Iraq Asked for $1 Billion in Cash. This Time, Washington Said No.

Baghdad says it needs the money, drawn from oil sales, but U.S. seeks to stop illicit flow of dollars to Iran

BAGHDAD-Iraq is seeking a special shipment of $1 billion in cash from the Federal Reserve Bank of New York, but U.S. officials have withheld approval, saying the request runs counter to their efforts to rein in Baghdad's use of dollars and halt illicit cash flows to Iran.

Since the U.S. invasion of Iraq two decades ago, the U.S. has supplied $10 billion or more a year to Baghdad on semimonthly cargo flights carrying massive pallets of cash, drawn from Iraqi oil sales proceeds deposited at the Fed. In Iraqi hands, the bank notes have become a lucrative source of illicit dollars for powerful militias and corrupt politicians, as well as for Iran, U.S. officials say.

In making a request for an extra shipment of $1 billion, Iraq says it needs the cash to help prop up its stumbling currency. After the U.S. denied Iraq's initial appeal in September, the Central Bank of Iraq last week submitted a formal request, which the Treasury is considering, a senior Iraqi of ficial said.

The behind-the-scenes wrangling highlights Baghdad's unique dependence on the dol- lar and the little-known system for supplying it. A vast amount of dollars flows through loosely regulated Iraqi banks and currency-exchange shops, which U.S. and some Iraqi officials say are rife with fraudulent transactions and money laundering. Since November, Washington has banned 18 Iraqi banks from dealing in dollars and adopted stricter rules for electronic dol- lar transfers from its banks.

Treasury officials told the Iraqi central bankers that sending a large extra shipment is contrary to Washington's goal of reducing Iraq's use of U.S. bank notes in favor of more easily traceable electronic transactions, Iraqi officials said. U.S. officials have said there is strong evidence that for years some of the dollars going to Iraq have been smuggled to Iran in cash, as well as to Turkey, Lebanon, Syria and Jordan.

"The U.S. continues to support Iraq with U.S. dollar bank notes and has not restricted" access to ordinary Iraqis and businesses, a Treasury spokeswoman said about the Iraqi cash request. "We will continue to work with our CBI colleagues," she said, referring to the Central Bank of Iraq. The U.S. supports Iraqi steps to "promote the use of the local currency inside of Iraq," she added.

The initial U.S. refusal angered some Iraqi officials, who say they asked for the additional $1 billion in their own funds because the country's cash reserves had dropped after Washington's attempts to restrict the dollar flow set off panic buying of dollars and hoarding by exchanges, the official said.

Iraqi officials with ties to powerful militias deeply involved in dollar transactions have denounced new restrictions imposed by Washington, calling them an infringement on Iraqi sovereignty.

"The American side is making excuses to not give Iraq its legal, legitimate money," said Moeen Al Kadhimi, a member of the Iraqi Parliament on the finance committee and of the Badr Organization, a Shiite militia group closely aligned with Iran.

The Central Bank of Iraq didn't respond to a request for comment about the requested dollar shipment.

Dawood Abed Zayer, the head of the Iraqi National Business Council, a trade association, said the central bank's request for additional dollars is a precautionary step. "So it will have enough cash to step in and control the ups and downs of the market," he said.

Efforts going back years by multiple U.S. administrations to disrupt the flow of illicit dollars have fallen short-in part because cutting off dollars risked plunging Iraq's economy into turmoil.

Iraqi officials say they are running short of bank notes because the central bank had to pump more dollars into the Iraqi economy this year after the market rate for exchanging dollars to dinars moved sharply higher in response to the U.S. crackdown on the flow of dollars out of Iraq.

Two regular cash shipments of U.S. dollars are scheduled for this year, Iraqi officials said.

WSJ