2Military measures against ISIL’s finances
The deaths of ISIL financial operatives
10.Military action by the Coalition has killed a number of ISIL’s financial planners. Witnesses to the inquiry have highlighted that individuals can be key architects of ISIL’s most intricate funding mechanisms. For example, David Butter, an Associate Fellow at Chatham House, told us that a method that ISIL used to raise revenue by infiltrating foreign-exchange auctions held in Iraq17 appeared to have been devised by one man, “a former Ba’ath party official”.18 This individual, believed to have been “Abu Salah”, was thought to have been killed by a US airstrike in November 2015.19 Other examples include a raid by US Special Forces in May 2015 that killed “Abu Sayyaf”, who was identified as a key official in ISIL’s oil production.20 The raid also captured documents from ISIL, which are now in the public domain,21 about how the group’s oil business functioned. In March 2016, a raid by US Special Forces killed “Haji Imam”, who was believed to have acted as ISIL’s “finance minister”.22
11.In their evidence to the Committee, Government officials did not provide a definitive assessment of whether the deaths of high-ranking ISIL operatives were undermining the ability of the group to maintain its most complex revenue-generating activities. Air Vice-Marshal Stringer said that “most of the evidence we have at the moment is second order”,23 but that “my judgment is that, as we remove—where we can—the central control of Daesh, of course it will be replaced”.24 The UK’s efforts to undermine ISIL’s finances should be informed by an assessment of whether ISIL does, or does not, depend on a small number of high-ranking operatives to run its most lucrative financing operations. If ISIL does largely depend on such operatives, then two key measures of success in the economic war against the group would be:
i)Assessing the financial disruption caused to ISIL by the deaths of these operatives; and
ii)Assessing to what extent ISIL is able to replace these operatives after their deaths.
The disruption of oil production and sale by ISIL
12.The production and sale of oil by ISIL, in the territory that the group holds in Iraq and Syria, is an aspect of the group’s revenue generation that has received extensive media attention. It is also one that has been targeted by the Coalition’s military campaign against ISIL. Describing the UK’s contribution to this campaign, Air Vice-Marshal Stringer told us that:
The UK is playing an important role in the Coalition’s military campaign with around 1000 UK personnel supporting Operation SHADER in the wider region. RAF Typhoon, Tornado and Reaper have flown over 2000 combat missions, including against the Omar oilfield, one of the most important to Daesh’s financial operations.25
13.In terms of the impact of the Coalition’s military campaign on ISIL’s oil activities, Air Vice-Marshal Stringer said:
The UK has participated in Coalition operations that have damaged or destroyed 1216 oil infrastructure targets and tankers, inflicting significant damage on Daesh’s oil industry. This amounts to a 25% reduction in oil production,26 estimated to have reduced Daesh’s overall revenue by as much as 10%. The UK and US, along with oil industry partners will present in the CFIG [Counter-ISIL Finance Group] Oil subgroup a list of parts and chemicals that Daesh need to repair production facilities, in order to disrupt oil revenue further.27
14.There is disagreement over how much revenue ISIL generates from oil production. The written submission from the FCO estimated, in approximate terms, that ISIL’s oil revenue was “likely to be in the tens of millions of dollars a month”.28 Luay al-Khateeb, the Executive Director of the Iraq Energy Institute, gave a separate assessment: “My calculations, based on sources inside Syria, suggest ISIS made no more than $200 million in a year from oil (at best case scenario)”.29
15.The variations in the estimates of how much ISIL can earn from oil revenue are due to varying estimates of how much oil the group can produce, and of how much money the group can sell this oil for. Air Vice-Marshal Stringer estimated ISIL’s oil production capacity to be “about 30,000 barrels a day, but it is very patchy. It goes up and down”.30 Luay Al-Khateeb agreed that the figure fluctuated, but assessed that “in the best-case scenario ISIS-controlled territory managed to produce no more than 20,000 barrels, and this is on good days and, again, not necessarily seven days a week”.31
