3Isolating ISIL from financial systems
ISIL’s infiltration of foreign exchange auctions in Iraq
28.ISIL’s initial territorial expansion in parts of northern and central Iraq seems to have afforded the group a regrettable capacity to leech the financial lifeblood of the state. The Embassy of Iraq in London informed us, for example, that the total cash looted by ISIL from all of the Iraqi banks that it captured was $223 million.56 ISIL also appears to have been able to access other sources of cash. For example, the Iraqi Government halted the payment of salaries for state employees into areas held by ISIL in August 2015, out of concern that the group was taxing or stealing this money.57
29.During the inquiry, the Committee was informed of a method through which ISIL was attempting to multiply this stolen cash by feeding it into the regular official auctions of US Dollars that are held in Iraq. Patrick Rarden told us that ISIL “were abusing the system and were able to enter it”.58 The group was able to move its money in such a way as to exploit small differences in the official exchange rates between the US Dollar and Iraqi Dinars, and thereby multiply the value of the cash that it held.59 The FCO provided an explanation of this method:
The system Daesh allegedly used involved transferring captured money out through regional banks and Money Services Businesses (MSBs)—disguising its source—and then inserting the money back into the Iraqi banking system in Baghdad. The money was then entered into foreign currency auctions, where Daesh were able to make a profit on the differential between wholesale and retail exchange rates. Any profit from these activities was then transferred back into Daesh controlled areas through the Hawala system, which comprises of regulated and unregulated MSBs [Money Services Businesses].60
30.David Butter, from Chatham House, told us that he had seen “credible estimates” that ISIL was able to make “$20 million to $25 million a month” out of this method.61 But, responding specifically to that figure, Dan Chugg said “we have not seen anything to substantiate that”.62 The FCO told the inquiry that:
We assess the amount of money moved, and profit gained, in this way does not represent a significant proportion of Daesh’s income.63
31.Regardless of the disagreement over the extent to which the group was able to profit, ISIL’s infiltration of the foreign currency auctions shows that the group was able to gain access to local financial systems within Iraq. The defeat of ISIL depends on ensuring that the group cannot access local or international financial systems as a means of making or moving money, in Iraq but also in any other territory that the group controls.
ISIL’s occupation of bank branches
32.One of the ways in which ISIL has sought to access official financial systems is through its control of bank branches in the territories that it occupies. In terms of the counter-measures taken in Iraq, Patrick Rarden informed us that the Iraqi authorities “have cut 90 Daesh-controlled branches of banks off from their system”.64 We were told that UK financial entities have played a positive role in helping to identify bank branches in ISIL-held territory.65 The UK should work in conjunction with international partners to ensure the effective exclusion of all ISIL-occupied banks from national and international financial systems.
33.Speaking about Libya, Air Vice-Marshal Stringer said that the Libyan Central Bank had been quick to sever links with bank branches that ISIL has been able to capture in the Libyan city of Sirte.66 But, regarding Syria, a 2015 report on ISIL financing by the Financial Action Task Force (FATF)67 concluded that:
More than 20 Syrian financial institutions with operations in ISIL-held territory continue to operate in Syria. Syrian bank branches in territory where ISIL operates are connected to their headquarters in Damascus; and some of them may maintain links to the international financial system.68
The FCO should assess whether ISIL is capable of accessing local or international financial systems via Syria, and work to close any remaining points of access for ISIL elsewhere if they exist.
ISIL’s use of Money Services Businesses, and the Hawala system
34.ISIL has been able to move money through other methods, which do not require the group to physically occupy bank branches. Money Services Business (MSBs) are another type of institution involved in the transfer of money that ISIL has been able to exploit. For example, Mr Rarden told us that 146 MSBs69 have already been listed in Iraq for involvement with ISIL and have been prevented from taking part in Iraq’s foreign exchange auctions.70 But Mr Rarden also said that there were 1,800 MSBs in Iraq in total,71 leaving a large number to be monitored.
35.Another threat is ISIL’s use of Alternative Value Transfer Systems (AVTS), which are often referred to (in the context of the Middle East) as the ‘Hawala’ system. This is an unofficial method of transferring money without necessarily moving cash, based on a relationship of trust between different money traders in different locations.72
36.Some features of AVTS/Hawala networks, such as their avoidance of electronic transfer methods, make them difficult to track and disrupt. But these systems are used throughout (and beyond) the Middle East.73 Understanding ISIL’s use of the Hawala system should be a priority in the effort to counter the group’s finances. Air Vice-Marshal Stringer told us that his team had taken specific steps, such as the use of external experts, to enhance their knowledge of AVTS.74
Isolating ISIL from Iraqi financial systems
37.A written submission from the Embassy of Iraq in London has outlined the measures that the Iraqi authorities have taken to prevent ISIL from making or moving money by infiltrating that country’s financial systems.75 The submission does not provide an account of whether these measures have been effectively implemented, or of what impact they have had on ISIL’s finances. But the submission does appeal for the provision of technical support and financial expertise from the international community, to allow Iraq to build its own enforcement capacity:
Iraq is eager to be an active and effective element in the international society, and to adopt its position and orientation to combat terrorism through deeper coordination and cooperation with the international society. Therefore, Iraq needs training and developing of its financial expertise in human resources.76
The submission concludes by describing five areas in which the Iraqi Government specifically requests assistance. They include the provision and sharing of information, the enhancement of technical capabilities, and the development of the Iraqi personnel working to counter ISIL’s finances.77
38.We have been told that it is overwhelmingly the US Treasury that has led efforts to cut ISIL off from Iraq’s financial system. This is understandable, given that one of the key issues was ISIL’s purported exploitation of the US Dollar auctions. But foreign assistance should not come at the expense of weakening local capacity. ISIL has thrived in states whose capacity to uphold law and order has been debilitated by war, and where challenges such as those of corruption provide another longstanding obstacle to the effective enforcement of the measures put in place against ISIL. States such as Iraq, in which ISIL operates, must achieve and maintain an effective ability of their own to counter ISIL’s finances. The FCO should work to ensure that any deficiencies in Iraq’s ability to counter ISIL’s finances are addressed, and that the Iraqi authorities can access UK training and expertise in order to help build their own capacity in this respect.
