REPORT

The Billion-Dollar Caliphate

The Islamic State has gotten rich from extortion, heists, and smuggling. But how long can the extremist group continue to bankroll jihad?

• BY COLUM LYNCH, DAVID FRANCIS

Last month, U.S. fighter jets unleashed airstrikes against oil fields, refineries,

and hundreds of tanker trucks near the Syrian city of Deir Ezzor. Dubbed

Operation Tidal Wave II, the attacks were the latest phase in a campaign to

bomb the Islamic State into bankruptcy, striking at the heart of the black-

market economy and extortionist tax system that have underwritten the

salaries of tens of thousands of extremist fighters.

But the Islamic State has proved resilient, developing a diversified economy to

bankroll the costs of its burgeoning caliphate. According to a 2014 Thomson

Reuters study, the terrorist group has more than $2 trillion in assets under its control,

with an annual income of $2.9 billion.

Much of this money is raised through the “taxes” the group imposes on those who live

within its territory. This includes an $800-per-truck levy on vehicles entering Iraq

from Jordan and Syria, a 5 percent tax collected for social welfare and salaries, a $200

road tax on drivers in northern Iraq, a 50 percent tax for the ability to loot Raqqa’s

archaeological sites, and a 20 percent tax at similar sites in Aleppo, according to the

Thomson Reuters study. Additionally, non-Muslims must pay a religious protection

fee known as jizya.

“They call it taxes, but we call it extortion,” Hans-Jakob Schindler, the acting

coordinator of a U.N. Security Council group that monitors al Qaeda, the Islamic

State, the Taliban, and other terrorist groups, told Foreign Policy.

“There have been some strains on some of the financing streams caused by a

multitude of factors — maybe some sanctions, maybe some of the military

actions,” Schindler said. But he added, using an acronym for the Islamic State:

“The overall situation of ISIL, as far as financing is concerned, has not

significantly diminished. It’s just the relative importance of various financial

streams is changing. We have a balloon effect: You put pressure on one side; it

gets high on the other side.”

Fawaz Gerges, a professor of international relations at the London School of

Economics and Political Science, said everyday services are also heavily taxed. This

includes garbage pickup, heating oil, and electricity generators. Even residential

property rentals and sending kids to school are taxed, he said.

These kind of levies are “a growth industry” for the Islamic State, Gerges toldFP.

These payments could generate up to $30 million each month, according to Thomson

Reuters. A 2015 report by the New York Times, supported with data from Rand

Corp., put annual tax and extortion revenue higher, at $600 million in 2014. That same

study estimated that oil generated only $100 million that year, though many other

civilian and military experts estimated oil-related revenues to be much higher.

Traditional economic sanctions imposed by the U.S. Treasury Department’s Office of

Foreign Assets Control are ineffective against the Islamic State, said Elizabeth

Rosenberg, a sanctions expert at the Center for a New American Security. That, she

said, is because the militants do not have a traditional banking system to target.

Unless specific individuals dealing with the Islamic State can be identified, there is

little the Treasury can do to curb its business. The department hassanctioned more than

30 extremist leaders, affiliates, and supporters around the world, as well

as networks connected to the group, but that has had little impact on Islamic State

coffers.

Al Qaeda has long been heavily dependent on foreign donations, which left an opening

for Western law enforcement authorities to potentially hurt the militants by cracking

down on those cash flows. The Islamic State, which can effectively fund itself, doesn’t

need foreign money, making it far less vulnerable.

The Islamic State has shocked the world with its public beheadings, enslavement of

women, and the destruction of revered ancient religious and cultural sites, including

irreplaceable pre-Islamic temples in Palmyra, Syria, and Assyrian sculptures and

artifacts in Mosul, Iraq.

But the group has taken care to allow enough economic activity in the territory under

its control to generate steady streams of income. Most of the money comes from oil

fields in Syria and Iraq. But the movement also has a range of other revenue-raising

activities, one of which, for example, is encouraging trade in small religious and

cultural artifacts that can be potentially cashed in on the international black market.

