Part Two: How Islamic State fund their war

How Islamic State became the world's richest terrorist group

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The so-called Islamic State (IS) has become the world's most feared
and powerful terrorist group. It has also become its richest. A complex,
corporate approach to its war has seen the group open up a vast array of income
sources that have made it a more daunting foe than any encountered before.
In part one of this series we looked at how the group has structured itself in the style of a
major US corporation, and how much they need to spend to keep their war, and fledgling
'state' functioning.
Read Part one: How IS created the system that redefined terrorism
In part two of the series we look at where this cash comes from. With a budget of $2bn for
2015 the group have already built a bank balance greater than any terror group in history,
and with a diverse range of income streams they have insulated themselves from financial
attack better than any terrorist group before them.
Where does the money come from?
With income streams from kidnapping to the production of cement, the groups revenues are
diverse and can roughly be broken down into three sections domestic income (akin to
what a formal nation state might count on), criminal enterprise and foreign donations (we
looked at foreign donations in part one).

Domestic income
Tax and confiscation
Taxation more suitably called extortion - is a major income source, accounting for $8m per
month before IS's rapid expansion across Iraq in the summer of last year. With growing

territory the revenues have only risen, with estimates that internal tax/extortion revenue now
accounts for over $360m per year.
ISIL extorts money in connection with everything from fuel and vehicles transiting ISIL-held
territory, to school fees for children, all under the auspices of providing notional services or
protection, according to the US Department of the Treasury.
There are taxes on wages, businesses, roads, transport of goods and even life Christians
in IS towns, barred from working in most cases, stripped of their salaries in others, face a
grim postponement as they pay a fee to avoid execution while living in an IS controlled
region.

Image: IS militants in Raqqa, Syria, undated Credit: AP/militant website

Along with this there are also road taxes, taxes on business, restaurants and shopping
centres under their control - and the taxes are lower than under the regime of Bashar AlAssad.
Much of this tax is collected by banks in IS towns, who will deduct a levy from wages on
behalf of the group.
Leaked documents show the group's income and expenditure in the Deir Ezzor area of
Syria, between December 23 2014 and January 22 2015. The documents showed that 45%
of income in the region was through confiscations seizures of goods and businesses,
mostly targeted at anyone transporting banned goods, but also at people who have not
adhered to IS religious laws. Missing prayer three times can see your shop confiscated.
There is also rental income, with IS acting as letting agents for homes of those who have
fled or been killed in fighting.
While we dont know how typical the Deir Ezzor documents are, they do show an overreliance on a finite resource eventually you run out of things to seize.
Oil, gas and hydroelectric power
IS has conquered lands with a vast range of natural resources production, with gas fields
and hydroelectric dams providing fuel and cash for their war and state building.
It is oil however that truly drives the IS machine. Highlighted as having huge strategic
importance by the groups shura council in 2013, oil has been central to their planning and

operations since, to the point that IS now runs an operation not unlike a state oil company,
making roughly $1.5m per day as they pump out up to 40,000 barrels from their refineries.
Locals in Iraq have reported teams of engineers arriving as soon as their towns fell being
shipped directly to the refineries to ensure production began as soon as possible. Business
manager and trainers are also brought in to oil fields to keep the operation running.
They were ready, they had people there in charge of the financial side, they had
technicians that adjusted the filling and storage process, a local sheikh from the town of
Hawija, near Kirkuk, told the Financial Times.
They brought hundreds of trucks in from Kirkuk and Mosul and they started to extract the
oil and export it.
Having taken control of dozens of lucrative fields, IS now controls 60% of Syrias oil fields,
and 10% of Iraqs a nation which holds 40% of the worlds supply.
Map: Resources in IS controlled territory

Image: Map of infrastructure and resources in IS controlled regions Source: Congressional

Research Service

Estimates of how much the oil trade is worth to IS vary. The most recent estimate - from
the Financial Times, above - is $1.5m per day, a September 2015 report from RBC Capital
markets estimated that IS makes $8-$10m per month from the sale of oil and from the fields
it controls.
Other estimates are far higher in late 2014 Thomson Reuters said a conservative estimate
would be that they make $2m per day from oil. If IS were using the oil fields to their full
capacity they could make annual profits ranging anywhere from $730m to $1.4bn.
However, in the time between those reports the dropping global oil prices, combined with a
crackdown from neighboring governments on the black market trade and an increased
focus of air strikes on the IS oil infrastructure, have reduced this greatly. Most estimates say
IS could have lost up to 70% of its oil producing capacity.

There have been further claims this week that the airstrikes could threaten the entire IS oil
operation as since October 21 the coalition has intensified Operation Tidal Wave II, the
airstrike campaign specifically targeting IS oil revenues. While bombing is increasing there
remain major issues with this approach, as totally cutting off the oil supply could have
terrible costs for the population living under IS rule, while also providing the group with a PR
coup in the battle for local support.
In addition to oil and gas, IS has taken cement factories (bringing in $300m per year if
operating at capacity), captured vast swathes of agricultural land rich in wheat and barley,
and sulfur and phosphate mines that could bring in $300m per year if IS are exploiting them
to full capacity.

