VZCZCXRO5344
RR RUEHBC RUEHDA RUEHDH RUEHKUK
DE RUEHGB #3354/01 3630414
ZNR UUUUU ZZH
R 290414Z DEC 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 5924
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHMFISS/CDR USSOCOM MACDILL AFB FL
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUEKJCS/CJCS WASHINGTON DC
RUEKJCS/JOINT STAFF WASHDC
RHMFISS/COMJSOC FT BRAGG NC

UNCLAS SECTION 01 OF 05 BAGHDAD 003354 
 
SIPDIS 
 
DEPT FOR INL-I 
 
SENSITIVE 
 
TAGS: SNAR KCRM KJUS PGOV IZ
 
SUBJECT: IRAQ: INCSR Report Part II - Money Laundering and Financial 
Crimes 
 
BAGHDAD 00003354  001.2 OF 005 
 
 
¶1. (SBU) Summary: Iraq's economy is primarily cash-based, and there 
is little data available on the extent of money laundering in the 
country. Smuggling is endemic, involving consumer goods, cigarettes, 
and petroleum products. Bulk cash smuggling, counterfeit currency, 
trafficking in persons, and intellectual property rights violations 
are also major problems. There is a large market in Iraq for stolen 
automobiles from Europe and the United States. Ransoms from 
kidnappings and extortion cost Iraqi citizens millions of dollars 
each year, and the funds are often used to finance terrorist 
networks. Trade-based money laundering, customs fraud, and value 
transfer are found in the underground economy. There are credible 
reports of counterfeiting.  Hawala networks, both licensed and 
unlicensed, are widely used for legitimate and illegitimate 
purposes. Regulation and supervision of the formal and informal 
financial sectors is still quite limited and enforcement is subject 
to political constraints, resulting in weak internal private sector 
controls. Under its Stand-by Arrangement with the International 
Monetary Fund, the Central Bank of Iraq (CBI) has completed half of 
the necessary prudential regulations and is to finalize the 
remainder, including anti-money laundering regulations.  End 
Summary. 
 
¶2.  (SBU) Oil production is the main source of revenue for the Iraqi 
government, but theft and diversion of oil products is only slowly 
being checked. In 2006, the World Bank and the Iraqi Ministry of 
Oil's Office of Inspector General estimated that the Iraqi 
government loses tens of millions of dollars each year to the 
smuggling, diversion, or misallocation of refined oil products. 
 
¶3.  (SBU) Fraudulent investment schemes are also on the rise in 
Iraq. For example, in 2008 there was an investment scam in the Basra 
area that netted the perpetrator tens of millions of dollars in a 
"Ponzi" scheme involving a fake investment company promising 
investors huge returns of between 200 to 300 percent every six 
months. When the scheme collapsed, the owner of the investment 
company fled Iraq with the remaining money. 
Corruption is a major challenge and is exacerbated by weak financial 
controls in the banking sector and weak links to the international 
law enforcement community. Transparency International's 2009 
International Corruption Perception index ranked Iraq as 176 out of 
180 countries surveyed, demonstrating only minimal change from the 
previous year. 
 
¶4.  (SBU) Nevertheless, Iraq is taking demonstrable steps to combat 
corruption, including acceding to the UN Convention Against 
Corruption, seeking candidacy status in the Extractive Industries 
Transparency Initiative and the World Bank's Stolen Asset Recovery 
Initiative, pursuing civil service and procurement reforms and legal 
assistance agreements with other countries.  Iraq does not have a 
Mutual Legal Assistance Treaty with the United States and U.S. law 
enforcement agencies indicate that cooperation with Iraqi 
counterparts had been somewhat sporadic but is increasing.  While 
Iraq's anti-corruption institutions are making strides to inspect, 
audit, and prosecute corruption cases in Iraq's ministries, weak 
procurement laws, widespread patronage, and other flaws in internal 
Qprocurement laws, widespread patronage, and other flaws in internal 
controls and regulations provide opening for fraud and embezzlement. 
 The U.S. government, international financial institutions, and some 
Iraqi leaders are promoting new systems, laws, and enforcement 
mechanisms to address these gaps.  Nevertheless, these need 
concerted will from a broad range of actors including civil society 
and senior leadership. 
 
