Senators seek to choke off IS funds


After months of rampaging through Iraq and stoking international fears that the terrorist group the Islamic State (IS) could spread, a combination of Iraqi and Kurdish security forces aided by targeted airstrikes from the United States, appear to have been successful in pushing back the self-proclaimed caliphate’s rampage in the region.

Yet, IS’s potential reach and brutal tactics continue to worry lawmakers and analysts. The terrorist group, experts say, has managed to brilliantly leverage its acquisitions – land grabs, hostages and oil, among them – in a style that is part mafia tactics, part bureaucratic wile. So far, the group continues to be well armed, flush with cash, and holding American and European captives, which it has threatened to execute unless its demands are met.

Even with the U.S. Senate in recess, Sens. Bob Casey (D-Pa.), a member of the National Security Working Group, and Marco Rubio (R-Fla.), sent a joint letter to Secretary of State John Kerry on Aug. 26, calling for the administration to target all aspects of IS’s operational funding and to have the Treasury Department classify the group as a Transnational Criminal Organization (TCO). The senators praised current efforts by the administration to combat IS in the letter, but expressed concern that the jihadi group remains a threat to both the region and U.S. national security interests. “ISIS’s criminal activities – robbery, extortion, and trafficking – have helped the organization become the best-funded terrorist group in history,” the senators wrote. “This wealth has helped expand their operational capacity and incentivized both local and foreign fighters to join them.”

The senators’ letter described some of the methods used by IS to fund itself. “[IS’s] cash flow from this criminal enterprise relies on smuggling routes and black market sales. Reporting indicates that some smuggling routes cross through other countries in the region which, like the United States, have a clear national security interest in maintaining stability. “Additionally, there are reports that some government officials in the region have helped to facilitate this illicit cross-border trade,” the letter continued. “We believe the State and Treasury Departments should also consider designating [IS] as a TCO, which would send a strong signal to our partners in the region that we are prioritizing cutting off [IS’s] financial support.”

The black market the senators referred to is believed to have sprouted as a result of the region’s growing instability – the result of civil war in Syria aided by the marginalization of minorities, specifically Iraq’s Sunni Muslims by outgoing Iraqi Prime Minister Nouri al-Maliki’s majority Shiite Muslim administration in Baghdad.

IS, formerly known as the Islamic State of Iraq and the Levant (ISIL) or the Islamic State of Iraq and Syria (ISIS), is an offshoot of al-Qaida in Iraq (AQI) which was led by the late Jordanian militant Islamist, Abu Musab al-Zarqawi. The group’s extreme viciousness led al-Qaida to cut ties with IS, and, according to expert Thomas Joscelyn, senior fellow at the Washington D.C.-based think tank Foundation for Defense of Democracies (FDD), most of al-Qaida’s deep-pocketed, Gulf-based terrorism financiers remained with the parent organization, forcing IS to adopt unorthodox revenue methods.

At first glance, the senators’ request that the administration cut off IS’s funding sources looked to some like political posturing. IS, after all, was classified by the State Department as a Foreign Terrorist Organization in 2004 and its assets within the United States’ control were frozen. That designation further established sanctions for cooperating economically with the group. With the United States in open conflict with IS, was there really more to be done to choke off IS’s cash flow? The State Department has not yet replied to the senators’ letter, but one Senate staffer familiar with the letter said the administration’s reply might be that the administration has all the tools necessary to restrict IS’s funding, given the group’s current designation, and is using them.

All of this begs the following questions: Could the administration still do more, and what difference would a TCO designation make?

“I think there are [additional] things we can do to try and cut off the funding; it’s really hard,” said Austin Long, assistant professor in security policy at Columbia University’s School of International and Public Affairs. “Even when there were 100,000 U.S. troops in Iraq at the height of the surge, we couldn’t cut off all the funding to al-Qaida in Iraq, the predecessor of the Islamic State.”

