After the Iraqi government’s Committee for Freezing Terrorists’ Funds published a list of entities whose assets were to be frozen as “participants in terrorist acts” – a list that included Lebanon’s Hezbollah and Yemen’s Houthis – the decision was printed in the Official Gazette on 17 November and initially appeared to have passed without issue. Two weeks later, however, when journalists and researchers picked up the document in early December, the story exploded into public view, with wire agencies reporting that Iraq had officially frozen Hezbollah and Houthi assets.

The political reaction in Baghdad was immediate and furious. Iran-aligned factions denounced the move as a betrayal of “resistance” allies. Within hours, Prime Minister Mohammed Shia’ al-Sudani’s office described the inclusion of Hezbollah and the Houthis as an “error made before review”, ordered an urgent investigation and promised that the names would be removed in a corrected Gazette issue.

Context: Since 2015, Iraq has built a fairly robust – if unevenly applied – framework to comply with global anti–money laundering and counter-terrorism financing standards. Under this regime, the Committee for Freezing Terrorist Funds can issue decisions obliging all banks and financial institutions in Iraq to freeze the movable and immovable assets of listed entities and block any direct or indirect financial dealings with them. Decision 61 was one such act, adopted unanimously in October and published in the Gazette in November. While the prime minister and the relevant agencies – including Iraq’s Central Bank and the Committee for Freezing Terrorist Funds – have since issued clarifications to undo the designation of the two groups, the political and strategic implications are much harder to reverse.

Analysis: The official story is that a technocratic committee, responding to a Malaysian request, mistakenly let Hezbollah and the Houthis slip into a long list of ISIS- and al-Qaeda-linked entities, and that nobody noticed until the Gazette made it public. To reinforce this narrative, media aligned with pro-Iran Shia groups – such as Asaib Ahl al-Haq’s Ahd TV – published the names and photos of the committee members, dramatising the affair and placing the blame on them. That version is almost impossible to square with how such decisions are made and finalised in Iraq. Even formally, a decision like No. 61 does not remain inside a single office: it has to be circulated to a wide web of ministries, regulators, provincial authorities and security bodies responsible for implementing asset freezes.

Iraq’s post-2003 patronage system ensures that all major Shia parties and militias have trusted cadres embedded in precisely these institutions – from the Central Bank and Trade Ministry to the intelligence services and provincial administrations. Decision 61 was reportedly agreed in mid-October, signed at the end of the month, and only then sent to the printing presses for the 17 November Gazette issue. In that three-week window, it was copied to dozens of desks across the state. The notion that nobody in the Coordination Framework, no militia-aligned official, and no political appointee in the security services spotted the words “Hezbollah” and “Houthis” until Twitter/X users did stretches credibility.

What is more likely is that these factions knew about the list, tolerated it, and are now weaponising it in an intra-Shia struggle, especially against Prime Minister al-Sudani. Just as al-Sudani’s chances of a second term began to look stronger, and after high-level US engagement signalled at least conditional backing for his continuity, rival Shia factions had every incentive to frame him as the man who “sold out” Hezbollah under American pressure. Just this past week, al-Sudani received Trump’s envoy Tom Barrack, who reportedly warned that Iraqi factions must cut off support for Hezbollah or face economic and even kinetic targeting, as Israel insists on Hezbollah’s disarmament. In other words, what is being sold to the public as a “technical error” looks much more like a deliberate decision now being repurposed as a political trap.

Additionally, the intensity of the backlash – and of US interest – only makes sense if we remember how important Iraq has become for Hezbollah’s finances. For at least two decades, Hezbollah and the IRGC have relied on complex commercial networks in Iraq to move money, trade and oil around sanctions. The 2022 US sanctions on Ahmad Jalal Reda Abdallah – a Lebanese businessman designated as a Hezbollah official – offered a glimpse of this ecosystem: Abdallah and his associates ran a web of front companies in Lebanon and Iraq, including entities that imported pharmaceuticals from Lebanon and resold them in the Iraqi market, with profits channelled back to Hezbollah. Iraq has thus become one of Hezbollah’s most important financial back-ends – an arena where sympathetic political forces can steer contracts and licences to friendly firms, where Iranian oil can be laundered through Iraqi paperwork, and where front companies can operate under the cover of “normal” trade.

From Washington’s perspective, hitting these Iraqi channels is not just about symbolism. After the 2006 war, Hezbollah gained huge political capital by quickly compensating civilians whose homes and property were destroyed; its ability to mobilise cash for reconstruction outpaced the Lebanese state and cemented its credibility as a provider. Western officials and analysts have since openly argued that strangling Hezbollah’s financial capacity to compensate and rebuild is one of the main ways to erode its appeal and constrain its military options. That logic runs straight through Iraq: cut off the Iraqi revenue lifelines, and you limit Hezbollah’s ability to keep paying fighters, servicing patronage networks and buying loyalty after each escalation with Israel.

All in all, the drama over the list in Baghdad is classic intra-Shia point-scoring. But this tactic carries a strategic risk, because the US – which has already escalated its threats against the militias – is watching closely. That sets up a painful binary for Iraq’s Shia ruling parties: either they move, however slowly and selectively, towards genuine enforcement against Hezbollah-linked companies and networks on Iraqi soil; or they dig in, refuse, and accept a rising risk of hard US financial measures – more banks banned from dollar transactions, more Section 311-style designations, and potentially broader secondary sanctions on Iraqi entities seen as enabling Hezbollah and the IRGC.

Such measures would not just be an abstract “sovereignty” issue. They would directly hit the multi-billion-dollar ecosystem that sustains these same parties: banks, trading houses, fuel and construction companies, and the middlemen at the heart of Iraq’s rentier economy. Those structures are precisely what fund their patronage networks, pay their cadres and help them win the seats they currently hold.

By turning the Hezbollah designation into a domestic cudgel against al-Sudani, Iraq’s Shia factions may have invited a more binary American question: if you have the legal tools and can use them when it suits your internal politics, why won’t you use them when it hits Hezbollah’s money?

Whichever way they answer that question, the cost will be high – either with their base and regional allies, or with the international financial system that ultimately underwrites their own power.