The United States stopped the transfer of billions of dollars to Iraq this past summer out of fears that the money was making its way to Iran and the Islamic State of Iraq and Syria (ISIS), The Wall Street Journal reported (Google link) on Tuesday.

The Journal explained that since the Central Bank of Iraq was established in 2004, the dollar has become Iraq’s major currency. When the Iraqi government needs more cash, it requests the dollars from the Federal Reserve Bank of New York. The U.S. then sends billions of dollars to Baghdad, where they are auctioned off to financial firms.

Between 2012 to 2014, the amount of dollars requested by Iraq more than tripled from $3.85 billion to $13.66 billion, an increase that did not line up with the struggling Iraqi economy. This led American officials to suspect that the dollars “were being hoarded rather than circulated.”

Last December, U.S. officials called on their Iraqi counterparts to institute better controls on the distribution of American dollars and improve their reporting mechanisms. Iraq agreed to the demands and began providing more complete reports to American officials in January.

Around June, Iraqi officials working under the enhanced information-sharing agreement reported to their U.S. counterparts that three sanctioned Iranian banks—Islamic Regional Cooperation Bank, Bank Melli and Parsian Bank—had obtained at least millions of dollars through the auction. Like other Iranian banks, those were operating under international sanctions, and it was illegal for the Fed to knowingly ship dollars to them. U.S. officials around that time had concerns that Islamic State had gained access to dollars through the auctions, U.S. officials and people familiar with the matter said. The Iraqi officials believe the money has definitely gone to Islamic State through these auctions. Exchange houses in the northern, Kurdish-controlled city of Kirkuk—outside of Islamic State control but close to extremist front lines—are among the most active in allowing dollar flows into Islamic State-controlled territory and to Islamic State militants, Iraqi officials said. In addition, Islamic State in 2014 stole about $100 million from a Central Bank of Iraq-run vault in Mosul, said a person familiar with the theft.

Around July, the U.S. demanded that Iraq take steps to ensure that no more American dollars would reach the sanctioned Iranian banks and notified Iraqi officials that no more cash requests would be approved until circumstances improved. In early August, after Central Bank officials agreed to supply American officials with “ream of data,” the U.S. resumed the shipments of dollars to Iraq, though Washington continues pressuring Baghdad to ensure that the cash-shipments it receives and distributes don’t fall into the wrong hands.

[Photo: American Advisors Group ]