Cutting the links to ‘blood oil’ from Islamic State

By Prof. Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct

The terrorist attacks of November 13th in Paris caused shock and sorrow globally and also heightened global interest in the Islamic State (IS), raising the questions around how IS is funding its operations and how these sources of funding can be cut off?

The answer to the last question appears to be, at least in part, oil revenues. IS is said to control about half a dozen producing oilfields in Iraq and Syria. The value of illegal oil exports to IS has been valued starting at 200,000 USD[1] to more than 1,000,000 USD a day. [2] Prior to air strikes this number was estimated at more than 2 million USD a day.[3] Oil from these locations is said to be smuggled through Iraqi Kurdistan. Much of it is sold locally but some of is believed to end up in neighbouring countries including Turkey, Jordan and Iran.[4]

By financing their operations with revenue from oil production the IS has joined scores of other groups globally using natural resources for conflict financing.

Cutting off this source of funding to IS has been an identified as an important strategy to weaken the organisation and the international community has taken steps to achieve this. Earlier this year Resolution 2199 [5] was unanimously adopted by the United Nations Security Council. The resolution condemns trade with the IS and emphasises obligations of Member States to take steps to prevent access to financing for terrorist activity through trade in oil, antiquities and hostages, and donations. Furthermore a United Nations panel has urged the Security Council to order all countries to seize oil trucks coming in and out of territory controlled by terrorist groups in Iraq and Syria.[6]

According to a report released by the Financial Action Task Force, “There have been efforts to suppress the sale of oil and oil products of the Islamic State on regional markets, such as enhanced counter smuggling efforts of the Turkish authorities in the past two years, as well as recent steps taken by the Kurdistan Regional Government (KRG) and Iraqi Government authorities to seize suspected IS-related shipments of oil and oil products. This has reduced oil’s importance relative to other sources of revenue.”

However the report also cautions that “there is still a need to better identify the origin, middlemen, buyers, carriers, traders and routes through which oil produced in IS-held territory is trafficked.”’[7]  The below market rates for oil produced by IS have been credited as part of the reason why there continues to be a market for it despite international pressure to block its sale.

Tools and policies are available to help companies respect human rights and avoid contributing to conflict through mineral sourcing practices. For example, the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High Risk Areas has become the international standard for due diligence implementation in conflict.

This Guidance helps combat the illegal exploitation of natural resources in conflict zones by providing the tools to cut the link between mineral extraction and trade, and conflict financing. Companies and industry programmes – overseen and monitored by governments and civil society – implement the Guidance through mineral supply chain due diligence, risk assessments, traceability and chain of custody procedures.

In the area of conflict minerals (e.g. gold, tin, tantalum and tungsten), this approach has been effective. According to the UN Group of Experts on the Democratic Republic of the Congo (DRC), as a result of the implementation of due diligence and the OECD Guidance “the security situation at tin, tantalum and tungsten mine sites has improved and trade in tin, tantalum and tungsten has become a much less important source of financing for armed groups”.[8]

It is important to know that this standard extends beyond gold, tin, tantalum and tungsten and is applicable to all minerals. This includes ‘conflict-jade’ from Myanmar and ‘conflict-sapphires’ that finance the Taliban. Moreover, it can even serve as a relevant standard for dealing with ‘conflict-art’ and ‘conflict-oil’ from IS.

In addition to the export of oil it has been reported that IS imports energy infrastructure and equipment from neighbouring countries used to maintain local refiners processing IS oils. The Associated Press has reported that international actors in the region were intentionally or unintentionally aiding these imports and exports and called IS management of its oil fields “increasingly sophisticated.”[9]

Under the OECD Guidelines for Multinational Enterprises enterprises have a responsibility to seek to prevent or mitigate an adverse impact when the impact is directly linked to their operations, products or services by a business relationship. Thus far these expectations have focused on conducting top-down due diligence on business relationships through supply chains. In other words, companies conduct due diligence on the products they source and suppliers that they work with. However what this responsibility entails with respect to companies conducting due diligence of potential buyers or end users of their products and services has received less attention and may warrant further exploration in this context.

In any case it is clear that cutting off funding to conflict financing is a crucial step to weakening organizations such as IS. This involves both avoiding purchase of conflict oil as well as avoiding supplying IS with the equipment and resources it needs to support its operations. In order to stop the flow of blood oil from IS, businesses should carry out due diligence to ensure that they are not financing these activities through their sourcing or export practices.

 

[1] Drying up ‘Islamic State’ sources of financing, November 18, 2015. Deutche Welle  http://www.dw.com/en/drying-up-islamic-state-sources-of-financing/a-18858811

[2] Push in U.N. to Intercept Jihadists’ Oil, November. 17, 2014 New York Times http://www.nytimes.com/2014/11/18/world/middleeast/push-in-un-to-intercept-jihadists-oil.html?partner=rss&emc=rss&_r=2

[3] Where Islamic State gets its money , Jan 4th 2015, The Economist,  http://www.economist.com/blogs/economist-explains/2015/01/economist-explains

[4] Inside Islamic State’s oil empire: how captured oilfields fuel Isis insurgency, Nov. 19. 2014. The Guardian.  http://www.theguardian.com/world/2014/nov/19/-sp-islamic-state-oil-empire-iraq-isis

[5] Unanimously Adopting Resolution 2199 (2015), Security Council Condemns Trade with Al-Qaida Associated Groups, Threatens Further Targeted Sanctions, UN Security Council, February 12, 2015 http://www.un.org/press/en/2015/sc11775.doc.htm

[6] Financing of the Terrorist Organisation Islamic State in Iraq and the Levant (ISIL), Financial Action Task Force

February 2015; http://www.fatf-gafi.org/media/fatf/documents/reports/Financing-of-the-terrorist-organisation-ISIL.pdf

[7] Id.

[8] Annual Report on the OECD Guidelines for Multinational Enterprises 2014, p. 168

[9] Despite US Led Campaign, Islamic State Rakes in Revenues, Hamza Hendawi and Qassim Abdul-Zahara, October 23, 2015  http://bigstory.ap.org/article/061e7a83299644868c920bed0667eb9c/despite-us-led-campaign-islamic-state-rakes-oil-earnings

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