As the 20-year anniversary of the fall of Saddam Hussein approaches, Iraq’s politics are being roiled by the dollar — billions of them, sent in large pallets every month to Baghdad from the Federal Reserve Bank of New York.

This policy, known as the “dollar auction,” was initially adopted in 2003 to help Iraq purchase foreign imports. In 2023, the auction is seen by both the Biden administration and Iraqi reformers as a cause of the corruption that has hobbled Iraq’s politics and economy.

The man responsible for both the introduction of the dollar auction and the exposure of its corruption is the late Ahmad Chalabi, the Iraqi opposition leader who helped persuade Congress to pass the Iraq Liberation Act and later went on to serve as a deputy prime minister and power broker in his liberated country.

During the war, I several times visited Chalabi at his seat in Baghdad. Before he died of a heart attack in 2015, Chalabi was the chairman of the finance committee in the Iraqi parliament. There, he led an investigation into schemes to defraud the dollar auction through a network of phony companies borrowing money for imports that never came.

That investigation implicated the biggest banks in the country, including the Central Bank. Before he could issue his final report, though, Chalabi died. An official autopsy found no evidence of foul play.

Fast-forward to the summer of 2022, when, for the first time, the Federal Reserve began scrutinizing the orders from Iraq. The flow of dollars from New York slowed to a trickle. That pressure has already forced Iraq to devalue the dinar.  

“The dollar auction that was meant to help stabilize Iraq’s economy in the post-Saddam period has instead become the means by which a kleptocrat class has stolen perhaps hundreds of billions of dollars of Iraq’s national wealth,” a former senior director for President Trump’s national security council, Joel Rayburn, tells me in an interview.

Mr. Rayburn, who is now the director of the American Center for Levant Studies, says the dollar auction has been a way for Iran to launder money for the revolutionary guard and its terrorist proxies. “We are in a perverse situation where the U.S. government is helping to provide our enemies with dollars to use against us,” Mr. Rayburn says.

Last week, the dollar auction was at the top of the agenda for an Iraqi delegation in Washington led by the foreign minister, Fuad Hussein, and the governor of the Central Bank of Iraq, Ali al-Allaq. They met with senior American officials to discuss the abuses of the Federal Reserve’s dollar auction in Iraq and new proposals to reform the process.  

Speaking at the United States Institute of Peace last week, Mr. Hussein said that fighting corruption in Iraq was a more difficult task than the country’s war against the Islamic State. “This is painful for Iraqi people and the Iraqi government to only talk about smuggling dollars,” the foreign minister said. “There are, of course, some people who are smuggling dollars, as they are smuggling many other products.”

For now, the Iraqi government has gotten a reprieve. A review of the daily dollar sales on the Central Bank’s website shows a steady increase in cash sales since the delegation’s meetings last week.