Islamic State�s Funding and Territorial Control

Islamic State (IS) has garnered a lot of attention for its extreme barbarism, brutality, pornographic displaysof violence in its videos, unprecedented number of foreign fighters in its ranks and for seeking to revive the idea of the Caliphate while capturing considerable territory in Iraq and Syria. In the process, it has managed to accumulate substantial wealth to become one of the richest terrorist organisations in recent history.A key facet of the terrorist group’s strategy to consolidate captured territory and build institutions capable of administering services to civilians has been the role of finance. 

At the Carnegie Endowment for International Peace last year, the Under Secretary for Terrorism and Financial Intelligence of the USA David S. Cohen, in a speech titled ‘Attacking ISIL’s (Islamic State in Iraq and the Levant) Financial Foundation’ called ISIL‘probably the best-funded terrorist organization we have confronted’.In the context of countering terrorism finance,Cohen acknowledged the unique threat posed by the extremist group. He said “It has amassed wealth at an unprecedented pace, and its revenue sources have a different composition from those of many other terrorist organisations.”[1]

Unlike most terrorist groups, Islamic State’s reliance on foreign donors and ‘charitable’ contributions especially from benefactors in the Gulf countries is very limited. Its funding model goes beyond the conventional reliance on external sponsors in what seems to be a deliberate attempt to protect autonomy, diversify revenue streams and not surrender leverage as is often the case with external funding. Documents about theIslamic State(IS)declassified from the US Department of Defence’s Harmony database[2], when it was functioning under the names of Islamic State of Iraq(ISI) and Al Qaeda in Iraq(AQI), suggest that it is a very organized, adaptive and dynamic organization with extreme bureaucratic and hierarchical structures with focus on maintaining meticulous records of operations and financing. The records convey the group’s emphasis on self sufficiency even during the early phase of the insurgency and the fact that outside donations formed only a small fraction (less than 5 per cent) of the group’s operating budget.

IS depends on internal sources to fund its terrorist campaigns. This is at variance with the conventional understanding of the financing of terror groups.Loretta Napoleoni in her book ‘Terror Incorporated: Tracing the Dollars Behind the Terror Networks’ has outlined the sequential progression of terror finance especially in the developed world from state sponsorship to privatization and ultimately globalization of terrorism finance.[3]IS employs a self-sufficient model that is based on extortion, theft and autocracy under the garb of governance. It derives most of its income from the territory it controls. Its primary sources of funding include illicit proceeds from occupation of territory such as bank looting, extortion and illicit taxation of goods that transit territory where it operates, sale of oil extracted from oil fields and refineries under its control, kidnapping for ransom, sale of antiquities on the black market, robbery of economic assets, online fundraising and human trafficking.[4]It has tapped into the underground black market channels and smuggling routes that proliferated along the border areas of Iraq during the UN embargo on Iraq in the 1990s.

As a result, IS has managed to evade the financial mechanisms developed by the US Treasury after the 9/11 attacks to counter the threat of terrorism finance against the use of international financial system by terrorists and through targeted sanctions, which have been instrumental in isolating and targeting Al Qaeda’s financial networks.  The importance of territorial control for IS cannot be overstated since the legitimacy of the Caliphate is central to holding territory for state building and to continue the narrative of ‘Remaining and Expanding’.

Proto State

In the pastmany extremist organizations have announced state building projects with variations in terms of territorial reach, foreign fighters and longevity. Mostly these claims to territory are fictional, aspirational and serve as rhetoric to gain attention for potential recruitment or legitimacy. The Islamic Stateis exceptional because contrary to most cases of jihadist states where territorial hold is very limited, the vast area of land under its control and the huge number of foreign fighters in its ranks is perhaps only matched by the example of Taliban in the post-communist Afghanistan.

The control of territory by militant extremist organizations is not unprecedented. This is not the first instance in the contemporary world that a terror outfit is holding territory and attempting state like behavior. Taliban in Afghanistan, Al Shabaab in Somalia and Boko Haram in Nigeria have all held territory and administered governance[r1] . Post 2011, a greater number of these ‘Jihadi proto states’ have proliferated post Arab Spring in parts of West Asia and Africa. According to BrynjarLia, these jihadi proto states generally have four characteristics. They are all intensely ideological projects, internationalist, display aggressive behaviour towards neighbouring states and international community and are committed (atleast in rhetoric) to effectivegovernance.[5]

The importance that Islamic State itself places on governance can be gauged from the propaganda that it puts out. While the ‘instrumental violence’ displayed by the group in its sophisticated propaganda videos have grabbed all the bytes, a recent experiment archiving 30 days of the group’s official messaging for the month of Shawwal (July 17-August 15)has shown interesting results.Contrary to the usual references of the group’s brutality narrative, only 2 % included instances of executions while an overwhelmingly large number (37%) of events focused on military themed conquests. More than half (over 400 events- 52.5 %) focused on governance under the caliphate and advertised itself as an ‘Islamic utopia’.[6] While the sample size of a month may be small, the continued dissemination of media by the group with sustained frequency means that the results can be extrapolated to a larger time frame.

Sustainability

ISIS has a crude form of governance that uses coercion, subjugation of civilians and fear. Analyzing IS as an economic entity, some scholarshave concluded that it’s‘long run prospects are poor’ considering the level of productive activity in the territory it occupies is small and its institutions are detrimental for growth.[7]It casts doubt on its ability to sustain growth in a limited territory based on an extractive autocratic economy with little productive activity.

As the coalition intensifies its efforts in a bid to reclaim territory, the Caliphate is likely to feel a financial strain as well. Income from the production and sale of oil is likely to fall over the long run because of unavailability of skilled manpower (to operate the mature oil fields of Syria), lack of access to formal markets and falling oil prices. Coalition airstrikes have considerably reduced the revenue streams by targeting the infrastructure of oil pipelines and transportation networks as it is smuggled to the border regions for sale. The income from tactics like kidnapping for ransom and crime is variable. Ground reports suggest shortage of fuel, electricity, insufficient irrigation facilities, high inflation, shortage of food and it is possible that it can trigger a backlash from civilians and cause social unrest.[8]

IS seems stretched for resources as its sources of revenue are not sustainable in the long run and governance in the territories over a large population is a costly affair. It is also likely as its internal sources are stretched, the IS may respond with more coercive methods to fill its coffers implying more extortion or it may resort to more conventional methods of external donations/charities to fund its operations.