Black-market antiquities

While there are no reliable financial data on how much income has been generated by

stolen antiquities, according to Schindler, reports from museum officials and satellite

imagery of archaeological dig sites indicate that looting is happening on a massive

scale. Mohamed Ali Alhakim, Iraq’s ambassador to the United Nations, has said that

the Islamic State earns up to$100 million a year in the illicit artifact trade.

“Satellite images have shown industrial-level looting at Syrian and Iraqi

archaeological sites,” the FBI announced in an August bulletin, warning art dealers to

be on the lookout for stolen Syrian and Iraqi antiquities. “The FBI has received reports

from credible sources who have been approached by individuals trying to sell objects

that appear to have been illegally looted and trafficked from Syria or Iraq, likely by

those associated with the Islamic State in Iraq and the Levant.”

Last May, U.S. special operations forces seized far more than ancient artifacts during a

raid on the home of Abu Sayyaf, a senior militant who oversaw the Islamic State’s oil

sales in portions of eastern Syria.

The trove, which included ancient religious texts written in Aramaic, a

language believed to have been spoken by Jesus Christ, have been turned over

to Iraqi authorities — despite questions about whether some of the items were

fake. Abu Sayyaf himself was killed in the raid, but his wife is in Iraqi custody

and has since provided valuable intelligence on the group’s finances.

The U.N. monitoring team led by Schindler obtained documents showing how the

Islamic State has set up a natural resources department, known asDiwan al-Rikaz —

and all who want to deal in the antiquities market in the territory the group controls

must first pay for a digging license.

Moreover, Islamic State employees demand oversight of the artifacts after they

are delivered to regional evaluation centers, assessed, and taxed. Antiquities must be

transported to buyers on Islamic State-authorized trucks, offering another taxable

opportunity.

“ISIL understands that you cannot ask for 90 percent,” said Schindler, noting that

doing so likely would deter the antiquities’ sale. But he said: “They tax very diligently,

very organized, very ruthlessly.”

Rep. Bill Keating (D-Mass.) is the sponsor of a bill that would devote more resources

to preventing black-market items looted by the Islamic State from reaching the United

States. The United Nations already has an import ban in place, but Keating wants to

dedicate more resources to help U.S. law enforcement better identify stolen artifacts.

“They’re making tens of millions of dollars on this alone,” Keating told FP. “This is

one of their top means of fundraising.”

Disrupting oil

The United States remains skeptical that the Islamic State can ever establish a

sustainable fundraising scheme to replace its lucrative oil sales — a windfall

Washington hopes will eventually be diminished by airstrikes and the retaking of

territory.

But U.S. officials acknowledge the extremist movement will never be fully contained

unless its ability to raise funds is dramatically scaled back.

President Barack Obama recently held two high-level meetings that signaled his

priority of a campaign to suppress Islamic State fundraising. On Dec. 7, the president

met with U.N. Security Council representatives at the White House; the top item on

the agenda was an American push for a U.N. resolution to strengthen its current

strategy for containing Islamic State financing.

The second meeting was held Monday, at the Pentagon. “In recent weeks, we’ve

unleashed a new wave of strikes on their lifeline, their oil infrastructure, destroying

hundreds of their tanker trucks, wells, and refineries,” Obama said after meeting with

national security and military advisors. “And we’re going to keep on hammering

those.”

Treasury Secretary Jack Lew will preside over a Dec. 17 Security Council meeting to

consider the American-proposed U.N. resolution, which is being negotiated by the

United States and Russia. The measure is designed to strengthen enforcement of

existing measures that prohibit business dealings with the Islamic State. It will also

mark a formal recognition by the United Nations that the Islamic State has surpassed al

Qaeda as the chief threat to international peace and security. In one symbolic gesture,

the sanctions list, which includes the names of hundreds of accused terrorists, will be

changed from the al Qaeda/Taliban list to the Islamic State/al Qaeda list.

