"They have access to oil in Iraq and Syria; access to major population centres; access to banks, antiquities and smuggling groups - all of that allows them to be more agile and have access to more capital and resources than your average terrorist group."
US-led airstrikes against oil refineries and tanker convoys, coupled with lower crude prices, have cut Isis oil revenue by up to two-thirds, but the group has shifted to demanding higher taxes, fees and "protection money" from people and businesses.
It's also plundering everything from phosphates and grain to jewellery and antiquities and confiscating property and land, according to 12 current and former US officials and several experts on terrorist financing.
US Treasury and intelligence officials say they don't have an accurate estimate of what the group is now earning, and caution that analysts' guesstimates are based on limited information and outdated assumptions.
"The truth is nobody really knows how much they're making now," said Daveed Gartenstein-Ross, a senior fellow at the Foundation for Defence of Democracies.
"The US Government is getting closer to pegging the group's finances because of things like last month's raid in eastern Syria. But no one knows how much they're getting versus their spending."
Isis "is in some ways a proto-state, in some ways a terrorist organisation, in some ways an insurgency and in some ways a transnational criminal group", he said. Like drug cartels in Colombia and Mexico and al-Qaeda offshoots in Somalia, northern Mali and Yemen, the group is extorting taxes, plundering local resources and taking a cut of commercial enterprises, he said.
Princeton University professor Jacob Shapiro said the challenge for US policy is that Isis is "not as vulnerable as other transnational terrorist groups because they have a tax base. As long as it holds territory, it can tax and raise revenue. Think of them as a small economy with no central bank and no currency."
Isis has taken over banks, natural resources and agriculture, and is expanding its looting of antiquities and private property and its protection rackets, demanding 5 per cent to 20 per cent taxes on salaries, plus fees for a range of economic activities, US officials say.
"[Isis] extorts money in connection with everything from fuel and vehicles transiting Isis-held territory to school fees for children, all under the auspices of providing notional services or protection," said Jennifer Fowler, deputy assistant secretary of the Treasury for terrorist financing and financial crimes.
The group siphons money from Iraqi Government employees who leave Isis territory to get their paycheques. It also has established "back-door banking" in places outside its control, including the Iraqi Kurdish city of Kirkuk.
Matthew Levitt, a former deputy assistant secretary of Treasury, cited cases of funds being deposited - often by aspiring foreign recruits - in bank accounts in the US, European Union or elsewhere, then immediately withdrawn from a bank just outside Isis territory. Saudi Arabian officials have reported the group soliciting money through online media such as Twitter and Skype and receiving prepaid purchase cards.
"To date, the amount of outside financial support is minimal in comparison to their revenue-producing activities" in areas controlled by Isis, said Gerald Roberts, who leads the FBI's global terrorist financing investigations.
Still, "by following the money, we are not only able to identify individuals and networks who are financially supporting Isis, but it also enables us to identify foreign fighters and aspirant travellers before they depart the US and other countries."
Levitt, director of the Washington Institute's programme on counterterrorism and intelligence, said Isis' "Achilles' heel" may turn out to be having "more expenses than they can cover".
"While it's true they're the best-financed terror group we've seen, they're still an insurgent group, and they have a lot of expenses."
The money seized from banks in Mosul and elsewhere isn't being replenished, and its revenue from black-market oil sales is diminishing, according to US officials.
Already, the group's "revenues are insufficient to fund the several-billion-dollar annual budget that the Government of Iraq had previously allocated" to territories that Isis now controls, Fowler said.
A US raid in Syria last month that seized laptops and mobile phones belonging to an Isis financial officer known as Abu Sayyaf is helping the US get a more detailed picture of where some of the money comes from and how it's spent, according to State Department and Treasury officials.
"We collected substantial information on [Isis] financial operations," Marine General John Allen, the presidential envoy for the coalition against Isis, said last week in Doha, Qatar. Still, said Zarate, "there's not a magic button for Treasury to push that will allow us to constrict the budget of Islamic State" short of retaking its territory and resources.
"The reality is we have to dislodge this group.
- Bloomberg
