Race is on for IS to get funds out of crumbling caliphate

ANTAKYA (Turkey) — For years, Mr Ammar’s tiny money-transfer shop in the Turkish city of Antakya caught no one’s attention but the fellow Syrian refugees who pressed inside to send and receive money from abroad. That was up until this summer, when security officials started visiting every week.

“I’ve had to show them my accounting books each week, and they took the shopkeeper next door and detained him for three months,” he said. “Everyone is scared.”

Mr Ammar, who asked not to be identified by his real name, knew what they were hunting for — businesses transferring money on behalf of the Islamic State (IS). He just did not understand why the officials were interested in him. He did not hail from an IS-held area, and the border region he lives in is nowhere near the jihadi group’s last remaining strongholds.

What Mr Ammar had not realised was that his town had become a conduit for illicit funds.

While international attention has been focused on the jihadis’ territorial losses to the United States-backed international coalition, IS has been waging another, silent campaign: To make as much money as it can, as fast as it can, and get that money out of its collapsing, self-proclaimed caliphate.

“They’re dividing up the family estate,” joked one former black-market trader from an IS stronghold. “They’ll spread that money everywhere, to keep it working for the organisation long after the caliphate is gone.”

The group’s race to move its money is a prime concern for Western governments, as the fight against IS shifts from Syrian and Iraqi battlefields to European capitals. As its money spreads further afield, especially into Europe, they believe IS will try to use those funds to launch further attacks.

IS gained prominence in 2014, exploiting the chaos of Syria’s civil war to seize more than a third of Iraq and almost half of Syria. Territorial control and self-financing distinguished it from its predecessor, Al Qaeda, and helped make it the world’s richest jihadi group, earning hundreds of millions in revenues a year.

But now, Iraq’s second city of Mosul is back in government hands, US-backed Kurdish forces are bearing down on Raqqa, the group’s de facto capital, and Syrian President Bashar Assad’s forces, backed by Russia, are encircling the militants’ eastern desert territory.

Analysts expect IS will soon be forced to revert to the amorphous insurgency it once was. Yet interviews with people inside or recently escaped from IS-controlled areas say the group is still making aggressive efforts to produce oil and impose its own currency, a bid to garner as many dollars as it can to funnel through a secret trail of money transfers and business investments.

“Now that they are losing territory, this has become a priority for them,” said Mr Renad Mansour, an analyst at the UK’s Chatham House think-tank, who has been studying the issue. “They need to maintain financial influence and power.”

In Syria’s oil-rich east, traders survey daily caravans of “whales” — their nickname for large trucks that haul up to 220 barrels of IS crude, sometimes 60 vehicles at a time, across the desert towards government-held parts of Syria. Despite constant coalition air strikes that have degraded production, they say IS has kept the trade going.

“The oil never stopped … People need oil, IS needs to sell and business keeps moving,” said the owner of one of the makeshift oil refineries that dot the eastern province of Deir ez-Zor. IS seized the wells in 2014, and now Deir ez-Zor is expected to be the place it wages its last stand.

Analysts at IHS Markit this year calculated an 88 per cent drop in monthly IS revenues compared with January 2015, while the International Centre for the Study of Radicalisation in London said IS has now lost 90 per cent of its wells.

Both estimate oil revenues were cut in half this year. Yet interviews with more than a dozen Syrian oil workers and traders suggest IS can still make up to US$1 million (S$1.36 million) a day, thanks to its ability to shift costs — and risk — to eager buyers. They say IS has maintained its original pricing at US$20-US$45 a barrel, depending on quality.

One trader, who has fled to Turkey, recalled a recent visit to an oil well, minutes after a coalition air strike. He requested a discount from the IS official taking payments, as dirt had mixed into the crude. “But he replied, ‘Let the oil spill on the ground. We won’t sell for less, not even by one dollar,’” said the trader. “IS always sells, even if the coalition is striking and the sales are stalled the price never changes.”

Despite losses, IS holds Syria’s two most productive fields: Al Omar and Al Tanak. Together, traders and well workers say the fields can still produce up to 25,000 barrels a day.

“IS is making a good profit, even if production isn’t like before. It may even be more profitable,” said one fuel trader. “Two years ago, they may have made double or even four times as much. Now, their territory has drastically shrunk, but so have their expenses.”

Earlier this year, some traders expected the IS oil trade to founder, after coalition advances blocked routes into the rebel-held north-west, once its main external market.

Instead, the group doubled down on another market: Traders close to the Assad regime.

Government-held areas struggle to maintain fuel supplies due to Western sanctions, relying mostly on Iran, its regional patron, which has shown a willingness to halt supplies to pressure Damascus. Traders say the main regime middleman has set up an office in Sabha, in IS territory where young men line up each day for a chance to drive his “whales”, for about US$130 a trip.

