Islamic State takes advantage of cash economies in Iraq and Syria

Backed by hundreds of millions of dollars in locally generated funding, the Islamic State has reaped the benefits of cash-driven economies in Iraq and Syria. The US-led military campaign must focus on obstructing and confiscating the group’s revenue-generating assets.

Despite a months-long military campaign aimed at slowing the advance of the Islamic State (IS), the militant fighters have tightened their grip over large swaths of territory in Iraq and Syria. US-led air strikes, while effective in protecting critical Iraqi infrastructure, have failed to counter days of IS advances over towns and resources along the Syrian-Turkish border.

The air strikes, recently expanded to include targets in Syria, are intended to bolster local Kurdish, Iraqi and Syrian opposition troops holding positions on the ground. A US-led coalition has been training and equipping Kurdish and Syrian opposition fighters in an effort to strengthen moderate forces against both the IS and Syrian President Bashar al-Assad.

But air strikes and training have proven ineffective thus far, leaving underequipped Kurdish and Iraqi forcesunable to hold on to positions in IS-controlled towns.

Background: Iraq and the Islamic State

Backed by tanks and strapped with cash, IS has cemented its status not only as the Middle East’s most feared militant group, but also the wealthiest. While most militant organizations rely on foreign donors for funding, IS raises the majority of its funds through oil sales, property seizures and forced coercion of local businesses. The group’s strategy of local source funding has secured a cash flow estimated at over $1 million per day.

This cash flow has been bolstered by the looting of local banks, most notably the seizure of hundreds of millions of dollars in cash from the central bank of Mosul in northern Iraq. And while the size of the theft is staggering, it begs a bigger question: What is the central bank doing with that much cash on hand?

Cash is the most dominant medium for financial transactions in the Middle East. Less than 5 percent of the population in the Middle East uses credit cards, and that figure is even smaller when looking at just Iraq and Syria. When making large purchases, such as buying a car or a home, consumers will often pull massive amounts of cash from their bank accounts and carry it to their local dealership or brokerage. Banks, for this reason, tend to keep exceedingly large amounts of cash on hand at all times.

By taking advantage of the cash-driven nature of the Iraqi and Syrian economies, IS has been able to fund its state-building activities without the threat of sanctions from the US and its allies. Since the group raises and spends most of its money locally, the sanction regimes that were successful in freezing the assets of foreign-funded groups like Al-Qaeda and Al-Shabaab gain little traction when dealing with Islamic State.

The United States has even seen its own cash transfers ending up in the hands of militant organizations. Following the defeat of Saddam Hussein in 2003, over $12 billion in cash withdrawn from Iraqi government accounts and held in the United States was loaded into planes and flown back to Baghdad. Although the money was intended to fund the Iraqi transitional government, pay contractors and boost the economy, billions of dollars were lost or stolen along the way.

While it is unlikely that all missing funds end up in the hands of militant organizations, Western governments’ participation in these cash economies makes it easier for IS to embezzle and transfer funds without an electronic financial footprint. Even if the intervention is successful in degrading IS militarily, breaking these funding streams will be critical to ensure the group remains in check.

To disrupt IS’s cash flows, the US-led coalition must focus on confiscating the group’s revenue-generating assets, such as its oil wells in northern Iraq. Seizing these assets would encourage confidence in new Iraqi oil minister Adil Abdul Mahdi, who could build on this momentum to promote new oil projects that create jobs and spur economic development.

With no end to the offensive against IS in sight, however, greater financial transparency in Iraq and Syria will have to wait for another day.

Tags: cash, economy, emerging markets, global risk, iraq, islamic, syri
Posted in Asia, Politics Risk