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Airstrikes cutting into Islamic State's cash supply, U.S. says

Islamic State's finances have been squeezed by falling oil prices and airstrikes on oil production sites and cash hoards, forcing salary cuts for its fighters and limiting purchases of arms and ammunition, according to U.S. officials.

Unable to dislodge the extremist group from its quasi-state, the U.S.-led coalition has begun targeting buildings where it suspects the militants store cash from looted banks, ransom payments or taxes collected in territory they control.

U.S. officials estimate the group has lost more than $100 million in 10 such airstrikes. In one, a Pentagon video released last month showed a missile slamming into a building near Mosul, in Iraq, sending a cloud of bills fluttering in the air and presumably incinerating others.

That's a small fraction of the multibillion-dollar wealth the Sunni militants have amassed in Iraq and Syria over the last two years.

U.S. officials, who have struggled to trace the group's funding schemes, cautioned that the financial losses are still more a management problem for Islamic State than a strategic threat to its future.

Still, combined with the group's several recent defeats on the battlefield, the effort is showing some results, according to U.S. military, counter-terrorism and Treasury Department officials.

U.S. intelligence officials recently obtained an Islamic State notice, for example, that said leaders had halved monthly salaries for all fighters in Raqqah, the group's self-declared capital in Syria, because of "exceptional circumstances."

"They're cutting people's salaries, cutting wages," Col. Steve Warren, spokesman for the U.S.-led military coalition, told reporters Wednesday in a teleconference from Baghdad. That's a "fairly significant indicator" that the airstrikes have hampered the militants' ability to generate revenue, he added.

"There is nothing on their economic horizon that could backfill" the lost oil revenue and burned cash stores, agreed Matthew Levitt, the former top Treasury Department official on terrorism financing.

"The bank vaults aren't being replenished. It is a fairly closed economy. And you can only tax and extort people so many times," he said in a telephone interview.

Daniel Glaser, an assistant secretary of the Treasury, said airstrikes on oil infrastructure have "undoubtedly impeded" the group's' ability to "profit from oil as it had been doing."

Glaser praised the Iraqi government's decision in August to stop issuing about $170 million a month in salaries and pensions to Iraqi citizens in captured areas. That stopped the militants' ability to tax that income at rates of up to 50%.

"It is clear that these measures in fact have played a key role in pressuring ISIL financially," Glaser said at a conference on terrorism financing at Chatham House in London, using an acronym for Islamic State.

The Treasury Department also has imposed financial sanctions on more than 30 individuals and institutions accused of assisting the group.

In the most recent cases, on Feb.11 Treasury officials sanctioned Faysal al-Zahrani, who managed oil fields and moved money for the group in eastern Syria; Husayn Juaythini, who recruited fighters in the Gaza Strip and Libya; and Turki al-Binali, a religious advisor who called for attacks on Bahrain after the government there revoked his citizenship.

Cutting them off from U.S. banks and financial systems is unlikely to affect the militants' operations, however, because Islamic State is largely self-funded, said Seth Jones, a former U.S. counter-terrorism official now with Rand Corp., the Santa Monica-based think tank.

It still controls major cities and towns in Syria and Iraq. The militants can raise money by increasing local fees and taxes, demanding a bigger cut from smugglers and expanding extortion of businesses, Jones said.

"Until they start losing territory, I am skeptical it will have a huge dent on their ability to collect money," he said.

In any case, the militants have a ready supply of cash. They raided banks and businesses as they swept into Iraq in 2014, initially seizing at least $500 million, and have raised millions more from smuggling oil, antiquities and other illicit schemes.

Officials say intelligence for some of the recent airstrikes came from a Delta Force raid into Al Amr, a town in eastern Syria, in May.

The U.S. commandos killed their target, Abu Sayyaf, who ran Islamic State black market oil and gas operations. But they took his wife, Nisreen Assad Ibrahim Bahar, and a cache of notebooks, laptops, cellphones and other materials back to a base in Iraq.

The 25-year-old Iraqi woman ultimately revealed details about the group's leaders and clandestine financial system, according to a criminal complaint, filed on Feb. 8 in U.S. District Court for the Eastern District of Virginia, that charged her with conspiracy to provide material support to a terrorist organization.

Bahar, who is in Iraqi custody, said Islamic State had used her house to store large sums of U.S. dollars from oil and gas sales, according to the court documents.

Starting in October, coalition air raids began targeting other buildings with suspected cash hoards. The coalition also stepped up attacks on oil wellheads, oil and gas separation plants, and tanker trucks, mainly in the oil-rich Dair Alzour region in eastern Syria.

The attacks have cut production in the region to about 34,000 barrels a day, down from 45,000 barrels daily, according to Pentagon officials, but the small decrease means the revenue stream remains strong. Smugglers carry the oil across the border into Turkey and Iraq or sell it in Syria.

"The long-term effects of this effort to degrade ISIL oil revenue will take time to be fully realized, but we know in the short term we are disrupting a significant source of [their] funding," said Sgt. Maj. Donald Sparks, a Baghdad-based spokesman for the U.S.-led military coalition.

The Pentagon is calling the bombing campaign against the oil installations Operation Tidal Wave II, named for the American daylight bombing raid on heavily defended Nazi-controlled oil refineries around Ploiesti, Romania, in World War II.

The original Operation Tidal Wave, on Aug. 1, 1943, was a military disaster. The U.S. Army Air Forces lost 53 aircraft and more than 600 air crewmen on the mission, the worst such loss of the war. Oil output from the refineries actually increased soon after the raid, the U.S. military later concluded.

brian.bennett@latimes.com

william.hennigan@latimes.com

Copyright © 2016, Los Angeles Times
A version of this article appeared in print on February 21, 2016, in the News section of the Los Angeles Times with the headline "U.S. says airstrikes cut into Islamic State's cash supply - Leaders are forced to halve salaries and reduce spending on weapons, officials say." — Today's paperToday's paper | Subscribe
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