The Islamic State runs a self-sustaining economy across territory it controls in Syria and Iraq, pirating oil while exacting tribute from a population of at least eight million, Arab and Western officials said, making it one of the world’s richest terror groups and an unprecedented threat.
That illicit economy presents a new picture of Islamic State’s financial underpinnings. The group was once thought to depend on funding from Arab Gulf donors and donations from the broader Muslim world. Now, Islamic State—the former branch of al Qaeda that has swallowed parts of Iraq and Syria—is a largely self-financed organization.
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Money from outside donors “pales in comparison to their self-funding through criminal and terrorist activities,” a U.S. State Department official said, adding that those activities generate millions of dollars a month.
For Western and Arab nations that are striving to stop Islamic State, the group’s local funding sources pose a conundrum: A clampdown on economic activity that helps fund the group, counterterrorism officials and experts said, could cause a humanitarian crisis in the already stressed areas it controls.
“Can you prevent ISIS from taking assets? Not really, because they’re sitting on a lot of assets already,” said a Western counterterrorism official. “So you must disrupt the network of trade. But if you disrupt trade in commodities like food, for example, then you risk starving thousands of civilians.”
From Raqqa in Syria to Mosul in Iraq, Sunni radicals from the group administer an orderly extortion system of business and farm tributes, public-transport fees and protection payments from Christians and other religious minorities who choose to live under the militants rather than flee, according to residents of these areas, analysts who have studied the group and government officials tracking it.
Islamic State also does business with people from some of the same regions whose governments are trying to stamp it out. From the territory the group has taken, it controls the sale of oil, wheat and antiquities, spurring a vast gray market with buyers as unlikely as the Syrian regime and Shiite and Kurdish businessmen from Lebanon and Iraq, said Western officials and Syrians and Iraqis with knowledge of the now-common business transactions.
“They have a stable economy, more or less, across their territory in Syria and Iraq,” said Hasan Abu Hanieh, a Jordanian scholar of Sunni radicalism who is an expert on al Qaeda and Islamic State.
Ransom payments are a major source of income for the group but are far less consistent than income from domestic activities, Western officials said.
Al Qaeda in Iraq, formed by Jordanian national Abu Musab al-Zarqawi, was the backbone of the group that expanded into Syria in the chaos of civil war, calling itself first ISIS or ISIL, Islamic State of Iraq and al-Sham—a historic geography spanning the Levant.
In June, after seizing Mosul, it dropped the geographic reference and declared an Islamic caliphate with ambitions for broader territory, naming Iraqi national Abu Bakr al-Baghdadi its caliph. The group now calls itself Islamic State, claiming to command western Iraq and northeastern Syria.
In its moves in Syria last year and its blitz through Iraq this year—militants grabbed oil fields, crop lands and central-bank branches—Islamic State appeared to surprise outside observers. But Mideast experts say the group remains very much the successor of al Qaeda in Iraq, which became al Qaeda’s richest branch using the same sorts of local taxation and extortion.
“At the time, no one could do any simple daily transaction or business—a truck couldn’t pass down the road—without payment,” Mr. Abu Hanieh said of al Qaeda in Iraq’s heyday. “This local revenue strategy continues,” he said. Islamic State is also structurally similar to its predecessor and is believed to have retained a financial committee with a “minister of finance” who oversees financial affairs, he said.
Interviews with Syrians and Iraqis with relatives living in Islamic State-controlled towns offered a snapshot of how institutionalized the group’s domestic fundraising and illegal trade has become—and how difficult it may be to rein in.
At least eight million Syrians and Iraqis live under full or partial Islamic State control, according to estimates by the Syrian opposition and local Iraqi officials.
Earlier this year, as Islamic State militants swarmed northern Syria, one farming family got a knock on the door that would strip them of their livelihoods.
The militants, who introduced themselves as Islamic State members, said they were administering the town and had a list of how many acres of land and other assets the family owned, said one family member. They also said they had a list of the town’s Christian families and the tribute they had to pay to be able to stay living there.
