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 hawaladars. 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. Hawala networks, both licensed and unlicensed, are widely used for legitimate as well as illicit purposes. Iraqi law enforcement and bank supervisors do carry out financial investigations and levy regulatory fines, but have poor capabilities to detect and halt illicit financial transactions.
Since June 2014, 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 the central government’s control. The Central Bank of Iraq (CBI) has taken a number of steps to cut off financial connectivity to ISIL, including by issuing a national directive to prohibit financial transactions with banks and financial companies located in ISIL-controlled areas and publishing a list of companies prohibited from accessing the U.S. currency auction and have revoked the licenses of others. However, the CBI lacks adequate personnel and technical capacity to fully monitor financial entities operating in Iraq and routinely encounters difficulty engaging other parts of the Government of Iraq during its investigations. To overcome these challenges, the CBI has requested technical assistance from international donors.
Smuggling is endemic, often involving consumer goods, including cigarettes, counterfeit prescription drugs, antiquities, and petroleum products. ISIL has been able to take advantage of insufficient law enforcement capacity to smuggle and illicitly trade 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 it, along with increasing kidnappings for ransom, continues to be a growing concern to Iraqi authorities. Extortion is rampant in ISIL-controlled areas. Corruption is pervasive at 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 and is linked to underground financial systems such as hawala.
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, and investment advisers; and dealers in precious metals and stones
Number of STRs received and time frame: 18 in 2015
Number of CTRs received and time frame: 11,863 in 2015
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, and investment advisers; and dealers in precious metals and stones
money laundering criminal Prosecutions/convictions:
Prosecutions: Not available
Convictions: Not available
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 endemic corruption, 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.
In January 2014, the Government of Iraq started to implement the first phase of a 2010 tariff law that will eventually replace the across-the-board 5 percent tariff rate enacted more than a decade ago, with a much broader scale of some lower, and mostly higher tariff rates. Implementation thus far has been inconsistent and variable. In August 2015, the Prime Minister’s Office halted the implementation of phase two after popular protests in Al Basrah Province.
In October 2015, Iraq passed a new AML/CFT law. The new law, while an improvement on the 2004 law, will require extensive implementing regulations to ensure it is compliant with international standards. The CBI is working with international donors to draft the necessary regulations. The new law makes a number of improvements to Iraq’s AML/CFT regime. It establishes an AML/CFT Council that will be chaired by the CBI Governor and will include representatives from a number of Iraqi executive bodies. Broadly, its duties will focus on proposing new laws and developing needed AML/CFT regulations; monitoring and reporting on AML/CFT developments in Iraq; and facilitating the exchange of information across regulatory bodies.
A new AML/CFT Office will act as Iraq’s financial intelligence unit (FIU), replacing the current Money Laundering Reporting Office (MLRO) at the CBI. The AML/CFT Office will analyze and compile information related to illicit financial flows and will be empowered to suspend transactions for up to one week to help ensure timely action against suspicious activity. Currently, in practice, very few suspicious transaction reports (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 filing reports.
A CBI deputy governor will chair a new committee empowered to freeze the funds and assets of individuals designated by UN sanctions. The new law also allows for the seizure of illicit funds. It permits the judiciary to seize ML/FT-related assets at the request of the public prosecutor, the CBI Governor, or the AML/CFT Office. Furthermore, the law sets penalty standards and dictates the scope of punishment for violating AML/CFT provisions. Money laundering will be punishable by up to 15 years in prison and a fine of up to five times the amount of the illicit transaction; terrorism finance will be punishable by up to life in prison.
The 2015 law strengthens supervisory authorities. A number of ministries including the Ministry of Trade and the CBI will be granted powers to develop inspection procedures and standards and to issue guidelines to assist financial institutions with complying with the new regulations. It also increases the obligations of financial institutions. Banks and financial companies will be required to report regularly to the AML/CFT Office and to establish compliance programs to reduce the potential for illicit financial flows. Financial institutions must also follow customer due diligence (CDD) and KYC procedures for opening new accounts. The implementation of the new AML/CFT law should help to increase the regulation and supervision of the financial sector, but the capacity of the regulatory authorities is limited, and enforcement is subject to political constraints. The CBI lacks adequate personnel and technical capacity to fully monitor financial entities operating in Iraq and routinely encounters difficulty engaging other parts of the government during its investigations. Informal money and value transfer systems such as hawala operate outside the scope of CBI control. In practice, despite 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.
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. The new law will likely help empower prosecutions.
Greater overall coordination between the Government of Iraq and the Kurdistan Regional Government is needed to regulate financial transactions, crack down on smuggling networks, and cooperate on AML/CFT efforts. Kurdistan officials report they are abiding by Iraq’s AML law, and there are initial efforts underway by the Central Bank of Iraq to increase supervision of the exchange house sector in Kirkuk. Moreover, Kurdish customs requirements are less stringent than Iraq’s, which risks enabling the smuggling of illicit and counterfeit goods into Iraq. The Government of Iraq should put in place the necessary regulations to fully implement and enforce its new AML/CFT law. 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.