16.In terms of the selling price, Mr Al-Khateeb assessed that “when Brent was around $100, ISIS-controlled territories could hardly manage to sell for more than $20 a barrel, or $25 in the best case scenario. During 2015, we are talking about $10 to $12 a barrel”.32 Mr Al-Khateeb considered this low price to be due to the low quality of the oil extracted by ISIL.33 But Air Vice-Marshal Stringer reported that ISIL was able to get a larger amount of money for the oil it sold, because it was selling that oil into a closed market:
Because it is a closed internal market you have got to think more in terms of the supply and demand of drugs—narcotics. If you halve the supply, you can double the price. So, even when the open market price per barrel was $30 a few months ago…Daesh was still selling it at up to $50 and maybe a little bit more.34
17.Experts agree that ISIL’s oil market is largely internal, meaning that the commodity is predominantly sold in the territory under the group’s occupation through a convoluted supply chain. The FCO referred to open source reporting that suggests that up to 95% of ISIL’s oil trade is internal.35 Air Vice-Marshal Stringer told us that:
There is micro-smuggling, but it is down to hosepipes and things like that. There is no evidence, other than gas supplies to the Assad regime, that there is any large-scale systemic smuggling outside and therefore transfers of money in based on oil.36
18. ISIL does not appear to refine the oil before selling it. Instead of converting it into a form that is usable as fuel, ISIL is therefore selling crude oil.37 ISIL sells this oil as it exits the ground at the wellhead, to a large number of small-scale middlemen traders who store it in whatever containers and vehicles they possess. These traders move the crude oil elsewhere, sell it again, or refine it. ISIL gains most of its oil revenue from various fees imposed at the wellhead where the crude is sold, or through taxes levied later down the supply chain.38
19.As well as the constraints inherent in its fractured supply chain, ISIL’s oil production faces other pressures. ISIL’s fields in Iraq and Syria are ageing, and the oil that they produce contains impurities.39 This puts technical obstacles in the way of producing oil in high quantities and qualities. ISIL has also lost control of some of the territory in which its oil wells were situated, to armed opponents.40 This is in addition to the impact of the Coalition’s air campaign. Explaining the priorities of this campaign, Air Vice-Marshal Stringer told us that it sought to target particular elements of ISIL’s oil production capacity:
We try to hit those small but high-value elements in any of the plant that will then be difficult to replace and shut the whole plant down, rather than flattening the thing and having to rebuild the industry from scratch afterwards.41
Air Vice-Marshal Stringer also highlighted UK efforts to disrupt ISIL’s ability to access the spare parts needed to repair its oil facilities,42 and its ability to access the chemical additives required to turn crude oil into usable fuel.43
20.Despite these measures, the FCO assesses that ISIL continues to earn tens of millions of dollars a month44 from its sale of oil from the wellheads. Patrick Rarden told the inquiry that “[ISIL] have shown a reasonably large amount of resilience in still being able to produce [oil] and their middle men to refine”.45
21.Military strikes against ISIL must always be balanced against the risk of undermining the ultimate capacity for post–war reconstruction in the areas now controlled by ISIL, and the danger of worsening the conditions of the populations who now live under the group’s occupation. The targeting of ISIL’s oil industry must also consider the environmental impact, as well as the risk to civilians who are not necessarily adherents of ISIL but who nevertheless work in the oil supply chain controlled by the group.
22.If the FCO assesses that, despite the Coalition’s efforts to eliminate key aspects of ISIL’s oil-producing capacity, ISIL’s oil production continues to provide the group with revenue and fuel, then the Coalition should be prepared to target the wellheads themselves more intensively.
