The Finances of the Islamic State

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The Finances of the Islamic State

Postby DT Cochrane » Mon Sep 08, 2014 4:46 pm

Howdy all,
I wanted to share something I've been wondering about lately. With its self-declaration of the world’s newest state, and its high profile murders of journalists James Foley and Steven Sotloff, the Islamic State (IS; formerly the Islamic State of Iraq and Syria) has captured the world’s attention. That attention has resulted in the U.S. making limited reengagements in Iraq. In response to domestic and international pressure, U.S. President Barack Obama has had to outline a plan to confront IS.

In addition to its territorial gains, IS has reportedly gained control of large amounts of wealth, both directly by capturing banks, and via black market oil sales from the oil wells it has captured. Armies are expensive and having these finances has been extremely important for IS’s war-making. That raises a question: why are efforts not being made to financially isolate IS?

Criminal organizations work extremely hard to launder their funds and liquidate stolen goods. Unless they are able to do so, their ‘wealth’ is worthless. The metaphor of liquidity is useful to highlight this fact: wealth has to be capable of flowing if it is to actually constitute wealth. In a globalized world, both the money IS possesses, and the oil it sells must enter the global marketplace. The money and oil both have to flow from IS hands through various conduits who relay it into these markets. IS is isolated from any government who could readily facilitate the laundering of their illicit wealth. So, where is the gateway between the legal and illegal domains of financial intermediation and oil sales? Who is operating there? How clandestine could these operations actually be? How opaque to the major financial players could these transactions actually be?

It would seem that closing off these pipelines, both the metaphorical ones for monetary wealth, and the literal ones for oil wealth, should be a priority as putting a financial chokehold on IS would seriously compromise their ability make war, since they have few allies, even among other jihadis.
Therefore, why are we not hearing calls to do this?

Thoughts?
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Re: The Finances of the Islamic State

Postby joefrancis » Tue Sep 09, 2014 2:32 am

One thought: It's quite common for two (or more) sides in a war to continue trading with each other. During the Yugoslav wars, for instance, there was a common joke that the Bosnians were buying the bullets from the Serbs that they would fire back at them in the afternoon. Presumably the Islamic State is continuing to trade with other warring groups and its neighbours, which is where its financial resources come in handy. I've read, for instance, that a lot of the arms being supplied to other groups in Syria are being bought by the Islamic State. I'm not sure their funds would necessarily need to enter the international financial system at this point...
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Re: The Finances of the Islamic State

Postby DT Cochrane » Tue Sep 09, 2014 10:53 am

Thanks for your observations, Joe.

I can't help but wonder if one of the reasons we aren't hearing such calls is because the integrity of the global financial system supersedes any and all conflicts, even of the most horrifying sort.

I would add that although the immediate buying of weapons and munitions would be a pressing need for IS, the reported amounts they've come to acquire far exceed what could possibly be utilized in this way. Are they just sitting on these large sums of money? Also, it should be possible to trace the lines of transactions to these weapons sales. Obviously large amounts of money are circulating in the region, without having to enter into the global financial system. But, it also seems like there would be a need for saving and borrowing. Where and how is this occurring?
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Re: The Finances of the Islamic State

Postby sanha926 » Tue Sep 23, 2014 5:37 am

Fascinating discussion, guys (Troy you always ask the important questions!). There was an article about the finances of ISIS or IS in the FT a couple of days ago. It seems most of the transactions take place in advanced smuggling rings.

http://www.ft.com/cms/s/2/34e874ac-3dad ... z3E2qFuDkQ

The article also mentions that IS deals mostly in cash and has little reliance on the international banking system. So seizing assets and cracking down on the accounts of international donors isn't going to have much of an effect (apparently they've got enough cash stocked up to finance themselves for around two years).

So Troy, your question still stands: where the hell are they storing all this money?
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Re: The Finances of the Islamic State

Postby DT Cochrane » Fri Oct 10, 2014 12:40 pm

Thanks for sharing that link, Sandy. It was very informative.

With every article I read about the internecine warfare in Syria and Iraq, the more complex the alignments of interests become. This article adds Kurdish smugglers serving as middlemen for the black market in oil that is used to fill the coffers of ISIS. They are not entirely operating against the interests of the Kurds more generally, because they increase the supply of oil in Iraqi Kurdish areas and help to keep down the cost of oil, so despite the fact that these funds help to pay the fighters attacking Kurdish areas, the Kurdish central authorities are somewhat turning a blind eye.

Would it be better for the people of the region if ISIS essentially became like the FARC of Colombia, who initially used narco earnings to finance their guerrilla war and then largely abandoned any pretense of revolution and liberation to maintain their narcotics empire?
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Re: The Finances of the Islamic State

Postby joefrancis » Mon Oct 13, 2014 8:26 am

This story of US$1 billion being kept in a bunker in Lebanon seems to illustrate how illegal money doesn't have to be laundered.

http://www.theguardian.com/world/2014/oct/12/iraq-bilions-iraq-lebanese-bunker
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Re: The Finances of the Islamic State

Postby DT Cochrane » Tue Oct 14, 2014 7:37 am

joefrancis wrote:This story of US$1 billion being kept in a bunker in Lebanon seems to illustrate how illegal money doesn't have to be laundered.

http://www.theguardian.com/world/2014/oct/12/iraq-bilions-iraq-lebanese-bunker


I'm not sure it does illustrate that. I don't disagree with the point, necessarily, but I don't think this story makes that point. As described here, the money was stolen and then stored. It does not get into how it was spent. Laundering is needed to make illicit cash liquid. This illustrates, once again, that markets are any thing but free. There are eyes watching transactions and anomalies attract attention.

We need to know about the money flowing back out of the Lebanese bunker. This story does not make the point, but if the Iraqi officials who spirited the cash and gold away are supporters of ISIS, perhaps these funds of U.S. origins are being used to pay the fighters. These relatively meagre sums are then being sent to family members and used to buy daily provisions. Having been shattered into thousands of shards, the funds become much harder to track. Just like the fighters who are mixing into civilian Sunni populations, the purchases of ISIS fighters mix in with those of their neighbours.

This thought experiment does illustrate your point, Joe. Within the sphere of local economies, where small-time gangsters spend their 'earnings,' laundering is not needed. By the time those funds again agglomerate, say with a regional importer, they have been legitimized by the licit transactions of daily functioning. If an ISIS bagman comes around to collect a 'donation' from the importer, then a closed loop gets added that can recirculate the funds.
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