Inside the Iraqi Kleptocracy

Early last October, while working in his office in Baghdad, a businessman named Hussein Laqees got a phone call from a number he’d never seen before. “We need to talk,” the caller said. The man’s voice was gruff and self-assured, a little menacing. He demanded that Laqees come meet him but refused to give his name.

Laqees demurred, and the call ended. He might have forgotten the whole exchange had a colleague not been in touch a few minutes later with worrisome news. The mystery caller, he said, was from Kataib Hezbollah, a powerful Iraqi militia with strong ties to Iran’s Revolutionary Guards. They had a business proposal to discuss.

When the militiaman called again, Laqees reluctantly agreed to a meeting. He gathered a few colleagues, and they all drove to a house off Sadoun Street in downtown Baghdad, arriving near dusk. Inside, he was led into a dim office and introduced to a small, bald man who got right to the point. “You need to work with us, there is no other choice,” the bald man said. “You can keep your staff, but you must do as we say.” He explained that Kataib Hezbollah would take 20 percent of Laqees’s gross revenue — about 50 percent of his profits.

Laqees refused. His company, Palm Jet, had a five-year government contract to run a V.I.P. terminal at Baghdad’s international airport, along with a nearby hotel; it also works routinely with Western aeronautics firms like Lockheed Martin. He could not have any dealings with a group like Kataib Hezbollah, which is listed by the U.S. government as a foreign terrorist organization (as is the unrelated Lebanese group also called Hezbollah). The bald man replied that if Laqees refused, he would seize everything he owned in Baghdad. Laqees looked at him in disbelief. “I’m an investor,” he said. “There is law.” The bald man shot back: “We are the law.” He told Laqees to give him an answer by noon the next day.

The following afternoon, five Chevrolet S.U.V.s rolled up outside the V.I.P. terminal. Twelve men got out, dressed in black paramilitary gear and carrying guns. They found Laqees in the cafe of the airport hotel, smoking and sipping coffee. He had been calling all his government contacts since the night before, along with the airport’s department heads. No one had called back. It was as if they’d been warned — or perhaps paid off. The militiamen took Laqees’s phone and told him to sign a document relinquishing his contract. He stalled for time. One of his employees slipped outside to take a cellphone picture of the militiamen’s vehicles, but they caught him, smashed his phone and beat him up. Laqees, who is Lebanese, had been working in Iraq since 2011. He knew the country was troubled by crime and corruption, but he believed that the airport, with its hundreds of uniformed immigration and security officials, was different. “I wait 20 minutes, maybe someone will come,” Laqees told me later. “Police, something.” Finally, he walked to the departures hall and caught a flight to Dubai. Days later, Kataib Hezbollah installed its preferred contractor in his place. Laqees has not returned to Iraq since.

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The airport raid took place just four days after the start of Iraq’s anti-government protests, as thousands of young demonstrators were flooding the streets of Baghdad and other cities, chanting their poignant trademark slogan: “Nureed watan,” or “We want a country.” The protesters quickly took over Tahrir Square in the heart of Baghdad, setting up tents and fighting pitched battles with the police. Although the chaos brought much of the city’s business and government to a standstill, it also won the sympathy of Arabs across the region, igniting an equally powerful protest movement in Lebanon. To those who took part in the rallies, groups like Kataib Hezbollah are not just Iranian proxies; they are the newest faces of a kleptocracy that has enriched itself at the expense of Iraq’s youth, who have been left jobless and destitute in ever-increasing numbers. Some militia leaders, meanwhile, have joined the ranks of Iraq’s richest men, becoming famous for buying upscale restaurants, nightclubs and opulent farms on the Tigris.

The militias have been aided and abetted by a new Iraqi political class whose sole ethic is self-enrichment. Over the years, this cross-sectarian cabal has mastered scams at every level: routine checkpoint shakedowns, bank fraud, embezzling from the government payroll. Adel Abdul Mahdi, who was hailed as a potential reformer when he became Iraq’s prime minister in 2018, hoped to subordinate the militias to the state. Instead, they outmaneuvered and overpowered him. His cabinet included people with ties to some of the worst graft schemes afflicting the country.

