Countries/Jurisdictions of Primary Concern - Iraq
Iraq’s economy is primarily cash-based, and its financial sector is severely underdeveloped. Iraq has about 2,000 financial institutions, most of which are currency exchanges and hawalas. There is approximately one commercial bank branch for every 50,000 people, and ATMs are even less common. U.S. dollars are widely accepted. Due to weak supervision and regulation of banks and other financial institutions, there is little data available on the nature and extent of money laundering in the country. Iraqi law enforcement and bank supervisors have little recourse and poor capabilities to detect and halt illicit financial transactions. Hawala networks, both licensed and unlicensed, are widely used for legitimate as well as illicit purposes. Iraq lacks the capacity to adequately regulate these informal financial institutions.
Since June, when Iraq’s ongoing conflict with the Islamic State of Iraq and the Levant (ISIL) escalated, it has been more difficult for the Government of Iraq to monitor AML/CFT in areas outside of central government control. This has created opportunities for ISIL and other groups to exploit the vulnerabilities in Iraq’s inability to adequately monitor its entire financial system.
Smuggling is endemic, often involving consumer goods, including cigarettes, counterfeit prescription drugs, antiquities, as well as petroleum products. ISIL has been able to take advantage of insufficient law enforcement capacity by smuggling and illicitly trading crude oil and refined fuels. Bulk cash smuggling is likely common, in part because Iraqi law only allows for the seizure of funds at points of entry, such as border crossings and airports. Trafficking in persons, intellectual property rights violations, and currency counterfeiting also have been reported. Narcotics trafficking occurs on a small scale but is a growing concern to Iraqi authorities. Kidnappings for ransom are increasing, rising in tandem with violence levels. Extortion is rampant in ISIL-controlled areas. Corruption is pervasive among the local, provincial, regional, and national government levels and is widely regarded as a cost of doing business in Iraq.
Iraq has four free trade zones (FTZs): the Basra/Khor al-Zubair seaport; Ninewa/Falafel area; Sulaymaniyah; and al-Qaim, located in western Al Anbar province. Under the Free Trade Zone Authority Law goods imported or exported from the FTZs are generally exempt from all taxes and duties, unless the goods are to be imported for use in Iraq. Additionally, capital, profits, and investment income from projects in the FTZs are exempt from taxes and fees throughout the life of the project, including the foundation and construction phases. Trade-based money laundering is a significant problem in Iraq and the surrounding region.
On January 2, 2014, the Government of Iraq started to implement the first phase of a 2010 tariff law that replaces the across-the-board five percent tariff rate enacted a decade ago by the Coalition Provisional Authority, with a much broader scale of some lower, and mostly higher tariff rates. The government has stated it intends to fully implement the 2010 tariff law in phases, but it has not decided their timing or details. Implementation thus far has been inconsistent and variable. The Kurdistan Regional Government (KRG) applies the new tariff regime as well.
For additional information focusing on terrorist financing, please refer to the Department of State’s Country Reports on Terrorism, which can be found at: //2009-2017.state.gov/j/ct/rls/crt/
Do FINANCIAL INSTITUTIONs engage in currency transactions related to international narcotics trafficking that include significant amounts of US currency; currency derived from illegal sales in the U.S.; or illegal drug sales that otherwise significantly affect the U.S.: NO
criminalizATION OF money laundering:
“All serious crimes” approach or “list” approach to predicate crimes: All serious crimes
Are legal persons covered: criminally: YES civilly: NO
Know-your-customer (KYC) rules:
Enhanced due diligence procedures for PEPs: Foreign: NO Domestic: NO
KYC covered entities: Banks; managers and distributors of shares of investment funds; life insurance companies; securities dealers; money transmitters, hawaladars, and issuers or managers of credit cards and traveler’s checks; foreign currency exchange houses; asset managers, transfer agents, investment advisers; and dealers in precious metals and stones
Number of STRs received and time frame: 4 in 2013
Number of CTRs received and time frame: 1,320 in 2011
STR covered entities: Banks; managers and distributors of shares of investment funds; life insurance companies; securities dealers; money transmitters, hawaladars, and issuers or managers of credit cards and traveler’s checks; foreign currency exchange houses; asset managers, transfer agents, investment advisers; and dealers in precious metals and stones
money laundering criminal Prosecutions/convictions:
Prosecutions: 3 in 2012
Convictions: 3 in 2012
Records exchange mechanism:
With U.S.: MLAT: NO Other mechanism: YES
With other governments/jurisdictions: YES
Iraq is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF), a FATF-style regional body. Its most recent mutual evaluation report can be found at: http://www.menafatf.org/images/UploadFiles/Final_Iraq_MER_En_31_12.pdf
ENFORCEMENT AND IMPLEMENTATION ISSUES AND COMMENTS:
Iraq’s ability to detect and prevent money laundering and other financial crimes is limited by capacity constraints in public institutions, weak financial controls in the banking sector, and weak links to the international law enforcement community and regional financial intelligence units.
