BEYOND SYRIA IRAQ

FINANCING
methodology. In the decade following 9/11, an international regime was developed
to counter al-Qaeda-style financing, disrupting international transfers by
deep-pocket donors and setting standards for transparency in charities to guard
against the diversion of funds to terrorist organizations.
In Iraq and Syria, IS effectively took advantage of multiple preexisting
dynamics to enrich itself quickly after taking territory. These included a
high concentration of natural resources and established smuggling networks
needed to monetize them; a sizable population and sufficient economic
activity to tax and extort; and opportunities to loot valuable goods, including
machinery and weapons, as well as bank branches, from which it is reported
to have taken as much as $1 billion.
The Islamic State did not develop this expertise overnight. For more than
a decade its predecessors, al-Qaeda in Iraq (AQI) and the Islamic State in
Iraq, had acted according to the strategic decision to derive revenues locally
to avoid foreign dependence and direction. These practices included sales
of stolen goods, black-market fuel sales, and large-scale extortion, closely
resembling an organized-crime operation engaged initially in petty criminality
and later in extortion of the oil sector and contracting, according to
a RAND Corporation assessment of recovered financial documents. 2 The
same review suggests AQI revenue sources were volatile, and funds were
expended mostly at the local level, with little surplus made available to the
organization. This is likely because of the emphasis on rapid expansion;
functioning as a terrorist organization and an insurgency with aspirations
of statehood is expensive.
Likewise, despite its prosperity in 2014, IS’s considerable expenses created
vulnerabilities that the government of Iraq, along with the U.S.-led Counter-
ISIL Coalition, has effectively exploited. One well-known example is the
August 2015 cutoff of Iraqi federal government salaries to employees in IScontrolled
territories, which hindered the Islamic State’s ability to derive revenue
from them through extortion. Previously, employees could collect their
salaries just outside IS-controlled territory, and IS would tax the funds at a rate
of 10–50 percent once they reentered. Additionally, a change in military tactics
beginning in November 2015 allowed greater use of coalition airstrikes to target
oil wells and refineries, as well as oil convoys, reducing the Islamic State’s
oil revenue by an estimated 30 percent. 3 Finally, perhaps the greatest impact on
IS’s bottom line has been the territorial losses: as of mid-2016, the Islamic State
had lost nearly half the territory it had once controlled in Iraq and 20 percent
in Syria, meaning fewer local resources—including people—to extort.
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