The Effects of Money Laundering on The Performance of Banks: An Analytical Study of a Sample of Iraqi Banks

Money laundering is an organized economic crime in the world, the acquisition of economic crime through criminal activities. To enable the movement and use of such illegally obtained money—known as "dirty money"—criminals use laundering methods to assimilate it into the legal financial system, appearing clean. This manoeuvring is especially common in crimes like drug trafficking, arms smuggling, human trafficking, financial corruption, and economic infractions. The basis of transnational crime lies in the increasingly worldwide and interconnected nature of financial markets made possible by liberalised economics and trade policies, rapid advances in technology and the digital revolution that has allowed the rise of money laundering from a local to a transnational issue (Salih et al., 2018). It has a strong influence on economic, financial, social, and cultural systems, which are, in turn, reflected in factors such as the distribution of national income, savings rates, investment environment, unemployment, and resource allocation. Also, this is harmful to stock markets and the banking system — the latter creates instability within financial institutions (Yaqub, 2019). Banking services account for a vast majority of money laundering operations primarily because of the variety of customer services they provide including money change, cash deposits, transfers of funds via wire, credit and debit cards, liquidation, portfolio management and electronic banking. Hence, banks are major players in fighting money laundering to safeguard themselves against financial risks and legal liabilities (Salih et al., 2019). Understanding the dire consequences of money laundering at both national and global levels, the international community has taken significant initiatives to combat this crime. International standards and regional regulatory systems have also developed to facilitate the identification and punishment of money laundering. Across the planet, governments are in a constant state of improvement of the banking laws and anti-money laundering (AML) programs, including bilateral, regional and global efforts to promote cooperation.

One of the biggest money laundering cases in Iraq, named with a high-profile news coverage "The Theft of the Century" recently garnered most of the attention in the Iraqi cities. The defendants in this case are accused of embezzling approximately four trillion Iraqi dinars by transferring money through five fictitious companies to essentially fund their businesses and personal investments (Yaqub, 2024). According to reports, one of the thieves later transferred the stolen money abroad, depositing it into his wife's account and subsequently divorcing her. Then he and his wife legally changed their identity and got married again under her new name, successfully hiding his money. This situation underscores the air of necessity for improved anti-money laundering policies and tightened subsequently corresponding mechanisms in Iraq's financial market (Salih et al., 2020).

• Research Problem

Money laundering still one of the major financial issues in Iraq. It is the process of taking illegally obtained money—such as the proceeds of drug trafficking, corruption and tax evasion—and manipulating that money to appear legitimate (Wronka, 2022). One of the main reasons behind money laundering in Iraq are the weak regulations, banking operation transparency, and poor enforcement of AML policies (Fatah et al.; 2025).

However, particularly more serious risks arise from the facilitation of money laundering facilitating organized crime and corruption, and financing of terrorism are among the biggest threats to a stable economy and national security (Fatah et al., 2025). In this way, money laundering enables criminals to disguise the origins of their illegally-acquired funds and integrate otherwise illegal money back into the commercial economy, perpetuating unethical financial practices, deteriorating public trust in legitimate banking institutions, and impairing economic growth (Almalih et al., 2015). Moreover, the ambiguity of the legitimacy of financial transactions undermines public trust in the banking system, resulting in lower investments and stunted economic growth (Yaqub et al.; 2024). Therefore, this study aims to analyse and evaluate the phenomenon of money laundering to find out how well Iraqi banks are combating it in line with this aim, we can identify and formulate the following hypothesis: The study aims to explore the degree of compliance among banks with regard to anti-money laundering (AML) measures in Iraq, focusing on their role in detecting and preventing acts of money laundering and the extent to which they contribute to the overall framework of AML in the country (Yaqub, 2024).

• Research objectives

The research seeks to achieve the following objectives:

1)  Defining the phenomenon of money laundering and revealing its most important sources and methods.

2)                                        Identify the stages of money laundering operations.

3)                       Analysis of the negative economic and social effects of money laundering.

4)                               Statement on the role of banks in combating money laundering.

5) How banks are exploited in money laundering. 