But the proposed resolution also highlights the shortcomings in curtailing Islamic State

fundraising. It has been more than two-and-a-half years since the United States and its

partners on the U.N. Security Council first moved to rein in the finances of the Islamic

State, slapping its leaders with an asset freeze on their financial holdings and the

bombing of its oil facilities. Those measures have been repeatedly reinforced, but with

limited success, as the extremists expanded their claim of territory and financial

resources.

Russia’s envoy to the U.N., Vitaly Churkin, denigrated U.S. efforts to curtail Islamic

State oil profits, saying Washington has put insufficient pressure on Ankara, a close

American ally, to stop the illicit smuggling of oil through Turkey. U.N. Security

Council resolutions, he noted, require states to report such violations to the 15-nation

council. This fall, Russia began striking Syrian rebels, including some Islamic State

targets. But Ankara and other Sunni-dominated nations have accused Moscow of

seeking to bolster Syrian President Bashar al-Assad instead of fighting terrorists.

Churkin, in Washington last week with the Security Council delegation, told a Russian

news agency that he asked Pentagon officials “a very simple question: You’ve been

flying there for a year; we’ve been there for two months and already provided many

photos showing that oil is smuggled through the Turkish border. Didn’t you know

about it?”

“They must have known, and if they did, they should have reported it to the Security

Council,” Churkin said.

The new resolution will seek to strengthen the council’s approach, criminalizing a

broader range of potential financial transactions with the Islamic State. It will

encourage greater cooperation between governments and private business and greater

interaction with the private sector.

It also instructs the U.N.’s various counterterrorism agencies to present quarterly

updates to the council on the Islamic State’s efforts to raise funds. Additionally, two

new experts will be assigned to the Security Council’s eight-member monitoring team

to focus exclusively on the Islamic State.

U.S. officials are placing most of their efforts on destroying Islamic State oil revenues.

They say the extremist group’s other rackets, including antiquities and extortion, will

never supplant the huge sums it generates on the black-market oil trade.

A significant turning point in the effort to curb the group’s lucrative oil

operation came in May, during the raid on Abu Sayyaf’s home in Syria,

which provided a wealth of intelligence on the group’s finances.

Abu Sayyaf was one of the leaders of the organization’s black-market oil and

gas operation, and while he was killed in the raid, a senior U.S. official said the

raid produced an “enormous amount of information that was very detailed

about how they operated the energy sector.”

“That raid was a critical point for us to be able to understand this better,” the

official, who was not authorized to speak for attribution, said. “We made a lot

of assumptions before. I have to say much of it was accurate, but some of it was

not.”

After pouring through the intelligence for much of the summer, the U.S.-led

coalition kicked off Operation Tidal Wave II in October, targeting Islamic

State-run oil refineries and oil-trucking assets. The official added that earlier

this year, the U.S. government estimated that the Islamic State was pulling in

as much as $50 million a month from its oil operations, but analysts think that

number has decreased since the start of stepped-up airstrikes.

Last week, Adam Szubin, the acting Treasury undersecretary for terrorism and

financial intelligence, said containing the Islamic State has been difficult because only

a tiny share of its money comes from foreign donors.

The Islamic State “is a nimble and determined adversary,” Szubin told a Dec. 10

gathering of foreign-policy experts at London’s Chatham House think tank. “But it can

and will be defeated.”

The Islamic State has generated more than $500 million from black-market oil sales in

Syria and Iraq. It has looted between $500 million and $1 billion from bank vaults in

territory under its control, and it has extorted millions of dollars more from Syrians

and Iraqis living under its domain, Szubin said. “So ISIL is wealthy,” he said. “But it

has its vulnerabilities. Waging a multi-front war while attempting to essentially act as

a proxy state requires steady and renewable sources of funding.”

The group has to pay salaries for tens of thousands of fighters, buy weapons, and

provide basic services for people living in its territory. The U.S. strategy against

Islamic State finances is double-barreled: It seeks to shut down the extremists’ oil

trade through precision airstrikes and stifle their ability to move money through the

international financial system.

Extortion in Iraq and Syria

So long as the group controls territory in Iraq and Syria, it has a healthy source of

income, said Valérie Marcel, a Chatham House associate fellow focused on energy and

resources. Right now, the Islamic State hasapproximately 8 million people under its

thumb.

