The Finer Points of Paying for Terror
With the looting of private and state-owned Iraqi banks, Daesh gained access to an estimated half a billion dollars, supplementing an income that also includes revenue streams from oil sales, kidnapping, and a far-flung protection racket that extorts up to 50 percent of government employees’ salaries. In addition to the consequences that protection rackets have on prices, reportedly 1000 percent increase for eggs in some parts of Syria, why pay attention to the financial operations of Daesh? The cost of terror, if measured by the cost of terrorist attacks, is not particularly high—$12000 for the 2005 London underground bombings or $400 for a remote controlled bomb. However, the cost of using terrorist tactics cannot be reduced to the cost of individual terror attacks. From an organizational point of view the financial management of Daesh reveals important characteristics of how it conducts its operations, how it relates to its employees, and whether it has sophisticated wealth managers or just skilled accountants.
To use the words of Lewis Carroll let’s begin at the beginning:
Where is the money coming from?
In a word: territory. As discussed in the February 2015 report issued by the Financial Action Task Force (an intergovernmental body that issues policy recommendations to safeguard the financial system), Daesh obtains most of its funds from criminal activities in the territories it controls; in contrast with other groups that have traditionally relied on external donations to finance their operations. While estimating the income of groups such as Daesh is not an exact science due to the difficulty of obtaining reliable information, the best- known sources of income are the following[i]:
Under the guise of taxation and charitable donations supported by the threat of violence, Daesh takes up to 50 percent from the salaries of government officials and levies fees on goods transiting through their controlled territory ranging from $200 to $1000. Businesses that operate in Daesh-held areas also give up a percentage of their earnings and pay fixed amounts in exchange for electricity and water. This practice also includes agricultural production where farmers may pay in kind rather than cash. Farmers are especially vulnerable to the control of inputs by Daesh that can use them to destroy farmland or to extort producers who rent back confiscated equipment. Additionally, individuals pay fees on goods such as fuel and vehicles, and five percent on cash withdrawals from private banks. Even students pay depending on the grade they are completing: $22 for elementary school compared to $65 for those enrolled in university. To avoid completely hampering economic activities, they refrain from ‘double taxation’ by issuing receipts upon completion of the payments.
Some groups, however, experience more violence than other under Daesh’s protection racket. The group subsidizes staples such as bread, runs a food kitchen in Raqqah, and ensures products such as medicines meet quality standards through an authority resembling a consumer protection agency. However, those who oppose the group or with different religious beliefs face a much brutal side such as Assyrian Christians who have been captured and killed and Yazidi women who have been abducted and sold into slavery.
In addition to highly publicized cases of foreign aid workers and journalists, Daesh also kidnaps local residents. In 2014, the United Nations estimated the group received between $35 to $45 million in ransom money. Notably, the group engages in price discrimination, asking for different amounts according to the nationality of the victim, ranging from approximately $133 million for U.S. journalist James Foley to at least $500 for a local resident. Whereas residents rely on family and tribal leaders to negotiate ransoms, high profile victims often rely on their governments to pay. It should be noted, however, that the U.S. and the United Kingdom have policies against paying ransom money but some European countries have, unofficially, paid ransoms to Daesh as well as terrorist groups such as Al Qaeda. Among its European counterparts, France is estimated to have paid $58 million; more than the combined ransom payments made by Switzerland, Spain, and Austria.
Much has been reported on the estimated revenue generated by controlling oil and gas fields. However there are three important caveats: 1) the withdrawal of companies, including their equipment and expertise along with coalition-led airstrikes targeting modular refineries and transport convoys have diminished the capacity to extract and refine oil forcing the group to use techniques that produce low quality product. In some cases, the group burns the crude in open pits which significantly diminishes the amount of product obtained. 2) The low quality product sold through contraband results in a reduced revenue stream, as low as $18 per barrel, further affected by declining oil prices. Notably, the product not sold to the local population is sold to middlemen who re-sell the product at a higher price. Therefore, it is the middlemen rather than the group who benefit the most from the smuggled product. 3) If left with crude oil, this would be of little use for its operations. The group needs diesel and petroleum for cooking and fuel, including stolen military equipment such as Humvees and tanks.
Are they truly sophisticated financial managers?
Although this self-financing scheme based on crime has vulnerabilities of its own, it denotes a higher level of financial sophistication than its predecessors. By having independent sources of income, Daesh is not as exposed to the dismantling of networks and sanctions on banks that other groups have experienced. For example, Al-Qaeda’s access to funds grew increasingly harder as the U.S. Department of Treasury designated banks and individuals subject to sanctions. This effectively reduced the incentives of legitimate businesses that would not engage with designated entities at the risk of being linked to terrorists. Al Qaeda’s financial operations were furthered weakened by disrupting the use of charitable organizations that could no longer funnel donations to the group.
More importantly, a fundamental difference is that Daesh, unlike Al Qaeda, is not a terrorist organization. By linking its sources of revenue to territorial control, Daesh is better characterized as what counter-terrorism expert Scott Englund calls “a sectarian insurgency that seeks to supplant established political orders with its own” rather than a terrorist organization.
However, even if the group conducts governance acts such as “issuing identification cards for residents [and] promulgating fishing guidelines to preserve stocks” as part of their caliphate aspirations, administering such a wide array of revenue streams poses challenges of its own; challenges where Daesh lacks experience. Reportedly, between August 2008 and January 2009, Daesh generated less than $1 million per month compared to 2014 when it generated an equal or greater amount per day. To put it into perspective, $1 million a day is similar to the revenue generated by the famous smart phone gaming app Candy Crush Saga or approximately Novak Djokovic’s prize money as the 2015 runner up in the French Open.
