State Dept warns Iraq over Iran proxies amid report US halted dollar payments

The Trump administration has reportedly stepped up punitive measures to force Iraq to disband the Iranian regime-backed militia known as the Popular Mobilization Force (PMF), which has formed part of its government following sustained attacks on US personnel and facilities.

Amid a tenuous ceasefire between the United States and the Islamic Republic of Iran, the administration has tightened pressure on Iraq by halting shipments of US dollars to Baghdad. Increasing disagreements over policy between the United States and Iraq could lead to a weakening of Iran’s presence in the region and further U.S. war aims against Tehran.

“The United States has consistently made clear that we will take all measures to counter Iran’s destabilizing activities in Iraq, to ​​protect U.S. interests in Iraq against Iran-aligned terrorist militias, and to make clear our concerns about the Iraqi government’s failure to prevent this terrorism,” a State Department spokesperson told Fox News Digital.

USA WARNED THAT IRAQ MUST TAKE ACTION AGAINST IRAN-SUPPORTED MILITIA ATTACKS AGAINST AMERICAN ASSETS

The spokesman added: “While we recognize the efforts of the Iraqi Security Forces to respond to terrorist attacks by Iran-linked militia groups, we continue to emphasize that the failure of the Iraqi government to prevent these attacks, as well as the fact that elements affiliated with the Iraqi government continue to actively provide political, financial and operational protection to the militias, negatively impacts US-Iraq relations. The US will not tolerate attacks against US interests and expects the Iraqi government to immediately take all measures to dismantle Iran-linked militia groups in Iraq.”

The Wall Street Journal first reported on the security and financial penalties imposed on Iraq last week. According to the report, the United States halted security cooperation programs with the Iraqi military and halted “cargo aircraft deliveries of approximately $500 million in U.S. notes, proceeds from Iraqi oil sales from the accounts of the Federal Reserve Bank of New York.”

The newspaper said this was the second blocked dollar delivery to the Central Bank of Iraq since the US-Israeli war began against Iran on February 28.

The Treasury Department declined to comment on the blocked payments.

Iraqi security forces stand guard during a funeral ceremony in Baghdad, March 8, 2026, for a slain member of the Popular Mobilization Forces who was killed in a U.S.-Israeli airstrike in Mosul the previous evening. (Ahmed Al-Rubaye/AFP)

“In terms of relations with the United States, Iraq views them as an important partnership based on shared interests and cooperation. The two sides fought together in a decisive war against ISIS, which reflects the depth and importance of this relationship,” an Iraqi official told Fox News Digital.

Regarding pro-Iran militias, the Iraqi official said: “When it comes to the issue of armed groups, it is important to note that the Iraqi reality is quite complex with overlapping political, security and social dimensions. Some of these groups also have political and popular influence. Accordingly, addressing this problem requires careful and gradual approaches based on a deep understanding of the domestic context, which will strengthen state authority and ensure that weapons remain in the hands of the state while maintaining internal stability.”

TRUMP THREATENS TO END SUPPORT TO IRAQ DUE TO RETURN OFFER BY IRANIAN AL-MALIKI

A billboard with a photo of Iran’s religious leader Ali Khamenei is seen on a street in Baghdad on March 9, 2026. (Murtadha Al-Sudani/Anatolia)

“External measures that do not take into account the specifics of this reality can lead to adverse consequences and negatively affect internal balances, which will not serve the stabilization efforts carried out by Iraq and its partners, especially Washington,” the official said. he added.

The PMF is an umbrella organization comprised of militias largely loyal to the Islamic Republic of Iran, the world’s worst state sponsor of terrorism, according to the State Department. Members of Hashd al-Shaabi launched attacks against US assets in Iraqi Kurdistan and the Iraqi Kurds, US’s valuable ally in the Middle East.

A senior Kurdish official told Fox News Digital: “The dollar pause is part of the nuclear option at the Treasury Department, and the Americans have always been reluctant to use it. Meanwhile, the Iraqis have been brutal towards their partners, namely the Americans and the KRG. [Kurdish Regional Government]”As this war has shown – and now Washington is drawing a red line.”

The Kurdish official said: “They have made it clear that things will get worse for Iraq if the militias continue their attacks on US interests, including the Kurdistan Region. It is now time for the Americans to pull that lever; for too long they have allowed Iran to choose a prime minister and dictate the rules, despite repeated encouragement to veto Iran’s cuts in Iraq.”

Both Iraqi and Kurdish officials said the government was in flux as different parties positioned themselves to elect a new Iraqi prime minister.

IRAQI STATE BANK ACCUSED OF PROCESSING PAYMENTS OF HUTHI TERRORISTS WHO OBSTACLED RED SEA TRADE

Smoke rises from the US embassy building in Baghdad, Iraq, following the attack on the diplomatic mission on March 14, 2026. (Ali Jabar/AP)

The Trump administration opposes the return of former Iraqi Prime Minister Nouri al-Maliki due to his close ties to Iran.

The Kurdish official emphasized the role of the Shiite majority population in Iran: “But in the end, it is the Shiite wing that chooses the prime ministership. They have some freedom, but ultimately they will choose a candidate acceptable to both Iran and the USA. This is the game, and America has always reacted to Iran’s game. But this time, Washington seems intent on influencing the outcome rather than just observing.”

The official added: “This is particularly important because Iraq is dependent on oil and its revenues are deposited in American banks with the US Federal Reserve. How Washington treats these deposits affects the process and reshapes the balances within the Shiite dynasty. This is extremely important.”

Entifadh Kanbar, a former spokesman for the Iraqi deputy prime minister, warned that Iraqi Prime Minister Mohammed Shia al-Sudan must quickly disband Hashd al-Shaabi because they pose a clear and present danger to the US Embassy in Baghdad.

Iraqi Shiite men hold photos of Iranian Supreme Leader Ayatollah Ali Khamenei during a symbolic funeral ceremony in Najaf, Iraq, on March 1, 2026. (Anmar Halil/AP)

The Iraqi government also provides these groups with government identification cards, vehicles and official government license plates under the name of the PMF structure, he told Fox News Digital. “This allows them to enter Baghdad’s high-security Green Zone at will and threaten the US Embassy or any Iraqi government institution.”

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To highlight the dangers of PMF, the US Department of Justice announced on Monday a $10 million reward for the terrorist leader of the pro-Iran militia group Harakat Ansar Allah al-Awfiya (HAAA).

The US embassy wrote on Monday: in x Terrorists from the pro-Iran militia “Harakat Ansar Allah al-Awfiya (HAAA) have carried out attacks in Iraq and across the region, including ambushing US diplomats near Baghdad International Airport on April 8. HAAA terrorists continue to undermine Iraq’s sovereignty while threatening the safety and security of both Iraqi and US civilians. We will not tolerate attacks on US interests and ensure that all measures are taken to dismantle Iran-allied terrorist militia groups in Iraq We are waiting.”