¶5.  (SBU) The Coalition Provision Authority (CPA) Order No. 93, the 
"Anti-Money Laundering Act of 2004" (AMLA), continues in force and 
governs financial institutions in connection with: money laundering; 
financing of crime; financing terrorism; and imposes requirements to 
monitor financial transitions. The law also criminalizes money 
laundering, financing crime (including the financing of terrorism), 
and structuring cash transactions to avoid legal requirements. The 
AMLA covers: banks; investment funds; securities dealers; insurance 
entities; money transmitters; and foreign currency exchange dealers 
as well as persons who deal in financial instruments, precious 
metals or gems, and persons who undertake hawala transactions. 
Covered entities are also required to verify the identity of 
non-account holders performing a transaction or series of 
transactions whose value is equal to or greater than five million 
Iraqi dinars (approximately $4,250). Beneficial owners must be 
identified upon account opening and for transactions exceeding ten 
 
BAGHDAD 00003354  002.2 OF 005 
 
 
million Iraqi dinars (approximately $8,500). Records must be 
maintained by financial institutions for a period of at least five 
years. Covered entities must report suspicious transactions and wait 
for guidance before proceeding with the transaction; the relevant 
funds are frozen until guidance is received. 
 
¶6.  (SBU) Reports of suspicious transactions are to be completed for 
any transaction over four million Iraqi dinars (approximately 
$3,400) that are believed to involve funds that are derived from 
illegal activities or money laundering, intended for the financing 
of crime (including terrorism), or over which a criminal 
organization has disposal power, or a transaction conducted to evade 
any law or which has no apparent business or other lawful purpose. 
Nevertheless, the Government of Iraq is currently drafting a new 
anti-money laundering law to replace Order No. 94. 
 
¶7.  (SU) The "tipping off" of customers by bank employees where a 
transaction has generated a report of suspicious transaction is 
prohibited. Bank employees are protected from liability for 
cooperating with the government. Willful violations of the reporting 
requirement may result in fines or imprisonment CPA Order No. 94, 
the "Banking Law of 2004," gives the CBI the authority to conduct 
due diligence on proposed bank management. Order No. 94 establishes 
requirements for bank capital, confidentiality of records, audit and 
reporting requirements for banks, and prudential standards. 
 
¶8.  (SBU) The CBI is responsible for the supervision of financial 
institutions. The CBI was mandated by the AMLA to issue regulations 
and require financial institutions to provide employee training, 
appoint compliance officers, develop internal procedures and 
controls to deter money laundering, and establish an independent 
audit function. The CBI has branches in Irbil, Sulaymaniyah, Mosul, 
and Basra. 
 
¶9.  (SBU) The CBI headquarters in Baghdad also houses Iraq's 
financial intelligence unit, the Money Laundering Reporting Office 
(MLRO). The MLRO is responsible for the collection and analysis of 
suspicious transactions and forwards the results of their analysis 
to law enforcement authorities. The MLRO's primary Iraqi law 
enforcement contact is with the Ministry of Interior's Financial 
Crimes Unit. The CBI branches are responsible for the licensing and 
examining of public and private banks, and the licensing of money 
exchangers and money transmitters. 
 
¶10.  (SBU) The CBI is required to conduct examinations of public 
banks every six months and private banks every three months. Order 
No. 94 gives the CBI administrative enforcement authority including 
the removal of institution management and revocation of bank 
licenses. The banks provide traditional banking services such as 
deposit taking, foreign exchange, transfers, and lending to the 
community.  There is no time limit for funds to be held in the CBI 
for accrual of interest. Outside of this relationship, there is poor 
communication between the CBI and Iraq's public and private banks, 
particularly with respect to money laundering, terrorist financing, 
and other potential risks. The formal financial sector continues to 
develop.  Thirty seven private banks and six state-owned banks 
operate in Iraq. The state-owned banks still control a majority of 
Qoperate in Iraq. The state-owned banks still control a majority of 
the banking sector. 
 
¶11.  (SBU) The CBI is still experiencing challenges with 
communications between its various offices. Efforts are underway to 
modernize the banking technology utilized by the CBI, but the effort 
has borne little fruit to date. In particular there is a lack of an 
adequate electronic payment and wire transfer systems. Electronic 
payment systems are being introduced in Iraq, including payment of 
pensions by a "Smart Card" (embedded microchip) and electronic 
transfers by private banks, but these programs are at an early 
stage. There is little institutional knowledge in the CBI, law 
enforcement agencies, or the judiciary regarding implementing Iraq's 
anti-money laundering/countering the financing of terrorism 
(AML/CTF) legislation and combating systemic money laundering and 
terrorist finance threats. In addition, the economy is still largely 
cash-based. There is widespread societal distrust of banks by the 
Iraqi people based on their experiences during the Saddam Hussein 
regime. 
 
