Iraq's banking reforms will likely take far longer than what Prime Minister Ali Al Zaidi suggested after his inaugural visit to Washington last week.
Dozens of Iraqi banks have been cut off from US dollar access for years over concerns about sanctions evasion, money laundering and illicit finance. Because Iraq’s international oil revenue is held at the Federal Reserve Bank of New York, Washington retains significant influence over Baghdad’s financial policies.
Mr Al Zaidi, who entered office as a political unknown, is seeking to reshape US-Iraq relations into one focused on investment and commercial ties. While in Washington last week he reaffirmed his vow to disarm militia groups with ties to Iran, and secured $60 billion in commercial agreements during a business summit with US companies.
Those efforts appeared to bear fruit on Saturday, when Baghdad said the Central Bank of Iraq secured an agreement under which seven restricted Iraqi banks would be reintegrated into the US dollar system.
The Treasury department's Office of Terrorism and Financial Intelligence later clarified that “no banned banks have regained access to foreign currency transactions”. Among those banned banks is Al Janoob Islamic Bank, which is owned and controlled by Mr Al Zaidi.
“This is … Treasury finally reacting to a major demand signal from the Iraqi government, specifically because the Iraqi Prime Minister has one of the banks that's been trying to regain access to the dollar,” said Victoria Taylor, director of the Iraq Initiative and Syria Project at the Atlantic Council.
Instead, Treasury laid out, for the first time, a detailed plan for how these restricted Iraqi banks might reconnect.
“This meeting was important for establishing a pathway where Treasury would review steps the banks have taken and give a seal of approval, which would then … give other international banks like Citibank, JP Morgan, others, confidence that they could establish correspondent banking relationships,” Ms Taylor said.
First, the Central Bank of Iraq must complete the initial phase of its banking reform programme. Once a restricted bank satisfies the required compliance and governance standards, it may be reintegrated into non-US-dollar correspondent banking channels. Treasury said the first phase of the banking reform programme is scheduled to conclude this summer.
The second phase involves several parts. Banks must complete the entire bank reform and licensing process. Treasury said this involves performing a satisfactory third-party audit of their compliance function, securing a qualified investor and satisfying “international fit and proper standards”. Only then will an Iraqi bank be able to conduct US dollar transactions.
"Some of them may never reach the level," Ms Taylor said.
The department also reaffirmed that the US “will not tolerate the abuse of Iraqi banks by Iran-aligned militia groups and will take independent action, if necessary, to target such activity”.
Hiba Abdulwahhab, an Iraqi researcher and analyst, said the process would test Iraq's ability to enforce the rule of law. While she said Baghdad has produced reform plans, the challenge remains implementing them, “especially when reforms affect politically connected interests”.
“That is why I believe this process will take years rather than months, and its success will depend not on new regulation alone, but on whether the Iraqi state can enforce them consistently and impartially,” Ms Abdulwahhab said.
And while Mr Al Zaidi did offer concessions on militias, Ms Abdulwahab said concerns about corruption and Iran-lined networks remain valid.
"The Iraqi government must convince both the US and international financial institutions that these reforms are genuine and sustainable," she said.
During his visit to Washington, Mr Al Zaidi also met Treasury Secretary Scott Bessent, who reaffirmed the importance of countering Iranian influence, combatting illicit finance and strengthening Iraq's banking sector.
“The Secretary also underscored Treasury’s support for the government of Iraq’s efforts to deliver prosperity and freedom for the Iraqi people, and reaffirmed continued co-operation to advance the shared security and economic interests of the United States and Iraq,” Treasury said in a statement.
