US Treasury and Federal Reserve ban 14 Iraqi banks from USD transactions

The United States Treasury and Federal Reserve Bank of New York have banned 14 Iraqi banks from conducting US dollar (USD) transactions. This follows concerns that US currency could be redirected to sanctioned individuals and possibly benefit Iran. The sanctions – which contrast with recent steps by the Biden administration to improve relations with Iran – are part of an attempt to stem the flow of United States currency to Iran and other sanctioned jurisdictions.

Activity suspected of benefitting Iran

According to US officials, the measures respond to recently-uncovered evidence of illicit activity committed by the banks, including fraud and money laundering. According to the Wall Street Journal, one official went on record, saying, “We have strong reason to suspect that at least some of these laundered funds could end up going to benefit either designated individuals or individuals who could be designated. …[T]he primary sanctions risk…relates to Iran.” 

The new bank ban follows similar restrictions imposed against four Iraqi banks in September 2020, which barred the institutions from participating in “dollar auctions” – a process that involved Iraq’s central bank providing dollars to commercial banks in exchange for dinars. The ban also follows a tightening of wire transfer controls that occurred in 2022 by the US Treasury and the Central Bank of Iraq, which saw plummeting values in Iraqi currency. The current measures are expected to have a similar economic impact.

The US dollar and financial crime in Iraq

USD plays a vital role in the Iraqi economy.  However, the practice of using Iraqi banks to transfer US funds to Iran has raised concerns, prompting joint efforts between the US and Iraq to address the issue. During a press conference in February 2023, US Department of State spokesperson Ned Price confirmed this bilateral approach, stating: 

When we engage with our Iraqi partners, we do often talk about the challenges that we confront in the region and well beyond. Many of those challenges are challenges to both of our interests. Iranian-backed forces in some cases pose a challenge to both of our interests.

So when we talk about sanctions, we don’t talk about it in terms of what we are demanding of our Iraqi partners. We talk about it in terms of what is good for both of our countries, and there is a lot that is good for both of our countries.

Source: US Department of State

Iran has been the target of a range of US sanctions since the 1979 revolution. While the original sanctions were lifted in 1981, new sanctions were imposed throughout the 1980s by the Carter and Reagan administrations in response to Iran’s actions in the Persian Gulf and its support for militant groups associated with terrorist activities. Since then, the US has issued further designations in response to a wide range of other alleged Iranian illicit activity, including:

• State terrorism and overseas interference by the Iranian intelligence services and the Iranian Revolutionary Guard Corps (IRGC).
• Support for extremist Islamist groups such as Hezbollah and Hamas.
• Human rights abuses.
• Cyber criminality.
• Attempts to develop military nuclear technology and ballistic missiles. 

Key takeaways

The Office of Financial Assets Control (OFAC) enforces the US sanctions regime. Unlike other sanctions regimes, which apply only to those subject to the legal authority of the sanctioning authority (primary sanctions), the US also imposes sanctions on non-US citizens and entities engaging with designated targets (secondary sanctions). The recent Iraqi bank bans highlight the importance of ensuring a holistic sanctions screening approach. 

Such an approach should consider not only named targets on the US sanctions list but also entities that may be covertly involved with those entities. This requires a carefully-designed anti-money laundering and counter-terrorist financing (AML/CFT) program tailored to a firm’s specific risks. This is particularly true for firms based in areas used as locations for Iranian

clandestine procurement and commodity trading, who will need to take care to mitigate risks from Iranian evasion activities using proxy front companies.  

Any suitable OFAC sanctions-compliant program should be based on an up-to-date enterprise-wide risk assessment (EWRA) and feature robust and up-to-date OFAC sanctions screening tools – along with the following measures:

• Customer due diligence (CDD) – This includes establishing each customer’s identity during onboarding, undertaking enhanced due diligence (EDD) for high-risk customers, and continuously monitoring and updating customer patterns and information.
• Transaction screening and monitoring – Screening and monitoring customer transactions is critical to preventing and mitigating sanctions evasion attempts.
• Politically exposed persons (PEPs) coverage – Firms should ensure they have tailored PEP screening and monitoring practices to mitigate the higher financial crime risks these individuals are exposed to.
• Adverse media monitoring – Firms should monitor for adverse media stories that involve their customers and that reveal association with sanctions targets.