By JAMES RISEN and DURAID ADNAN
WASHINGTON — When President Obama announced last month that he was barring a Baghdad bank from any dealings with the American banking system, it was a rare acknowledgment of a delicate problem facing the administration in a country that American troops just left: for months, Iraq has been helping Iran skirt economic sanctions imposed on Tehran because of itsnuclear program.
The little-known bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former American and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy.
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The Obama administration is not eager for a public showdown with the government of Prime Minister Nuri Kamal al-Maliki over Iran just eight months after the last American troops withdrew from Baghdad.
Still, the administration has held private talks with Iraqi officials to complain about specific instances of financial and logistical ties between the countries, officials say, although they do not regard all trade between them as illegal or, as in the case of smuggling, as something completely new. In one recent instance, when American officials learned that the Iraqi government was aiding the Iranians by allowing them to use Iraqi airspace to ferry supplies to Syria, Mr. Obama called Mr. Maliki to complain. The Iranian planes flew another route.
In response to questions from The New York Times, David S. Cohen, the Treasury Department’s under secretary for terrorism and financial intelligence, provided a written statement saying that Iran “may seek to escape the force of our financial sanctions through Iraqi financial institutions.” But he added that “we will pursue, and are actively pursuing, efforts to prevent Iran from evading U.S. or international financial sanctions, in Iraq or anywhere else.”
Some current and former American and Iraqi officials, along with banking and oil experts, say that Iraqi government officials are turning a blind eye to the large financial flows, smuggling and other trade with Iran. In some cases, they say, government officials, including some close to Mr. Maliki, are directly profiting from the activities.
“Maliki’s government is right in the middle of this,” said one former senior American intelligence official who now does business in Iraq.
In announcing that he was “cutting off” Elaf Islamic Bank, Mr. Obama said it had “facilitated transactions worth millions of dollars on behalf of Iranian banks that are subject to sanctions for their links to Iran’s illicit proliferation activities.”
But the treatment the bank has received in Baghdad since it was named by Mr. Obama suggests that the Iraqi government is not only allowing companies and individuals to circumvent the sanctions but also not enforcing penalties for noncompliance.
Iraqi banking experts said last week that the bank was still allowed to participate in the Iraq Central Bank’s daily auction at which commercial banks can sell Iraqi dinars and buy United States dollars. These auctions are a crucial pathway for Iranian access to the international financial system. Western officials say that Iran seeks to bolster its reserves of dollars to stabilize its exchange rates and pay for imports.
Iraqi and American officials with knowledge of Iraqi banking practices say Iranian customers are able to move large amounts of cash through the auction, and from there into banks in regional financial centers like Dubai, United Arab Emirates, or Amman, Jordan, and then into the international banking system.
Mudher Salih, the central bank governor, said in an interview that Elaf Islamic Bank was being allowed back into the auction because Elaf officials had denied any wrongdoing. “Elaf Bank is attending the auctions, and they are telling us that they didn’t violate the law, and saying that they didn’t deal with any Iranian institutes,” Mr. Salih said.
While Iraq has tried to impose more stringent reporting requirements that might pick up illegal transfers, officials with knowledge of the Iraqi banking industry say that banks, hawala houses, an unofficial global network of money-traders, and their Iranian customers are finding ways around them, often by forging documents that make it look as if the money transfers are to finance legitimate trade between Iraq and other countries.
Thanks to Iraq’s growing oil revenue, the Iraqi central bank has about $60 billion in foreign exchange reserves, held in accounts at the Federal Reserve Bank of New York, with which to meet the insatiable demand for dollars. But the new flight of dollars out of Iraq is prompting criticism of the central bank and of the Iraqi government.
The accusations of high-level Iraqi government involvement in sanctions-busting have roiled Iraqi politics and invariably reflect on Mr. Maliki, since many Iraqi officials now say that he has taken effective control of the Iraqi central bank, which is nominally independent.
“We want to question the central bank and the banks that are involved,” Ali al-Sachri, a member of Parliament, said in an interview. Mr. Salih acknowledged the huge dollar transfers and said that they threatened the economic stability of Iraq by depleting the country’s foreign reserves. He said that “in order to prevent the economy from collapsing, we should put an end to this illegal flow of dollars outside Iraq.”
He said the large-scale money laundering was probably being helped by “some corruption that requires the government to investigate,” but he defended the actions of the central bank, saying that it does “not have the capability to watch everything.”
Several American and Iraqi banking and government officials also say that Iranian organizations have gained effective control over at least four Iraqi commercial banks through Iraqi intermediaries. That gives Iran direct access to the international financial system, supposedly denied to Tehran by the economic sanctions. Even as the United States has moved to tighten the vise against Iran this summer, the Maliki government has openly sought to enhance its already deep economic and political ties with Iran. Trade between Iraq and Iran, which fought a costly war from 1980 to 1988, has been growing rapidly ever since the American-led invasion that toppled Saddam Hussein, and it is now estimated to be as high as $11 billion a year. Among other openly acknowledged forms of trade, Iraq has contracts to buy large amounts of electrical power from Iran.
Just last week, an Iraqi delegation that includes the deputy prime minister and top officials from the ministries of finance and trade and the central bank met in Tehran with their Iranian counterparts for talks about further increasing economic ties.
An Iraqi government spokesman, Ali al-Dabbagh, said in a telephone interview that Iraq “is not intending to break any rules,” but added that “we also have good relations with Iran that we do not want to break.”
This year, Iraqi officials publicly expressed concerns that their large volume of trade with Iran might place them in violation of the sanctions on Iran, and they said they would seek a sanctions waiver. After those public statements, American officials privately told the Maliki government that Iraq would not be found to be in violation of the new Iran sanctions because of its publicly acknowledged cross-border trade, according to a former senior United States official.
Whatever help Iraq has given Iran, the sanctions have put considerable pressure on Tehran. Iran’s oil exports have dropped by about 40 percent because of the latest round of sanctions, while Iraq’s own oil production has been surging. American officials say that if aiding Iran was a priority of the Iraqi government, Baghdad would not be so eagerly ramping up oil production to fill the void left by Iran.
Still, clandestine trade, including large-scale smuggling of oil and oil products, has been increasing, and the Iraqi government has done little to stop a highly organized effort that frequently provides financial benefits to Iraqi political parties and powerful political leaders, according to American and Iraqi oil traders and experts.
Iraqi fuel oil, acquired by smuggling operations with close connections to political leaders at extremely low prices with the help of government subsidies, is being smuggled from Iraq through Kurdistan and into Iran. From Iran it is smuggled once again, with some going to Afghanistan, where the cheap fuel is resold at a large profit. American and Iraqi oil experts say they believe that at least some Iranian oil is finding its way to Iraqi ports for export.