Why ISIS’s secret banking network prospers

More than a year of US-led air strikes and financial sanctions haven’t stopped Islamic State from ordering supplies for its fighters, importing food for its subjects or making quick profits in currency arbitrage.

This is because of men such as Abu Omar, one of the militant group’s de facto bankers. The Iraqi businessman is part of a network of financiers stretching across northern and central Iraq who for decades have provided money transfers and trade finance for the many local merchants who shun conventional banks.

When Islamic State seized control of the region in 2014, the world’s wealthiest terror group made him an offer he decided not to refuse: You can keep your business if you also handle our money.

“I don’t ask questions,” said Abu Omar, whose money-exchange offices in the Iraqi cities of Mosul, Sulimaniyah, Erbil and Hit charge as much as 10% to transfer cash in and out of militant territory — twice normal rates. “Islamic State is good for business.”

These financiers ensure that millions of dollars in cash churn in and out of Islamic State’s territory every day, muting international efforts to isolate the terror group from the global banking system, say people involved in the business. They operate across borders and battlefields in the midst of one of the world’s most dangerous conflicts, protected by profits and their integral role in the regional economy.

Moreover, despite being ruled by Sunni fundamentalists, Islamic State has shown itself to be relatively pragmatic when it comes to financing its operations.

“Daesh follows the laws of money, not religion or politics. In that way, they are as Iraqi as the rest,” said a money changer from Anbar, referring to Islamic State. His correspondent network reaches from Amman, Jordan, to Fallujah and Baghdad.

US Assistant Secretary for Terror Financing Daniel Glaser said these businesses — there are more than 1,600 in Iraq alone — serve as a worrisome portal for Islamic State to connect with the world outside its declared caliphate.

“Diverse efforts are under way to deprive ISIL of its resources and deny it access to the international finance system,” Mr. Glaser said. The Federal Reserve and Treasury Department are collaborating with US allies in the Middle East. But, he said, there “is no simple or quick tool to separate ISIL from its vast wealth.”

The men who run exchange houses and their shell companies reflect a variety of Iraqi ethnicities and religions. Their network works on trust, with members honouring real-time money transfer orders between offices. People pay cash in one office and a recipient draws the equivalent funds at a distant locale, a Middle Eastern practice known as hawala that predates the modern banking system.

Money changers provide a reliable way to conclude deals worth tens of thousands of dollars in towns hundreds of miles apart. They settle their accounts by shuttling bank notes, often through war zones.

Three Iraqi money-exchange operators say they pay Shiite militias, who are at war with Islamic State, to guard cash shipments that travel the road from Baghdad across their front lines to militant-controlled territory in Anbar Province. Iraqi Kurdish fighters, also at war with Islamic State, are bribed to grant passage of cash shipments across their front lines into militant-held areas around Mosul. Both Shiite and Kurdish commanders negotiate flat fees from $1,000 to $10,000, the money changers said.

Islamic State imposes a 2% tax on cash shipments entering its territory, which buys the smuggler protection on the final leg to the exchange houses, according to four people involved in the business.

The cash travels on at least three routes. One begins in the narrow streets behind Istanbul’s Grand Bazaar and, via Iraqi Kurdish towns, reaches Mosul, the largest city under Islamic State control. Another connects Jordan’s capital of Amman with Baghdad and Islamic State-controlled parts of Iraq’s Anbar Province. A third links the city of Gaziantep in southern Turkey with Syrian regions around Raqqa, the administrative capital of Islamic State.

Turkish and Jordanian officials say their governments are committed to fighting Islamic State and aggressively investigate and prosecute both money laundering and terror finance.

Iraqi officials say licensed money changers play an important role in the country’s financial sector, but those who break the law or aid terrorists should be punished.

Foreign ministers from the US-led coalition fighting Islamic State repeated their determination last month to disrupt the group’s economy and financial assets, which are estimated at between $300 million and $700 million. Their financial containment effort is one element of a campaign that includes US air strikes against Islamic State oil wells. There have also been strikes on vaults in downtown Mosul, which US officials suspect store cash to pay fighters.

Treasury and other US agencies regularly send intelligence reports to Baghdad about suspected terrorist financial transactions, US officials said, and maintain close relationships with regulators and security agencies in neighbouring countries. The cash flow continues, nonetheless.

The Central Bank of Iraq named 142 currency-exchange houses in December that the US suspected of moving funds for Islamic State. The central bank banned them from its twice-monthly dollar auctions, hoping to keep US bank notes from the terror group, which, like much of Iraq, operates as a cash economy.

Islamic State’s Cash Flow

At least two companies on the list, both based in Mosul, continue making money transfers from Turkey to Iraqi and Syrian cities controlled by Islamic State, according to three clients.

One, Azva El Seyig, said by phone it wasn’t performing financial services, including money transfers, within Islamic State territory because it had become too difficult.

Yet on a rainy February morning, about 20 Iraqi and Syrian men lined up at the company’s office on a street in Istanbul’s Beyazit neighbourhood. The clients conducted approximately $50,000 in dollar-denominated transfers bound for Mosul during a 30-minute stretch, according to participants. Two clients received $10,000 from Raqqa, Syria. No one at the office asked the purpose of the transfers or whom the money came from.

