Iraqi Banks Used U.S.-Created System to Funnel Funds to Iran

New York Fed’s process to move Baghdad’s oil earnings lacked key money-laundering safeguards, resulting in illicit transfers that financed terrorist groups for years

By David S. Cloud, WSJ

Ali Ghulam was the undisputed dollar king of Iraq for al- most a decade.

His three Baghdad banks wired tens of billions of dollars outside the country, ostensibly for car parts, furniture and other imports. He was one of the biggest operators in an ad hoc banking system set up around two decades ago under the U.S. occupation that gave the Federal Reserve Bank of New York a key role in processing Iraq's international transactions.

Years later, when the Fed began looking closely at where the money was going, it shut him down almost overnight. U.S. officials suspect his banks were among more than two dozen Iraqi banks involved in funneling dollars to Iran and its militia allies, using front companies and falsified invoices to circumvent sanctions that block Iran from the global financial system. Audits of Ghulam's banks completed in May, reviewed by The Wall Street Journal, reveal extraordinary details of overseas dollar transactions that auditors said raised money-laundering concerns. Ghulam, in interviews, denied the allegations.

As much as 80% of the more than $250 million in dollar wire transfers flowing through Iraqi banks overall on some days were untraceable and some portion of that amount went secretly to Iran's Islamic Revolutionary Guard Corps and the anti-U.S. militias it supports, according to U.S. officials.

A top U.S. Treasury official told Iraqi officials at a Baghdad meeting in January that Iraqi banks "deliberately exploited" their access to U.S. dollars to support the Quds Force, a paramilitary arm of the IRGC, and also militia groups operating in Iraq that the Iranian government backs.

The militias were involved in "ongoing attacks" on U.S. forces, including some that have caused casualties, Brian Nelson, under secretary of the Treasury for terrorism and financial intelli- gence, told Central Bank of Iraq officials at the meeting, according to U.S. officials familiar with the discussions.

The U.S. has taken action to block the suspected Iraqi banks from using the Fed system to transfer dollars, Nelson told the Journal in an interview. "It's been important for Treasury to ensure those funds are not diverted in support of the Iranian regime." Nelson, who left Trea- sury in August, declined through a spokeswoman to discuss his talks with Iraqi officials.

The crackdown on Iraqi banks started in late 2022 after more than a decade of U.S. in-action, even after warnings of potential fraud by the Pentagon inspector general as long ago as 2012. Current and former U.S. officials said that over the years the U.S. implemented temporary restrictions on cash flows to Iraq, but feared that tight or permanent controls would plunge Iraq into economic chaos and set back its fight against Islamic State.

For Iran, which has been sanctioned for illicit nuclear activity and for supporting terrorism, access to dollars is critical for buying weapons and parts for drones and missiles, and financing armed groups it sup- ports around the Middle East.

Those include Hamas in Gaza and Hezbollah in Lebanon, U.S.- designated terrorist groups that have battled Israel since last October, raising tensions in the Middle East to the highest level since the U.S.-led invasion of Iraq two decades ago.

Ad hoc system
After the invasion of Iraq in 2003, Washington agreed to hold Iraq's earnings from oil sales-tens of billions a year-at the New York Fed. To circulate the proceeds back into Iraq, the Fed began shipping dollars in cash to Baghdad and processing commercial wire transfers from Iraq's private banks for international trade, hoping to revive its shattered economy after years of war and sanctions.

The system lacked a check that is standard in international banking: It didn't require the banks to divulge specifically who was getting the funds they were wiring out of Iraq.

In the U.S. and most other countries, banks seeking to move money internationally typically use a secure messaging system, known as Swift. The Belgium-based service routes messages between banks, specifying the amount and the intended recipient. It handles millions of daily payment instructions across more than 200 countries and territo- ries and 11,000 financial institutions. Each bank in a message chain approves or disapproves the transfer after a review aimed at curbing money laundering, terrorist financing or other fraudulent activity.

After decades under sanctions, Iraqi private banks didn't have the necessary agreements with foreign banks to make international wire transfers using the standard Swift system for commercial transactions.

Instead, the U.S. and the Central Bank of Iraq began using a different type of Swift message normally used for moving funds between banks. Since bank-to-bank transfers are considered far less risky than those between commercial customers, the messages don't require dis- closure of the final recipient of wire transfers.

In Iraq, that gap was used to divert dollars on a massive scale, U.S. officials said.

The 42-year-old Ghulam, now a London resident, ran an empire that handled the biggest share of the dollars transferred out of Iraq-on some days as much as 20% of the wire transfers, he and Iraqi banking officials said.

His banks-Iraqi Middle East Investment Bank, Al Ansari Islamic Bank and Al Qabidh Islamic Bank-were the first to be blocked from dollar transactions by the Fed and Treasury in late 2022. U.S. officials haven't explained the decision publicly, but said privately the banks were cut off because of their large volume of suspicious transactions. No action has been taken against Ghulam personally.

