IRAQ
Summary
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Sanctions

Financial and Arms Embargo

FAFT AML Deficient

Yes

Higher Risk Areas

 

Non - Compliance with FATF 40 + 9 Recommendations

US Dept of State Money Laundering Assessment

Supporter of or Safe Haven for International Terrorism

Not on EU White list equivalent jurisdictions

Corruption Index (Transparency International & W.G.I.)

World Governance Indicators (Average Score)

Failed States Index (Political Issues)(Average Score)

Medium Risk Areas

Weakness in Government Legislation to combat Money Laundering

 

 

ANTI-MONEY LAUNDERING

 

FATF Status

Iraq is on the FATF List of Countries that have been identified as having strategic AML deficiencies

 

Latest FATF Statement - 24 February 2017

In October 2013, Iraq made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since October 2016, Iraq has taken steps towards improving its AML/CFT regime. Iraq should continue to implement its action plan to address its remaining deficiencies, including by: (1) continue implementing the legal framework and appropriate procedures for identifying and freezing terrorist assets; (2) ensuring that all financial institutions are subject to adequate customer due diligence requirements; (3) ensuring that all financial institutions are subject to adequate suspicious transaction reporting requirements; and (4) establishing and implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors. The FATF encourages Iraq to continue implementing its action plan to address its remaining AML/CFT deficiencies.

 

Compliance with FATF Recommendations

The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Iraq was undertaken by the Financial Action Task Force (FATF) in 2013. According to that Evaluation, Iraq was deemed Compliant for 2 and Largely Compliant for 1 of the FATF 40 + 9 Recommendations. It was Partially Compliant or Non-Compliant for all 6 of the Core Recommendations.

 

US Department of State Money Laundering assessment (INCSR)

Iraq is categorised by the US State Department as a Country/Jurisdiction of Primary Concern in respect of Money Laundering and Financial Crimes.

OVERVIEW

 

Iraq’s economy is primarily cash-based and its financial sector is severely underdeveloped. Iraq has about 2,000 financial institutions, most of which are money exchange houses. Although Iraqi law prohibits these entities from transferring funds outside of Iraq, some probably conduct cross-border transfers. U.S. dollars are widely accepted. Iraqi law enforcement and bank supervisors have made progress in their capabilities to detect and halt illicit financial transactions mostly due to a 2015 AML law. However, the illicit use of some currency exchange networks and the weak compliance capabilities of the banking sector leave the Iraqi financial sector susceptible to abuse.

 

Smuggling is endemic, often involving consumer goods. Bulk cash smuggling is likely common, in part because Iraqi law only allows for the seizure of funds at points of entry, such as border crossings and airports. Narcotics trafficking occurs on a small scale. Corruption is pervasive at all government levels and is widely regarded as a cost of doing business in Iraq.

 

Iraqi authorities have been making strides in combatting money laundering, but almost all of the progress is connected to terrorist financing. Investigations into financial gains from political corruption or other actors remain virtually nonexistent.

 

VULNERABILITIES AND EXPECTED TYPOLOGIES

 

Since June 2014, when Iraq’s ongoing conflict with ISIL escalated, it has been more difficult for the government to monitor AML efforts in areas outside of central government control. The Central Bank of Iraq (CBI) has taken a number of steps to deter money laundering, including by issuing a national directive to prohibit financial transactions with banks and financial companies located in ISIL-controlled areas, publishing a list of companies prohibited from accessing the U.S. currency auction, and increasing its investigative activities and cooperation with the Ministry of Interior (MOI). However, the CBI lacks adequate personnel and technical capacity to fully monitor financial entities and routinely encounters difficulty engaging various parts of the government during its investigations.

 

According to the manager of Iraq’s Free Trade Zone Authority, Iraq has three FTZs, but only Khour Az-Zubayr, Basrah, is currently operational. Under the Free Trade Zone Authority Law goods imported or exported from the FTZs 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 FTZs are exempt from taxes and fees throughout the life of the project. TBML is a significant problem in Iraq and is linked to hawalas and informal financial systems.

 

KEY AML LAWS AND REGULATIONS

 

In October 2015 Iraq passed a new AML law; implementing regulations are still being drafted. The CBI is working with international donors to draft the regulations. The implementation of the 2015 AML law should help to increase the regulation and supervision of the financial sector, but to date the capacity of the regulatory authorities remains limited, and enforcement is subject to political constraints.

 

Since June 2016, Iraq has made improvements to its AML regime, namely through addressing issues related to the criminalization of money laundering and strengthening its FIU.

