When President Obama announced recently that he was barring a Baghdad bank from any dealings with the American banking system, it was a rare acknowledgment of a delicate problem facing the administration: for months, Iraq has been helping Iran skirt economic sanctions imposed on Tehran because of its nuclear program.
The little-known bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former American and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy.
The Obama administration is not eager for a public showdown with the government of Prime Minister Nuri Kamal al-Maliki over Iran less than a year after the last American troops withdrew from Baghdad.
Still, the administration has held private talks with Iraqi officials to complain about specific instances of financial and logistical ties between the countries, officials say, although they do not regard all trade between them as illegal or, as in the case of smuggling, as something completely new. In one recent instance, when American officials learned that the Iraqi government was aiding the Iranians by allowing them to use Iraqi airspace to ferry supplies to Syria, Mr. Obama called Mr. Maliki to complain. The Iranian planes flew another route.
Some current and former American and Iraqi officials, along with banking and oil experts, say that Iraqi government officials are turning a blind eye to the large financial flows, smuggling and other trade with Iran. In some cases, they say, government officials, including some close to Mr. Maliki, are directly profiting from the activities.
“Maliki’s government is right in the middle of this,” said one former senior American intelligence official who now does business in Iraq.
The accusations of high-level Iraqi government involvement in sanctions-busting have roiled Iraqi politics and invariably reflect on Mr. Maliki, since many Iraqi officials now say that he has taken effective control of the Iraqi central bank, which is nominally independent.
Several American and Iraqi banking and government officials also say that Iranian organizations have gained effective control over at least four Iraqi commercial banks through Iraqi intermediaries. That gives Iran direct access to the international financial system, supposedly denied to Tehran by the economic sanctions. Even as the United States has moved to tighten the vise against Iran this summer, the Maliki government has openly sought to enhance its already deep economic and political ties with Iran. Trade between Iraq and Iran, which fought a costly war from 1980 to 1988, has been growing rapidly ever since the American-led invasion that toppled Saddam Hussein, and it is now estimated to be as high as $11 billion a year. Among other openly acknowledged forms of trade, Iraq has contracts to buy large amounts of electrical power from Iran.
An Iraqi government spokesman, Ali al-Dabbagh, said in a telephone interview that Iraq “is not intending to break any rules,” but added that “we also have good relations with Iran that we do not want to break.”
This year, Iraqi officials publicly expressed concerns that their large volume of trade with Iran might place them in violation of the sanctions on Iran, and they said they would seek a sanctions waiver. After those public statements, American officials privately told the Maliki government that Iraq would not be found to be in violation of the new Iran sanctions because of its publicly acknowledged cross-border trade, according to a former senior United States official.