The employee behind the glass window had one question for a client seeking a $700 money transfer to Mosul: Was the recipient wanted by Islamic State? “That’s the one transaction that is impossible to do,” the employee said.

Iraqi refugees and businessmen in Turkey, Jordan and the Kurdish city of Erbil in Iraq say many more of these companies have opened over the past 18 months, presumably to capitalise on the growth of Islamic State.

“Money flows easier than water,” said an Iraqi trader named Kemal who uses another Turkish-Iraqi company, Taha Cargo, to transfer funds out of Islamic State, and then employs its logistic network to ship goods in return. Taha didn’t respond to requests for comment.

Such financial operations are woven into the fabric of Middle Eastern society because of their service, discretion and timely delivery. They operate from offices that often give no hint of their services or the wealth they control.

The money-exchange financiers know the liquidity of their trading partners and won’t enter into transactions that can’t be honoured. And cheating is rare, as are robberies. In such a tight-knit profession, exchange operators know their families would be responsible for unpaid debts, and their tribe would suffer for any dishonesty.

Iraqi bankers and development agencies estimate that more than half of Iraqi retail traders rely on money-exchange and remittance companies instead of conventional banks. As a result, Iraqi officials have to balance international demands with their economy’s health. Closing the exchange network would trigger economic shock.

“They move the wheels of Iraq’s economy. Without them we wouldn’t have imported clothes, fresh shipments of vegetables,” said Yahya al-Kubaisi, an analyst at the Iraqi Studies Center in Jordan and a former Iraqi politician.

Before Islamic State seized Mosul, the city of nearly two million people had 40 banks and around 120 licensed money changers and remittance facilities, according to Iraq’s central bank and money changers.

Only banks and remittance facilities are licensed to transfer money domestically or abroad. But money changers have long flouted these rules and provided such services in Mosul, the economic powerhouse of northern Iraq.

Islamic State’s takeover of Mosul in June 2014, followed by other cities in Iraq and eastern Syria, swiftly shut down local banks. The terror group looted bank vaults of hundreds of millions of dollars, according to US estimates.

The US and regional governments took immediate steps to sever bank branches in Islamic State territory from the international banking network, declaring off-limits transactions with the identification code of seized branches.

That left money changers as the sole providers for a region covering several million people. A currency office owner from Anbar Province said in late summer of 2014 his offices were handling $500,000 a week in money transfers in and out of Islamic State. Fees for such services were 10%, he said. Before the Islamic State takeover, fees were between 3% and 5%.

Some early transactions were made for residents eager to escape the extremist group. The money changers “didn’t question why you were sending money or who was the recipient, even if they knew you were sending it out of Islamic State for yourself or your family,” said Mohammed, a former professor in Mosul, now a refugee, whose declared atheism made him an Islamic State target.

A Fallujah-based money changer said he moved $100,000 to Baghdad in June 2015 for a man from Anbar suspected by Iraqi authorities of being an Islamic State fighter. The money changer said he made the transfer because he didn’t believe the allegation. “I don’t think I did anything wrong,” he said.

By that time, virtually all goods coming into Islamic State territory — such as motor oil for vehicles transporting fighters and the austere clothing mandated for women — were purchased through the moneychanger network, according to three merchants involved in the business.

Extremist leaders last year banned exchange houses from approving the transfer of funds outside of Islamic State without a receipt showing the client had paid a 10% religious tax, known as “zakat.”

Besides helping collect taxes, the network of money changers has also helped Islamic State capitalise on currency arbitrage — by providing more money to tax, for example, and in direct profits from exchange operatives.

For years, participants in the twice-monthly dollar auction by the central bank included money-exchange houses that would buy dollars at the official rate and sell them for a profit on the street. The rate difference in the past year was as much as 7 percentage points.

For the first auction in December, money-exchange firms placed orders for more than $20 million. Given the exchange-rate differences between the auction and black markets in Islamic State territory, those contracts represented potential profits of more than $330,000.

The Central Bank of Iraq has an account at the Fed, funded largely by oil reserves, and regularly withdraws large shipments of new $100 bills from a Fed facility in Rutherford, N.J. They travel by chartered plane to Baghdad.

The Fed last summer temporarily shut off deliveries over concerns the notes were going to Islamic State through the exchange houses. A cash crisis loomed until shipments resumed in August, when Iraq agreed to turn over more records.

Many exchange companies based in Islamic State territory — or their correspondent offices elsewhere in Iraq — participated in the auctions until mid-December, when the U.S. pressured Iraq to ban dozens of companies believed to be working with the terror group.

Money changers who still participate in the currency auction doubt the effectiveness of the black list. Iraq has no mechanism to ensure that the owners of banned companies don’t get around the restrictions by simply opening new firms or by hidden ownership stakes in other exchange firms.

“Iraq doesn’t have investigators or auditors,” said Abu Omar, the money-exchange owner. “Iraq has officials who expect bribes.”