Islamic State still generates tens of millions of dollars a month in illicit income despite a U.S.-led effort to cut the financing streams that have helped turn the once-obscure militant group into a terrorist organization unlike any previously seen, a senior U.S. counter-terrorism official said Thursday.
U.S. and allied airstrikes have pounded small oil refineries that the Sunni militants captured in eastern Syria, slowing but not halting their ability to process and sell smuggled oil and petroleum products at discounted rates on the black market in neighboring Turkey and elsewhere.
But in Iraq, U.S. financial officials say, dozens of local bank branches remain free to transfer money in and out of cities and towns controlled by the militants, giving them some access to financial systems.
In his first public comments on the still-evolving U.S. effort, David S. Cohen, the Treasury undersecretary for terrorism and financial intelligence, said Islamic State has "amassed wealth at an unprecedented pace," including taking in at least $20 million in ransom payoffs this year.
With the exception of some state-sponsored groups, Islamic State is "probably the best funded terrorist organization we have confronted," he said, and stopping it will take time.
"We have no silver bullet, no secret weapon to empty ISIL's coffers overnight," Cohen said, using a common acronym for Islamic State. "This will be a sustained fight and we are in the early stages."
The slow progress on the financial front comes as the Obama administration has defended its 10-week-old military operation. More than 600 airstrikes by the U.S. and allies have yet to dislodge the militants from any major cities or areas in Syria and Iraq.
Speaking at the nonpartisan Carnegie Endowment for International Peace, Cohen said Islamic State raises tens of millions of dollars a month through the sale of stolen oil, ransoms for kidnapping victims, theft and extortion in areas it controls and, to a lesser extent, donations from donors and financiers in Persian Gulf nations.
Although precise figures are impossible to obtain, U.S. investigators estimated that Islamic State earned about $1 million a day from oil sales beginning in mid-June, when the group's military blitz through western Iraq vastly expanded its territory and its access to oil fields and refineries.
Coalition airstrikes and other efforts since August have "begun to impair" those sales, Cohen said. The International Energy Agency reported last week that the militant group's ability to produce, refine and smuggle oil had been "significantly hampered."
Treasury and State Department officials met Oct. 17 with representatives of 20 nations and organizations in an attempt to financially isolate and undermine Islamic State, as well as its allies in Al Qaeda-linked Al Nusra Front and its ostensible enemies in Syrian President Bashar Assad's government in Damascus.
In addition to selling oil and refined petroleum products directly to middlemen and smugglers in Turkey, Islamic State has sold oil to Kurds in Iraq for resale in Turkey, Cohen said. "And in a further indication of the Assad regime's depravity, it seems the Syrian government has made an arrangement to purchase oil from ISIL," he said.
U.S. military planners have held back from disabling or destroying Iraqi pipelines, refineries and other oil production facilities because the government in Baghdad still hopes to push the militants out and doesn't want to make expensive and lengthy repairs to the electrical grid and oil production facilities.
Iraq's ambassador to the United States, Lukman Faily, said in a telephone interview Thursday that his government wants to preserve infrastructure for what he called the "day-after scenario," should the government regain control.
For now, Cohen said, Islamic State poses a tougher challenge than other traditional terrorist groups.
Unlike Al Qaeda, it draws relatively little of its revenue from foreign donors, who typically send funds from abroad. Tracking down and blocking such bank transfers is one of the Treasury Department's most powerful tools.
The bulk of Islamic State's money comes instead, Cohen said, from local criminal and terrorist activities. The group raises several million dollars a month through what he called a "sophisticated extortion racket," extracting payments from people passing through or conducting business in territory it controls.
In Mosul, Iraq's second-largest city, Islamic State fighters have gone "home to home, business to business, demanding cash at gunpoint," he said.
Religious minorities have been forced to pay tributes, and militants have robbed banks, looted and sold antiquities, and stolen livestock and crops from farmers, Cohen said. In some cases, militants also levy a 10% fee on cash withdrawals from bank branches.
"Make no mistake: This is not taxation in return for services or even for real protection," he said. "It is theft, pure and simple."
A complete crackdown is impractical. The Iraqi government has been reluctant to close bank branches in Mosul and other cities under Islamic State control because it would be disruptive to business and the millions of people in those areas.
Partly as a result, U.S. investigators have struggled to distinguish between legitimate commercial transactions and withdrawals for or by the militants.
"We have been in discussion with the Iraqi government and others about concerns about bank branches within ISIL-controlled territories," Cohen said.
The militants now control so much territory, especially in Iraq's Sunni dominated regions, that U.S. officials are struggling with "a lot of difficult questions about how to take action against ISIS without alienating the local population," said Rep. Adam B. Schiff (D-Burbank), a member of the House Intelligence Committee, referring to Islamic State by another acronym.
"We need to be realistic about just how much we can go after their income as long as they are in control of that oil-producing area," Schiff said.
"In terms of stopping the extortion or the kidnapping or the fees that they levy, there is little way to get at that income," he added.
Islamic State "has not only established a safe haven but has determined it is going to run a war economy and not destroy the financial infrastructure in doing so," Juan C. Zarate, President George W. Bush's deputy national security advisor from 2005 to 2009, said in a telephone interview.
"This presents a real complication for the Treasury because you obviously want to deny ISIS the use of those bank branches and finances but you don't want to strangle all the economic activity for the people living in those territories," Zarate said.
Still, Cohen described Islamic State's territorial ambitions as a financial burden.
Iraqi provinces now under the group's sway were slated to receive more than $2 billion in budget subsidies from the government in Baghdad this year, a largesse that "far outstrips" Islamic State revenue, he said.
"What this means is that ISIL cannot possibly meet the most basic needs of the people it seeks to rule," Cohen said.