Iraqi banks under US scrutiny: Who controls the transfers and who pays the price?

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Iraqi banks under US scrutiny: Who controls the transfers and who pays the price?

April 7, 2026Last updated: April 7, 2026

The Iraqi banking system has found itself under increasing regulatory pressure since late 2022, related to dollar transfers and import financing, as part of a broader tightening of international compliance and anti-money laundering regulations. Bankers and economists say this tightening, practically linked to access to the US financial system through correspondent banks, has reshaped the remittance market in Iraq, reduced the operating margins of several private banks, and increased the cost of trade, with the effects quickly being felt by the market and consumers.

According to banking estimates, more than 70 banks operate in Iraq, both public and private, in addition to branches of foreign banks. However, the real activity is concentrated in a limited number of institutions. Public banks hold the largest share of deposits and handle most official transactions and government salaries, while many private banks rely more on financing trade and remittances than on lending and investment, making them more sensitive to any restrictions related to the dollar or scrutiny of commercial documents.

Bankers describe the “transfers” mechanism as the heart of the crisis. A bank submits a request to transfer funds against import documents, and the transaction is then executed through foreign correspondents according to strict auditing procedures. However, industry sources say that in previous years, loopholes were widely exploited through inflated invoices, fictitious import transactions, or inaccurate data, raising the risk rating and leading to escalating external pressures that impacted banks and the market.

Banking officials add that the restrictions are not being applied equally to everyone. Banks with stronger compliance systems and more stable correspondent relationships have been better able to process transfers, while a number of banks have suffered from restrictions, slowdowns, or rejections of transactions, leading to a concentration of some trade demand in specific channels. According to observers, this concentration answers the question, “Who controls the transfers?” Control effectively shifts to banks that can meet auditing standards and to intermediaries who know how to manage official channels at a higher cost, or resort to informal channels when procedures become complicated.

As for “who pays the price?” the market answers this question quickly, according to economists, through three channels. The first is the increased cost of imports due to slower remittances, higher commissions, and increased documentation requirements, which is reflected in the prices of goods in a country heavily reliant on imports. The second is the expansion of the informal market whenever a gap appears between the official and market exchange rates, thus putting pressure on purchasing power and increasing inflation. The third is the decline in confidence in banks, as a large portion of the money supply remains outside the banking system, limiting banks' ability to lend and finance the real economy.

Bankers warn that the problem is no longer simply a matter of dollar liquidity, but rather a fundamental business model for a banking sector that relies more on remittances than on financing production. The lack of effective lending and the limited scope of banking services are pushing banks to seek profit through dollar transactions and trade finance, which increases risks and makes the sector vulnerable to any external tightening. Meanwhile, state-owned banks, despite their control over deposits, remain less agile in modernizing technology and developing services, creating a gap between their size and their role.

Experts believe that the true test of reform begins with measurable measures, including stricter auditing of import invoices and preventing inflation and forgery, developing compliance systems within banks, and restructuring weak banks through mergers or liquidations according to clear criteria. They also emphasize the need to enhance transparency in trade finance and reduce reliance on cash. Furthermore, they stress that reducing the cost of transfers and protecting the market requires minimizing opportunities for manipulation, not merely managing the exchange rate.

Ultimately, the oversight of remittances has become a factor reshaping the banking landscape in Iraq: few institutions are able to operate within the required standards, others are declining or besieged by restrictions, and the market bears the brunt of this in prices and the cost of living. While bankers speak of the necessity for swift internal reform to restore confidence and reduce risks, the open question remains: can Iraq transform the "dollar audit" into an opportunity to rebuild a banking sector that finances the economy, or will remittances remain an arena controlled by limited channels, with the markets and citizens paying the price?https://mustaqila.com/مصارف-العراق/