How Iraq Avoided a New Round of U.S. Sanctions on Its Banks

In recent weeks, Iraq’s banking sector has witnessed a series of rapid developments that reflect mounting external — particularly American — pressure on state-owned financial institutions, foremost among them Al Rafidain Bank, the country’s largest and oldest lender.
These developments come at a delicate moment as Iraq faces heightened international scrutiny over financial transfers, following multiple rounds of U.S. Treasury sanctions against Iraqi entities and individuals accused of facilitating transactions linked to Iranian influence networks.

U.S. Accusations and Political Pressure

The latest episode began when U.S. Congressman Joe Wilson accused Al Rafidain Bank of transferring funds to Yemen’s Houthi movement, labeling Iraq a “state sponsor of terrorism” and urging the U.S. Treasury Department to impose direct sanctions on the bank.
Wilson’s allegations centered on Al Rafidain’s branch in the Yemeni capital, Sana’a, which reportedly continued to operate despite the city’s control by Houthi forces. The congressman claimed that the branch was indirectly financing a group designated by Washington as a terrorist organization — a charge that sparked wide debate within Iraq’s financial community and prompted Baghdad to move quickly to clarify its position to U.S. authorities.
This political escalation revived memories of earlier rounds of U.S. sanctions against several Iraqi banks and raised genuine concern in Baghdad that Al Rafidain could soon find itself on the Treasury’s blacklist.

A Preemptive Move to Protect Al Rafidain Bank

Faced with mounting allegations, Iraqi authorities moved swiftly to avert a financial or diplomatic crisis. The decision to close Al Rafidain Bank’s branches within the Popular Mobilization Authority (PMF) was both symbolic and pragmatic.
While some media outlets linked the move directly to recent U.S. sanctions, informed sources said the decision was made in consultation with an American financial consultancy firm, with the aim of insulating the bank from any suspicion of involvement in funding armed groups or irregular transfers.
A senior source at the bank confirmed that the transfer of PMF payroll accounts to Al-Nahrain Bank was part of a broader reorganization of financial operations — a preventive measure designed to avoid potential scrutiny from the U.S. Treasury or from Arab governments that had lodged complaints accusing Al Rafidain of financing non-state groups.

A Strategic Partnership as a Shield

The most significant step that helped Iraq avoid sanctions was the signing of a strategic partnership agreement between Al Rafidain Bank and an American financial consultancy firm in August 2025.
Under the agreement, the consultancy works with the bank’s leadership to address negative audit findings and to develop a comprehensive internal compliance program spanning three years. The initiative aims to ensure full alignment with international anti–money laundering (AML) and counter–terrorism financing (CTF) standards.
According to a statement released at the time, the partnership “marks an institutional transformation in Al Rafidain’s governance approach and lays the foundation for a new era of financial reform in Iraq that aligns with international expectations.”
This move was widely viewed as a safety valve — a proactive measure that shielded the bank from being added to the sanctions list.

Broader Context: Renewed U.S. Pressure on Iran

These developments coincided with the U.S. Treasury Department’s announcement of new sanctions related to Iran, reinforcing the perception that any financial link between Iraqi institutions and Tehran-aligned entities could trigger immediate penalties.
Given Iraq’s deep reliance on the U.S. financial system for dollar-clearing operations and oil revenue transactions, Baghdad has clearly opted for a strategy of containment and compliance rather than confrontation.

Avoiding a Financial Fallout

Taken together, these events suggest that Iraq’s banking sector narrowly escaped another wave of U.S. sanctions. Swift coordination between the government, the Central Bank of Iraq, and Al Rafidain Bank — supported by an American advisory partner — helped defuse Washington’s concerns and demonstrate Baghdad’s commitment to addressing irregularities.
This approach is consistent with the Central Bank’s ongoing reform agenda since 2023, aimed at tightening oversight, curbing informal transfers, expanding digital payment systems, and raising transparency standards across the sector.
The recent episode illustrates Iraq’s growing awareness that preserving financial stability depends on its ability to adapt to the global financial system and adhere to the regulatory standards that underpin dollar-based transactions.
While challenges remain, recent actions — from closing Al Rafidain Bank’s branches within the PMF to reassessing the operations of its Sana’a branch, which had been accused by Congressman Wilson of financing the Houthis — have served as a temporary protective shield against punitive measures.
Collectively, these steps sent a clear signal to Washington that Baghdad is serious about financial integrity and countering illicit finance. They also underscore Iraq’s desire to distance state-owned banks from regional political entanglements.
Yet an important question lingers: Can Iraq truly shield its banking system from another crisis that might undermine investor confidence and international trust? The answer ultimately depends on whether the officials overseeing this file can sustain genuine, incremental financial reform — one that strengthens transparency, compliance, and the credibility of Iraq’s banking institutions in global markets.
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