When a group is designated a TCO, its operations are restricted, as outlined in Executive Order 13581, which prevents members of TCO-designated organizations, and those aiding and abetting them, from transferring, paying, exporting or withdrawing assets in the United States “or in an overseas branch of a U.S. entity” – essentially the same barriers currently facing IS. Some of the groups presently listed as TCOs include: The Brothers’ Circle (Eurasia), Camorra (Italy), Yakuza (Japan), Los Zetas (Mexico), Yamaguchi-Gumi (Japan) and Mara Salvatrucha (El Salvador).

Sens. Casey and Rubio are part of a larger group of lawmakers pushing to include the Lebanon-based terrorist organization, Hezbollah, under the TCO classification in the Hezbollah International Financing Prevention Act (S. 2329 in the Senate and H.R. 4411 in the House). The bill was passed unanimously by the House in July and is currently awaiting approval from the Senate Committee on Banking, Housing and Urban Affairs.

Jonathan Schanzer, vice president for research at Foundation for Defense of Democracies and a former terrorism finance analyst at the Treasury Department, said that the additional designation would allow for a broader scope to investigate and cut off the group’s funding sources. “It allows the intelligence community to work with a broader array of actors to counter [IS], and it allows for the FBI to have a greater role as well,” said Schanzer. “It basically widens the ability of the United States government to act on multiple levels with multiple players – inside and outside the United States.

If it’s considered a criminal organization, the FBI can look into whatever assets may be here. So, in other words, it becomes a warfare issue as well as a criminal one.” Operating like an organized crime family, IS has surprised – and even, in a dark sense, impressed – the international community with its numerous, creative methods to fund itself.

“IS has managed to successfully translate territorial control in northern Syria and portions of Iraq into a means of revenue generation,” said a Treasury Department spokesperson. “IS generates a large portion of its revenue from smuggling, extortion, and robbery in areas under the group’s control, as well as from ransoms received for hostages it has kidnapped. The group also benefits from extortion-derived proceeds from Iraqi and Syrian oil resources.”

Taking a page from al-Qaida in Iraq’s former playbook, IS has developed sophisticated fundraising tactics to make use of the resources in the areas it conquers. Once in control of a city or resource rich area, it threatens the local population with violence and seizes control of basic resources such as water and other necessities.

“The common assumption has been for a long time, and I don’t know where it comes from, but there are a lot of people who have surmised that IS’s funding comes from various Gulf individuals or a number of different Gulf governments including Qatar and Kuwait. This is not true,” said Lee Smith, senior fellow at the Hudson Institute. “There has been some money in the past but this is not the main source of IS’s funding. The main source of funding comes from the fact that IS sells oil on the black market. That’s the number one source of income. The number two source of IS’s income is its extortion rackets in towns it runs – and it runs a few, including Raqqa in Syria and Mosul in Iraq, which are both fairly large Arab cities.”

IS’s single most profitable venture is the selling of oil that is produced in areas under the group’s control. Two of its biggest oil wells are located in a region it occupies in northern Syria – the cities of Deir ez-Zor and Raqqa. Upon occupying an oil field or oil producing city, the group makes the local populace an offer it can’t refuse, says Columbia’s Long. “That’s what they try to do. People don’t always cooperate, but in general, if somebody says, ‘We’re going to keep paying your salary, just keep showing up for work’ and the alternative might be something bad happens to you. Then you can either keep showing up for work or you can become a refugee, and I think a decent number of people don’t want to become refugees understandably,” said Long, who previously served in Iraq as an analyst and adviser to the Multinational Force-Iraq and the U.S. military.

Much of the oil is then sold internally, to the Syrian and Iraqi residents of IS-occupied territories.

“People have lots of cars,” said Long. “Iraq is just like every modern country, but in some sense is more dependent on it. You need trucks to move food around – without gasoline, the economy grinds to a halt.”

The rest of the oil is smuggled out and sold abroad and, surprisingly, some of the buyers include governments that are fighting IS – such as the Syrian regime and Turkey. “

That’s a pretty typical feature of Arab warfare,” said Smith. “People make all sorts of deals with all sorts of different people.”Determining who exactly is bypassing sanctions and buying oil from IS sources – or even exactly how much of it is being bought – is difficult to determine. The oil is sold on the black market and transported by smugglers to refineries located mostly in Turkey. “The oil could be going across the border in Turkey, and the Turks maybe aren’t asking too many question about who it comes from, hypothetically, because of course it won’t be necessarily somebody waving the Islamic State flag that drives the tanker truck across the border,” said Long.

