, while balancing domestic political pressures and growing tension between Washington and Tehran.