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US Officials Outline "Secret" Summer Operation To Stop Flow Of Dollars To ISIS

Over the last five or so weeks, Washington has been in panic mode with regard to America’s “fight” against ISIS. Once the Russians arrived at Latakia and began to provide air cover for Iranian ground troops operating in Syria it was clear that the clock was ticking on the strategy of using Sunni extremists to overthrow the Assad regime. 

That was bad news for Washington and its regional allies for a number of reasons. First, it meant that Iran was set to preserve the “Shiite crescent” and therefore Tehran’s supply line to Hezbollah. Second, it meant that the installing a “friendly” puppet government in Damascus was no longer in the cards and that doesn’t bode well for lucrative energy deals like the Qatar-Turkey natural gas pipeline. Third, it raised the possibility that the public would begin to get wise to the rather peculiar arrangements in place between Saudi Arabia and Qatar and the various Sunni militias fighting in Syria - including ISIS. 

That last point is critical. If the US electorate ever gets anything that even looks like definitive evidence that Washington is knowingly supporting the group that’s been held up as the scourge of humanity they’ll be a public outcry the likes of which America hasn’t seen since Vietnam. So, Washington has done its best to suggest that the US is set to step up the fight. The campaign began with helmet cam footage depicting a successful raid on an ISIS prison in northern Iraq and swiftly morphed into an announcement from the Obama administration that America would soon put boots on the ground in Syria, presumably to be embedded with the Kurdish YPG.

Well, in the latest example of Washington playing catch up, “officials familiar with the matter” have told WSJ about a concerted effort to cut off the flow of dollars to ISIS. Allegedly, the US became concerned about the amount of hard currency being shipped to Iraq over the summer. The problem: the requested amounts didn’t seem to be consistent with the country’s economic fundamentals and so, the US cut off Iraq’s access to dollar funding, nearly plunging the the country into crisis. Here’s more:

The previously unreported move to stop the cash shipments pushed the Iraqi financial system to the brink of crisis and marked a climactic moment in efforts to avert the flow of dollars to U.S. foes.

 

The situation sheds light on an important facet of the long-running U.S. battle against terror: Just as military officials worry about U.S. weapons getting to enemies, finance officials are on a global hunt to keep dollars from getting into the hands of adversaries who could use it to finance their activities.

 

The spread of Islamic State set off alarms among U.S. officials about the potential for the currency shipments to be exploited by terrorists. The Sunni extremist group controls about a third of the war-torn country, including the second-largest city, Mosul, and is already well-funded from tax collections, oil sales and a range of other activities.

 

The problem dates to last December when Fed and Treasury officials called a secret meeting in an Istanbul hotel conference room with Iraqi officials. The Americans were alarmed by the rising volume of dollars being shipped into Iraq and the lack of clarity into where the cash was ending up, the people said.

 

Since the U.S. overthrew Saddam Hussein and helped establish the Central Bank of Iraq in 2004, the U.S. dollar has largely become the country’s chief currency because so much of the economy runs on cash. When Iraq needs more paper currency, the money is drawn from the country’s account at the Fed, funded largely by oil reserves, and flown to Baghdad.

 

The amounts have been soaring. In 2014, annual U.S. dollar cash flow from the Federal Reserve Bank of New York to Iraq was $13.66 billion, more than triple the $3.85 billion in 2012, according to data compiled by Iraq’s parliament and reviewed by The Wall Street Journal.

 

That spike doesn’t mesh with the sluggish Iraqi economy of late, and as a result U.S. officials suspected the dollars were being hoarded rather than circulated.

 

The system for distributing dollars within Iraq works like this: Foreign central banks hold dollars and can call on the Fed for currency distribution. The new $100 notes are flown to Baghdad after leaving a Fed facility in East Rutherford, N.J. In Baghdad, the bills are moved to the Iraqi central bank, where they are sold in daily auctions in which Iraqi financial firms request dollars that they pay for largely using dinars, the country’s currency.