Ghulam denied his banks knowingly sent funds to the Quds Force or the Iranian government. "I have nothing to do with money laundering or Iran," he said in an interview.

He said his life in London, where he and his family live after relocating from Baghdad in 2018, has been turned upside down since the U.S. dollar off. His $40 million house, recently renovated with a base ment lap pool and a parrot aviary, is just a few blocks from the U.S. ambassador's residence. After a fitness walk, he often heads to favorite restaurants in his Rolls-Royce SUV.

"The system is bad, but ev ery bank in Iraq was operating under the same system," he said. "Why did the Americans bring this system?"

New controls
Two dozen other Iraqi banks have since been banned by the U.S. from conducting dollar transactions.

New rules imposed since late 2022 by the Central Bank of Iraq under U.S. pressure require banks to disclose final recipients of wire transfers. The New York Fed around that time began carefully monitoring wire transfers out of Iraq's official accounts, rejecting any that didn't comply with standard procedures for international money transfers, officials said.

The Iraqi central bank also announced plans to do away with its current system for wir ing dollars overseas by the end of this year. The bank didn't respond to requests for comment.

"The previous system allowed some misuse of these channels, such as transactions involving fictitious exporters," Ali Mohsen Al-Alaq, the Iraqi central bank governor, said in August to the country's news agency. Iraq is "establishing direct relationships between Iraqi banks and correspondent banks, bypassing the need for execution through the Central Bank or the Federal Reserve," he said.

A spokeswoman for the New York Fed said in a statement: "Working in collaboration with [the Central Bank of Iraq] and the U.S. Treasury Department, we will continue updating and refining our compliance controls to best prevent abuse of our payment channels."

The U.S. maintained its role in processing wire transfers so Iraq could "continue to conduct international trade in a high-risk environment, including during the war with ISIS," said a Treasury official, adding that the system was "valuable to U.S. national security."

Even though the U.S. occupation of Iraq ended in 2011, the dollar remains popular with ordinary Iraqis and businesses, functioning almost as a second official currency.

Cargo planes still deliver pallets of U.S. currency-Iraq's oil sale proceeds to the Iraqi Iraqi central bank, totaling as much as $10 billion a year, and as much as $35 billion or more a year flows electronically.

As part of the process of moving those dollars into the economy, the Iraqi central bank conducts a daily cash sale of dollars for dinars at a fixed rate. Banks can then resell the dollars at the higher unofficial rate of fered by private exchange houses and dollar traders, legally generating instant profits. In a separate procedure for overseas wire transfers, Iraqi banks deposit dinars at the central bank, which messages the Fed to send an equivalent amount of dollars to foreign accounts specified by the banks, a system unique to Iraq.

When Iraq's powerful militias saw the dollars to be made from the system, they if yoy started taking over private banks. They then entered the business of wiring money abroad, abusing the system by using fraudulent or inflated invoices for nonexistent imports, according to Iraqi officials and bankers.

Once the funds arrived abroad, usually in the United Arab Emirates, the dollars were withdrawn as cash or moved through informal channels known as hawala, which have few controls. The central bank of the U.A.E. didn't respond to requests for comment.

Some of the funds ended up with Iran's IRGC, which used its close ties to Iraqi power brokers to skim off unknown amounts, according to the U.S. Treasury. Some of the money ended up back in Iraq in the hands of militias and other powerful entities, including bankers.

The dollar king
Ghulam's rise through the Iraqi banking sector began after the 2003 U.S. invasion. The power vacuum "allowed many impoverished Iraqis to amass wealth amid the social unrest," according to K2 Integrity, a firm which conducted the audits of Ghulam's banks for the Central Bank of Iraq.

Ghulam opened a Baghdad clothing business that was a front "for selling U.S. dollars on the black market," according to the audits, which included multiple interviews with unnamed Iraqis described as well-acquainted with Ghulam's family and career. He joined the Mahdi Army, a Shia militia group led by a cleric with close ties to Iran that battled U.S. troops in the early years of the U.S. occupation, the audits said.

Ghulam, in interviews with the Journal, said those accounts of his background are false, spread by his rivals. He said he has no ties to militias but that most other bankers did. "Working in Iraq, if you don't have your own militia, it's very, very hard," he said.

In 2008, he said, he established a currency-exchange com- pany and started buying up shares of Iraqi Middle East Investment Bank. He was married to a woman who had been a teller there, and who had told him back in 2002-when his father's Baghdad bakery had an account at the bank-that there was good money to be made in currency trading.

Also in 2008, he was kidnapped at his Baghdad home and certificates of origin by armed men in police uniforms. He was released 19 days later after his wife's father paid a $900,000 ransom, he said.

In 2014, he took control of Iraqi Middle East Investment Bank after buying out the second-largest shareholder, he said. When the bank's founder, formerly the largest shareholder, balked at his choices for the board of directors, Ghulam showed up at a board meeting with armed men to install his relatives and associates, includ- ing a cousin who became the board's chairman, according to Iraqi officials and bankers.