 

Iraq is a member of MENAFATF, a FATF-style regional body.

 

AML DEFICIENCIES

 

A lack of technological and human capital is a major hindrance to Iraq’s efforts to effectively combat money laundering. The lack of cooperation between the intelligence agencies, the FIU, the CBI, and the judiciary, while improving, is a major obstacle to effective enforcement actions. Additionally, the Money Laundering Reporting Office (MLRO) needs to be empowered to enforce its authority to receive reports from all reporting entities.

 

In practice, despite CDD requirements, most banks open accounts based on referrals by existing customers and/or verification of a person’s employment. Actual application of CDD and other preventive measures varies widely across Iraq’s state-owned and private banks. Banks generally comply with the requirement to file CTRs with the MLRO, but very few STRs are filed. Due to a weak institutional culture of compliance and the lack of robust penalties for noncompliance, banks often are unmotivated to file STRs and sometimes conduct internal investigations in lieu of reporting. Iraqi authorities should encourage increased reporting by financial institutions through more in-depth onsite supervision and an increase in the penalties levied for noncompliance.


 

ENFORCEMENT/IMPLEMENTATION ISSUES AND COMMENTS

 

The CBI revoked the licenses of dozens of exchange houses and money transfer companies linked to illicit financial activity in 2016, and the MOI closed the offices of over 40 unlicensed exchange houses.

 

The number of criminal convictions rose dramatically in 2016, and coordination with U.S. authorities has increased. However, the result in many cases is a fine against an institution or closure of the financial office.

 

Greater coordination between the Iraqi government and the Kurdistan Regional Government (KRG) is needed to regulate financial transactions, crack down on smuggling networks, and cooperate on AML efforts. The KRG abides by Iraq’s AML law, and there are renewed efforts to coordinate with the central government; however, the extent of the cooperation remains extremely limited. Moreover, Kurdish customs requirements are less stringent than Iraq’s, which risks enabling the smuggling of illicit and counterfeit goods into southern Iraq.

 

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SANCTIONS

The UN, EU and US have arms embargos in place together with assets freezes targeted at all funds belonging to Saddam Hussein, senior members of his regime and their immediate family members

 

The Arab League (comprising 22 Arab member states), of which this country is a member, has approved imposing sanctions on Syria. These include: -

-      Cutting off transactions with the Syrian central bank

-      Halting funding by Arab governments for projects in Syria

-      A ban on senior Syrian officials travelling to other Arab countries

-      A freeze on assets related to President Bashar al-Assad's government

The declaration also calls on Arab central banks to monitor transfers to Syria, with the exception of remittances from Syrians abroad.

It should be noted that Lebanon and Iraq have refused to impose the sanctions.

 

The Arab League has also boycotted Israel in a systematic effort to isolate Israel economically in support of the Palestinians, however, the implementation of the boycott has varied over time among member states. There are three tiers to the boycott. The primary boycott prohibits the importation of Israeli-origin goods and services into boycotting countries. The secondary boycott prohibits individuals, as well as private and public sector firms and organizations, in member countries from engaging in business with any entity that does business in Israel. The Arab League maintains a blacklist of such firms. The tertiary boycott prohibits any entity in a member country from doing business with a company or individual that has business dealings with U.S. or other firms on the Arab League blacklist.

 

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BRIBERY & CORRUPTION

 

Index

Rating (100-Good / 0-Bad)

Transparency International Corruption Index

17

World Governance Indicator – Control of Corruption

4

 

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INVESTMENT CLIMATE - Executive Summary (US State Department)

Investors in Iraq face both tremendous opportunities and significant challenges. The Government of Iraq (GOI) has publicly stated its commitment to attract foreign investment and plans to invest $357 billion in energy, building and services, agriculture, education, transportation, and communications sector projects under its five-year National Development Plan. In 2013 the Iraqi economy grew by 4.2% and investment expenditures in oil production reached $20 billion. Inward FDI grossed $2.5 billion in 2012. Real estate is the largest non-oil area of foreign investment in Iraq.

The World Bank ranked Iraq 151 out of 189 economies for “ease of doing business.” Potential investors should prepare to face significant security costs, to navigate cumbersome and confusing bureaucratic procedures, and to expect long payment delays on some GOI contracts. Corruption, delays in customs, unreliable dispute resolution mechanisms, electricity shortages, and lack of access to financing are also common complaints from investors. Internal GOI regulations at times impose unpublicized requirements or procedures that create additional burdens for investors. The GOI currently operates over 192 state-owned enterprises, a legacy of decades of oil-dependent statist economic policy. Insurgent groups, including the Islamic State of Iraq and the Levant, an al-Qa’ida offshoot, are increasingly active throughout Iraq. Sectarian and terrorist violence has increased since the beginning of 2013 in Iraq, most notably in the provinces of Baghdad, Ninewa, Salah ad Din, Anbar, and Diyala.