 


 

Early on, U.S. concerns centered on roughly 2,000 financial firms called exchange houses, which are active participants in these auctions.

 

U.S. officials believe several of these Iraqi firms have ties to Islamic State and have deep concerns the exchange houses are being used as conduits of dollars to the group, said a U.S. official and another person familiar with the matter. While the U.S. inevitably loses control at some point over the dollars it sends abroad, the Fed is barred from sending cash to entities it knows will distribute it to U.S. enemies.

 

Around June, Iraqi officials working under the enhanced information-sharing agreement reported to their U.S. counterparts that three sanctioned Iranian banks—Islamic Regional Cooperation Bank, Bank Melli and Parsian Bank—had obtained at least millions of dollars through the auction. Like other Iranian banks, those were operating under international sanctions, and it was illegal for the Fed to knowingly ship dollars to them.

 

U.S. officials around that time had concerns that Islamic State had gained access to dollars through the auctions,

U.S. officials and people familiar with the matter said. The Iraqi officials believe the money has definitely gone to Islamic State through these auctions.

 

Exchange houses in the northern, Kurdish-controlled city of Kirkuk—outside of Islamic State control but close to extremist front lines—are among the most active in allowing dollar flows into Islamic State-controlled territory and to Islamic State militants, Iraqi officials said. In addition, Islamic State in 2014 stole about $100 million from a Central Bank of Iraq-run vault in Mosul, said a person familiar with the theft.

 

Based on the new information, U.S. officials sent a written demand around July to Iraqi officials that the Iranian banks be cut off and separately conveyed to Iraqi officials that the Fed wouldn’t approve cash requests until the overall situation improved.

 

The decision was delivered just as Iraq’s central bank was running out of cash. Many Iraqis panicked after large withdrawal requests were denied, and the exchange rate fluctuated much more than usual.

Right. Ok, so this is another one of those scenarios where we’ll probably never know what the actual story is or was nor will we ever be able to gauge how accurate any of the above is in terms of depicting real events, but there are a couple of key takeaways. 

First, to the extent that the bit about Iranian banks accessing dollars through the FX auctions is true, it shouldn’t come as a surprise. Tehran is deeply embedded in Iraqi politics and one certainly imagines that it would be exceptionally easy for Iran’s financial institutions to tap into auctions where record keeping is poor, especially if there are a few bribes exchanged. 

Second, we find it particularly amusing that the US is apparently so concerned about supplying Sunni extremist groups with dollars that Washington is willing to push Baghdad to the precipice of crisis in order to cut off the flow. After all, supplying Sunni militants with money and weapons is the whole strategy in Syria and has been from the beginning. Sure, the Kurds are involved on both sides of the border, but generally speaking, the Saudis and Qatar, with the tacit support of the US, have been arming and funding Sunni extremists in Syria for years and so if the Fed is concerned about the flow of dollars to those groups, they may want to consider... oh, we don’t know, not funding those groups and making sure Washington’s regional allies don’t either. 

Even more amusing is this line: "...just as military officials worry about U.S. weapons getting to enemies." Yes, the US is so worried about that possibility that the Pentagon embarked on a $500 million effort to arm "properly vetted" fighters earlier this year and has now resorted to paradropping hundreds of tons (literally) of ammo and weapons into the middle of the desert and hoping the Kurds pick them up. Meanwhile, the CIA has funneled a completely unknowable amount of money and arms to a mishmash of Syrian Arabs battling the regime. Needless to say, there's absolutely no telling where those weapons will end up and where those fighters' loyalties will lie in the future.

Obviously, this is just the latest piece of propaganda in what has become a truly epic farce. We'd also note that if the US is interested in stopping ISIS from robbing central bank vaults , Washington may want to consider giving some of the ammo and weapons the Pentagon is dropping into the desert in Syria to the Iran-backed Shiite militias operating in Iraq. Unlike the US-trained Iraqi regulars, they don't tend to run away when they're getting shot at.