Ghulam said the men accompanying him were body-guards he had employed since his kidnapping. He denied that he had used intimidation to take over the bank, saying that as the new majority share- holder he had the right to name board members.

The bank gave Ghulam access to the system that drew on dollars held in the New York Fed. Working through the Iraqi central bank, he soon turned the business of transferring payments abroad into a bonanza. He acquired two more banks and became the biggest player in the business.

Red flags
The K2 audits showed that Ghulam's banks sent a total of $3.5 billion outside Iraq in the six months before the 2022 ban, all in huge round-dollar amounts to just a handful of ob- scure companies in the U.A.E. The smallest transfer was for exactly $2,970,000, and the largest was for exactly $17,000,000. In the six months audited, one Iraqi company sent precisely $243,000,000 in 17 payments through Iraqi Middle East Investment Bank. The audit called the round numbers a red flag for money laundering because such amounts are al- most never seen in legitimate business transactions.

Documents reviewed by the auditors showed Ghulam's banks sent the funds on behalf of a tiny group of clients, many of whom had opened their accounts at the banks on the same day in 2016.

Invoices said the payments were for "general goods" or "carpets" or "vehicles" or other broad categories, including, in some cases, "all types of goods." The audits said the invoices had limited identifying information and "appeared un- suitably simple given the complexity of payments," and lacked supporting export documents such as bills of lading and certificates of origin.

Ghulam's banks transferred the funds to only five little-known companies. All of the re- cipients had accounts at a single Dubai bank but almost no online presence and little indication they were capable of exporting goods to Iraq at the scale of the payments they received.

"The exact business activities and precise locations for the customers remain unclear," one of the audits concluded, and payments lacked "apparent economic/business purpose." One of the biggest recipients was Silicon Valley FZE, a U.A.E. company whose registration said it specialized in trading electrical equipment, building materials, electronics and spare parts. Its business license was suspended by U.A.E. authorities days after Ghulam's banks were banned by the U.S., according to the audits. The owner, Omar Awad Zahmak, declined to comment, saying through an intermediary "all of his busi- ness in U.A.E. had stopped."

The audits said that once the funds were transferred to Dubai companies, they were then distributed to 163 other recipients in the U.A.E., most of whom were "wholly unidentifiable" from the bank's records. Ghulam, in the interviews, said his clients were Iraqi merchants, not Iranians, and the round-dollar amounts moved to the U.A.E. were due to the system established by the U.S. and the Iraqi central bank, which he said preferred to bundle dollar transactions into round amounts to keep the number of daily wire transactions limited.

"It's very possible," he added, that a portion of the dollars he moved might have ended up in Iran, but only after the funds were no longer under his banks' control.

Pilot program
The K2 audits didn't trace the funds to Iran, but unnamed individuals "knowledgeable about the Iraqi financial sector" told the auditors that Ghulam has ties to "Iran and Iranian- backed militia groups." One said that Ghulam sent Iran over $1 billion in 2021. Another told au- ditors he smuggled cash and gold bullion to Lebanon, Syria and Iran on behalf of a former Iraqi prime minister. The audits said it wasn't possible to corroborate Ghulam's reported rela- tionships with Iranian and Iran- allied individuals and entities.

People interviewed told the auditors that Ghulam had a connection to Hamad Al-Mous- sawi, who helped him forge connections to Iran-aligned mi- litias and with the Iranian embassy in Baghdad. Al-Moussawi, an Iraqi banker, has been sanctioned by the U.S. for money laundering and support of terrorist-designated groups.

Al-Moussawi owned Bagh- dad's Al-Huda Bank, one of the banks banned and also sanctioned by the U.S. A Treasury statement in January said the bank "exploited its access to U.S. dollars" to send funds to the IRGC and to Kataib Hezbol- lah, an Iraqi militia group with ties to Tehran that has been designated a terrorist organiza- tion by the U.S.

Ghulam said he has known Al-Moussawi for years but hasn't had much contact with him since 2018. Al-Moussawi didn't respond to requests for comment. Ghulam said he is still hopeful the Fed will restore his access to dollars, which U.S. officials said is unlikely.

The U.S. clampdown has substantially reduced the illicit dollar transactions by Iraqi banks, U.S. officials and Iraqi bankers said. The Fed still handles some transfers from Iraqi banks but only after the recipients of the dollars are verified by K2, U.S. officials said. The Iraqi central bank plans to eventually route all Iraqi wire transactions through international banks, instead of the Fed.

At the urging of the Fed, the Iraqi central bank has established a pilot program in which four Iraqi banks process dollar transfers through Citigroup, which checks where the money is going before approving the transfer. As much as $800 million a week now flows through the program, following standard international regulations. Karen Kearns, a spokeswoman for Citi, declined to comment on the program.

But the U.S. moves haven't halted Tehran's attempts to use Iraq as a source of dollars, Nelson, the now-former Treasury undersecretary, said: "Iran continues to seek to abuse the international financial system not only in Iraq, but through-out the region, and frankly wherever they have the opportunity to do so."