Iraq faces new pressure after return to financial watchlist

The Financial Action Task Force’s decision on June 19 to place Iraq back on its grey list marks a significant setback for Baghdad’s efforts to modernize its financial system and strengthen confidence in the country’s regulatory environment.

The move does not amount to sanctions, nor does it cut Iraq off from the international financial system, but it does place the country under increased monitoring and signals that Iraq must demonstrate tangible progress in addressing weaknesses in its anti-money laundering and counter-terrorist financing framework.

FATF’s official statement was not entirely negative. It noted that Iraq had made a high-level political commitment to work with FATF and its MENA subsidiary to strengthen the effectiveness of its AML/CFT regime. It also acknowledged that, since the adoption of Iraq’s Mutual Evaluation Report in November 2024, the country had made progress on several recommended actions. These included applying market entry controls to prevent criminals and terrorists from accessing important sectors, providing guidance and outreach to non-banking financial institutions, and introducing measures to mitigate risks in the real estate sector.

Iraq is therefore not being judged simply for failing to pass laws or issue regulations, but rather, FATF is focused on whether reforms are producing measurable outcomes. In this sense, Iraq’s grey-listing reflects a familiar problem in governance where there is a gap between formal reform measures and effective implementation.

The action plan agreed with FATF is extensive but can broadly be grouped into three areas: improving oversight of financial activity, strengthening transparency, and increasing enforcement. Iraq is expected to improve its understanding of money laundering and terrorist financing risks, strengthen oversight of informal money transfer networks, establish a regulatory framework for virtual assets, and ensure that banks and other high-risk sectors properly implement AML/CFT requirements.