The disruption of ISIL’s cash economy, and its taxation
23.As well as the 40% of its revenue that the FCO assessed ISIL to gain from oil sales, it told us that the group gained a further 40% of its money from “extortion, taxation and the local cash economy”.46 This multi-faceted category of revenue generation partly involved the use of cash that ISIL had looted from the banks and populations under its occupation in Iraq and Syria. Air Vice-Marshal Stringer informed us that “the best assumptions that we, the Coalition, have are that ISIL has managed to loot up to $1 billion. That is a commonly accepted figure.”47
24.ISIL keeps some of its cash in bulk-storage facilities that the Coalition has been able to target, in what Air Vice-Marshal Stringer called “cash strikes”.48 He described “probably no more than 10 strikes, mostly around the northern Iraq area” and reported that “US Treasury estimates of what they believe they have removed from circulation would now be into the hundreds of millions”.49 Air Vice-Marshal Stringer said that, although their precise impact was difficult to assess, evidence suggested that the cash strikes had placed financial strain on ISIL:
The second order effects that we saw, principally after the cash strikes—once again, cause and effect are hard to be definite about, but this was certainly after some of the cash strikes—included ISIL reporting that they could only afford to pay 50% of salaries to some of their fighters.50
25.Cash strikes are examples of precision operations that have a significant impact on ISIL’s financial capacity. But broader measures are also required, as ISIL has sought to integrate itself into—and profit from—various aspects of the economy under its control. In addition to forms of wealth tax, Air Vice-Marshal Stringer told us that:
There are taxes on agriculture and, essentially, on all productive elements of the economy51…Broadly, I would say, look at any aspect of the economy and whether it’s easy to regulate and calculate it…If you had an industry that was quite easy to observe, they were very good at taxing it and, as I say, that has become more arbitrary and more draconian recently.52
Air Vice-Marshal Stringer suggested that, in the face of growing financial pressure, ISIL may be relying on taxation to a greater extent,53 and the nature of ISIL’s taxation appears to be becoming more arbitrary and criminal:
Now it looks a heck of a lot more like gangsterism and protection rackets, because they are desperate for more money, which would tend to indicate that it is a problem for them.54
26.The only way to completely stop ISIL from exploiting the populations and economies under its occupation is to end this occupation itself, by re-capturing the territory held by the group. Particular emphasis should be placed on recapturing the cities now occupied by ISIL, because holding them allows the group to control concentrations of people and commerce. The re-capture from ISIL of Mosul in Iraq and Raqqa in Syria will be especially important for eroding the group’s finances, as well as its capabilities more generally. Using examples in Iraq, Air Vice-Marshal Stringer told us that:
The UK has trained more than 3300 Peshmerga and over 7200 Iraqi Security Force soldiers. These personnel, supported by Coalition airpower, have been involved in regaining territory in Ramadi and Sinjar, thus reducing Daesh’s taxation opportunities.55
27.Local ground forces in the region should lead the fight to erode ISIL’s territorial control. When choosing which ground forces to support in the fight against ISIL, the UK must take into account that there are unreconciled territorial disputes between some of the different sides that are currently fighting the terrorist group. Providing military support should be undertaken in the context of a broader effort to reconcile the anxieties of different national communities in both Iraq and Syria.
17 See Chapter 3 of this report, Section 1, ‘ISIL’s infiltration of foreign exchange auctions in Iraq’
18 Q16
19 “The Islamic State’s Sovereign Wealth Fund”, Talisman Gate Again, 11 December 2015
20 US Department of Defense, Statement by Secretary of Defense Ash Carter on Counter-ISIL Operation in Syria, 16 May 2015
21 “The Rise and Deadly Fall of Islamic State’s Oil Tycoon”, The Wall Street Journal, 24 April 2016
22 US Department of Defense, Carter: U.S. Military Targets Key ISIL Terrorists, 25 March 2016
23 Q157
24 Q158
26 Air Vice-Marshal Edward Stringer (SIF0004). A footnote at this point in the evidence read “Approximately 10,000 barrels per day.”
30 Q164
31 Q7
32 Q14
34 Q156
36 Q166
37 Q165
38 Q14
39 See Air Vice-Marshal Stringer, Q161
40 See Air Vice-Marshal Stringer, Q161
41 Q201
42 Q165
43 Q166
45 Q166
46 Q76
47 Q167
48 Q167
49 Q167
50 Q167
51 Q202
52 Q203
53 Q203
54 Q167
© Parliamentary copyright 2015
7 July 2016