With the territory it controls diminishing by the day and its sources of income increasingly squeezed, Islamic State is attempting to channel the group’s assets out of Iraq and Syria in order to secure a financial lifeline, according to European and American diplomats.
The apparent survival strategy means that Western governments and financial institutions may need to start devoting as many resources to stopping the outflow of IS funds as preventing supporters donating money to the militants.
The diplomats say IS are employing methods typically used by organised crime groups to launder their assets before investing the proceeds in legitimate business.
While many international banks have strong anti-money laundering measures in place, smaller less rigorously regulated financial services companies and banks may be unwittingly exploited by IS as it seeks to preserve its cash reserves in safe havens.
After IS proclaimed its Caliphate in June 2014, it stood out among terror groups for having a sophisticated bureaucracy and robust economy. The militants controlled significant swathes of land in Iraq and Syria, which allowed them to loot captured towns and villages, extort taxes from their inhabitants and trade oil from seized fields and refineries.
The money enabled IS to buy advanced weaponry, pay fighters’ salaries and even support welfare programmes. The group could thus appeal to foreign recruits by presenting itself in polished online propaganda as a genuine alternative to what it regards as morally corrupt states in the West and the Middle East.
The military campaign to stop IS has aimed to reduce the group’s territory in order to not only weaken its fighting ability but also disrupt its sources of income. Since the militants’ peak in 2014, their territory has more than halved, with some of the biggest losses in Iraq. A recent joint study by King’s College London and accountancy firm EY estimated that their revenues have halved in the last two years, to less than $900 million.
With its money-making operation diminished and ability to secure assets locally impaired, the diplomats say that IS has begun looking for safe havens to store its wealth, in effect reversing the measures it employed to channel funds into onetime strongholds in Syria and Iraq.
As late as 2015 there were still over 20 banks operating in IS territory. But after it was cut off from the international financial system, the group often received funds via Turkey, where it could access wire transfers or receive cash donations. It then smuggled the money across the border to Syria, or transferred value to more mobile assets like pre-paid credit cards, digital accounts or crypto-currencies.
The diplomats say IS is now using its established smuggling routes to channel assets out of Iraq and Syria, after which they are laundered to conceal their origin. The process is likely to be conducted through small financial services companies – such as money transfer operations and boutique banks – which receive little regulatory scrutiny.
Once integrated into the financial system IS might then use the same boltholes that money-launderers have employed for years, such as shell companies, offshore accounts and networks of trusts registered in jurisdictions with little oversight.
The diplomatic sources say IS’s laundered funds are being invested in legitimate businesses. Although they would not disclose the nature of these companies, they are likely to be inconspicuous enterprises such as car-dealerships and electronics stores, from which money can easily be retrieved without arousing suspicion.
Many major banks are already able to detect when illicit funds are deposited into seemingly legitimate businesses. But regulators in Europe and the US have not put smaller financial services companies under the same level of scrutiny, which has meant that some of the latter do not possess the kind of safeguards that mainstream banks have in place.
Moreover, while many governments in less developed parts of the Middle East and Africa have formally adopted international anti-money laundering standards, they have been slow to enforce them, leaving banks in these regions exposed to exploitation by the likes of IS.
In order to cut the chain of links in the militants’ laundering process, Western governments will need to both ensure small financial services companies comply with regulations and isolate developing world banks with weak controls. Unless the outflow of IS funds is kerbed, its members will continue to pose a serious threat to the Middle East and the West, long after they are defeated on the battlefield and their sources of revenue have dried up.
Martin Fischer is an analyst at Alaco, a London-based business intelligence consultancy.