Once the crude gets to a participating refinery, it is mixed with crude from other sources, making the final product even harder to trace. Just as difficult to track are the proceeds, mostly in cash, which make their way into the hands of middlemen, smugglers and corrupt politicians as kickbacks. What makes this oil attractive to even those at war with IS are the vastly discounted prices offered. According to a recent estimate by BBC News, IS exports about 9,000 barrels of oil per day at prices ranging from about $25-$45 a barrel – a significant discount from the current international price of around $100 a barrel. With prices so low, both IS and its enemies win from the transaction.

Casey and Rubio’s letter mentions that some of IS’s funding is supported by allied countries in the region, and Schanzer sees room for the United States to do more to pressure these nations, specifically Turkey, into doing more to crackdown on this illicit trade, even though Turkish officials have publicly denied that country’s involvement and condemned IS. “If you look at the map, you will see that IS maintains a presence all along the eastern Turkish frontier, just on the other side of the border and we don’t have definitive proof that there’s been direct assistance, but anecdotally we continue to hear that there are individuals and entities operating on the other side of the Turkish border that are facilitating this activity,” said Schanzer.

“I think that it is fair to say at this point that Turkey’s permissive border policies over the last two years or more have led to a rise in jihadi groups’ ability to finance their operations, arm their fighters and to provide other assistance to these groups.”

The United States has tried ramping up pressure on governments considered allies to do more to stop smugglers and traditional terror financiers, of both the IS and other terrorist groups in the region. In August, the Kuwaiti government arrested Hajjaj bin Fahd al-Ajmi, according to the newswire service Agence France-Presse (AFP). Al-Ajmi was accused of “providing money, fighters and weapons to extremist groups” – in his case, the Syrian-based al-Qaida-affiliated terrorist group, the al-Nusra Front.

The arrest came in response to the State Department designating al-Ajmi and two others as terror financiers – ordering their assets frozen and applied a travel ban. IS’s second major source of funding comes directly from the population it controls.

This comes in the form of mundane government functions such as tithes, called Zakat, which is required by Islam and operates much like taxes; tributes from religious minorities who remain in IS- controlled territory; bank robbery; and mob-style protection rackets. “So you go to a business and you’re like: ‘Oh, it would be a shame if something terrible happened to this nice business,’ ” said Long.

Yet another, more sinister method IS uses to fund its operation – the kidnapping and ransoming of Westerners, a commonly used terror tactic – has been in the public consciousness recently since the beheadings of American journalists James Foley and Steven Sotloff. Because of the frequency of this method, there is an international debate on whether it is worth paying a ransom to free captives from a terrorist group. Opponents say that the practice of paying ransoms incentivizes those groups to continue kidnapping.

Officially, the United States does not pay ransoms to terrorist organizations in return for hostages. In Foley’s case, U.S. officials revealed that his captors sent his family an email demanding $132.5 million for their son’s release prior to his videotaped decapitation. As of press time, there is no information available on if, or how much, ransom was requested for Sotloff’s freedom.

Conversely, some European countries, such as France, Spain and Switzerland, do pay ransoms in exchange for nationals even though their governments publicly deny it. Before video of his beheading was released Tuesday, Sotloff was one of four Americans currently being held by IS.

A freelance reporter who often wrote for Time, he was kidnapped near Aleppo, Syria, on Aug. 6, 2013. Last Wednesday, Sotloff’s mother, Shirley Sotloff, released a video directed at IS leader and self-proclaimed caliph, Abu Bakr al-Baghdadi, pleading for al-Baghdadi’s mercy to release her son.

A ccording to Time, the video was broadcast on the al-Arabiya TV network. Though rightfully, the kidnappings garner significant media attention, experts believe ransoms make up the smallest part of the groups budget. “There are lots of uses for [captives] and in the worst case scenario, you can use them for propaganda,” said Long. “That’s why I think it’s not something they necessarily count on but it’s a nice bonus.”

@dmitriyshapiro contributed to this story.

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