• Research hypotheses

To answer the questions raised above, the following hypothesis was adopted:

• Money laundering affects banking performance

LITERATURE REVIEW

Money laundering is a serious threat to the stability and functioning of banks around the globe. Its implications are widespread, extending to financial markets, regulatory compliance, and the general integrity of the banking industry (Yaqub, 2024). Many scholars and financial experts have studied how illicit financial activities erode the operations of banks and diminish the confidence of investor and expose institutions and organizations to risk in terms of legalities as well as reputational damages (Salih et al.; 2025). Literature on the association between money laundering and bank performance stresses the negative economic and monetary effects of money laundering on financial institutions (Salih et al., 2021). Research shows that banks involved in money laundering activities must endure substantial regulatory fines, financial losses, and damage to their market reputation. The need to divert resources to combat risks on account of illegal transactions can also impact profitability and service delivery, which impeded operational efficiency. Banks accused of money laundering typically face a loss of customer trust, reducing deposits and investment (Das, 2022).

Studies of money laundering in banking systems highlight how regulatory frameworks can galvanize financial crime-fighting efforts. The performance of banks is examined by Scholars regarding stringent anti-money laundering (AML) policies and compliance measures. Regulatory authorities levy large fines and sanctions on institutions not in compliance with AML, which can have adverse effects on profitability and shareholder confidence (Salih, 2021). Recent research has found that the costs of compliance with AML measures, including transaction monitoring systems and systems that vet customers, places a burden on banks, particularly smaller banks without the human capital to scale resources. This topic has been extensively discussed in the context of emerging economies with respect to financial stability. Research surrounding developing nations’ banking systems has identified vulnerabilities stemming from weak enforcement mechanisms and inadequate regulatory oversight. In balance sheets, control of high liquid is a product of speculative money. Scholars contend that, by promoting capital flight, limiting foreign investment, and undermining monetary policies, money laundering worsens financial instability (Alhafidh, 2015). Studying the Iraqi banking industry, researchers have investigated the problems money laundering creates in a sensitive economic scene 9 Mohammed et al., 2020). Experts have found loopholes in financial regulations and enforcement mechanisms that allow illicit transactions to pass through banking institutions. The lack of a strong AML infrastructure has exposed Iraqi banks to financial crimes, which in turn hinders their ability to draw international investments and gain trust in the world of international financial markets. The financial performance of banks operating in Iraq is greatly influenced by money laundering, which can lead to increased regulatory scrutiny and loss of competitiveness (Ali et al.; 2024). Given these academic debates on the relationship between money laundering and banks' performance, it is inevitable that the process of risk management will improve (Zia et al.; 2025). Advanced technologies, like artificial intelligence and block chain, need to be adopted by countries to build AML mechanisms, research states. Regular Monitoring & Data Patterns:Machine Learning technology can learn over a period to collect data over time. Moreover, scholars suggest that effective measures should also include transnational collaboration and information sharing among financial institution (Hamasalih et al., 2025).

