Loss of territory contributes to significant drop in ISIS funding

John Holland-McCowan, Ph.D. Candidate in the Department of War Studies at King’s and Research Fellow at ICSR, led the research and said: ‘We have reason to believe that re-capturing territory from the Islamic State is having a dramatic impact on its financial situation. However, the group and its predecessor, Al-Qaeda in Iraq, have demonstrated an ability to operate under much tighter financial constraints. As a result, these declining figures do not mean that they will be unable to carry out terrorist attacks outside, or within, their territory in the future.’ 

Professor Peter Neumann, Director of ICSR, said: “It is very difficult to accurately quantify Islamic State’s financial situation but terrorist operations are often cheap and funded on an ad hoc basis. There is good reason to believe that financial revenue will continue to decline as territorial progress is made and the loss of Mosul may come to be particularly significant. Whilst this is evidence that efforts to combat such streams of revenue are succeeding, it is far too early to declare victory.”

Dr. Stefan Heissner, Managing Partner of the EY Fraud Investigation & Dispute Services practice in Central Europe, said: “It is essential that both governments and the private sector have an in-depth understanding of the way the Islamic State finances itself. Based on this knowledge, they can work on reducing or stopping the sources of income. A close monitoring or blocking of specific financial transactions, as well as thorough due diligence on business partners should be important elements of the effort to degrade the Islamic State’s finances.”

Another recent paper published by the ICSR translated and analysed a 55-page document compiled and published by the Islamic State in 2016, which offered a unique window into the mind-set of Abu Bakr al-Baghdadi’s propagandists. The document showed evidence of a coherent narrative that is, at once, positive and alternative with the mainstream media considered an effective weapon by the Islamic State. 

Key findings
—- Estimates vary widely. It remains impossible to say exactly how much money Islamic State has at its disposal.

—- The group’s most significant sources of revenue are closely tied to its territory. They are: (1) taxes and fees; (2) oil; and (3) looting, confiscations, and fines. We have found no hard evidence that foreign donations continue to be significant. Similarly, revenues from the sale of antiquities and kidnap for ransom, while difficult to quantify, are unlikely to have been major sources of income.

—- In the years since 2014, Islamic State’s annual revenue has more than halved: from up to $1.9b in 2014 to a maximum of $870m in 2016. There are no signs yet that the group has created significant new funding streams that would make up for recent losses. With current trends continuing, the Islamic State’s “business model” will soon fail.

Assessment
—- Evaluating Islamic State finances through traditional approaches towards “countering terrorist finance” leads to serious misconceptions. Islamic State is fundamentally different because of the large territory it controls and the unique opportunities this offers for generating income.

—- Conversely, its reliance on population and territory helps to explain the group’s current financial troubles. According to figures provided by the Global Coalition, by November 2016 Islamic State had lost 62 percent of its mid-2014 “peak” territory in Iraq, and 30 percent in Syria. From a revenue perspective, this means fewer people and businesses to tax and less control over natural resources such as oil fields.

Prospects
—- There are good reasons to believe that Islamic State revenues will further decline. In particular, capturing Mosul, the Caliphate’s “commercial capital”, will have a significant detrimental effect on

Islamic State finances.

—- Nevertheless, Islamic State, and its Al-Qaeda in Iraq (AQI) predecessor, have repeatedly demonstrated that financial and military setbacks can be overcome.

—- Moreover, the decline in revenues may not have an immediate effect on the group’s ability to carry out terrorist attacks outside its territory. While hurting Islamic State finances puts pressure on the organization and its state-building project, wider efforts will continue to be necessary to ultimately defeat it.

— Read more in Stefan Heissner et al., Caliphate in Decline: An Estimate of Islamic State’s Financial Fortunes (ICSR, February 2017)