The United States is deeply implicated in all this, and not just because its serial invasions wrecked the country and helped ravage the economy. America provides the money that sustains it, even as U.S. officials wink at the self-dealing of Iraqi allies. The Federal Reserve of New York still supplies Iraq with at least $10 billion a year in hard currency from the country’s oil sales. Much of that is passed on to commercial banks, ostensibly for imports, in a process that was hijacked long ago by Iraq’s money-laundering cartels. At the same time, the United States inflicts punishing sanctions on two countries — Iran and Syria — with which Iraq shares notoriously permeable borders. It is the ideal breeding ground for corruption.

The Trump administration may have shocked Iraq’s militias with the unexpected assassination in January of Qassim Suleimani, the powerful Iranian spy chief, at the Baghdad airport. But Iranian proxies like Kataib Hezbollah do not seem overly worried. They know President Trump has little stomach for a war, especially in the Covid-19 era of soaring deficits. Their greatest priority is maintaining an Iraqi system in which literally everything is for sale.

The coronavirus pandemic has now pushed Iraq to the brink of an existential crisis. The global collapse of demand for oil has brought prices to historic lows, delivering a terrible shock to a country whose economy depends almost entirely on oil revenue. But it could also offer the new Iraqi prime minister, Mustafa al-Kadhimi, an extraordinary opportunity to face his country’s most intractable problem. Corruption can now be framed as a life-or-death issue: Iraq must choose between feeding its people and enriching its kleptocrats. Kadhimi has promised to take up this challenge. He is not likely to succeed unless the United States seizes this chance to undo some of the damage it has done in Iraq, and to make common cause with the protesters who are hoping to re-establish their country on a new footing.

In the annals of American diplomacy, corruption has long had an equivocal status: deplored in public but in practice often regarded as a tolerable, even useful vice. The United States has a long history of supporting kleptocrats who were on the “right side” of one geopolitical rivalry or another. The price of these bargains, often paid in blood, has fueled a reappraisal. “Corruption is not just a fundamental political problem but the most significant driver of most of the security problems we are supposed to be trying to address,” Sarah Chayes told me in May. Chayes’s 2015 book, “Thieves of State,” documents the destructive effects of corruption across a range of countries in Africa and Asia. The book grew out of her experiences in Afghanistan, where she lived for years before becoming a Pentagon adviser and saw how the rampant extortion and graft of the U.S.-backed government helped push the local population into the arms of the Taliban.

Iraq may be an even more vivid object lesson. As recently as the 1980s, corruption was rare, and ministries in Saddam Hussein’s autocratic government were mostly clean and well run. The change came during the 1990s, when the United Nations imposed crippling sanctions following Hussein’s invasion of Kuwait. Over a period of just seven years, Iraq’s per-capita income dropped to $450 from about $3,500. As the value of their salaries collapsed, government officials couldn’t survive without taking bribes, which became the currency of everyday life. The rot grew worse after the invasion of 2003, when American officers began handing out bricks of $100 bills in an attempt to make friends and jump-start the economy. They may have meant well, but their clumsy haste was catastrophic. A new group of opportunists, including returning Iraqi exiles, lined up for big government contracts. Billions went missing. The theft expanded in scale after the oil boom of 2008, thanks to a network of oligarchs empowered by Prime Minister Nuri Kamal al-Maliki.

When ISIS surged into northwestern Iraq in mid-2014, the Iraqi forces that rose to defend it were officially 350,000 strong, much larger than the attacking jihadi brigades. In reality, the army had been eviscerated by “ghost soldier” kickback schemes, with commanders pocketing hundreds, even thousands, of salaries. These practices destroyed morale inside the army and fed popular anger among civilians in Mosul, who became more receptive to ISIS than they otherwise might have been. A recent survey of people in the Mosul region, led by the Harvard Humanitarian Initiative, found that they saw corruption as a chief cause of the emergence of ISIS.

Weighing the full cost of what has been stolen from Iraq is not easy. Deals are done in cash, documents are hard to come by and the government’s statistics are often unreliable. Still, the available information suggests that Iraq may have had more of its national wealth illicitly drained abroad than any other nation. One Iraqi elder statesman with long experience in finance recently assembled a confidential assessment for the Atlantic Council, an American think tank, based on conversations with bankers, investigators and contacts in a variety of foreign countries. He concluded that $125 billion to $150 billion is held by Iraqis overseas, most of it “illegitimately acquired.” He noted that other estimates run as high as $300 billion. Some $10 billion in stolen money, he estimated, is invested in London real estate alone. A full reckoning would extend well beyond the financial bill to the damage inflicted on Iraq’s culture and society — a point I often heard older Iraqis make with great sadness during the years I lived there.

