Daesh and the ‘Fraudulent US Dollar Note’: Profiting from Foreign Exchange

Recent reporting has shone a light on a complex element of Daesh financing that demonstrates the group’s sophisticated ability to profit from a regional exchange system that is open to corruption and abuse.

At the most recent UK Parliament Foreign Affairs Sub-committee hearing on Daesh’s sources of financing, MPs questioned officials from the Foreign Office on one of the more complex elements of Daesh financing, namely the group’s use of the foreign exchange markets. The committee members’ questions stemmed from evidence provided in a previous hearing that suggested there was credible evidence of Daesh earning ongoing revenue in the region of US$20–25 million per month from the Iraqi money markets.

The headlines that followed were alarmist: ‘ISIS “making millions” by gaming forex markets’ and ‘Group using cash looted from banks in Mosul to speculate on international currency markets’ were typical offerings. Sensationalist though these were, it is clear that Daesh’s financial tentacles and expertise extend far beyond their dealings in oil and tax.

Like so much related to Daesh and its financing, the roots of this issue are years old and the commentaries are often confused – because the mechanisms Daesh exploits are complicated – and conflated – because the concepts of laundering and profit are often muddled. The issue needs unpacking.

How could Daesh benefit from the Iraqi foreign exchange and money markets? Here’s what we know. Following the ousting of Saddam Hussein, a newly constituted Central Bank of Iraq (CBI) was created in 2004 and now oversees an economy that is substantially cash-based and reliant on US dollars. The Iraqi state primarily earns US dollars through its sale of oil; hard currency it holds on account with the US Federal Reserve. When it needs to drawdown these funds, cash is brought by plane from the US to Baghdad. 

The amounts flown to Baghdad are vast and have grown rapidly in recent years. According to the Wall Street Journal, the amount has tripled from $3.85 billion in 2012 to $13.66 billion in 2014. This dramatic rise poses a number of fundamental questions: Why has the need for US dollars risen so dramatically? What is this currency being used for, and by whom? Some uses of the money are entirely legal – the dollars are being used to pay for imports or are being bought by citizens who want to store value in a reliable currency like the US dollar rather than the more volatile Iraqi Dinar (IQD). But other uses of the dollars are anything but legal.

Since its formation the CBI has held regular US dollar auctions, selling its hard currency for a fixed IQD price. Access to such a regular supply of US dollars is invaluable for Iraqi traders seeking funds for the purchase and import of foreign goods. 

But this access also provides a font for others in the region, such as those seeking to launder illicitly-earned local currency into US dollars via, for example, an industry of false invoicing, as well as sanctioned Iranian and Syrian entities that had been cut off from accessing US dollars and the international financial system. For example, in 2012 the Elaf Islamic Bank was sanctioned by the US for allegedly using its access to the CBI auctions to buy dollars for Iranian banks that were subject to sanctions at the time. President Barack Obama said that the Iraqi bank had ‘facilitated transactions worth millions of dollars’ for those Iranian banks. Put simply, the CBI’s US dollar auctions have become an illicit finance honeypot.

Recognising this risk, the CBI has, in concert with US authorities, sought to restrict the opportunity for the auctions to be used for illicit purposes. Auctioned amounts have been reduced; qualification for participation in the auctions has been tightened by restricting access for smaller banks, with greater oversight provided by the economic crime and money-laundering unit of the CBI; and proof of a need for US dollars (such as a trade invoice) is now required. 

But imposing such limits has created profitable opportunities for those inside the system. For example, those banks with the preferred status that allows them to participate in auctions have been accused of abusing their position to extract commission from those outside the auction system – taking advantage of the price difference between wholesale purchase and retail sale prices – and charging significant additional fees.

In sum, the auction system offers two key opportunities for illicit use: profit from inflated fees for those in control of access to sought-after hard currency, and money laundering for those seeking to recycle illicit IQD or circumvent sanctions. Given the importance to Daesh of financing and access to US dollars, it is no surprise that the group seeks financial benefit from these opportunities.

Daesh captured significant sources of IQD in its expansion across Iraq in 2014, subsequently topped up by the taxation of people in the group’s territory (including tax on salary payments made by the Iraqi government to state employees in Daesh territory until these payments were frozen in August 2015).  With US dollars flowing regularly into the Iraqi economy from the New York Fed, Daesh has had plenty of opportunity to source US dollars through the sale of its dwindling stock of IQD by securing access to the weekly CBI currency auctions. Whilst tighter controls on the sale of US dollars and the isolation of exchange houses in Daesh-controlled territory should limit this access, the movement of funds outside Daesh territory and an existing domestic industry of false invoicing and corruption, with links across the Gulf region, ensure this access can be maintained.

Whilst Daesh’s continued access to US dollars should be a concern for the international community, it is the apparent profit-making opportunities that have attracted the most attention. As briefly illustrated above, the CBI auction system is riddled with rent-seeking opportunities. Inflated fees are charged for transferring funds into and out of Daesh-controlled territory; the retail mark-up on US dollar sales is as much as 7 per cent; Daesh sells products from factories under its control in US dollars but pays salaries in IQD, forcing the population to buy US dollars at an inflated price; and access to US dollars via false invoicing and other corrupt means generates fee-earning opportunities for a group adept at parasitic fundraising.

Over the past decade, it appears that the CBI’s US dollar auctions have become an integral part of both the legal and illicit economy in Iraq and neighbouring countries. From facilitating sanctions circumvention in Syria and Iran to fuelling local rent-seeking and profit opportunities for false-invoicing further afield, the system, critical to the survival of the local economy, is also a significant crack in the region’s financial integrity; a crack from which Daesh, despite its ideological objection to the ‘fraudulent US dollar note’, is profiting handsomely.


Tom Keatinge

Director, CFCS

Centre for Financial Crime and Security Studies

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