The 2006 National Investment Law (NIL) provides a baseline for a modern legal structure to protect foreign and domestic investors in addition to providing investment incentives. The NIL allows both domestic and foreign investors to qualify for incentives equally. A 2009 amendment to the NIL, followed by 2010 implementing regulations, allows for limited foreign ownership of land solely for the purpose of developing residential real estate projects. The lack of clear and definitive implementing regulations for the NIL and the 2009 amendment remains a source of delay and confusion in the approval of investment projects. Under the NIL, the National Investment Commission and the Provincial Investment Commissions are designed to be “one-stop shops” to facilitate investment. However, Investment Commissions operate without clear regulations and standard operating procedures. A new amendment to the NIL is currently under consideration by the Shura Council, which vets legislation before it is considered by parliament.

Under the Iraqi Constitution, some competencies relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to the regions. Investment in the Iraqi Kurdistan Region (IKR) operates within the framework of the 2006 Kurdistan Region Investment Law and the Kurdistan Board of Investment. Investors in the IKR face many of the same challenges as investors elsewhere in Iraq, including corruption, red tape, and inefficiencies, but the business-friendly investor law and generally stable security situation continue to attract foreign businesses.

The United States government and the GOI are seeking to address impediments to trade and investment through bilateral economic dialogue mechanisms provided under the U.S.-Iraq Strategic Framework Agreement and the Trade and Investment Framework Agreement. The bilateral Investment Incentive Agreement entered into force in 2013, and numerous programs geared towards creating an enabling environment for investment are ongoing.

 

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FURTHER REPORTS

Extract from IMF Report: Iraq: 2015 Article IV Consultation and Request for Purchase Under the Rapid Financing Instrument

Iraq faces serious corruption, money laundering (ML) and terrorist financing (FT) risks that may undermine the financial system and the wider economy. Surveys suggest that the perception of corruption is very high in Iraq.1 Furthermore, the operations of ISIS increase the risks of terrorism financing. ISIS relies on funding from a wide range of sources including the appropriation of cash held at state-owned banks, exploitation of oil fields, and extortion of part of salary payments of Iraqi government employees.

The Financial Action Task Force (FATF) identified Iraq as a jurisdiction with AML/CFT strategic deficiencies. In October 2013, Iraq made a high-level political commitment to work with the FATF and MENAFATF to address these weaknesses based on an agreed action plan, but they remain as of the FATF June 2015 assessment. Due to lack of sufficient progress in improving its AML/CFT regime, Iraq might be subject to countermeasures that could impede its access to global financial markets.

The AML/CFT measures laid out in the action plan are powerful tools in addressing corruption and limiting the ML/FT risks, and will allow Iraq to exit the FATF listing. In light of the security and capacity constraints and the volatile political situation, a risk-based approach to the implementation of these measures would assist in mitigating the main ML/FT risks. The priority is to adopt the draft AML/CFT law— now under consideration by parliament—to bring it in line with the revised standards and allocate resources for its effective implementation. It is also important to develop an AML/CFT comprehensive national strategy and strengthen the existing key stakeholders—including the financial intelligence unit and the CBI AML supervision (including banks having branches under ISIS control). Moreover, targeted financial sanctions in line with the United Nations Security Council resolutions should be used to prevent and suppress terrorism and terrorist financing.

Anti-corruption measures could also be stepped up to improve governance. Measures could include adopting an anticorruption strategy, strengthening the asset declaration regime, and enhancing the transparency of the procurement system.

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Extract from IMF Report:  Iraq: 2013 Article IV Consultation

'However, the authorities have been limiting foreign exchange supply to address concerns related to money laundering and terrorism financing. The CBI has recently taken steps to simplify foreign exchange market regulations, but has not eliminated all existing exchange restrictions and the multiple currency practice.

The CBI continues to rely on controls to ration the supply of foreign exchange, which have contributed to the increase in the spread between the official auction and parallel market rate. The authorities aim to liberalize the foreign exchange market over the medium term. However, given the limited capacity of the financial sector to implement Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) preventive measures, they consider restricting the supply of foreign currency necessary to stem illegal outflows triggered by regional developments and increased import demand financed by illegal sources.'

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