Global Policy Forum

By John F. Burns and Kirk Semple

The insurgency in Iraq is now self-sustaining financially, raising tens of millions of dollars a year from oil smuggling, kidnapping, counterfeiting, connivance by corrupt Islamic charities and other crimes that the Iraqi government and its American patrons have been largely unable to prevent, a classified United States government report has concluded.

The report, obtained by The New York Times, estimates that groups responsible for many insurgent and terrorist attacks are raising $70 million to $200 million a year from illegal activities. It says $25 million to $100 million of that comes from oil smuggling and other criminal activity involving the state-owned oil industry, aided by "corrupt and complicit" Iraqi officials. As much as $36 million a year comes from ransoms paid for hundreds of kidnap victims, the report says. It estimates that unnamed foreign governments — previously identified by American officials as including France and Italy — paid $30 million in ransom last year.

A copy of the seven-page report was made available to The Times by American officials who said the findings could improve understanding of the challenges the United States faces in Iraq. The report offers little hope that much can be done, at least soon, to choke off insurgent revenues. For one thing, it acknowledges how little the American authorities in Iraq know — three and a half years after the invasion that toppled Saddam Hussein — about crucial aspects of insurgent operations. For another, it paints an almost despairing picture of the Iraqi government's ability, or willingness, to take steps to tamp down the insurgency's financing.

"If accurate," the report says, its estimates indicate that these "sources of terrorist and insurgent finance within Iraq — independent of foreign sources — are currently sufficient to sustain the groups' existence and operation." To this, it adds what may be its most surprising conclusion: "In fact, if recent revenue and expense estimates are correct, terrorist and insurgent groups in Iraq may have surplus funds with which to support other terrorist organizations outside of Iraq."

Some terrorism experts outside the government who were given an outline of the report by The Times criticized it as imprecise and speculative. Completed in June, the report was compiled by an interagency working group investigating the financing of militant groups in Iraq. A Bush administration official, who spoke on condition of anonymity, confirmed the group's existence. He said it was led by Juan Zarate, deputy national security adviser for combating terrorism, and was made up of about a dozen people, drawn from the C.I.A., the F.B.I., the Defense Intelligence Agency, the State Department, the Treasury Department and the United States Central Command.

The group's estimate of the financing for the insurgency, even taking the higher figure of $200 million, underscores the David and Goliath nature of the war. American, Iraqi and other coalition forces are fighting an array of shadowy Sunni and Shiite groups that can draw on huge armories left over from Mr. Hussein's days, and benefit from the willingness of many insurgents to fight with little or no pay. If the $200 million a year estimate is close to the mark, it amounts to less than what it costs the Pentagon, with an $8 billion monthly budget for Iraq, to sustain the American war effort here for a single day.

But other estimates suggest the sums involved could be far higher. The oil ministry in Baghdad, for example, estimated earlier this year that 10 percent to 30 percent of the $4 billion to $5 billion in fuel imported for public consumption in 2005 was smuggled back out of the country for resale. At that time, the finance minister estimated that close to half of all smuggling profits was going to insurgents. If true, that would be $200 million or more from fuel smuggling alone.

For Washington, the report's most dismaying finding may be that the insurgency now survives off money generated from activities inside Iraq, and no longer depends on sums Mr. Hussein and his associates seized as his government collapsed. American officials said that as American troops entered Baghdad, Mr. Hussein's oldest son, Qusay, took more than $1 billion in cash from the Central Bank of Iraq and stashed it in steel trunks aboard a flatbed truck. Large sums of cash were found in Mr. Hussein's briefcase when he was captured in December 2003.

But the report says Mr. Hussein's loyalists "are no longer a major source of funding for terrorist or insurgent groups in Iraq." Part of the reason, the report says, is that an American-led international effort has frozen $3.6 billion in "former regime assets." nother reason, it says, is that Mr. Hussein's erstwhile loyalists, realizing that "it is increasingly obvious that a Baathist regime will not regain power in Iraq," have turned increasingly to spending the money on their own living expenses. The trail to these assets "has grown cold," the report adds.

The document says the pattern of insurgent financing changed after the first 18 months of the war, from the Hussein loyalists who financed it in 2003 to "foreign fighters and couriers" smuggling cash in bulk across Iraq's porous borders in 2004, to the present reliance on a complex array of indigenous sources. "Currently, we assess that these groups garner most of their funding from petroleum-related criminal activity, kidnapping and other criminal pursuits within Iraq," the report concludes.

One section of the report is dedicated to the role played by "sympathetic donors," including Islamic charities and nongovernmental organizations. It says that "intelligence reporting" indicates that only 10 to 15 of the 4,000 nongovernmental groups support terrorist and insurgent groups, but that those few take advantage of lax Iraqi regulation to divert funds to insurgent and other armed groups and, in some cases, "to provide cover for insurgent recruitment and the transport of weapons and personnel."