¶12.  (SBU) Bulk cash smuggling is a significant problem in Iraq. The 
CBI is considering issuance of regulations to require currency 
 
BAGHDAD 00003354  003.2 OF 005 
 
 
transaction reports be filed for the cross-border transfer of 
currency in amounts exceeding 15 million Iraqi dinars (approximately 
$12,750). Neither Iraqis nor foreigners are permitted to carry more 
than $10,000 in U.S. currency when exiting Iraq, but these measures 
are rarely enforced. Overseas currency speculation regarding the new 
Iraqi dinar is widespread often involving fraudulent schemes. It is 
illegal under Iraqi law to export dinars. 
 
¶13.  (SBU) Another vulnerability to Iraq's AML/CTF regime is that 
money exchangers and money transmitters, including hawaladars, are 
largely unregulated. Because of the efficiency and easy access of 
the money exchange business and money transmitters, most people in 
Iraq use these businesses to conduct international business. Some 
conventional banks can take weeks or months to conduct simple funds 
transfers while similar international transactions can be done 
rapidly and efficiently through the informal money exchange and 
transfer services. Although money exchangers and transmitters are 
required to be licensed by the CBI, the level of supervision and 
enforcement is minimal. As of late 2009, there were credible media 
reports of fraud and theaft involving money changers in some Iraqi 
provinces. 
 
¶14.  (SBU) Money exchangers are not subject to the same level of 
supervision as banks nor are they required to report suspicious 
transactions to the CBI. The level of training on AML/CTF given by 
the CBI to managers and operators of money exchanges and money 
transmitter businesses is inadequate. The MLRO, in its present form, 
is unable to provide adequate training and guidance on AML/CTF 
issues to the banking institutions it oversees, let alone the money 
transmitter or money exchange businesses in Iraq. Because the MLRO 
is part of the CBI, it also suffers from the same shortcomings as 
the CBI regarding communication with the CBI branches outside of 
Baghdad and the private banks. Furthermore, the MLRO has no criminal 
investigative authority.  A recent Iraqi academic study reported 
money-laundering activities in the province of Dohuk and warning of 
vulnerabilities in the Kurdish Regional Government (KRG) financial 
system. 
 
¶15.  (SBU) The MLRO, which was formed in mid-2006, is weak and 
requires significant funding, support and training in order to 
adequately monitor the formal and informal financial systems in 
Iraq. The MLRO is understaffed with approximately 30 personnel, who 
have rudimentary accounting capabilities and computer skills. 
Additionally, the MLRO's computer equipment and software are 
outdated and access to the internet is inadequate. The MLRO receives 
little support from the Iraqi law enforcement agencies. Although, 
the MLRO is empowered to exchange information with other Iraqi and 
foreign government agencies, those contacts are limited. All 
financial institutions in Iraq are required to report suspicious 
financial transactions, including potential money laundering and 
terrorist financing, but only a few reports have been submitted 
since the MLRO's establishment.  Institutional links between KRG 
financial authorities and Baghdad needs strengthening, as well as 
cooperation between all institutions involved in tracking and 
enforcing financial crimes. 
Qenforcing financial crimes. 
 
¶16.  (SBU) The predicate offenses for the crime of money laundering 
extend beyond "all serious offenses" to include "some form of 
unlawful activity." The penalties for violating the AMLA depend on 
the specific nature of the underlying criminal activity. For 
example, "money laundering" is punishable by a fine of up to 40 
million dinars (approximately $34,000) or twice the value of the 
property involved in the transaction, (whichever is greater) or 
imprisonment of up to four years or both. Other offenses for which 
there are specific penalties include the financing of crime with a 
fine of up to 20 million dinars (approximately $17,500) or two years 
imprisonment or both and structuring transactions to avoid reporting 
requirements of up to 10 million dinars (approximately $8,500) or 
one year imprisonment or both. No Iraqi government arrests or 
prosecutions for crimes covered under the AMLA have been reported. 
The current law is ineffective and is not consistent with the 
provisions of the Iraqi legal system.  Penalties for violations of 
the law are weak.  The GOI is in the process of drafting a new AMLA 
law. 
 
