8 June 2017
As ISIS loses territory and moves underground, tackling its financial model will be the next step in ‘degrading and defeating’ the terror organization.
Renad Mansour

Dr Renad Mansour

Research Fellow, Middle East and North Africa Programme

Hisham Al-Hashimi

Researcher, Al-Nahrain Centre for Strategic Studies; Member, National Reconciliation Commission, Iraq


In 2014, the so-called Islamic State conquered one-third of Iraq in its pursuit of a Caliphate. By 2017, the organization is finding it difficult to claim statehood. It has suffered a series of territorial losses, from Tikrit (2015) to Ramadi (2015-2016) to Fallujah (2016) to Mosul (2016-2017), and is now facing an assault on its ‘capital’ of Raqqa. Its days of controlling and administering territory appear to be nearing an end. 

However – and despite references to a post-ISIS Iraq – territorial losses do not mean the end of ISIS in the country, where it has existed in one form or another since 2003. Relying on its dynamism, the Salafi-jihadi organization will shift tactics as it goes back underground – a now familiar cycle of expansion and contraction. During this new period of contraction, ISIS will attempt to maintain some strength while it awaits an opportunity to resurge.

While underground, ISIS will have to change its organizational mind-set; it can no longer think of itself as a state, but rather as an underground organization. This shift in mind-set has implications for both military and financial tactics. Though many writers now focus on the changing military tactics, from conventional to unconventional or asymmetric warfare, less attention is paid to the change in financial practices.

Yet, finances are ISIS’s key method for survival. The ideational (meaning the ‘idea’ of the Caliphate), religious, or political beliefs will not be enough to sustain the dynamic organization, which arose from the war economy and amassed economic resources by offering a better form of security to smuggling routes. Due to this model, as many have argued, profit-driven business and tribal elites’ in smuggling networks in northern Iraq partnered or even joined the Salafi-jihadi organization.

The feature differentiating ISIS from other groups was its control over territory. During the period of governing territory, ISIS revenue streams sought to mimic those of a state. In addition to raising funds from the export of commodities such as oil and antiquities, ISIS sought to impose tariffs on imports (2.5%), levy taxes on the population under its control, and enforce a licensing fee on businesses (between $2,500 and $5,000). Although other elements facilitated the financial rise, such as foreign donations, human trafficking and the spoils of war, the distinguishing feature of ISIS financing was the emphasis on state-like tactics. Its leadership perceived the organization as a state. In Mosul, it even had a finance minister.

The loss of administrative territory not only signals the end of the state mind-set, but it also jeopardizes ISIS’s position in the war economy. It will no longer be able to offer security to smuggling networks. As such, the organization must now adjust to new realities to maintain its position and economic interest-based relationships.

To do this, ISIS is focusing on a new industry: legitimate business via third parties, which are the profit-driven businesses and tribal elites. Here, and similar to the smuggling relationship, middlemen – who are not necessarily ISIS-loyalists but businessmen looking to make money – are playing an important role. These middlemen agree to terms with their funder without many questions asked. They are not only Sunni, but also include Shia businessmen. Their key interests are economic, not ideational, religious or political. This allows ISIS to maintain liquidity and therefore relevance in the war economy.

For ISIS, the new approach centres on its ability to launder its massive cash reserves, plundered from major cities such as Mosul, in a manner that will allow it to continue to draw upon them without intervention from hostile powers. 

According to well-placed sources, ISIS is using these middlemen to clean its cash reserves by purchasing various businesses in Baghdad and elsewhere. Under this financial model, an ISIS leader, who is unable to own property in Baghdad, pays a third party a lucrative monthly salary to purchase a legitimate enterprise. Businesses include electronic companies, car dealers, private hospitals and the food and beverage industry. The third party business owner then shares his revenues with his ISIS contact. Often times, the third party engages in the business without asking where the money is coming from.   

Another way to launder this money is by selling Iraqi dinars and buying US dollars, which can be more easily used transnationally. Throughout Baghdad, the organization either owns (via third parties) or relies on currency exchange companies in order to exchange the money. According to insider sources, ISIS is also actively engaging in the Central Bank of Iraq’s (CBI) currency auctions. These auctions are held by the CBI to buy back Iraqi dinars in exchange for US dollars as a means of stabilizing the currency, thus unwittingly providing a route for ISIS to buy dollars from the CBI and sell their massive reserve of dinars.

The next phase of attempts to ‘degrade and defeat’ ISIS will be multifaceted but will have to tackle this new stage of its war economy. ISIS will be investing its cash reserves into both informal and formal economies.

Today, while its income has depleted owing to the loss of territory, ISIS has also reduced its expenses associated with administering that territory. And, despite these losses, it will remain the ‘wealthiest terror group in history’ as a result of its stockpile of reserves obtained in its heyday (2014–16) when it was making an estimated $2–3 million a day. This wealth is the distinguishing factor between ISIS and other groups. 

Since 2014, the military fight against ISIS has relied on the fact that ISIS had an ‘address’ – its territory – and therefore assets were easier to identify. As ISIS goes underground, the challenge for its enemies will be to prevent the organization from blending back into Iraqi society. The long-term approach will continue to be a push to address ISIS’s root causes. However, the new short-term ‘degrade and defeat’ strategy will have to adapt in order to adjust to changes within ISIS. Disrupting its financial networks will be a critical, and highly challenging, task. In essence, the next stage of ISIS’s war economy depends on its cash assets and its role in both the informal and formal economy.

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