The Islamic State is facing an unprecedented cash crunch in its home territory, U.S. counterterrorism officials say, as months of strikes on oil facilities and financial institutions take a deepening toll on the group's ability to pay its fighters or carry out operations.
For the first time, U.S. officials are seeing clear evidence of the financial strain on the group's leadership, as reports surface of clashes among senior commanders over allegations of corruption, mismanagement and theft.
Cash shortages already have forced the group to put many of its Iraqi and Syrian recruits on half-pay, and accounts from recent defectors suggest that some units haven't received salaries in months. Civilians and businesses in the Islamic State's self-proclaimed homeland complain of being subjected to ever-higher taxes and fees to make up for the shortfall.
U.S. officials attribute the economic upheaval to a months-long campaign to destroy the group's financial underpinnings, including weeks of punishing strikes on oil facilities as well as banks and other repositories of hard currency.
The strikes against oil fields, refineries and tankers have cut oil production by about a third, according to several counterterrorism officials, who spoke on the condition of anonymity to discuss sensitive intelligence from the region. Meanwhile, overall revenue from the Islamic State's oil business has plummeted by as much as 50 percent because of falling oil prices and a diminished capability to make and sell refined products such as gasoline, the officials said.
"For the first time, there's an optimistic tone," Daniel Glaser, assistant secretary for terrorist financing at the Treasury Department, said of the financial war against the Islamic State. "I really do think we're having a significant impact."
But, he added, "They still make a lot of money, and we still have a long way to go."
U.S. military operations, meanwhile, have killed a number of high-ranking financial officials including the group's finance minister, Haji Iman, whose death in an airstrike was announced a week ago.
Moreover, because of the group's territorial losses in recent months - military defeats have shrunk the size of the self-declared caliphate by about 40 percent over the past year - the terrorists now have a significantly smaller population to exploit for cash, U.S. officials and analysts say. Unlike al-Qaida, which relied on outside donors for revenue, the Islamic State has traditionally generated much of its income locally, through extortion and other criminal enterprises as well as taxes and fees imposed on businesses and civilians.
"The successful pushback of ISIL from the territory they control is huge," Matthew Levitt, an expert on terrorist financial networks who worked at the Treasury Department and FBI, using one of the common acronyms for the Islamic State. "If they don't control the territory they can't exploit the population. They can't take advantage of natural resources, whether it's oil or wheat or water."
Some terrorism experts think the recent terrorist attacks in Europe are partly a response to the group's worsening prospects on its home turf. In the short term, pressure on the Islamic State's finances could make the group more dangerous and unpredictable, some say.
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"You corner a wild beast and it's going to lash out," said Levitt, now a senior fellow at the Washington Institute for Near East Policy, a think tank.
Counterterrorism officials have seen little evidence of significant financing or material support from the Islamic State's central branch for the recent attacks in Paris and Brussels. Indeed, the group appears to be providing little, if any, monetary aid to its new affiliates elsewhere in the Middle East and South Asia, counterterrorism experts say.
"While some provinces may have received funds, others appear to not be seeing much in return for fighters sent to Syria and Iraq," said Katherine Bauer, until recently a senior adviser on terrorist financing at the Treasury Department.
U.S. officials caution that the Islamic State has recovered from serious setbacks before, and the group's leaders are both resilient and creative in overcoming obstacles. Hisham al-Hashimi, an Iraqi military strategist, expressed skepticism about U.S. claims of success in inflicting serious damage to the terrorists' financial infrastructure.
"They're not going through a financial crisis that will lead to their collapse," Hashimi said. "They still have 60 percent of Syrian oil wells and 5 percent of Iraq's."
For the United States and its allies, the task of cutting the Islamic State's financial lifelines has proven to be exceptionally difficult, in part because of the group's economic self-sufficiency but also because of the huge amounts of cash its fighters acquired after capturing several major Iraqi cities in 2014, officials say. That initial financial windfall - estimated at more than $700 million - instantly made the group the world's wealthiest terrorist organization.
That cash is now mostly gone, U.S. officials say, much of it having been either spent on salaries or incinerated in recent weeks in a series of carefully targeted airstrikes.
Col. Steve Warren, a U.S. military spokesman in Baghdad, said the ongoing strikes are believed to have destroyed tens of millions of dollars' worth of hard currency once held by the Islamic State. Some U.S. officials said the losses were probably in the hundreds of millions of dollars.
"They stockpile their cash in various locations: large quantities of cash, millions of dollars in one spot," Warren said. "And we find out where they are and destroy it."
The losses in oil revenues have been at least as great. In 2014, when its fighters were sweeping across eastern Syria and western Iraq, the terrorists seized control of oil wells and refineries, which were soon employed in producing oil and gas for the black market. As recently as a year ago, the group was generating a half-billion dollars annually by selling petroleum products to buyers in Turkey and Syria.
Obama administration officials initially expressed reluctance about targeting oil facilities that could some day aid the rebuilding of Iraq and Syria. But since the November terrorist attacks in Paris, a U.S.-led military offensive dubbed Operation Tidal Wave 2 has carried out more than 200 strikes against oil wells, refineries, pipelines and trucks.
Since the start of the campaign, the Islamic State's oil production has plummeted, and it has lost both refining capacity and easy access to its black-market dealers in Syria and southern Turkey, U.S. officials say.
With oil revenues down, the terrorist group is increasingly dependent on the money it collects from local populations in the towns and villages it controls, U.S. officials say. Since 2014, the Islamic State has skimmed hundreds of millions of dollars from Iraqis and Syrians through an elaborate system of taxes and fees as well as criminal enterprises ranging from extortion and kidnapping.
A key blow to the group's "tax" revenue came last year when the Iraqi government agreed to halt salary payments to thousands of government workers in Mosul and other cities under Islamic State control. That one move disrupted a revenue transfer approaching about $2 billion a year, U.S. officials say.
"This is money they use to pursue their military efforts and run their government," Glaser, the Treasury official, said. "We're cutting them off from their sources of revenue and we're cutting them off from markets so they can't go out and spend the money they have."
Defectors' accounts and social-media postings attest to the toll of such losses on the Islamic State's daily operations as well as life in terrorist-controlled districts. Civilians and foreign recruits fleeing the self-proclaimed caliphate have described dwindling supplies of basic goods, as well as higher fees for violating the group's conservative dress code or breaking taboos against smoking or skipping prayers.
Abu Sara, 33, an engineer from the Iraqi city of Shadadi, said friends and relatives who joined the Islamic State are expressing disillusionment after months of pay cuts.
"Their members are getting quite angry, either they are not getting salaries or getting much less than they used to earn," said Abu Sara, who now lives in Turkey. "All of the people I am in contact with want to escape, but they don't know how."
With travel banned, the only opportunity to escape is after battle, when disillusioned fighters "throw down their weapons and mingle with the civilians," he said.
Keywords: national security, isis, petroluem, islamic state, isil