By Ralph Stobwasser and Bhavin Shah 

The Federal Reserve Bank of New York as a Watchdog for Financial Integrity Leveraging Conditional Access to the U.S. Dollar

The Federal Reserve Bank of New York (FRBNY) has cemented its role as a global financial watchdog, using its influence to safeguard the integrity of the U.S. dollar and the broader international financial system. Recent regulatory actions related to Iraq and Libya demonstrate a proactive approach to combating illicit financial flows, setting a precedent for oversight in other high-risk jurisdictions, including Syria, Lebanon, Gaza, and Ukraine, which are likely to undergo major post-conflict reconstruction.

Iraq’s Banking Overhaul Driven by U.S. Measures to Block Untraceable Dollar Transfers and Enforce Reforms 

In Iraq, FRBNY investigations revealed that certain banks were exploiting U.S. financial systems to facilitate large sums of untraceable U.S. dollar transactions. The funds were suspected of indirectly supporting sanctioned entities and Iran’s Islamic Revolutionary Guard Corps (IRGC). In response: 

1. Decisive Actions: U.S. authorities blocked several Iraqi banks from accessing U.S. dollar transactions, with further bans as new evidence surfaced. As recently as February 2025, Iraq’s central bank banned five additional local banks from engaging in U.S. dollar transactions, following meetings with U.S. Treasury officials aimed at combating money laundering and smuggling. (Source: reuters.com)
2. Coordinated Reforms: Collaboration between the U.S. Treasury and Iraq’s central bank focuses on establishing direct banking relationships with international correspondent banks, aiming to close loopholes for money laundering and sanctions evasion. 

Libya’s Central Bank Also Under Pressure 

As reported by the Libyan Observer, Libya’s Central Bank received a stark ultimatum from the NY Fed in December 2024: improve oversight or face suspension of dollar-based operations. The mandated review mechanism requires an independent party to monitor transactions under international anti-financial crime standards. Without this oversight, Libya risked not only operational disruptions but also damage to its international financial reputation. This directive was intended to align Libyan banking practices with global anti-money laundering (AML) and counter-terrorist financing (CTF) standards.  

It illustrates how the FRBNY is using the conditional access to the U.S. Dollar to drive domestic regulatory reforms, compelling nations to adopt measures that enhance transparency and accountability in financial operations.  

A Little Further Afield, the Same Picture  

In January 2025, a U.S. judge dismissed a lawsuit from Puerto Rican bank Banco San Juan Internacional (BSJI), which challenged the FRBNY’s decision to terminate its access to the U.S. central banking system. The termination was due to concerns over compliance with U.S. sanctions and anti-money laundering rules related to Venezuela. The court ruled that the NY Fed had the discretion to close such accounts, especially given BSJI’s heightened risk profile. 

Looking Ahead to a Blueprint for Post-Conflict Reconstruction Efforts 

The regulatory interventions in Iraq, Libya and elsewhere offer a glimpse into how similar oversight could be applied to countries that are likely to see major post-conflict reconstruction efforts. As international aid and reconstruction funds begin to flow into Syria, Lebanon, Gaza, and Ukraine, stringent financial oversight will be necessary to prevent funds from being used for illicit purposes. The FRBNY’s approach of conditional access to the U.S. financial system could become a powerful tool for maintaining transparency and accountability in these volatile environments. 

The FRBNY’s actions align with a broader strategy of conditional oversight, which could be especially impactful for regions with a history of financial abuse or vulnerability to illicit financial flows, such as those influenced by narco-trafficking or conflict-related reconstruction. It also adds to foreign policy and national security tools available, strengthening an arsenal that also includes economic and trade sanctions which are handled by the U.S. Department of Treasury’s Office for Foreign Asset Control. The approach hinges on: 

1. Conditional Access to U.S. Financial Systems: The threat or actual enforcement of suspending dollar transaction privileges acts as a strong incentive for compliance. 
2. Maintaining Global Financial Integrity: By ensuring robust compliance frameworks, the FRBNY not only fights financial crimes but also upholds the stability and reliability of the U.S. dollar as a global reserve currency. 

A New Era of ‘Financial Integrity’ Diplomacy 

The evolving role of the FRBNY and the U.S. Department of the Treasury underscores a shift towards using financial oversight as a tool of global diplomacy and security. By setting stringent conditions for access to the U.S. dollar system, these institutions not only protect financial integrity but also contribute to stabilizing fragile economies. As the world witnesses the rebuilding of conflict-torn nations, the integration of conditional oversight into international aid and financial support programs could be a defining factor in ensuring sustainable and corruption-free economic recovery.