Iraqi political life may look like gang warfare to outsiders, but on most days its turbulent surface conceals a calm and cheerful business of looting. At every government ministry, the biggest spoils are allocated by unwritten agreement to one faction or another. The Sadrists have the Health Ministry, the Badr Organization has long had the Interior Ministry and the Oil Ministry belongs to Al-Hikma. Newcomers sometimes have trouble adjusting to this state of affairs. One former cabinet minister — a technocrat who spent decades abroad — discovered, on arriving in his post, that his ministry was procuring vaccines with a $92 million contract. He found another way to buy the same vaccines for less than $15 million. “Once I did this, I faced a great deal of resistance, a fierce campaign against me,” he told me. His priority was addressing the gap between Iraq’s oil wealth and its devastated health system, which lacks access to many basic medicines. To his opponents, the only imperative was their own and their party’s interests. The minister eventually decided that these two philosophies were irreconcilable, and he resigned. (Like most of the people I spoke to for this article, he spoke on condition that I not use his name. Corruption is the third rail of Iraqi politics: Touching it can easily get you or your relatives killed.)

The political bosses who preside over this graft are well known; some are staunch American allies. The Barzani and Talabani families of Kurdistan have used their control over that region’s contracts and its central bank to become immensely rich. Maliki and his ring of powerful cronies still loom over the Iraqi political scene. Moktada al-Sadr, the mercurial Shiite cleric, is another godfather figure whose followers are notorious for demanding hefty kickbacks. This system should have received a jolt in 2014, when its depredations led directly to the country’s near-takeover by ISIS. Instead, the main consequence was the rise of a new breed of parasite: the militias who helped defeat ISIS, known collectively as the Hashd al-Shaabi, or the Popular Mobilization Forces. The Hashd is a loose confederation of armed groups, some of which have been around for decades. In 2016, Prime Minister Haider al-Abadi recognized them as part of the country’s security sector, and they now receive regular salaries just as soldiers and police officers do.

Among the most powerful is Kataib Hezbollah. It was accused of mounting an attack on an Iraqi air base in December that killed an American contractor and led to the assassination of Suleimani — its ultimate patron — a week later. Despite its high profile, it is surrounded by mystery. “We know almost nothing about the leadership,” says Michael Knights, an analyst at the Washington Institute for Near East Policy who has tracked the group since its founding. “It’s like the Masons. You can be in it and be in another movement at the same time.” It has built an economic empire, partly by forcing its way into legitimate businesses and government contracts.

Among the militia’s least-known and most troubling ventures has been its gradual assertion of control over the Baghdad airport. It started several years ago, when Kataib Hezbollah and another Iranian-backed militia called Asaib Ahl al-Haq began stealthily placing workers loyal to them throughout the airport, according to a senior airport official I spoke with. They were also able to get G4S, a British company that has a long-term contract for security at the airport, to hire their people, he said. (G4S did not respond to requests for comment.) As a result, the two militias now have access to all the airport’s CCTV cameras and to a limited-access road called Kilometer One that connects the runways to the airport perimeter, bypassing the security barriers, the official told me. (When Qassim Suleimani and his entourage were struck by an American drone in January, they had just come off this road.) The militias’ efforts became more aggressive about a year ago, the official told me, when its members held the Baghdad airport’s director of civil aviation at gunpoint and forced him to hire a man loyal to them as his nominal deputy. In late October, a Kataib Hezbollah front company received a 12-year contract at the Baghdad and Basra airports, worth tens of millions of dollars a year, even though the firm — the blandly named Gulf corporation — was only two months old and did not have the necessary accreditation or licensing and its founder had been barred from the airport. The contract has since been terminated, but the company that took over the V.I.P. terminal and hotel from Hussein Laqees remains in place.

