U.S. Cut Cash to Iraq on Iran, ISIS Fears

Fed and Treasury officials were concerned that dollars were ending up at sanctioned Iranian banks and possibly being funneled to Islamic State militants.

The Federal Reserve and Treasury Department temporarily shut off the flow of billions of dollars to Iraq’s central bank this summer as concerns mounted that the currency was ending up at Iranian banks and possibly being funneled to Islamic State militants, according to U.S. and Iraqi officials and other people familiar with the matter.

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.

After Iraqi officials this summer agreed to institute tighter controls on the distribution of U.S. dollars by Iraq’s central bank, the dollars are flowing again and with better oversight, according to U.S. and Iraqi officials and people familiar with the matter.

Still, 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.

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