¶17.  (SBU) The AMLA includes provisions for the forfeiture of any 
property. Such property includes, but is not limited to, funds 
involved in a covered offense, or property traceable to the 
 
BAGHDAD 00003354  004 OF 005 
 
 
property, or any property gained as a result of such an offense, 
without prejudging the rights of bona fide third parties. The courts 
can order confiscation of property, but they can only do so if the 
property is directly related to the crime, including drug proceeds. 
According to the Iraqi Penal Code, a person must pay the government 
back for any property stolen from the government. In other cases of 
theft, restitution is made to the victim(s). 
 
¶18.  (SBU) Any property forfeited to the state becomes state 
property and goes into the general treasury. Should the government 
confiscate perishables, it can sell them while the case is ongoing 
and if the defendant is acquitted, the government returns the money 
it acquired from the sale of the goods to the defendant. While the 
case is ongoing, the government appoints a judicial guardian to 
supervise and maintain the property pending the outcome of the case. 
The AMLA also blocks any funds or assets, other than real property 
(which is covered by separate regulation) belonging to members of 
the former Iraqi regime and authorizes the Minister of Finance to 
confiscate such assets following a judicial or administrative order. 
The lack of automation or infrastructure in the banking sector 
hinders the government's ability to identify and freeze assets 
linked to illicit activities. 
 
¶19.  (SBU) Iraq has four free trade zones: the Basra/Khor al-Zubair 
seaport; Ninewa/Falafel area; Sulaymaniyah; and al-Qaim, located in 
western Al Anbar province. Under the Free Trade Zone (FZ) Authority 
Law, goods imported or exported from the FZ 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 FZ are exempt from taxes and fees throughout 
the life of the project, including the foundation and construction 
phases. Value transfer via trade goods is a significant problem in 
Iraq and the surrounding region 
 
¶20.  (SBU) The CBI distributes the UN 1267 Sanction Committee's 
consolidated list of suspected terrorist organizations to the 
various banks under its supervision as mandated by the AMLA. 
However, no asset seizures or any other information pertaining to 
the names on this list has been reported. Currently there is no 
legislation in Iraq that allows the GOI to freeze and confiscate 
terrorist assets without delay under civil proceedings. This 
represents a significant shortfall in the GOI's AML/CTF regime and 
in the international standards set by the Financial Action Task 
Force (FATF). 
 
¶21.  (SBU) Iraq became a member of the Middle East and North Africa 
Financial Action Task Force (MENAFATF) in September 2005.  The Iraq 
MLRO attended the May 2009 MENA FATF meeting in Bahrain. Iraq also 
has not yet undergone a mutual evaluation of its compliance with the 
FATF standards. Iraq is a party to the 1988 UN Drug Convention, the 
UN Convention against Corruption, and the UN Convention against 
Transnational Organized Crime. It is not a party to the UN 
Convention for the Suppression of the Financing of Terrorism. 
 
¶22.  (SBU) A USG interagency group lead by the State Department 
conducted a Financial System Assessment Team (FSAT) study of Iraq in 
September 2009.  A report of the findings is forthcoming and will 
QSeptember 2009.  A report of the findings is forthcoming and will 
present recommendations for improvements. 
The Government of Iraq has the foundation needed to support the 
fight against terrorist financing and money laundering, but needs to 
implement existing legislation, bolster the relevant agencies in 
Iraq's AML/CTF regime, and issue or establish the proper regulations 
and legislation related to combating systemic money laundering and 
terrorist financing threats in Iraq. 
 
¶23.  (SBU) The CBI should be particularly cautious about granting 
licenses to banks from jurisdictions of concern; the MLRO needs 
proper training, equipment, and direction; the Iraqi financial 
sector needs to adopt and use AML/CTF standards and best practices; 
the GOI should pass legislation that allows Iraq to freeze and 
confiscate criminal and terrorist assets; Iraq needs to participate 
fully in the MENAFATF by attending its plenary meetings, taking 
advantage of its training opportunities and implementing the FATF's 
international standards; Iraqi law enforcement and the judiciary at 
national and regional levels need to enhance their ability to 
soundly interpret, apply, and enforce the legal principles of the 
AMLA and therefore better conduct investigations and to cooperate 
with one another; Iraqi law enforcement, border authorities, and 
 
BAGHDAD 00003354  005.2 OF 005 
 
 
customs service should continue to strengthen border enforcement and 
identify and pursue smuggling, trade-based money laundering, and 
terrorist financing networks; and, the GOI should make a concerted 
effort to combat the corruption that hinders development and impedes 
an effective anti-money laundering and counterterrorist financing 
regime. Iraq should become a party to the UN Convention for the 
Suppression of the Financing of Terrorism.