Iraq investigates private banks for money laundering

88% of private banks in Iraq are under investigation on charges of money laundering, which have become rampant in the country in the absence of efficient audits by the Central Bank.

al-monitor A man uses an ATM machine at a bank in Baghdad, March 4, 2012. Photo by REUTERS/Mohammed Ameen.

Topics covered

money laundering, iraq, corruption, central bank of iraq, banking & finance, banking

Dec 4, 2014

A prominent economic official in the Iraqi government, who preferred to remain anonymous, said in an interview with Al-Monitor that out of the 33 private Iraqi banks operating in the country, 29 were under investigation on charges of corruption and money laundering.

According to an article published Oct. 16 and based on the report issued by Special Inspector General for Iraq Reconstruction Stuart Bowen, money laundering through the Central Bank of Iraq has resulted in the loss of over $100 billion in the past 10 years, most of which was transferred into banks in Dubai and Beirut.

The economic adviser to the prime minister, Mazhar Mohammad Saleh, told Al-Monitor that he considered this phenomenon to be a major loss in the private financial sector, on which the recovery of Iraq’s economy was based. Saleh said the high number of banks under investigation was due to the government’s absence in private financial administration, and to the weakness of cash credit, pushing banks to look for profit-making operations that are often nonfinancial. He said the audit policy of the Central Bank changed after 2003 from compliance auditing to preventive auditing. This new role is a supervisory task, not a controlling one, as the Central Bank monitors credit and liquidity to ensure their safety in accordance with financial ratios.

Saleh said the lack of credit ratings in banks led to the decrease of trust in the credit-worthiness of private banks. A third party, a specialized international company, usually conducts such operations, which would later be adopted by the Central Bank.

A major shareholder in one of the banks accused of illegal financial operations told Al-Monitor on condition of anonymity that former staff members of banks — who were trained in both Rafidain and Rasheed banks and who were still working in the private banking sector until recently — were laid off from private banks. The new CEOs that took over started meeting the demands of major shareholders leading illegal operations. This is why those currently under investigation are the CEOS of the 29 banks, whose inexperience contributed to the charges.

He said manipulation operations began in private banks with currency conversion in 2004, which led to the emergence of financial mafias that dominated the market. This was followed by the Banking Act issued by the Central Bank in March 2004: Paragraph 28 prevents private banks from entering or participating in investment operations and even owning more property than they need (i.e., preventing investment in the real estate market).

This prompted banks to look for capital and methods to illegally make profits; they used capital from unknown sources and thus laundered money that was not subject to taxes. Funds from abroad and others from local unknown sources began entering private banks. The owners of that money even dominated certain departments in banks and controlled the auction sales of US dollars practiced by the Central Bank, while they exploited that money for personal benefits.

Banks also falsified the documents of the money’s destination, in cooperation with influential figures inside and outside Iraq, knowing that the money was often being circulated out of the country to the Gulf, Jordan, Iran and other countries.

However, banking expert Majed al-Souri told Al-Monitor that private banks were not an intelligence apparatus that follows up on all documents. This is why they are not responsible for the source of the money they receive. In the event that there are any doubts, the Central Bank is notified, and in its turn, it notifies the competent authorities that are supposed to take the suitable legal measures.

He noted that private banks are the victim of a wrong general view, which is circulated by the leaders and officials dominating economic activity in Iraq.

Souri referred to the serious imbalance in following up on the movement of funds in Iraq, which largely contributes to financial irregularities and illegal deals. Finding out about financial corruption and illegal trading comes too late, as the banks’ audits are received by the Central Bank a month after the initial operations are conducted, and starts auditing these previous operations for another month. This means that two months will have passed since the start of the audit operations and by then, the funds will have probably reached their final destination, which could be anywhere in the world.

To solve this major issue, Souri urges the Central Bank to adopt a comprehensive, technological banking system, which guarantees real-time control of funds and simultaneous access to information, in both the public and private banking sector.

Gavin Wishart, CEO of the British Standard Chartered Bank, which opened a branch in Iraq around the end of 2003, told Ayn al-Iraq News on Aug. 21 that Iraqi banks were poorly managed and in urgent need of international experience in this field, and to rely on international standards and specifications.

Audit expert Awatef Mohsen told Al-Monitor that the financial control of the private banking sector was not currently feasible, describing it as “timid.” She also stressed the need for an intervention from the government, since the private banking sector was a closed sector that was managed like a family business, and was a major loophole for financial corruption. Mohsen believes that the solution lies in the formation of a joint committee between the Board of Supreme Audit, the Central Bank and private banks, to have real-time audits. In this context, she supported Saleh’s suggestion to adopt better corporate governance as a way to reduce the private banking sector problems.

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