The Baghdad airport is just one of the economic gateways that the militias now control. They have used the ISIS threat to install themselves at most of the country’s land borders. And the militias have dominated much of the trade through Iraq’s southern seaports for more than a decade. In effect, the militias operate a shadow state, charging importers higher fees in exchange for expedited processing and delivery. They have economic committees with offices in Baghdad, where private companies can make deals that brazenly circumvent the country’s legal channels. “For example, if I’m bringing 100 cars in from Dubai, if I do the legal process it might take two months to clear,” the airport official told me. “If I pay Kataib Hezbollah, say, $10,000 to $15,000, it might take only two days.”

The cash that has fueled Iraq’s descent into kleptocracy originates, for the most part, from a heavily guarded Federal Reserve compound in East Rutherford, N.J. There, every month or so, a truck is loaded with more than 10 tons of plastic-wrapped U.S. currency, a haul worth $1 billion to $2 billion. The money is then driven to an Air Force base and flown to Baghdad. It belongs to the Iraqi government, which routes the proceeds of its oil sales through an account at the New York Federal Reserve. This unusual arrangement is a legacy of the U.S. occupation, when America directly controlled the Iraqi government and its finances. It has remained in place because it suits both sides: The Iraqis get quick, preferential access to dollars, and the United States retains tremendous leverage over Iraq’s economy. Ostensibly, the periodic dollar shipments (a small part of the country’s overall oil revenue) are to meet the needs of Iraqi exchange houses and importers, who require hard cash. In practice, many of the dollars have found their way into the hands of money launderers, terrorist groups and Iran’s Revolutionary Guards, thanks to a little-known ritual run by the central bank of Iraq: the “dollar auction.”

The dollar auction has been called the “sewage system of Iraqi corruption,” but its inner workings have rarely been written about. The fraud schemes that revolve around it have fueled every side in the Syrian civil war, including ISIS. The U.S. Treasury Department has made serious efforts to keep auction dollars out of the hands of ISIS and Iran, but it has often turned a blind eye to other kinds of money laundering. And terrorists have repeatedly found new companies and methods to disguise their participation in the auction, often with the complicity of central-bank officials.

The auction’s name is misleading; it is a daily process in which Iraq’s central bank provides dollars to a limited number of the country’s commercial banks in exchange for Iraqi dinars. The American occupation authorities established it in 2003 to serve two purposes: collecting enough dinars to pay salaries in cash to Iraq’s vast armada of government employees and helping the country pay for badly needed imports in dollars. In principle, the auction is similar to the process used by some other countries to facilitate foreign trade. It was meant to work like this: A company intending to import shoes from India, for instance, would go its local Iraqi bank with an invoice from the Indian shoe company. The local bank would authenticate the transaction and deposit the required amount in Iraqi dinars with the central bank, which would wire dollars to a correspondent account belonging, ostensibly, to the exporter.

The trouble started with a swelling tide of dirty money: Iraqis who had stolen large sums through fraudulent contracts or kickback schemes were hungry to trade their dinars for dollars, so that they could use them abroad. To meet the need, a new class of opportunists began registering fake companies and fabricating the invoices required to simulate an import deal, which would then be funded via the dollar auction. In a matter of days, someone who had defrauded his country of millions could become the owner of a London townhouse. The phony imports left little trace, because they were documented with ID cards and photographs of real people, who would agree to play company officials in exchange for a bribe.

Each time the authorities at the Iraqi central bank or the New York Fed got suspicious, the fraudsters would up their game correspondingly. “There were small offices of young people to produce professional-looking forgeries,” a former Iraqi banker, one of several financiers and former government officials who described the scheme, told me. “Then they cook the whole file around it.” To avoid paying taxes on the phony imports, the launderers would register dozens of companies, abandoning them and creating new ones whenever their taxes were due. They got the border authorities involved, paying officials to provide fake manifests with realistic-looking stamps. The launderers eventually commandeered much of the central bank’s daily dollar sales, which have totaled, according to the central bank’s own figures, well over $500 billion since 2003. (That figure is much higher than the number of physical dollars flown to Iraq from the Fed, because most of the dollars sold by the central bank are electronic transfers from Iraq’s oil revenues.)