Iraq’s Anti-Money Laundering Law, issued under Coalition Provisional Authority Order 93 in 2004, is the only AML statute in Iraq. The penalty under the 2004 law is only that of a misdemeanor. Iraq does not prosecute cases under this law because the law does not effectively criminalize money laundering. Iraqi law treats money laundering as a subsidiary crime, requiring a more serious predicate crime to also have occurred before the government can prosecute money laundering offenses. Iraq has drafted AML legislation that was reviewed by Iraq’s Shura Council, but international experts have assessed the current draft law does not meet international standards. In particular, the law needs to do more to ensure the independence of Iraq’s Money Laundering Reporting Office (MLRO), Iraq’s financial intelligence unit. In 2014, the government continued to review and amend the draft law, aiming to bring it in line with international standards. Once revisions to the draft are completed, the law will be submitted to the Council of Ministers for approval, followed by the Council of Representatives for passage. The government is unable to provide a timetable for the passage of the AML/CFT law.
In 2013, Iraq formed a high-level committee chaired by then acting Governor of the Central Bank of Iraq (CBI) Abdulbasit Turki to follow up on noted deficiencies; however, the committee made little progress. In September 2014, Ali al-Allaq replaced Turki as acting CBI Governor. Allaq is focused on anti-corruption efforts, which he promoted in his previous positions as Secretary General of the Council of Ministers and chairman of the Joint Anti-Corruption Council.
Senior-level support and increased capacity for all parties are necessary to ensure AML/CFT cases can be successfully investigated and prosecuted. Investigators are frustrated when judges do not pursue their cases; similarly, judges claim the cases they receive are of poor quality and not prosecutable. Iraq reportedly has one judge assigned to process all money laundering cases, and that judge does not exclusively focus on money laundering. In addition, the current lack of implementing legislation, weak compliance enforcement, and the need for more technical capacity at the CBI’s MLRO all undermine Iraq’s ability to counter terrorism financing and money laundering.
Although former acting CBI Governor Turki approved an independent budget for the MLRO, it does not yet have sufficient operational independence and autonomy. Overseen by the CBI’s Banking & Supervision directorate, the MLRO lacks the requisite organizational structure, funding, staffing, and technology to effectively perform its function. The MLRO staff lacks adequate AML training and technology to receive, store, retrieve, and analyze data from the reporting institutions. In 2014, the MLRO transitioned from manual data processing to electronic reporting.
The MLRO is empowered to exchange information with other Iraqi and foreign government agencies, but rarely does so. Legal constraints on the MLRO’s purview hinder its cooperation with the Ministry of the Interior’s (MOI) Directorate for Economic Crimes, which is responsible for investigating financial crimes, including money laundering, bulk cash smuggling, and counterfeiting. The MLRO lacks the investigative authority of the MOI, but the MOI is unable to prosecute money laundering crimes without the MLRO’s cooperation. Iraq should ensure the MLRO has the capacity, resources, and authorities to serve as the central point for collection, analysis, and dissemination of financial intelligence to law enforcement and to serve as a platform for international cooperation.
Regulation and supervision of the financial sector are limited, and enforcement is subject to political constraints. In practice, despite customer due diligence (CDD) requirements, most banks open accounts based on the referral of existing customers and/or verification of a person’s employment. Actual application of CDD and other preventive measure requirements varies widely across Iraq’s seven state-owned and 48 private Iraqi and foreign banks. Banks are required to file reports with the MLRO for transactions greater than $10,000, a requirement with which banks generally comply. In practice, very few STRs are filed. Due to a weak institutional culture and the lack of robust penalties for noncompliance, banks often are unmotivated to file reports and sometimes conduct internal investigations in lieu of reporting to the MLRO. Iraqi authorities should encourage increased reporting by financial institutions through more in-depth onsite supervision as well as an increase in the penalties levied for noncompliance.
Greater overall coordination between the Iraqi government and the KRG is needed to regulate financial transactions, crack down on smuggling networks, and cooperate on AML/CFT efforts. KRG officials report they are abiding by Iraq’s AML law, but there are no efforts to coordinate with the central government. Moreover, Kurdish customs requirements are less stringent than Iraq’s, which risks enabling the smuggling of illicit and counterfeit goods into southern Iraq.
Although Iraq is a party to the UN Convention for the Suppression of the Financing of Terrorism, there is no formal mechanism in place to implement UNSCR 1267 and no legal mechanism to implement UNSCR 1373. Iraq should take steps to establish appropriate mechanisms. Iraq also should develop political support to create and safeguard the MLRO’s independence in order to bolster Iraq’s AML/CFT capacities.