Donations to ISIL
39.The Ministry of Defence told us that:
It is accepted amongst FATF [Financial Action Task Force] members that the overall value of external donations to Daesh is minimal in relation to the revenue it generates from other sources, such as oil and taxation. But there is historical evidence of instances of financial donations to Daesh from within Gulf States.78 Furthermore, it is understood that family donations are being made to Daesh, through the unregulated Alternative Value Transfer Systems.79
40.The Government emphasised to us that it had no evidence of any state in the Middle East providing money to ISIL as a matter of policy. A written submission from the Ministry of Defence outlined the important role that countries such as Turkey, Saudi Arabia, Kuwait, and Qatar are playing in the international Coalition against ISIL,80 and the Embassy of Qatar in London wrote separately81 to the inquiry about that state’s efforts to militarily and financially isolate this terrorist group. The Gulf States are vital allies in the war against ISIL, but the UK should be able to ask hard questions of close friends as part of our collective efforts to counter this common threat.
41. Witnesses from the FCO addressed allegations that some governments in the region may have failed to prevent donations reaching ISIL from their citizens. Dan Chugg said that:
There were allegations that Gulf countries were turning a blind eye, at the very least, to what was happening82…allegations that Saudi, Qatar and Turkey were involved in funding Daesh in some ways83…I am not aware of hard evidence that those countries were funding Daesh, but there was a lot of speculation that those countries were not playing a terribly helpful role.84
42.Tobias Ellwood described a time, soon after ISIL first caught international attention with its rapid military expansion, when the group may have been perceived as a defender of Sunni Muslims in the wars in Iraq and Syria.85 Dan Chugg put this period “around two years ago”,86 while Tobias Ellwood referred to “before 2014”.87 During this period, ISIL may have been able to attract donations from sympathetic Sunnis, with the wealthiest states in the region—the Sunni monarchies of the Gulf—being the subject of particular concern. Mr Chugg said that “it was certainly a problem in the early days of the Daesh organisation that there was funding coming in from Gulf countries and other places.”88
43.States in the region are establishing the legal and institutional infrastructure required to counter ISIL’s ability to raise finances. These steps have been described to us by the Ministry of Defence,89 and we welcome the action taken. Progress has also been made in establishing a global framework for internationally-coordinated action. UN Security Council Resolution 2253, which was passed on 17 December 2015, is an important international standard for countering terrorism financing. It establishes provisions that member states are expected to enact so as to counter funding, and other material support, for ISIL. Resolution 2253 includes such measures as preventing donations to ISIL, freezing its assets, and inhibiting trade related to the group.90
44.But these efforts—of both individual states and of the international community—will not be effective if the measures against ISIL are enforced more effectively in some states than others. Some of the local measures to counter ISIL’s fundraising have been slow to be implemented by regional states. For example, the MoD told us that it was only in March 2015 that the Interior Ministry of Saudi Arabia passed laws making it illegal for Saudi residents to provide support to ISIL.91 In contrast, the UK designated ISIL as a distinct terrorist organisation in June 2014.92 There is also the issue that some of those donating to ISIL may have been close to the ruling families of the region. Tobias Ellwood told us that:
It is very opaque, it has to be said. When somebody who is close to the top of a royal family is a very rich individual donor and chooses to do so, that is very likely to happen.93
45.Dan Chugg said that:
It is difficult with some of these countries to know exactly what is Government funding and what is not when you are dealing with royal families, wealthy princes and those kind of things94…Our strategy was not to try to ascertain whose problem and whose fault it was, but to stop the funding going to Daesh. That was what was important. And that is what our efforts have been focused on.95
46.ISIL has received funding in the form of donations in the past. The FCO should work with local partners in the region to ensure that they have the capacity and resolve to rigorously enforce local laws to prevent the funding of ISIL, so that the group cannot benefit from donations in the future.
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67 An international organisation that focuses on countering terrorist financing as part of its mandate
68 Financial Action Task Force (FATF), Financing of the Terrorist Organisation Islamic State in Iraq and the Levant (ISIL), February 2015, p 28
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78 Ministry of Defence (SIF0006). A footnote at this point in the evidence read” E.g., On 24 September 2014, a Daesh official was listed and sanctioned by the US Department of the Treasury after receiving a 2 million USD donation emanating for the Gulf (http://www.fatf-gafi.org/media/fatf/documents/reports/Financing-of-the-terrorist-organisation-ISIL.pdf).”
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90 UN Security Council, Resolution 2253, 17 December 2015
92 Home Office, Proscribed Terrorist Organisations ,accessed 21 June 2016
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© Parliamentary copyright 2015
7 July 2016