Corruption in Iraq: Where Did All the Money Go?

Officials have pilfered funds that could have been spent fighting ISIS.

Once again, the subject of illicit financial flows from kleptocratic regimes is in the international spotlight, this time in the form of the “Panama Papers.”

What is surprising is the level of shock at something that should have been obvious. For a long time, many financial institutions turned a blind eye to nefarious PEPs (politically exposed persons) and not just in Switzerland, as we see now with big names such as HSBC, once again deflecting allegations.

The industrialized world can’t afford any more surprises like this, otherwise aid and loans will continue to enter weak states, only to be rapidly snuck out.

Encouragingly, there are signs that governments and regulators are being energized by the Panama Papers. The U.S. Treasury will soon announce a requirement that banks disclose the owners of shell companies, and in the UK regulators set a deadline for banks to disclose details of clients’ relations with Mossack Fonseca, the company at the centre of the current storm.

Iraq, with lamentably high corruption, can be a litmus test for revived effort. Iraq also desperately needs to recover stolen assets, because it is running out of money for both fighting ISIS and rebuilding Iraq, in order to prevent ISIS 2.0.

Luckily, the United States is leading the way with the formation of the Kleptocracy Asset Recovery Initiative (KARI), but far more global coordination is needed. In Iraq, financial assistance should be put into ministries to train people in spotting and preventing corruption.

There are certainly good young people who want change in the Iraqi government, the challenge is creating a culture where they can speak out. That will take a renewed and internationally coordinated capacity building effort. As an example, the Higher Council of Education Development, an Iraqi organization that has sent four thousand students overseas to help ministerial capacity, had a budget of just over $100 million last year. The international community must urgently help Iraq to resource such work, because so far war expenditures dwarf other efforts.

Asset recovery and civil service capacity building are far smarter than traditional forms of aid. The United States has already tried a $60 billion reconstruction effort in Iraq, for everything from schools to prisons. Around $700 billion of Iraqi oil revenue has not achieved much more, all because of corruption and mismanagement.

Alas, this is a familiar story for Iraqis, who live in a country ranked 171 in the Corruption Perception Index. Corruption in Iraq is tied to chronically weak accounting and murky governance. Estimates of how much goes missing vary from $100 billion lost since 2003 to $20 billion in 2013 alone. One Iraqi government official put total money lost to corruption as high as $300 billion. This is fifteen times the amount Iraq now seeks to borrow.

As Iraq’s currency reserves rapidly drain and state salaries run out, the ultimate effect could be giving the so-called Islamic State vital breathing space, as the Iraqi state loses the means to function.

Meanwhile, corruption has gotten worse. In 2005, Iraq put out warrants for twenty-seven officials at the Ministry of Defense accused of stealing over $1 billion. By 2012, the Commission of Integrity investigated fourteen officials in the Ministry of Defense for taking kickbacks in a $4.2 billion arms deal.

Last year the late Ahmed Chalabi found that nearly thirty companies were making off with almost $4 billion, through forging invoices and taking funds from the Central Bank of Iraq. What could be more lamentable than phantom projects funded by fake invoices made to the central bank? Currency auctions must stop, because they are killing Iraq.