The multiplicity of streams and the volume of its revenue create important constraints. While the estimates of Daesh’s revenue are impressive, with amounts sometimes reaching up to three million dollars per day, a key point to consider is that the bulk of their revenue are proceeds from criminal activities. By ‘taxing’ the population and spending heavily in salaries without investing in infrastructure Daesh is eroding precisely the economic activity it seeks to exploit. Distributing fruits, fixing potholes, and organizing training sessions for future fighters might contribute to cementing the idea of a new political order but it puts pressure on a budget already burdened by paying fighters and the cost of war. Furthermore, without access to world markets individuals will progressively be unable to meet the protection quotas demanded. For example, a family with three children might initially meet the $22 quota per child to attend elementary school but as the parents are increasingly isolated from economic activity under Daesh control it seems unlikely they can continue to meet this fee which in turn limits the revenue streams the group currently uses.
Additionally, the influx of volunteers of over 40 countries has the potential to become a burden for the organization. While the volunteers might finance their trips to Daesh-held territory, once there the group has to shoulder the cost of their participation. More importantly, even though some volunteers might contribute to the group by helping out with tasks such as cooking and cleaning or marrying a fighter, other poorly trained volunteers with lack of tactical experience could hinder the group by performing actions that unnecessarily expose its vulnerabilities or go against the group’s long-term goals.
Are Financiers Good Targets? No. Generally, financiers within groups who use terrorist tactics tend to be undesirable targets. Although groups are generally thought of as unitary actors that share similar views, Daesh, just like any other organization, experiences the negative effects of internal group dynamics. Just because an individual is a member of a group this does not guarantee that he will always behave in a way that ensures the group’s goals are achieved. Whereas some individuals may participate out of commitment towards the group’s vision, others may join motivated by the monthly salary of up to $500. The point is simple: groups are not monolithic and the different levels of commitment demonstrated by individuals directly affect who should be targeted in hope of disrupting the group’s activities.
Financiers tend to be less committed compared to other group members who volunteer for riskier tasks[ii]. A member who volunteers for conducting attacks has a greater appetite for risk than a member who manages the payroll. The liability inherent in killing a financier, therefore, is that the replacement might be more extremist than his predecessor, increasing the lethality of the organization. Put simply, a financier with lower levels of commitment might even pocket some of the money for personal gain whereas a financier with high levels of commitment will try to ensure the money is used efficiently to achieve the group’s goals. From a policy perspective, the financier who skims part of the income is more useful than one who manages it with Swiss-clock precision.
In May 2015, the group’s identified chief financial officer Abu Sayyaf was killed during a U.S.-led raid that recovered laptops and cell phones and captured Umm Sayyaf, the financier’s wife. Little is known of Sayyaf who before being in charge of managing oil sales and kidnapping operations for Daesh was a member of Al Qaeda Iraq. U.S. officials considered his death as a ‘significant blow’ to the group and the information recovered as valuable and substantial regarding their financial operations. In particular, intelligence obtained during the raid led to locating and killing Abu Hamid another key member of the organization. In the cases like those of Abu Sayyaf, who they were hoping to capture alive but killed after he retaliated, the trade-off is clear: the raid might have produced substantial intelligence on the financial operations but this likely created opportunities for more extremist elements to move up the ranks and manage increasingly relevant areas for the group’s survival.
Emptying Its Coffers
If targeting financiers is not an optimal strategy, what other options are there to reduce Daesh’s income and therefore its ability to continue fighting? As acknowledged by the FATF, the type of self-financing scheme employed by Daesh is a relatively new challenge and more research needs to be done to determine in greater detail how the group manages its finances and in turn how to disrupt them. Nevertheless there are three key elements to consider:
- Territory is essential for Daesh to obtain income. From a financial point of view the fluctuation in the territory it controls poses a considerable weakness. New territorial acquisitions require spending time and resources in obtaining intelligence with the purpose of extorting the population. Rather than classifying territorial gains solely as a victory for the group, setting up the protection racket is a costly process that can be exploited by coalition-led efforts.
- In March 2015 Italy, Saudi Arabia, and the United States announced the creation of the Counter-ISIL Finance Group (CIFG) as part of the Counter-ISIL Coalition effort against Daesh. The CIFG has quoted the findings from the Financial Action Task Force and has expressed is interest in following resolutions issued by the United Nations Security Council, and enhancing its coordination efforts to deny income to Daesh. With three countries leading the CIFG plus 25 members as part of the coalition the challenge lies in efficiently determining who has what type of intelligence are what are the best ways to integrate these sources.
- During the second meeting in May held by the CIFG it announced its opposition to pay for ransoms in order to reduce a significant revenue stream for the group. Unless the leadership and 25 coalition members follow through with this statement, Daesh will continue to have incentives to kidnap individuals of these countries. Furthermore, lack of compliance could signal disagreement among its members and undermine the perception of a coordinated response. In this type of fights with asymmetric actors it is necessary for states to maintain the perception of control.
[i] For a detailed analysis of the sources of income of Daesh see “Financing of the Terrorist Organisation Islamic State in Iraq and the Levant” of February 2015 by the FATF and “Islamic State Financing and U.S. Policy Approaches of April 2015 by the U.S. Congressional Research Service.
[ii] For an in-depth discussion on the heterogeneity of terrorists groups in particular regarding the role of financiers see “Underfunding in Terrorist Organizations” by Shapiro and Siegel, International Studies Quarterly, 2007.
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