Iraq’s Illicit Economy and Its Regional Repercussions: Why the International Community Should Pay Closer Attention

Iraq is currently ranked 8th in the world in the Global Organized Crime Index, a score which aptly captures the dominance of organised crime and illicit networks in the country, particularly those with direct links to hybrid and non-state armed groups.1 These activities, including drug trafficking, smuggling, extortion, and corruption, have evolved into a more immediate and pervasive threat to Iraq’s domestic stability than terrorist groups like ISIS.

The transnational nature of these illicit activities and their role in financing the activities of hybrid and non-state actors in the region extend this destabilizing impact of unhindered criminality beyond Iraq. This has been of particular concern amidst the region’s conflict surge over the past year and the direct and indirect roles Iraq’s illicit economy and armed groups involved have played in funding, supplying, and partaking in these conflicts. 

         (Source: Global Organized Crime Index) 

Iraq’s geostrategic importance, coupled with weak border controls and fragmented governance, has made it a hotspot for various illicit activities. Armed groups, tribes, and political factions have entrenched themselves in smuggling networks, narcotics trade, and other shadow economies. Organized criminal networks exploit the country’s porous borders, while factions leverage their control over checkpoints and ports to siphon resources. Although Iraq’s government expects to collect around $9 billion annually from customs, only about $1 billion will actually reach government coffers.2 

Moreover, Iran and its proxies are making an estimated $1–3 billion annually through oil smuggling networks operating in Iraq. This figure, representing just the oil trade, excludes the billions more derived from other illicit activities such as imports manipulation, real estate schemes, drug trafficking, and corrupt government contracts.3 

The UK-Iraq Security Agreement 

In response to this growing threat and the growing realization that Iraq’s role as a hub for transnational illicit networks poses risks far beyond its borders, the governments of UK and Iraq signed in November this year a joint security agreement which aims to combat these illicit networks.4 The agreement has been described by the UK government as a critical “world-first” step in addressing the growing transnational nature of illicit activities in Iraq.  

The initiatives envisioned under the agreement seek to enhance border security, train law enforcement on organized crime and narcotics, and improve the capacity to counter human trafficking. It includes for instance £300,000 for law enforcement training and £200,000 for border security projects in the Kurdistan Region of Iraq (KRI). Additionally, the deal seeks to disrupt disinformation campaigns by human trafficking networks and establish reintegration programs for returnees.5 

While these steps are promising, their success will depend on effective implementation and complementary efforts by other international stakeholders. Tackling Iraq’s entrenched illicit economies requires a coordinated, multi-stakeholder approach that addresses structural drivers; mainly corruption. 

Expected Increase in U.S. Financial Pressure on Iraq 

The incoming Trump administration is expected to bring significant changes to US foreign policy  toward Iraq. These changes will likely include more pressure/scrutiny on the government of Iraq’s finances and enforcement of sanctions targeting economic operations linked to Iran and its Iraqi proxies, including oil revenues and other illicit activities.6 

These measures will aim to disrupt militia-controlled businesses and deter international collaborators by selectively sanctioning Iraqi banks, shipping companies, and entities suspected of facilitating illicit finance. While such actions may weaken Iran-linked networks and their influence, they are also likely to exacerbate strains on Iraq’s fragile financial system. This could complicate operations for development organisations, deter foreign investors, and create additional hurdles for local businesses operating in an already challenging environment. 

A Shared Responsibility 

The challenges posed by Iraq’s illicit economy are not confined to its borders. From smuggling networks that finance armed groups to narcotics flows that reach European markets, the impacts are global. For donors and international organizations, this presents an opportunity to deepen support for the Iraqi government in the areas which the government is struggling with the most.