Iran assistance: Iraq helps Iran evade international financial sanctions.

When President Obama announced last month that he was barring a Baghdad bank from any dealings with the U.S. banking system, it was a rare acknowledgment of a delicate problem facing the administration in a country that U.S. troops just left: For months, Iraq has been helping Iran skirt the economic sanctions imposed on Tehran because of its nuclear program.

The bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former U.S. and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy.

The Obama administration is not eager for a public showdown with the government of Prime Minister Nouri al-Maliki over Iran just eight months after the last U.S. troops withdrew from Baghdad.

Fiscal, logistical ties

Still, the administration has held private talks with Iraqi officials to complain about specific instances of financial and logistical ties between the countries, officials say, although they do not regard all trade between them as illegal, or as in the case of smuggling, as something completely new.

In response to questions from the New York Times, David Cohen, the Treasury Department’s undersecretary for terrorism and financial intelligence, provided a statement saying, “we will pursue, and are actively pursuing, efforts to prevent Iran from evading U.S. or international financial sanctions, in Iraq or anywhere else.”

Some current and former U.S. and Iraqi officials and banking and oil experts, however, say Iraqi government officials are turning a blind eye to the large financial flows, smuggling and other trade with Iran. In some cases, they say, government officials, including some close to al-Maliki, are directly profiting from the activities.

“Maliki’s government is right in the middle of this,” said one former senior U.S. intelligence official who now does business in Iraq.

Auctions a pathway

Iraqi banking experts said last week that Elaf Islamic Bank was still being allowed to participate in the Iraq Central Bank’s daily auction at which commercial banks can sell Iraqi dinars and buy U.S. dollars. These auctions are a crucial pathway for Iranian access to the international financial system. Western officials say Iran seeks to bolster its reserves of dollars to stabilize its exchange rates and pay for imports.

Iraqi and U.S. officials with knowledge of Iraqi banking practices say Iranian customers are able to move large amounts of cash through the auction and from there into banks in regional financial centers like Dubai, United Arab Emirates or Amman, Jordan, and then into the international banking system.

Mudher Salih, the central bank governor, said that Elaf Islamic Bank was being allowed back into the auction because Elaf officials had denied any wrongdoing.

Thanks to Iraq’s growing oil revenue, the Iraqi central bank has about $60 billion in foreign exchange reserves, held in accounts at the Federal Reserve Bank of New York, with which to meet the insatiable demand for dollars. But the new flight of dollars out of Iraq is prompting widespread criticism of the central bank and of the Iraqi government.