US Pressure Leads Iraq to Curb Iranian Militia Funding Near Border

The United States has exerted significant and sustained pressure on Iraq, resulting in Baghdad agreeing to implement a new oversight mechanism aimed at preventing the flow of American funds to Iran and its allied militias. This development follows the halt of Iraq's oil exports due to the ongoing conflict with Iran, which had allowed Tehran to use Iraq as a key channel to circumvent US sanctions and secure financial resources.

Iraqi officials revealed that the Federal Reserve Bank (Fed) blocked at least two cash shipments under directives from the US Treasury Department, including one valued at approximately $500 million. These shipments resumed last month via cargo planes chartered by the Iraqi government. In exchange, Baghdad committed to measures that would stop Iran and its allied militias from accessing US dollars through Iraq's currency exchange businesses and from paying salaries to militia members.

The Iranian-backed Shiite militias in Iraq emerged from the chaos following the 2003 US invasion. They have defended Shiite regions against Sunni militants and fought US forces. Iran supplied weapons to many of these groups, which later played significant roles in combating ISIS fighters arriving from Syria in 2014. While many militias have official roles within Iraq's security forces, there is overlap with rogue groups, and some commanders reportedly collect salaries for "ghost soldiers" who do not exist.

Iraq's dependence on US dollar cash surged after the 2003 invasion. The US agreed to hold Iraq's oil revenue in the Federal Reserve Bank of New York and began sending up to $13 billion annually in physical US currency to Baghdad to sustain the largely cash-based economy. Unlike most countries, Iraq has few private banks with international financial ties, complicating access to US dollars for ordinary Iraqis. Although Baghdad has reduced its dollar reliance in recent years, these shipments remain vital.

Reports indicate that Iranian-backed militias were involved in purchasing large quantities of prepaid Mastercard and Visa cards loaded with funds in Iraq. They transferred these cards to the UAE and neighboring countries to withdraw cash in US dollars. The US Treasury stated that armed groups converted the cash back into Iraqi dinars, profiting from currency arbitrage in a scheme that also benefited Iran.