In the aftermath of Iraq’s invasion of Kuwait on August 2, 1990, the United Nations Security Council, on August 6, 1990, passed Resolution 661[1], imposing severe economic sanctions on Iraq. In this resolution, the Security Council demanded that all States refrain from undertaking any form of trade with Iraq, in respect of both imports from and exports to Iraq, except for medical and food supplies to Iraq, as well placing restrictions on Iraqi assets and funds abroad[2]. As for the Central Bank of Iraq, restrictions were applied to all its accounts and financial activities abroad. The Central Bank of Iraq needed approval from a special committee within the Iraqi Asset Management to carry out any major financial operations or transfer of funds.
Following the military intervention in March 2003, followed by the occupation of its territory, the legitimacy of the authorities heading Iraq was not recognized, especially since they did not exercise any real sovereignty under the role played by Paul Bremer and the occupation authorities[3]. Security Council Resolution 1483 was implemented on 22/5/2003, which lifted the economic sanctions imposed on Iraq and reinstated its affairs to its pre-1990 status. However, among the provisions of the resolution was the establishment of the Development Fund for Iraq into which all funds derived from the export of oil and gas are deposited and to meet other needs[4]. The funds of the Development Fund were deposited in the US Federal Bank in New York. Furthermore, the Governor of the Central Bank of Iraq was appointed in cooperation with the US Federal Bank to manage these funds[5].
In due course, the Strategic Framework Agreement was signed in 2008 to underscore the friendship and cooperation between Iraq and the United States of America, which was also the preamble to the eventual withdrawal of American forces from Iraq and the end of formal occupation[6]. In response to a letter from Iraq’s then prime minister, Nouri al-Maliki, to the President of the Security Council, UN Security Council Resolution 1956 of December 15, 2010 was passed which effectively terminated the Development Fund for Iraq and also ended the monitoring, immunity and supervision of the Central Bank of Iraq[7].
Regarding the Iraqi funds held by the US Federal Reserve, the agreement between the Central Bank of Iraq and the Federal Bank to hold those funds was renewed, subject to the terms and conditions of transparency set by the US Federal Reserve. However, control over and the management of the funds remained with the Central Bank of Iraq[8].
In relation to Iraq’s outstanding debts to Kuwait, the task of the Compensation Fund, established by the Security Council in its resolution 687 under Chapter VII of the Charter of the United Nations in 1991, has been achieved. Meanwhile, the last remaining payment of compensation due to Kuwait was paid on February 22, 2022, amounting to $ 44 million, out of a total of $ 52.4 billion. With this, Iraq had finally fully paid off the compensation imposed on it under the supervision of the UN, more than 31 years after the invasion of Kuwait[9]. Despite the fact that Iraq was removed from Chapter VII and placed under Chapter VI of the UN Charter, nevertheless, Iraq has not been permitted to have access to its frozen funds abroad. Furthermore, the United States continues to have stewardship over those funds held in the US Federal Bank.
Where do Iraq’s oil revenues go?
Since 2003, Iraq has deposited its foreign currency reserves in the U.S. Federal Reserve, giving the United States significant control over Iraq’s dollar supplies, including Iraq’s $120 billion in reserves from oil revenues[10].
Previously, the Central Bank of Iraq sold dollars from the Federal Reserve to commercial banks and foreign exchange bureaus through a mechanism known as the “dollar auction.” Over the years, large amounts of dollars have been transferred out of Iraq to Turkey, the United Arab Emirates, Jordan, Lebanon, Iran and Syria through “grey market trading,” using fraudulent invoices for high-value goods. According to Iraqi banking officials and politicians, the previous system of remittances allowed this to be porous and easily exploited[11].
At the end of last year, the Fed began imposing more drastic measures. Amongst these measures, the United States demanded from the Central Bank of Iraq the use of an electronic system for transfers that requires detailed information on the final recipient of the dollar[12].
What does it mean for Iraq to maintain US immunity on its funds?
It was expected that if Kuwait’s compensation was paid in full[13], the UN protection in place would be withdrawn from the Iraqi government’s assets abroad. At the same time, there have been many demands from historical creditors, whether governments or the private sector, who have been waiting for this protection to be lifted to enable them to seize these funds and to obtain compensation.