Key Reasons U.S. Banks Avoid Dealing in the Iraqi Dinar

1. Limited convertibility and illiquidity on global forex markets

• The Iraqi dinar is not widely traded on major global foreign-exchange markets. That makes it difficult for banks or dealers in the U.S. to reliably buy or sell it in large volumes.

• According to Investopedia, “the Iraqi dinar does not trade on the global forex market and is only available through specific money exchangers” under restricted conditions. (Investopedia)

• Because it’s illiquid, the spread (the difference between the buy and sell prices) would be steep, and the risk is significantly higher.

From a business and risk perspective, U.S. banks generally don’t view it as a viable currency to carry or trade.

2. U.S. sanctions, regulatory risk, and anti-money laundering (AML) concerns

Even if a currency is technically legal in Iraq, U.S. banks operate under many rules around sanctions, countering terrorism financing, and anti-money laundering. The U.S. Treasury, through its Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN), establishes rules that can render dealing with certain foreign banks or currencies highly risky or even prohibited.

• The Treasury has taken steps to sever relationships between U.S. financial institutions and certain Iraqi banks that it identifies as conduits for illicit financing. For example, in January 2024, it designated Al-Huda Bank as a “foreign financial institution of primary money laundering concern,” and proposed rules to prohibit U.S. banks from maintaining correspondent accounts for it. (U.S. Department of the Treasury)

• The Treasury maintains an “Iraq-Related Sanctions” program through OFAC, which requires special licenses for certain transactions with Iraq or Iraqi entities. (OFAC)

• Some Iraqi banks have been banned from conducting U.S. dollar transactions due to concerns over illicit financial flows, smuggling, or connections to sanctioned entities. (Mishcon de Reya LLP)

• U.S. banks must constantly screen for “prohibited transactions” (i.e. transactions that U.S. persons may not engage in under sanctions rules). OFAC’s regulations are part of that framework. 

So even if someone wanted to move or trade Iraqi dinars through a U.S. bank, the bank would need to ensure it’s not breaking U.S. sanctions or AML rules; often, that is too high risk or too burdensome.

3. Structural banking and correspondent relationships

For U.S. banks to transact in a foreign currency, they generally need to have a correspondent banking relationship with foreign banks that have access to that currency system. If there is no solid infrastructure, liquidity, or trusted counterparty, U.S. banks would be reluctant.

• If the Iraqi banking system is perceived as risky, non-transparent, or weak in its compliance standards, U.S. banks may decline to establish or maintain relationships with it.

• Additionally, due to sanctions and blacklisting, certain Iraqi banks are being cut off from U.S. dollar transactions, making it more challenging for these banks to serve as intermediaries. (Reuters)

• In fact, Iraq has banned some of its own local banks from doing U.S. dollar transactions in recent years. (Reuters)

Thus, even if a U.S. bank wanted to, the pipeline and counterparty network to support dinar trading is fragile or blocked in many cases.

4. Speculative nature and risk to reputation/compliance burden

Because the dinar market is not mainstream, it has often been tied to speculative investing in “currency revaluations” or “dinar investments” (which many experts warn are risky or scams). U.S. banks generally avoid exposure to speculative or “unproven” currency markets, especially when compliance burdens are high.

What the U.S. Treasury (or related U.S. agencies) says

Here are relevant U.S. Treasury / regulatory positions and documents:

1. OFAC — Iraq-Related Sanctions
   This page provides the sanctions rules, legal authorities, and licensing information for dealing with Iraqi entities. You’ll see that even some financial activities need explicit licensing when dealing with Iraq.
   → “Iraq-Related Sanctions” (OFAC) (OFAC)

2. Treasury press release on Al-Huda Bank
   In January 2024, Treasury announced actions to label Al-Huda Bank and restrict U.S. correspondent banking relationships for it due to money-laundering and terrorism risk.
   → “U.S. Treasury Takes Action to Protect Iraqi Financial System From Abuse” (U.S. Department of the Treasury)

3. Sanctions Lists / OFAC Designations
   The U.S. Treasury’s sanctions list search shows particular Iraqi branches or entities subject to blocking. (Sanctions List Search)
   The general OFAC / sanctions framework is also described on the Treasury “Sanctions Programs and Country Information” page. (OFAC)

4. State Department / Investment Climate Statements
   Some U.S. government reports on Iraq note that banks may engage in spot currency transactions, but not forward or speculative transactions in the Iraqi dinar without constraints. (State Department)

Simple analogy to wrap it up

Think of a U.S. bank wanting to open a shop selling a rare fruit from a remote country with many trade restrictions. If that country has export bans, government red tape, suppliers under sanctions, and risk of funding illegal activity, the bank would say, “Too many risks, too little reliable supply, too many legal checks.” That’s basically what dealing in Iraqi dinar is like from the perspective of U.S. banks.