US expects Iraq to help disrupt Iran-backed groups' finances

The US expects Iraq’s government to help it identify and disrupt the financing of Iran-backed armed groups in the country after a drone attack by Iraqi militants that killed three US soldiers, a senior US Treasury official has said.

According to the Pentagon, the drone strike on a US military outpost near the Jordan-Syria border on Sunday bore the “footprints” of Iraqi armed group Kataib Hezbollah, although a final assessment has not yet been made.

Iran-aligned groups have been waging attacks on Israeli and US targets from Lebanon, Yemen, Iraq and Syria since the Hamas incursion on 7 October and the start of Israel’s military offensive against the Palestinians in Gaza. Iraqi armed factions have claimed more than 150 attacks on US forces in the region since then.

“We are now in a situation where there has been a loss of American life in Jordan,” the Treasury official told Reuters, speaking on condition of anonymity, in line with regulations. “These are, as a whole, groups that are actively using and abusing Iraq and its financial systems and structure in order to perpetuate these acts and we have to address that directly.”

He added that it is the expectation from a Treasury perspective that there is more that can be done together with Iraq to share information and identify exactly how these militias are operating in the country.

Iraq is a rare ally of both the United States and Iran. It has more than $100 billion in reserves held in the US, and relies heavily on Washington’s goodwill to ensure that its access to oil revenues and finances are not blocked.

The current Iraqi government came to power with the support of powerful, Iran-backed parties and armed groups with interests in Iraq’s highly informal economy, including the financial sector long seen as a money-laundering hotspot.

Nevertheless, Western officials have lauded cooperation with Iraqi Prime Minister Mohammed Shia Al-Sudani towards carrying out economic and financial reforms meant to curb the ability of Iran and its allies to access US dollars, and to bring the Iraqi economy into line with international standards. That includes a push to link banks to the international financial system and promote e-payments in a society where cash remains king.

“I do feel like just in 12 to 13 months we’ve seen a tremendous amount of progress in all those spaces,” confirmed the Treasury official.

Iraq’s financial system was isolated from the world due to international sanctions imposed in the 1990s after the then leader Saddam Hussein invaded Kuwait. Sanctions were lifted after the 2003 US-led invasion that toppled Saddam, but little progress was made towards financial sector reforms during the years of the US occupation and sectarian bloodletting that followed. Shia Muslim armed groups and parties close to Iran acquired bigger influence in Baghdad following the invasion and are collectively the most powerful force in politics, although they do not see eye-to-eye very often.

In line with US sanctions on Iran, Washington has tried to curb Iranian access to US dollars in Iraq, imposing enhanced security in 2022 on a central bank dollar auction that was rife with fake invoices and a major source of dollar diversion. The Iraqi central bank requests its own dollars from the US Federal Reserve and sells them to commercial banks, which in turn sell them to businesses in the import-dependent economy. Around $200 million is auctioned daily.

Last year, the US blacklisted 14 relatively minor banks involved in that auction and this week acted against one more that it said was used to divert funds to Iran-backed groups. Washington has previously called on Baghdad to take a more active role addressing concerns at banks.

“We are not trying to achieve perfection. This is a difficult neighbourhood and Iran is very good at this in particular,” explained the US Treasury official. “I actually have some confidence we will achieve getting Iraq to international money-laundering and terrorism-finance standards, and that will remove a vast amount of the illicit finance capacity of this system.”

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