WASHINGTON — As the Islamic State group sees its territory shrink to half its original size and its dreams of a caliphate evaporate, the extremist fighters are losing access to the sources of revenue that once gave them their power, prompting them to turn to extortion, kidnapping or foreign donations like their predecessors, the militant group al-Qaida.
The Islamic State group had a unique ability to capitalize on the natural resources of its territory in Iraq and Syria and swiftly implement a system of taxation and governance that allowed it to rule an area that once was the size of Switzerland.
As the battle gets underway to retake Mosul, the group's largest stronghold in Iraq, the Islamic State group is being denied access to revenue sources such as oil and gas and cash reserves that once amounted to more than $1 billion in 2014, said Daniel Glaser, the Treasury Department's assistant secretary for terrorist financing.
With those resources slipping away, the Islamic State group is expected to revert to "traditional methods we see al-Qaida using — whether it's deep-pocket donors, whether it's charities, whether it's NGOs, whether it's criminal activity," Glaser said in a recent discussion at the Washington Institute for Near East Policy.
Beyond oil and gas sales, the Islamic State group also generated some $30 million per month in Iraq from taxation and extortion in 2015. Hisham al-Hashimi, an expert on IS who advises the Iraqi government, said the militant group currently makes about $4 million per month from taxes in Mosul alone. Al-Hashimi said the group charges a 4 percent income tax on salaries less than $600 per month, and 5 percent on monthly salaries between $600 and $1,000.
Bank robberies made up the Islamic State group's third biggest source of revenue, mainly in Mosul, where there was more than $500 million in state-owned bank vaults when they captured the city in June 2014, but that was "a one-time take for them," Glaser noted, and they are quickly burning through that cash.
Glaser says the Islamic State group is under financial duress. Fighter salaries have been cut in half in some areas, including in Raqqa, Syria, its de facto capital. The group also set up an internal corruption agency, suggesting corruption may be a factor, Glaser and al-Hashimi said.
To compensate, there's been a noticeable spike in the IS group's revenue from criminal activity, such as extortion — the Paris-based Center for the Analysis of Terrorism says extortion accounted for a third of its revenue in 2015, compared to 12 percent in 2014.
In Syria, Islamic State-run services are lagging and the group recently shifted from paying fighter salaries in U.S. dollars to Syrian pounds, indicating that their access to money markets has been disrupted, said Ziad Awad, editor of The Eye of the City, an online publication in Deir el-Zour. He added that the militants' access to resources in Deir el-Zour, including oil, has been halved amid ongoing coalition airstrikes, which are complicating oil sales and transportation.
The oil wells were "bringing in about $2 million daily," Awad said in a Skype interview from Turkey. "This has shrunk because they've lost markets inside Syria and Iraq, due to shrinking territory."
The Iraqi government moved to suspend government salaries to people living in IS-controlled areas last year in an effort to hit its taxable revenues. Glaser said that the move dealt a significant blow to the group, since the Iraqi government payroll is about $2 billion per year in Islamic State-held territories.
But the challenges remain with reports that the militants coerce some employees to leave IS-controlled territory to collect their salaries, holding their property as collateral, only to retroactively tax them when they return home.
The group is shifting from a governing force to a militant group on the run.
"In a traditional terror financing model, you don't have an organization that is focused on governance and on holding and managing territory," said Yaya J. Fanusie, director of analysis at the Foundation for the Defense of Democracies' Center on Sanctions and Illicit Finances and a former CIA counterterrorism analyst. "Al-Qaida's money went to mainly operations and training."
Beyond criminal activity, Fanusie said IS will likely pursue money through any number of sources as its territory shrinks, from charities to nonprofit groups, sympathetic, wealthy donors, or the huwala system, an alternative remittance system used in countries around the world that allows the transfer of funds domestically and internationally without using formal financial institutions.
"ISIS losing territory is good, but to launch an attack in Europe or the U.S. or any part of the world doesn't cost a lot," he said, using an acronym for the group. "If they're being squeezed in Syria and Iraq and directing their resources on attacks externally and less on governance, then it doesn't mean they're not a dangerous force."
Associated Press writer Zeina Karam in Beirut contributed to this report.