How ISIS runs its economy

By Financial Times

From the site of the World Economic Forum

Dec 16 2015

This article is published in collaboration with The Financial Times.

Even under jihadi rule, death and taxes remain the two great certainties of life. Some learn that the hard way.

As Isis officials announced a religious tithe known as zakat last summer, Mansour, a 26-year-old grocery storekeeper in eastern Syria, stalled payment while he tried to cook his books.

A week later, four Isis officials stormed into his shop, ordered him outside, and tallied the bill themselves — to his dismay they based their calculation on the retail price of his stock. There were no price tags on the tinned beef, so one tax collector rode around town on his motorbike comparing canned beef prices in other stores.

Five hours later, the audit was complete. The bill: 32,500 Syrian lira (about $108).

“They told me, ‘You liar . . . How will victory be achieved if you’re not paying zakat?’” Mansour told the Financial Times via an internet site. Like all those from Isis territory who were interviewed by the FT, Mansour requested that his real name be withheld for his safety.

Syria’s oil may ostensibly be the militant group’s most profitable resource but even if US, French and Russian planes succeed in trying to bring down its crude production, local revenues like taxes could keep the Isis economy churning. An FT investigation indicates Isis earns at least as much from taxation, extortion and confiscation as oil.

Western intelligence officials, former Isis fighters and people living in Isis-controlled territory say zakat, fees and confiscations fund the salaries that attract recruits and finance services such as street cleaning and bread subsidies that Isis touts as proof of statehood.

An obligatory form of almsgiving in Islam, zakat dates back to the days of the Prophet Mohammed. It requires Muslims with sufficient income to hand over 2.5 per cent of their capital and can be given to those fighting for a holy cause, which is how Isis justifies its collections.

State or not, the self-proclaimed caliphate that spans nearly half of Syria and a third of Iraq is adept at tapping the population it rules, with the help of a small army of tax collectors and informants.

Isis reaches into nearly every aspect of the economy in its territory, bringing in hundreds of millions of dollars a year. After months of interviews with officials, analysts and people on ground, the FT has discovered money from trade, agriculture, and remittances — even salaries paid by the governments that are fighting it — all flowing into the jihadis’ coffers.

“They leave no source of money untouched — this is their lifeblood,” says Omar, a Syrian rebel commander who jointly ran military operations with Isis for a year before fleeing to Turkey, where he met the FT.

Even as the US-led coalition targets Isis’s infrastructure with air strikes, one of the challenges facing its efforts to destroy the group is its success at monetising opportunities.

Well before Isis held territory it extorted money from businesses , earning tens of millions of dollars from Mosul, Iraq’s second city. The US-based Rand Corporation think-tank estimates that before its June 2014 capture of Mosul, the group had accumulated $875m.

As Isis seized more land, it first relied on confiscations for income, looting banks, military bases and the homes of Iraqi officials. In each wilaya, or province, Isis set up and continues to operate a so-called “war spoils” office that calculates the dollar value of loot and pays a fifth of it to the militants who ran the raid. Non-military goods are sold at local “loot markets”, fighters and locals say; Isis members are allowed to buy at half price.

“You could buy anything: doors for a house, refrigerators, washing machines, cars, cows, furniture,” says a shopkeeper who works near the market in Salihiyeh, a village on the Syrian-Iraqi border. “All of that is pure profit.”

Over the past year, taxation and confiscation probably rivalled oil as the group’s main source of revenue, according to intelligence sources and former fighters. Oil revenues, which go straight to the group’s top leaders, are estimated to have reached more than $450m during the past year.

As income from one-off sources such as looting tails off, Isis is ensuring its longer-term revenue streams. Beyond oil, zakat and a range of other taxes are imposed locally. The provincial wali, or governor, oversees collection by a local Zakat Council, residents who work for the group say. This gives officials the flexibility to base collections on local conditions — or line their pockets with little oversight.

Taxes on government salaries in Mosul city alone probably netted the group $23m this year, according to FT estimates based on employee counts by Iraqi officials. The Iraqi government continued to pay wages for almost a year after the jihadis took control of the city.

The amount of zakat on grain and cotton Isis collected was worth over $20m, according to FT estimates based on statistics provided by Iraqi officials and Syrian farmers. If seizures of government grain stores are included, the group controlled $200m.

The US-led coalition has revamped its air campaign to target more effectively Isis’s oil revenue stream. During the past two months, it has been hitting facilities inside the fields, including pumping stations and vehicles that the militants use. But as long as traders supply goods, farmers plough fields and relatives send remittances into Isis territory, the jihadi organisation will find ways to profit.

Financial experts with the US-led coalition fighting Isis say the group’s territorial control confounds their work. Just as economic sanctions targeting governments strain the lives of civilians and cripple businesses, hitting at Isis income brings suffering to the population living under it.

Matthew Levitt, a former US Treasury official, says some US congressmen have pushed for a more aggressive campaign. “Some . . . want to know why we are not just carpet bombing Mosul and treat it like areas of France under Nazi control in WW2. But we are trying to minimise the effect on the average citizen-hostage so that they do not become more susceptible to [Isis],” he explains.

Trade

On Turkey’s south-western border, up to 600 trailer trucks line up daily to transport food and construction materials into Syria. Several drivers and traders say that most of the goods pass through rebel areas, avoid President Bashar al-Assad’s territory and head straight to the so-called caliphate.

