In 2023, what initially seemed like a minor payment operation quickly exploded into a massive $1.5 billion-a-month money laundering scheme involving Iran-backed militias in Iraq. This scheme exploited Visa and Mastercard’s prepaid and debit card systems to circumvent U.S. sanctions and generate huge profits by taking advantage of Iraq’s economic vulnerabilities and gaps in payment oversight.

The Evolution from Wire Transfers to Card Arbitrage

Previously, Iraqi militias and Iran had relied heavily on international wire transfers lacking robust anti-money laundering (AML) controls. The U.S. Treasury and Federal Reserve Bank of New York shut down these fraudulent transfers late in 2022. In response, militias rapidly shifted their tactics to exploit prepaid and debit cards issued by Visa and Mastercard.

This new system took advantage of a crucial loophole: the gap between Iraq’s official currency exchange rate and the higher black-market rate. Militias loaded these prepaid cards with funds in Iraq and then withdrew cash from ATMs in neighbouring countries like the UAE and Turkey. The cash was then converted back into Iraqi dinars at a significant profit margin, sometimes reaching 21%. This cycle, known as currency arbitrage, allowed militias to turn prepaid cards into cash machines.

By mid-2023, cross-border card transactions surged by nearly 3,000%, driven largely by this militia exploitation. Officials estimate that militia-linked cardholders made around $450 million in profit in 2023 alone, while Visa and Mastercard earned about $120 million in transaction fees.

Warning Signs and Delayed Corporate Action

Despite repeated warnings from the U.S. Treasury starting mid-2023, Visa and Mastercard were slow to respond. The Treasury had identified suspicious activity including mass ATM withdrawals in Dubai using prepaid Iraqi cards. However, it wasn’t until March 2024 that the card networks took sweeping enforcement actions.

During the delay, militias refined their methods, using fake transactions through foreign merchants, VPNs to mask point-of-sale devices, and complex smuggling networks. Some merchants accepted fabricated purchases in exchange for cash kickbacks. Money laundering was further facilitated by businesses like jewellery stores and shops in free-trade zones across the UAE and Turkey.

Adding to the complexity, the Iraqi government-backed Qi Card—used for salaries including militia members’ pay—became integral to the fraud. Militias hoarded cards and inflated payrolls with ghost employees to increase their card volume, intensifying the arbitrage scheme.

Enforcement and Regulatory Response

The crackdown finally escalated in early 2024. Mastercard blocked over 100,000 cards and removed 4,000 UAE merchants from its network. Visa flagged about 70,000 fraudulent cards and temporarily blocked thousands of foreign vendors. Iraqi regulators imposed a $300 million monthly cap on cross-border card transactions and a $5,000 per cardholder limit.

Further measures included hiring a New York-based financial crimes monitoring firm and requiring card issuers to operate only through banks with U.S. correspondent relationships. Several Iraqi card issuers were removed from Visa and Mastercard’s systems.

The U.S. Treasury blacklisted three card companies linked to militias, including one connected to the Al Abbas shrine in Karbala, a prominent site for Iranian pilgrims.

Broader Implications and Lessons

This episode highlights significant vulnerabilities in global payment networks, especially in fragile economies with weak oversight. Iraq’s largely cash-based economy transitioned to digital payments without sufficient safeguards, inadvertently enabling armed groups under sanctions to exploit Western financial infrastructure.

While Visa and Mastercard argue they acted responsibly and cooperated with authorities, officials believe their delayed response allowed the scheme to escalate unchecked for months.

This case serves as a stark warning about the risks of financial innovation outpacing regulatory oversight, and the ongoing challenges the U.S. faces in enforcing sanctions and preserving the integrity of the dollar in international markets.

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