“As soon as they expand territory, their potential for taxes, theft, tolls, and oil revenue

increases,” Marcel recently told FP. “They need territorial expansion to maintain their

revenue. Controlling territory is the bottom line.”

So far, Obama has ruled out deploying thousands of American ground troops to

dislodge the Islamic State. He’s relying on Kurdish fighters, the Iraqi Army, a small

contingent of U.S. special operators, and other local groups to remove the militants

from the area they control.

On Monday, Obama said the Islamic State has lost 40 percent of the territory it once

held in Iraq, where Iraqi forces are “fighting their way” into the western city of

Ramadi, encircling nearby Fallujah, and cutting off northbound supply routes into

Mosul. Additionally, the president said, the Islamic State “has lost thousands of square

miles of territory it once controlled in Syria — and it will lose more.”

Broadening the caliphate’s horizons

The Islamic State, meanwhile, is exploring new prospects for generating income

beyond Syria and Iraq’s borders. One of its top targets: Libya, which holds the largest

proven reserve of crude oil in northern Africa.

“Libya is strategically important for ISIL, in view of its geographical location at the

crossroads between the Middle East, Africa and Europe,” the U.N. monitoring

group concluded in a report last month.

Abu Bakr al-Baghdadi, the leader of the Islamic State, has dispatched several

emissaries to Libya over the past two years to form an alliance with local

groups and gain a foothold in the country.

Today, the Islamic State has more than 2,000 armed fighters under its command in

Libya, with its main stronghold in the city of Sirte, which it seized last February. Abul-

Mughirah al-Qahtani serves as the Islamic State’s representative in Libya, according to

the extremist group’s magazine, Dabiq. The Islamic State’s central command believes

Libya provides the “best’ opportunity to expand its so-called caliphate,” according to

the November U.N. report.

In a recent issue of Dabiq, Qahtani was quoted musing about the prospects of seizing

Libyan oil fields, providing the Islamic State with an opportunity to cut off vital

supplies to Italy and other European states.

At least for now, the Islamic State hasn’t been able to generate substantial new

revenue in Libya. The group has, however, found ways of raising enough money to

fund its operations there.

“Information from several [member states] points to the fact that ISIL operations in

Libya do not appear nearly as lucrative as its operations in the Syrian Arab Republic

and Iraq,” stated the November report by the U.N. monitoring group. “However, no

[member state] has indicated that ISIL in Libya is lacking financial resources — at

least for now. In fact, several [member states] even reported that members of other

groups in Libya had switched to ISIL for financial reasons.”

But while the Islamic State has not been able to lay claim to Libya’s oil riches, it has

mustered enough military capability to deny it to others — launching attacks on the

Mabruk, Bahi, and Ghani oil fields.

“Our interpretation of this is that they can’t make money on it, but they can try to

make sure no one else does,” Schindler, the U.N. coordinator, said.

Can it last?

Back in the caliphate’s heartland, it’s becoming more and more difficult for Iraqis and

Syrians — the vast majority of whom are poor or near poverty — to continue to pay

exorbitant fees and taxes, Gerges, the LSE professor, said.

“In the last six or seven months, we have plenty of reports that show that ISIS is now

squeezing the population” to a point where they can no longer keep up payments, he

said, using another acronym for the Islamic State.

Adam Chodorow, a law professor at Arizona State University who has writtenabout

the Islamic State’s ability to govern, doubts the group will be able to sustain its

financial stranglehold.

“They can go and take one or two of your goats, but eventually there are no goats left,”

he said. “I don’t think they’re going to be able to raise too much more money. They

can extort, they can steal, but when it comes to a real tax system, they’re very limited.”

Gerges, who is currently writing a history of the Islamic State, predicts that as people

run out of money, they will start to collaborate with local forces trying to dislodge the

group. That dynamic, though, probably won’t start immediately.

“The question is not, ‘Will ISIS lose?’” he said. “It’s, ‘How long will it take?’ Is it six

to nine months? One to two years? That’s the question.”