“Ninety per cent of what we sell is dependent on Isis now . . . they have the purchasing power,” says Marwan, who brings cooking oil, detergent and rice to Isis-held territories.

Through five years of civil war, he paid daily bribes at checkpoints held by pro-Assad militia and the rebels fighting them. With Isis, he flashes a receipt proving his company has paid its yearly zakat, and is waved through.

Trucks travelling from Iraq into Isis territory are charged customs duties that yield about $140m a year, according to accounts from truckers and Iraqi analysts.

Abu Mohammed, another trader who sells vegetables from rebel territory to Isis areas and also wanted to remain anonymous, says some of his friends moved their trade to Isis territory because business is more secure. “You could leave your warehouses open and no one would steal a pin. All you have to do is pay zakat,” he says.

Isis imposes a common zakat framework across its territory. It takes 2.5 per cent of capital from wealthy residents and businesses, whether that business is a factory or a truck with a single driver. From farmers, Isis levies the equivalent of 5 per cent of irrigated crops and 10 per cent of rain-fed crops. But it can be flexible. Some Isis officials require services over money: doctors in eastern Syria do not pay zakat but volunteer once a week at Isis hospitals.

Farming

Agriculture is one of the most lucrative sources of zakat, with wheat, barley and cotton the primary produce. Iraqi farmers contacted by the FT said they paid zakat in livestock and crops, while in Syria farmers report that many Isis tax collectors calculate market prices and ask for the cash equivalent.

Isis pays particular attention to the amount of land each farmer is cultivating. Farmers told the FT that Isis tax collectors intimidate local harvesting companies and encourage farmers to inform on each others’ yields in order to estimate how much tax they should be charged.

Azzam, a farmer who grows wheat, barley and vegetables on the outskirts of Mosul, says he was shocked by how many Isis operatives were involved in the tax-collecting process.

“They came in all sizes and colours — some were Iraqis, Syrians, even foreigners were with them,” he told the FT by phone. “There were so many of them, it was like a government convoy.”

The group profits several times from the same crop, according to traders and farmers who have worked with the jihadis. It takes zakat from wheat harvests, for example, but also buys a portion of the remaining crop to sell later in the season at better rates, and then taxes the trucks transporting it.

Salaries

One of Isis’s biggest source of income last year was collected indirectly from an unlikely source: the Iraqi government. Baghdad was still transferring salaries to its employees who lived in Isis territory, including Mosul, Iraq’s second-largest city that is home to at least 1m Iraqis. Estimates of the number of employees vary. Senior Iraqi officials estimate that as many as 400,000 government employees remain in Isis territory.

Members of Iraq’s parliamentary finance committee say the salary payments amounted to more than $1bn. Isis taxed salaries at a rate of between 10 and 50 per cent.

“There was no other alternative than to cut the salaries,” says Haitham al-Juboori, the deputy head of Iraq’s parliamentary finance committee. “We couldn’t find another way.”

Officials from Mosul, however, have criticised the decision, warning that it inflicts further punishment on the population. “People will go hungry, and they will be pushed into the arms of Isis,” said one former municipal administrator who fled the city and met the FT in the northern Iraqi city of Erbil.

Even with salary transfers halted, remittances from relatives abroad to those living under Isis’ control offers the group a taxation opportunity. Relatives use the “hawala” system, an informal money transfer arrangement similar to Western Union that is almost impossible to regulate. Locals say there are now streets lined with hawala offices, carefully monitored by Isis militants, who skim off a small percentage.

“Every person who has a relative abroad gets help,” says Abu Rami, who abandoned his government job in Raqqa when Isis took over. “My brother is in Lebanon. Every month he would send me $100, which is what he earns in two days. That $100 lasted me the whole month.”

As the US-led coalition tries to shrink the territory Isis controls, western officials expect the organisation to resort to increasingly brutal extortion to maintain its revenue stream.

Syrians and Iraqis living under Isis have been fleeing, diminishing the pool of taxpayers. Ali, a primary school teacher from Mayadeen city who fled last month, says most doctors, engineers and teachers from the town escaped over the summer.

An agricultural official from Mosul, meanwhile, says fewer than 2m dunams (50,000 hectares) will be cultivated in Isis territory this year, down from 3m a year ago. Livestock numbers, he says, have already dropped by half.

“The agricultural area will keep shrinking, production will deteriorate until eventually the farmer on his own will simply quit because he can’t profit,” says the official.

Possibly out of fear that its “state” will empty of people, Isis has been actively trying to prevent residents from leaving. The organisation has issued orders banning residents from going to “the land of the infidels” except for urgent medical reasons.

But many say there is a limit to the pressure Isis can exert on the remaining population. In frontline areas and extremely impoverished villages, Isis officials exact only small flat fees or forgo zakat completely. Ali, the school teacher, says Isis tried to impose a 20,000 lira fee (about $50) for newly produced textbooks earlier this year but repealed it when locals stopped sending children to school.

Syrians who have lived through five years of war warn that the Isis economy is unlikely to collapse, pointing out that as long as locals are making money to survive, the group will find ways to tax them.

On a recent trip into Isis territory, Marwan, the trader, says he watched in disbelief as farmers tilled fields along the front lines. “You’d see missiles flying overhead and the farmers out there ploughing . . . If they can’t work, how will they eat?”

Publication does not imply endorsement of views by the World Economic Forum.

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