“In recent months, this trend of selling oil to the regime has become normal,” said one trader. “At Friday prayers, the imam lectures that there is a fatwa allowing it, after people complained it was shameful.”

IS has also begun imposing more strictly its own currency in eastern Syria. It minted its own coins in 2015 — golden “dinars”, silver “dirhams” and copper “fils”.

But locals rarely saw the coins until about six months ago, when IS began ordering their use. “At first, we ignored them. But when people wanted to pay for their water or phone bills or zakat (religious tax), they asked us to bring the currency,” said one pharmacist who recently fled Deir ez-Zor. “Three months ago, they said their currency is obligatory at all times.”

Currency dealers say they are now required to sell Syrian pounds and US dollars to the IS “economy office” each week, in return for its coins, as the group seeks to soak up all the available convertible currency. Aymenn Jawad Tamimi, an analyst at the Middle East Forum who studies leaked IS documents, obtained a June order for all money transfers to be converted into IS currency.

“Any other currency that gets into the market, they suck it up now and exchange it for their own,” said one food warehouse owner in Deir ez-Zor.

“They want to monopolise hard currency.”

Only local merchants bringing in supplies from Syrian areas outside IS control are given permission to buy US dollars. Traders who buy IS oil in US dollars are also exempt.

The gold dinar, which weighs 4.25 grams, is sold at a rate higher than the market value of gold (currently about US$45 per gram). Local businessmen estimate that IS has sold more than 100,000 dinars, generating hundreds of thousands of dollars in profit for the jihadi group.

Coalition forces are aware of the dangers if the IS war chest is allowed to leave its territory. In June, before evening prayers, hawala and currency dealer Samer Idris was struck dead by a coalition air strike as he drove home. Few of his fellow traders were surprised.

For weeks, several of those interviewed said they had avoided working with him over suspicions that he was acting as an IS frontman. A US Central Command statement on the killing described Idris as an IS “financial facilitator” and “international money launderer”.

“Two years ago, Idris could barely afford to open one money transfer office,” said a fellow dealer. “Then, over a few months, he could open two.”

Hawala, derived from Arabic for “transfer”, is like an unregulated Western Union — a network of money dealers built on family ties and connections that spans the Middle East and stretches into Europe.

Its informal, hard-to-track nature makes it ideal for illicit transfers, and it was already being used by Isis to move funds for purchases, particularly weapons and parts for bombs.

But with 80 per cent of the Syrian population living below the poverty line, it is also a lifeline for civilians dependent on relatives abroad.

Refugees can use it to get their money out. Traders crossing enemy lines to bring in food and supplies can use it to avoid carrying cash.

Western sanctions, as well as regulations to combat terrorism financing, make it hard for Syrians to transfer funds, pushing them towards hawala.

“Go to any village in Syria and you’ll find at least one hawala office,” said Mr Ammar, the dealer in Turkey. “If we stopped transferring, people would die.”

Civilians who fled Raqqa and Mosul under IS rule describe entire streets lined with currency and hawala dealers. Turkish border towns often have dozens of jewellers and exchange shops running a side business in hawala.

Some dealers say IS develops relationships with merchants transporting food or medicine to help transfer tens of thousands of dollars a day. Several dealers said that Idris had been transferring US$10 million in eight batches over 25 days to Sarmada, a town in Syria’s north-west under the control of a different jihadi group.

One regional hawala dealer says he tallied at least US$25 million in transfers in recent months to Sarmada — where it can be easily smuggled to Turkey. This summer, coalition air strikes killed the three dealers accused of being behind those transfers: Idris, Fawaz Rawi and Bassam Jayfus.

Iraqi officials long suspected IS had money exchange offices in Baghdad and other Iraqi cities — two years ago it used some to bid in central bank auctions for dollars, until US authorities caught on.

Mr Mansour said IS later realised it could profit by buying businesses such as hotels and hospitals.

A United Nations Security Council report, seen by the FT, warns that IS-controlled business may even seek to exploit post-war reconstruction-financing in Iraq and Syria.

Iraqi ministries have repeatedly failed to coordinate and share information. Mr Mansour said several people told him they were afraid to help the government. “First, because they didn’t think anything would be done. And second, they feared moles within the authorities,” he said.

Syria is too devastated to have any official oversight, but many hawala dealers have noticed a rise in interrogations, detentions and even deportations among correspondent dealers in Saudi Arabia and the United Arab Emirates.

Many of them suspect that the ultimate goal for IS is to move money to Europe, and argue it is already camouflaging transfers amid those done by refugees. “If it wanted to send US$1 million to Europe right now, it could,” added another dealer. “But who are the ones receiving it? That knowledge is only with IS, the dealers, and God.” FINANCIAL TIMES

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