Unveiling corruption in Iraqi finance: Challenges and solutions

25-01-2024
Daban Sabir
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ERBIL, Kurdistan Region - In the realm of international finance, Iraq has reached a critical juncture, marked by a significant concern - the US dollar crisis.

Since November 2022, The Central Bank of Iraq (CBI) has been under intense scrutiny caused by the imposition of sanctions by the United States Treasury Department, due to corruption and lack of transparency within the Iraqi banking system. This eventually resulted in the freezing of over 100 million US dollars of Iraqi funds. US authorities demand proper documentation or a legitimate purpose in order to allow any processing of the frozen funds.

Concurrently, the parallel market in Iraq has experienced a notable upswing, with exchange rates soaring to approximately 15 percent higher than the official rate of 130,000 IQD for each $100. The escalation of this crisis is intricately linked to corruption within the Iraqi financial system, particularly in the approaches of exchange of US dollars and the transfer of money through wire transactions.

Iraqi banks are facing significant challenges within a financial system deeply affected by corruption. The absence of robust electronic infrastructure and an over-reliance on paper transactions have created an environment conducive to money laundering and fraud. Transactions are carried out in the shadows, making it difficult to track and regulate financial activities. This pre-existing vulnerability not only hinders the transparency of financial transactions but also facilitates illicit practices, including the circulation of fake bills and references. This environment allows for the smuggling of funds to neighboring countries such as Turkey, Iran, and Syria, as well as the funding of extremist groups like  the Islamic State (ISIS).

Oil revenues constitute the backbone of Iraq’s economy, accounting for about 85 percent of the country's total national income, according to latest data by the World Bank. The petrodollar system, term used to refer to the global practice of exchanging oil for US dollars rather than any other currency, requires Iraq to exchange its oil revenues to Iraqi dinars in order to meet the payroll demands of its extensive civil servant workforce and provide working capital for the government. In order to navigate this complex terrain, Iraq has relied on a mechanism known as the "dollar-auction" system.

The dollar-auction system, a mechanism initially established to address urgent economic needs, operates as follows: the CBI conducts auctions where commercial banks and financial institutions bid for US dollars using Iraqi dinars. While the aim of this system was to manage the demand for foreign currency and ensure stability in the exchange rates, it unintentionally evolved into a breeding ground for money laundering and corruption. During these auctions, issues such as the circulation of counterfeit bills and the lack of stringent oversight have surfaced, creating an environment where funds are susceptible to being siphoned off for unlawful purposes. The absence of adequate checks and balances within the dollar-auction process has facilitated activities like smuggling money to other countries, further exacerbating the challenges within Iraq's financial system.

In addition to this, the Iraqi parallel currency market and the myriad exchange shops scattered across the country also present a noteworthy challenge. The parallel currency market refers to the unofficial, unregulated market where currencies are traded outside the formal banking system. Exchange shops, which play a pivotal role in this market, engage in daily transactions involving millions of US dollars without proper documentation to verify the legitimacy of the funds. These small businesses operate with a high risk of corruption due to the lack of robust regulatory frameworks and stringent accountability measures. To illustrate the gravity of the situation, one can easily approach the counter of these exchange offices in Iraq and convert a substantial amount, such as a billion Iraqi dinars, into US dollars without being required to provide a single reference for the source of the money. This absence of oversight raises serious concerns about the transparency and integrity of financial transactions within the country.

Furthermore, a significant portion of Iraqis relies on the Hawala system for money transfers, both domestically and internationally, which further exacerbates the challenges within the financial landscape. The Hawala system is an informal and traditional method of transferring money, operating outside formal banking channels. Unlike conventional banking systems, Hawala transactions lack electronic documentation and official online platforms. In this system, a network of trusted intermediaries facilitates the transfer of funds between individuals. This informal and often culturally rooted system has gained popularity due to its speed, simplicity, and the ability to operate in regions with limited access to formal banking infrastructure. However, similar to the challenges posed by the dollar-auction system and parallel currency market in Iraq, the Hawala system's lack of electronic traceability raises concerns about the transparency and accountability of financial transactions within the country.

Despite the negative consequences associated with US sanctions on Iraq, there is a glimmer of hope for reforms being pushed forward as a result of the application of these measures. There is a growing desire, particularly from the United States, to see Iraq transition towards embracing digital currency solutions instead of the conventional practice of handling physical stacks of US dollars. The sanctions seem to have had a positive effect, catalyzing a shift towards financial transparency and security in Iraq's banking sector, exerting pressure on Iraqi authorities to make more concerted efforts towards the adoption of electronic platforms in their banking system. As a response to the sanctions, significant efforts have been made to establish online platforms dedicated to serving international traders, in addition to establishing an official channel for wire transfers. These advancements in the banking infrastructure not only address the challenges posed by the parallel market but also serve to protect the country from fraudulent activities.

In addition to addressing the challenges posed by the parallel market, it is crucial to acknowledge that this informal economy operates unofficially. However, emphasizing  transactions in Iraqi dinars should be viewed more favorably, given it is the national currency and holds intrinsic value. Rather the prevalent use of the US dollar in the market and endorsing unofficial practices. To navigate this complex landscape successfully, the key lies in enhancing the official channels for money exchange, such as banks, and fostering trust in the Iraqi dinar's inherent value. As the country endeavors to strengthen its financial system, promoting the use of the national currency can play a pivotal role in mitigating vulnerabilities and promoting economic stability.

As Iraq endeavors to navigate the complexities of its financial landscape, recent efforts by CBI signal a proactive stance. In November 2023, the CBI resumed the sale of gold ingots and coins through an electronic platform, aligning with global practices. Both government and private banks can now apply to purchase gold via this dedicated online platform, with sales conducted in accordance with the Central Bank's instructions and regulations, emphasizing a commitment to transparency and adherence to established guidelines.

Amid these developments, the CBI has initiated the sale of gold coins and bars to the public. This approach, aligning with the Iraqi people's deep-seated affinity for gold, could potentially serve as a means for Iraqi officials to exchange their frozen funds.

If the US were to impose a ban on Iraq for conducting US dollar auctions, something Iraqi officials could do is to use gold as a supporting way, but not as an alternative, to process their frozen funds. This involves gaining Iraqi dinars through selling gold to the public, facilitated through official channels with proper documentation and bills. Leveraging the cultural preference for gold, the sale of these tangible assets not only engages the public but also introduces a transparent process for circulating the frozen US dollars. The ongoing sale of gold by the Central Bank offers a unique opportunity for individuals to invest in tangible assets, while simultaneously providing a potential avenue for officials to navigate the challenges posed by frozen funds. This unconventional method, rooted in the Iraqi culture's strong connection to gold, may present a practical solution for the government in light of the existing constraints.
 

Daban Sabir holds a BA in Politics, a LLM in Law degree from University of Portsmouth in the UK. Sabir is an anti-corruption activist and works in the frontline in the fight against corruption in both civil society and public sector in his region. He has also released several publications and analysis related to corruption in Kurdistan region and Iraq. 

The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.

 

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