WASHINGTON // Iraq has been helping Iran skirt economic sanctions imposed as a result of its nuclear programme, according to a New York Times report.
A network of financial institutions and oil-smuggling operations are providing Tehran with a crucial source of US dollars.
Some Iraqi government officials are simply turning a blind eye to trade with Iran, while others in Baghdad are directly profiting from the activities - including several with close ties to the Iraqi prime minister, Nuri Kamal Al Maliki, the paper said.
Barack Obama, the US president, acknowledged the problem last month when he barred a small Iraqi bank, the Elaf Islamic Bank, from any dealings with the American banking system, according to the report.
At the time, he said that the bank had "facilitated transactions worth millions of dollars on behalf of Iranian banks that are subject to sanctions for their links to Iran's illicit proliferation activities."
And yet, Iraqi banking experts told the newspaper that Elaf Islamic Bank was still participating in the Iraq Central Bank's daily auction at which commercial banks can sell Iraqi dinars and buy dollars. Through these auctions, Iran was able to bolster its reserve of dollars, which are used to pay for much-needed imports.
The Times, citing sources within the US administration, along with current and former American and Iraqi officials and banking and oil experts, said Washington had privately complained to Iraqi officials about the financial and logistical ties between Baghdad and Tehran.
In one recent instance, when Mr Obama learnt that the Iraqi government had been aiding the Iranians by allowing them to use Iraqi airspace to ferry supplies to Syria, he called Mr Al Maliki to complain - and the Iranian planes then started using another route, the paper said.
Iranian organisations apparently have gained control over at least four Iraqi commercial banks through Iraqi intermediaries. If so, this would give Iran direct access to the international financial system, from which they have been barred by the economic sanctions, the newspaper said.
The problem with illegal Iraq-Iran trade has become well-enough known in Baghdad that it has roiled Iraqi politics, the newspaper said.
"We want to question the central bank and the banks that are involved," said Ali Al Sachri, a member of Parliament. He added that he was concerned that the huge dollar transfers were threatening the economic stability of Iraq by depleting the country's foreign reserves.
Iran's ability to trade and the incoming flow of dollars is crucial to the country because the economic sanctions imposed by the United Nations and individual countries are squeezing its economy.