The fraud was sometimes laughably obvious. In 2017, Iraq officially imported $1.66 billion worth of tomatoes from Iran — more than a thousand times the amount it imported in 2016. It also listed imports of $2.86 billion in watermelons from Iran, up from $16 million the year before. These amounts would be ludicrous even if Iraq didn’t grow large amounts of its own tomatoes and watermelons. Economists told me these official import numbers — still visible on the Iraqi planning ministry’s website — appear to be a poorly disguised cover for money laundering via the dollar auction.

The auction has also enabled a large-scale embezzlement scheme that has funneled billions of dollars to Iraq’s power brokers. This fraud was based on the difference between the fixed exchange rate offered by the central bank — which is pegged to the dollar — and the fluctuating market rate, which is often much higher. Soon after the auction started in 2003, the money launderers realized that if they could fake an import deal, they could then resell the dollars they’d acquired from the central bank, realizing an instant profit on the rate spread. As soon as Iraq’s political bosses realized how much money was to be made, they seized control of access to the auction. Ordinary companies and banks wanting to do legitimate imports or lending were squeezed out by those with backing from the main political parties and militias. To disguise this takeover, the newly minted plutocrats bought up almost all the remaining commercial banks, turning them into mere vehicles for the auction scheme.

It is impossible to say exactly how many billions have been stolen through exchange-rate arbitrage, but several former bankers and Iraqi officials told me that this kind of fraud accounts for most of the ostensible imports financed by the dollar auction since around 2008. My own estimate, based on figures from the central bank’s website and information from Iraqi bankers and finance officials, is about $20 billion, all of it stolen from the Iraqi people. The businessmen running the scheme are virtually printing their own money, because their costs — paying for fake invoices and bribing bank and government officials — are low. Some of the banks posting enormous profits from the auction are little more than fronts, with dilapidated branch offices and scarcely any employees. One bank bought $4 billion in dollars on the auction, I was told by a member of Parliament who has investigated corruption cases, a total that would correspond to a profit of $200 million. “We checked on this bank,” the lawmaker said. “It has one room, one computer and some guards.”

The damage caused by the auction fraud was not just about illicit profits. As Iraq’s commercial banks transformed into instruments for arbitrage, ordinary businesses were left without access to the loans they needed to grow. Some legitimate importers, unable to get dollars from the auction, were forced to use foreign banks instead. It is hard to know how much harm this did to the economy, but all the analysts I spoke to said it has been devastating, starving the country’s private sector and making Iraq even more dependent on its oil proceeds, which have been cut in half in recent months.

Only one Iraqi leader has made serious efforts to expose the crimes surrounding the dollar auction, and he was an unlikely hero. Ahmad Chalabi, the banker and politician who helped the Bush administration justify its invasion of Iraq, led a parliamentary investigation of the dollar auction starting in 2014. He uncovered documents that implicated some of the country’s biggest banks and their owners in large-scale fraud. Just as he was expected to reveal more about the scandal in November 2015, Chalabi died of a heart attack. (Despite the suspicious timing, autopsies found no evidence of foul play.) The bankers he identified in his investigations suffered no consequences and are still in business.

The auction continues to this day, and so do the money laundering and theft that surround it. On some days in mid-March, the central bank’s website registered dollar sales of well over $200 million — more than $1 billion in a single working week — all of it supposedly to pay for imports. At the time, the coronavirus pandemic was shuttering Iraq’s economy. Some of those imports may be legitimate, but the bankers I spoke to said the numbers suggest the persistence of large-scale money laundering. Another glaring sign of fraud is the daily total of dollars sold by the central bank to Iraq’s exchange houses, which are supposed to be used only by Iraqis traveling abroad. In mid-July, they were still averaging $10 million to $11 million per day, even though Baghdad’s airport was closed from March until July 23 and travel restrictions remain in place. There is also evidence that the auction continues to provide money for terrorist groups. In October, the New York Federal Reserve issued a letter to the Iraqi central bank demanding that it bar two banks and an exchange house from using the dollar auction, stating that it has reason to believe that the three entities are “affiliated with or engaged in material dealings with” ISIS or a group with ties to it. The three entities are owned by a financier named Hassan Nasser Jaafar al-Lami, also known in Iraqi financial circles as “the king of the fake invoices.” In January, an employee at Iraq’s central bank gave an interview to a Lebanese TV station claiming that al-Lami was still using the auction, through other banks than those named by the Fed.