Defeating ISIS: How Financial Liabilities will Undo the Jihadists

Since ISIS captured the Iraqi city of Mosul in June, much of the attention paid to the group has focused on the apparently vast financial resources it has amassed. The importance of degrading its literal ‘war chest’ was brought to the fore again last week when, in a speech delivered at the Carnegie Endowment For International Peace, David Cohen, US Under Secretary for Terrorism and Financial Intelligence addressed the issue of ‘Attacking ISIL’s Financial Foundation’.

Terrorist and insurgent groups that aim to move from a hand-to-mouth existence to more planned and strategic operations need reliable sources of financing. As discussed in a previous article, a key contributor to whether such groups are able to sustain and survive is the development of internal sources of financing.  The so-called ‘Islamic State’ has excelled in the art of acquiring income and, critically, whilst it may benefit from some external support, it has developed an impressive internal funding model that notwithstanding the recent passing of a UN Security Council Resolution aimed at its finances, makes restriction highly challenging.

Cohen’s speech recapped the main points that have emerged surrounding the breadth and depth of Islamic State’s financing, the oil, tax/extortion, use of longstanding smuggling routes, burgeoning use of kidnap-for-ransom, and the relative lack of involvement of donors from countries outside the territory the group controls. He also addressed the general efforts being undertaken to reduce Islamic State’s access to financing, particularly the targeting of the revenue it is earning from its oil business, including sales to the Syrian government, and the application of sanctions against known fund-raisers.

But perhaps the most important element of his speech addressed the financial burden that Islamic State has brought upon itself via its capture and control of large populations centres such as Mosul.  In a number of these cities, ISIS previously operated a form of organised crime, taxing businesses and individuals with few of the attendant liabilities associated with government.  In declaring the establishment of the ‘Caliphate’, a state in layman’s parlance, the ambition of the group has presented it with the responsibilities of any national government to provide for its people (estimated at 6-8 million).  This is likely to be the root of its undoing.  The expectations of those people it now controls will rise as the taxes they are asked to pay increase to supplement likely revenue shortfalls.

‘Islamic State’ is doing little to reduce expectations as the group has sought to highlight the welfare they will provide to those within the state. The inaugural issue of the group’s English language Dabiq magazine commits to ‘pump millions of dollars into services that are important to Muslims’ and ensure ‘the availability of food and products and commodities in the market, particularly bread’, all of which is intended to create a ‘flourishing relationship between the Islamic State and its citizens’. Maintaining food supplies will be challenging.  According to FAO, the Food and Agriculture Organization of the United Nations, Iraq is facing food security concerns in light of the ongoing conflict. The governorates most affected by the conflict produce a third of the country’s wheat and barley. ISIS’  ability to manage the harvesting, processing, and distribution of food to the people under its control will certainly add to the challenges it faces.

Furthermore, maintaining the infrastructure that supports the oil business on which much of its financing currently relies, will prove expensive, assuming that necessary resources can even be sourced.  The Iraqi budget for the states that ISIS currently occupies is estimated by Cohen to be US$2 billion per annum.  No amount of taxation, oil smuggling, kidnapping, or donations will cover the financial burden that the ISIS has taken upon itself.  As the US discovered during the Iraq War of 2003, if electricity, water, and air conditioning do not continue to function, the attitudes of a benign and acquiescent population can quickly change.

Patience as a Weapon

ISIS has made some impressive, one-off financial gains as it has swept across northern Syria and Iraq. But whilst these one-off gains are drying up, the liabilities the group needs to fund are ongoing, not helped by the expenditure associated with the military campaigns it is waging such as the weeks-long assault on Kobane. The group will, sooner than later, begin to struggle financially.

Whilst ISIS’ financial liabilities increase, the international community needs to apply restrictive measures where possible. This will require many small steps and will need the support of a range of partners including the coalition engaged with the air campaign seeking to destroy oil refineries and smuggling routes, countries such as Kuwait and Qatar that hitherto have been less committed to stopping the use of their banking systems for the transfer of funds to designated terrorist groups, and Turkey, who’s border remains porous to the smuggling of oil, fighters, and other materiel.

As Cohen rightly observed, this will take time and patience, as the international community seeks to slowly strangle the financial might that ISIS  has accrued. But there is only so much the international community can do. Ultimately, it will be the local people, those suffering from water shortages, food rationing, and power cuts that will need, as they did via the ‘Sunni Awakenings’ in Iraq during 2006-2007, to determine to rid themselves of the yoke of ISIS as the ‘flourishing relationship’ withers.

Tom Keatinge is an Associate Fellow at RUSI