“They demanded to be paid in gold, silver or any other precious material for the annual crop we were about to plant,” said the family member, who has since fled. He said farmers were forced to pay tribute based on land in their possession rather than the success of their crop—a hardship, coming in drought year.
Western and Arab officials said there is little quantifiable detail about the domestic activity that finances the group, because it varies between areas and because governments lack the intelligence capabilities to track such information.
The proportion contributed by local fees and racketeering—versus, for example, oil and agriculture sales—is also hard to gauge because smuggling and trading networks within Syria, Iraq and neighboring countries have become so vast.
In Syria, the insurgents control eight oil and gas fields in the provinces of Raqqa and Deir Ezzour, according to Syrian rebels who once controlled the fields.
Again, from these fields, they trade with people from the very countries that are fighting them. They sell heavy oil at an average of $26 to $35 a barrel to local merchants, to merchants across the border in Iraq, or to upstart refineries financed by Turkish, Lebanese and Iraqi businessmen, said Syrians and Lebanese involved in the oil trade.
Light crude, which is higher priced on global markets, sells at up to $60 a barrel, these people said. Crude smuggled out, rather than sold locally, is priced higher to account for the often complicated way out. Syrian rebels estimated Islamic State-controlled fields produce between 30,000 and 70,000 barrels a day.
Trade beyond Syrian and Iraqi borders is buoyed by a network of business people. Kurdish merchants transport oil into Iraqi Kurdistan and sell it either to Turkish or Iranian traders. Those traders smuggle it into their countries and sell it at a discount over local prices, or sell it back to the Syrian government, said Syrians and Iraqis involved in the oil trade.
Turkey’s foreign ministry said the amount of oil authorities have seized along the Turkey-Syria border has surged by 300% since the start of the Syrian uprising in 2011. “We are trying to see how we can stop this,” a senior Turkish foreign ministry official said, “but the border is very difficult to police.”
Western officials said it has also become clearer, through recent kidnappings, that the group is methodically using hostages to raise revenue. Given the small number of detainees released, they say, that revenue is likely much less reliable than that from the local economy.
The other source of external funding, wealthy donors and radical Sunni individuals in the Gulf, has sharply fallen as their governments recognize the severity of the Islamic State threat to the region, they said.
Earlier this month, the United Nations placed on a sanctions list six citizens it said were involved in funding or recruiting for Islamic State and al-Nusra front—al Qaeda’s official Syrian arm—imposing a travel ban and freezing their assets. Kuwait arrested one of its citizens on the list as he returned from Qatar last week, as well as at least two other financiers, Kuwaiti officials said.
Al Qaeda disavowed Islamic State this year, citing its brutality, but Al Nusra remains on U.S. and international blacklists.
The U.N. sanctions were the first international effort to stem the groups’ revenues and operations. But counterterrorism experts said that, because so much of the revenue is domestic and other trade is done in a cash-only region, there are few effective ways to clamp down.
The U.N. assigned a committee to find ways to implement the effort and make recommendations by November.
External donations are now “bonus payments” for Islamic State, said Douglas Ollivant, a former Iraq director at the U.S. National Security Council and fellow with the New America Foundation, a think tank.
“They are remarkably creative in their financing efforts and they can operate independently of outside sources,” Mr. Ollivant said. And because “the whole region is a cash economy, it’s very difficult to cut off financing.”
A senior Western diplomat said the U.N. sanctions effort was a positive, but rhetorical, step: “We are pretending it’s important to make it more tangible, but there is little real assessment of what we can do.”
Alexander Evans, who leads the U.N. team investigating Islamic State funding, said oil trading, kidnapping and assets seized in Iraq and Syria will continue to drive the group’s income.
Measures against Islamic State’s economic machine must weigh impact on the local populations, Mr. Evans added: “Any new sanctions measures should be balanced between the need to disrupt ISIL funding and maintaining the humanitarian needs of the people suffering under ISIL control.”