The Trump administration also suspended security cooperation with Baghdad in an escalating pressure campaign.

WASHINGTON—The Trump administration has suspended U.S. dollar shipments to Iraq and frozen security cooperation programs with its military, escalating the pressure on Baghdad to dismantle powerful Iranian-backed militias, said Iraqi and U.S. officials.

A cargo-plane delivery of nearly $500 million in U.S. banknotes, the proceeds from Iraqi oil sales from Federal Reserve Bank of New York accounts, was blocked recently by Treasury Department officials because of U.S. concerns about the militias, some of the officials said.

It was the second scheduled shipment of dollars to the Central Bank of Iraq delayed by the U.S. since the start of the Iran war in late February, the U.S. and Iraqi officials said. It came after weeks of militia attacks on American facilities in Iraq and neighboring countries in a show of support for Tehran.

The U.S. has informed Baghdad that it was also suspending funding for some counter-terrorism and armed-forces training programs until the militia attacks stop and Iraqi officials take steps to dismantle the armed groups, the U.S. and Iraqi officials said.

The moves highlight the pressure on Baghdad to align itself more closely with Washington and downgrade its close ties with Tehran since the beginning of the nearly eight-week U.S. and Israeli war against Iran. 

In a statement Tuesday that didn’t allude to the suspended deliveries, the Central Bank of Iraq said it wasn’t short of U.S. currency. It had “fulfilled all requests from banks and exchange companies for U.S. dollars,” the bank said.

After the invasion of 2003, Washington agreed to hold Iraq’s earnings from oil sales—tens of billions a year—at the New York Fed. To circulate the proceeds back into Iraq, the Fed began shipping as much as $13 billion a year in cash to Baghdad to keep its heavily cash-based economy functioning.

The U.S. shut off the cash deliveries briefly in 2015 over concerns that dollars were being funneled to Islamic State militants and has threatened to suspend the shipments in the past. Though Baghdad has reduced its reliance on dollars, cargo planes still deliver pallets of U.S. currency to the Iraqi central bank, giving the U.S. leverage to try to force Baghdad to reckon with the militias.

U.S. officials say the hold on Iraq’s dollar shipments is temporary, but they didn’t say what specific steps Baghdad needs to take for the deliveries to resume.

“The Iraqi government’s failure to prevent these attacks while some elements associated with the Iraqi government continue to actively provide political, financial and operational cover for the militias adversely impacts the U.S.-Iraq relationship,” State Department spokesperson Tommy Pigott said. “The United States will not tolerate attacks on U.S. interests and expects the Iraqi government to immediately take all measures to dismantle the Iran-aligned militia groups in Iraq.”

Iraqi militias have attempted hundreds of small-scale drone and rocket attacks since the war began, including against a U.S. military base and consulate in northern Iraq and a State Department facility at the Baghdad International Airport. U.S. officials blamed pro-Iran groups in Iraq for an attempted drone ambush on a U.S. security convoy involved in transporting a freed American hostage out of the country earlier this month. 

The U.S. has been conducting airstrikes against militia groups in Iraq since the Iran war began. 

The Pentagon has substantially reduced its military footprint in Iraq in recent years, moving most of its remaining forces to bases in northern Iraq. But the U.S. has continued to provide intelligence about Islamic State to the Iraqi military and to assist Iraq’s armed forces with training and equipment. 

Iraq’s most potent militias, including the Badr Brigade, Kataib Hezbollah and Asaib Ahl al-Haq, have enormous influence within Iraq’s government and financial sectors. Baghdad is in the midst of choosing a new prime minister, and the militias, as well as Tehran, are pressing for candidates who will maintain close ties with Iran. Some militia units have been incorporated formally into Iraq’s armed forces, making it hard for any prime minister to challenge them.

Mohammed Shia al-Sudani, who has served as prime minister since 2022, has sought Washington’s backing for a second term but has also been careful about not assailing the militias’ power.

“The decision to halt dollar shipments and security cooperation is a strong sign of U.S. displeasure with the Iraqi government,” said Victoria Taylor, a former State Department Middle East official during the Biden administration who is director of the Iraq Initiative in the Atlantic Council, a Washington think tank.

But “if the U.S. believes it can hand pick a candidate that will be better able to confront the militias, it will be disappointed,” she added.

The militias are also beneficiaries of Iraq’s access to U.S. dollars. More than two dozen Iraqi banks, many with close ties to the militias, were banned in 2023 and 2024 by the Treasury for siphoning off dollars from Iraq’s Fed accounts, using fraudulent wire transfers.

The militias were later involved in [acquiring huge quantities of MasterCards and Visas loaded with funds in Iraq. They arranged to transport the cards to the United Arab Emirates and other neighboring countries and withdraw the money as dollars. The armed groups then transferred the cash back to Iraq, exchanged it for dinars and profited from the currency arbitrage, Treasury said.

Iraq’s Shia militias grew out of the chaos after the U.S. invasion more than two decades ago. They defended Shia areas against attacks by Sunni militants and fought American forces that their leaders denounced as occupiers. Iran funneled arms to many of the groups, which later took on a role in fighting Islamic State fighters who swept into Iraq from Syria in 2014.

In January, President Trump warned that he would cut off U.S. assistance to Iraq if Nouri Al-Maliki, a former prime minister with close ties to Iran, returned to the job. Maliki recently withdrew his candidacy and his coalition, a group of Shia parties with varying degrees of allegiance to Iran called the Coordination Framework, has put forward another candidate, Bassem al-Badri, a senior member of Maliki’s Dawa Party.