Sources: Financial Times, Thomson Reuters

From conquered lands to the market

IS sells the oil at significantly discounted prices through middlemen - tribal leaders,
smugglers, even shipping companies who then sell it on to dealers in Iran, Lebanon,
Turkey and Kurdistan.
Using a variety of means from long established smuggling routes to underground
pipelines into Turkey these middlemen can transport IS oil out of the conflict zones and
into the markets.

Testifying before the US House Committee on Financial Services, Matthew Levitt, director of
the Stein Program on Counter-terrorism and Intelligence at the Washington Institute for
Near East Policy, gave a description of how the operation works in some areas.
ISIS has tapped into pre-existing black market routes that date back to the 1990s and the
smuggling networks that popped up under the Saddam-era oil-for-food program, he said.
It uses these to sell extracted crude oil to smugglers, who then transport the oil outside of
conflict zones using a variety of means: tanker trucks, vans, jerry cans carried by mules,
makeshift pipes, and even rafts when crossing rivers. In one case, Turkish authorities found
an underground pipeline as long as 3 miles.
From the Syrian town of Ezmerin, about 500 illegal oil pipelines extend to the Turkish side
of the Orontes River.
Diesel fuel is pumped from tankers on the Syrian side into private tanks via simple 'pump'
and 'stop' commands over cell phones.
These tanks feed pipelines that are buried deep under agricultural fields, crisscross under
streets, to reach the back yards of private houses in villages scattered across Hatay
Province.
Customers arrive at the houses and purchase the oil at a discount price. Around 80-90% of
Hacipasa's villagers are somehow involved in the fuel smuggling operation, he added.
While Levitts description paints a picture of a small, local operation, the sale of oil is
massive in some IS regions, with the Financial Times reporting recently that trucks queue
for up to a month at the al-Omar field in Syria to receive the product.

Besides supplying their own oil needs and smuggling huge quantities abroad, IS also sell oil
to their military rivals supplying Syrian rebels and the Assad regime forces with the
precious material necessary to keep their war machines running.
While it seems a strange arrangement, these kind of dealings are not unheard of, and are
akin to the odd mix of commerce and war found in the Lebanon civil war. They are also just
one example of the complex network of conflicts and alliances that make up the Syrian civil
war.
That IS supplies Assad with oil and electricity from their hydroelectric dams does little to
suppress theories in the region, and further beyond, that the regime are covertly allied on
some level with the Islamists.
It is in the gas industry however where the alliance of supposed enemies becomes most
complexly entwined.

Several gas plants in Syria are effectively partnerships between IS and the Assad
government with the two parties splitting the energy produced.
Gas supplies 90% of Syrias power grid, meaning both sides need a constant supply to
keep functioning. IS control the plants, but the regime has the expertise needed to operate
them and so a deal is made.
Reporting from the Financial Times (FT) has found that IS controls at least eight power
plants in Syria three hydroelectric and five gas, including the countrys largest gas plant.
The Syrian Ministry of Oil and Natural Resources told the FT in a written statement that
there is no co-ordination with the terrorist groups regarding this matter. But the Ministry did
admit that some of its employees work under IS for the sake of preserving the security and
safety of these facilities.
One power plant owner told the FT that the bargaining over Syrias power supply is a
1920s mafia-style negotiation. You kill and fight to influence the deal but the deal doesnt
end.

Criminal Enterprise
As far back as 2006 the US government had assessed that Al Qaeda in Iraq (a precursor to
IS) was self-sustaining due to its "very successful" criminal enterprise.
In the years since it has only expanded its crime network, and now uses everything from
kidnapping to smuggled antiquities to raise funds.

Image: The Islamic State's diverse criminal empire

How to combat the Islamic State business?

While the scale and success of the Islamic State business is daunting there are places to
find hope in the battle against the group.
While bombing raids can feasibly continue to dent ISs oil and gas producing ability, they
also have to be counter-balanced with the risk of sowing further seeds of hatred against
coalition forces among the local population. Ultimately any successful plan for defeating IS
will require a military and political foundation that is far more nuanced than the disasters of
planning that followed the 2003 invasion of the country, and the subsequent years policies
which indirectly led to the growth of IS.

A closer watch of international smuggling operations, particularly the oil and antiquities
trade, and financial transactions connected to the group could prove to be a major tool in
taking apart the group. But it would be foolish to imagine that squeezing the group's current
revenues won't drive them to carve out new cash sources, including expanding territory to
expand their 'tax' base.
Defeat for IS, however, could come from within.
A $2bn annual budget is not sufficient to run both a long-term war and a state of eight-ten
million people (or either, most likely) and with reports already emerging of a two-tier society,
in which IS volunteers enjoy comfortable lifestyles and local populations struggle, there
could be hope of local dissent against the group a factor which caused the collapse of AQI
rule of similar regions during the last decade. And there have already been protest from
populations living under IS control, with a judge recently assassinated and crowds taking to
the streets of the Syrian city of Manjib.
The Deir Ezzor documents show that they are spending three quarters of their income on
military and policing costs leaving little for the State element of their plan.
Brigham Young University political scientist Quinn Mecham has worked to gauge ISs statecapacity how effectively they run as a functioning country and ranked the selfproclaimed caliphate as the 16th most failed state in the world. That's more stable than a
handful of established nations, but certainly at risk of collapse.