However, the literature on the subject has explored the influence of corporate governance on curbing the impact of money laundering on bank performance. Open literature indicates that internal control mechanism is a clear return to economically upward movement and less dubious money-related activities (Maggetti, 2014). Independent Audit Committees and Compliance Officers: Many banking institutions often hire independent audit committees and compliance officers whose work is to help detect and prevent money laundering in the bank. This practice is associated with better detection of money laundering and prevention of money laundering in organized crime (Pieth and Aiolfi, 2004) However, the impact of money laundering on bank performance is still a vital area of study—especially in regions where financial regulations are reforming. According to research, a far more comprehensive approach tackling money laundering risks is needed — one which encompasses the potential for regulatory solutions, technological innovation and institutional governance reform (Nikolosk, 2012). For instance, for the Iraqi banks themselves, reinforcing AML policies and improving their regulatory enforcement, would help promote financial stability and restore investor confidence. Research highlights the importance of proposing measures to address the adverse implications of financial malpractice on banking processes and broader economic growth (Khalil, 2021).  The impact of money laundering on the economy, social, and financial dimensions have been studied in several studies, as well as the role of the bank and regulatory framework in relation to preventing this crime (Palani et al., 2025).  The economic, social, and political implications of money laundering, as well as the sources of criminal funds and the position of banks in combating money laundering were discussed by (Hendriyetty and Grewal.; 2017) work, The Economic and Social Effects of the Phenomenon of Money Laundering and the Role of Banks in Combating. The study underlines that banks play a pivotal role in detecting and preventing money laundering and insists that solid regulatory controls are in place, which allows regulation officials or banking staff to question the source of funds and financial transactions (Hussein et al.; 2025). Hendriyetty and Grewal, (2017) also calls for the creation of specialised regulatory bodies in financial activities and stresses that central banks need to be more active in monitoring and supervising banking activities linked to money laundering. Aluko and Bagheri (2012) also tackles through his study entitled The Role of Internal Auditing in Combating Money Laundering and Terrorist Financing: An Applied Study on a Sample of Iraqi Banks the importance of internal auditing to prevent money laundering and terrorist financing (Rahman et al., 2021). It should also be noted that this study places a lot of emphasis on compliance with international, regional and local regulations while it maintains that internal auditing is in the best position to strengthen external auditing; By aligning with international standards, firms tend to facilitate greater institutional use efficiency, reduce risks of financial crises, and elevate truths related to finance (Abdurahman et al., 2025). Both past and present this study emphasizes that internal auditing is an important safeguard for financial institutions providing support services for external auditors, shareholder, customers, and all banks. In addition, it calls on the tested banks to enhance their scrutiny of the charitable organization sub-sector, especially with respect to the origin of the funds and its end beneficiaries. Ali et al., (2012), The Economic Effects of the Crime of Money Laundering and the Role of Penal Laws in combating it, examines the economic effects of money laundering and the role of penal laws, especially in Iraq, in combating the phenomenon of money laundering (2013). It seeks to redefine economic policies through identifying the stakeholders involved in money laundering and analysing the localities targeted by money laundering activities. It also examines the negative effect of money laundering on the banking system and an array of strategies to combat these transactions, especially through limiting financing routes (Salih et al., 25). The research similarly evaluates how effective penal laws are in encouraging economic stability. Al-Mashhadani and Al-Yawar (2012) in Explaining the Role of the Internal Control System in Combating the Phenomenon of Money Laundering examine the role of internal control systems in combating money laundering. Thus, the study particularly examines the compliance of Iraqi banks with the rec­ommendations of the Ministry of Finance in the Republic of Iraq, the reso­lu­tions of the Central Bank of Iraq, the FATF recommendations, and the Basel Com­mittee orders. Using inductive and deductive research methods, the study uses a questionnaire distributed to a sample of five banks in Iraq to investigate the effect of the internal control system (variable independent) on the rate of money laundering (dependent variable). The results show an adequate degree of compliance with FATF and Basel Committee guidelines ((Salih, 2025). However, there were weaknesses in risk management processes, especially in relation to customer classification as well as risk identification. While adherence to the KYC framework was generally robust, shortcomings were identified in the monitoring of current accounts of charitable organizations (Abdlaziz et al.; 2025).

METHODOLOGY

The study is based on an inductive research approach on a sample of banks working in the Sulaymaniyah Governorate. This is a statistical approach to the process to extract meaningful insights and provide an accurate evaluation of the research problem. The study employs this method to successfully meet its objectives, confirm its hypotheses, and produce accurate scientific results relevant to the issue that is being considered (Muhammad.; 2025). The target population of the study is employees of the chosen banks. The sample was purposefully drawn from relevant administrators with direct references from the customer deposit service and with extensive knowledge of money laundering techniques to ensure the fulfillment of the study objectives and obtain relevant data. Data was collected using a structured questionnaire from a total of 80 respondents. Data was collected through questionnaire administrated to the selected employees and later retrieved for analysis (Aivas et al.; 2025). The research covers all public and private banks in Sulaymaniyah Governorate. The data collection period extends over January to February 2023. The next section provides demographic and professional background information about the respondents.

Table No. (1) Names of banks

Data analysis

Below is a test of the study hypothesis using simple linear correlation and regression methods:

Analytical description of questionnaire paragraphs

We will analyze the questionnaire paragraphs by taking the paragraphs of each research axis separately as follows. The total number of study questions was (15) questions and each question was given five alternative answers according to a Likert scale from strongly disagree to strongly agree, and each question was given a weight ranging from one to five.

Table No. (4)