The possibility that Iraq-based terrorist groups could finance attacks outside Iraq appeared to echo Bush administration assertions that prevailing in the war here is essential to preventing Iraq from becoming a terrorist haven, as Afghanistan became under the Taliban. But that suggestion was one of several aspects of the report that drew criticism from Western terrorism and counterinsurgency experts working outside the government who were given the outline of the findings.

While noting that the report appeared to reflect a major effort by the administration to learn more about the murky world of insurgent financing in Iraq, the experts said the seven-page document appeared to be speculative, at least in its estimates of the funds available to the insurgent and terror groups. They noted the wide spread of the estimates, particularly the $70 million to $200 million figure for overall financing, the report's failure to specify which groups the estimates covered and the absence of documentation of how authors had arrived at their estimates.

While such data may have been omitted to protect the group's clandestine sources and methods — the document has a bold heading on the front page saying "secret" and a warning that it is not to be shared with foreign governments — several security and intelligence consultants said in telephone interviews that the vagueness of the estimates reflected how little American intelligence agencies knew about the opaque and complex world of Iraq's militant groups.

"They're just guessing," said W. Patrick Lang, a former chief of Middle East intelligence at the Defense Intelligence Agency, who now runs a security and intelligence consultancy. "They really have no idea." He added, "They've been very unsuccessful in penetrating these organizations." He said he was equally skeptical about the report's assertion that the insurgent and militant groups may have surpluses to finance terrorism outside Iraq. "That's another guess," he said. "A judgment like that, coming from an N.S.C.-generated document," he said, is not an analytical assessment as much as it is a political statement to support the administration's contention that Iraq is a central front in the war on terrorism. "It's a statement put in there to support a policy judgment," he said.

Several analysts said that, except for the possibility that Al Qaeda of Mesopotamia might be transferring money to Qaeda factions elsewhere, the assertion that insurgent money might be flowing out of the country was doubtful considering the single-minded regional focus of most of the militants operating here.

Dr. Magnus Ranstorp of the Swedish National Defense College, an author of extensive studies of the Iraqi insurgency, said he doubted Iraqi groups were ready to finance terrorism outside the country. "There's very little evidence that they're preparing to export terrorism from Iraq to the West," he said. "I think it's much too early for that."

The document tracing the money flows acknowledges that investigators have had limited success in penetrating or choking off terrorist financing networks. The report says American efforts to follow the financing trails have been hamstrung by several factors. They include a weak Iraqi government and its nascent intelligence agencies; a lack of communication between American agencies, and between the Americans and the Iraqis; and the nature of the insurgent economy itself, primarily sustained by couriers carrying cash rather than more easily traceable means involving banks and the hawala money transfer networks traditional in the Middle East.

"Efforts to identify key financial facilitators, funding sources and transfer mechanisms are yielding some results, but we need to improve our understanding of how terrorist and insurgent cells interact, how their financial networks vary from province to province or city to city and how they use their funds," the report says. It also says the United States must help the Iraqi government "to excise corrupt officials from its law enforcement and security services and its ministries" and "to prevent smuggled Iraqi oil from being sold within their borders."

Another challenge for the United States, the report says, was to persuade foreign governments to "stop paying ransoms." It gives no details, but American officials have said previously that France paid a multimillion-dollar ransom for the release in December 2004 of two French reporters held hostage by an insurgent group. Italy, these officials have said, paid ransoms on at least two occasions, in September 2004 for the release of two women, both aid workers, and in March 2005, a reported $5 million for the release of Giuliana Sgrena, a journalist for the Rome newspaper Il Manifesto.

Several American security consultants, all former members of government intelligence agencies that deal with terrorism, said in interviews that the ineffectiveness of efforts to impede the revenues to the insurgents was reflected in the continuing, if not growing, strength of Iraq's militants. "You have to look at what the insurgency is doing," Mr. Lang said. "Are they hampered by a lack of funds? I see no evidence that they are."

Jeffrey White, a defense fellow with the Washington Institute for Near East Policy, also a former Middle East analyst with the Defense Intelligence Agency, agreed. "We've had some tactical successes where we've picked off a financier or whatever, but we haven't been able to unravel a major component of the system," he said. "I've never seen any indication that they're strapped for cash, never seen any indication that they were short on weapons."

He said the insurgency had demonstrated tremendous regenerative properties. "The networks fix themselves, they heal themselves," he said. He pointed to the success of Al Qaeda in Mesopotamia in withstanding the loss of hundreds of combatants and dozens of major leaders. "They keep coming back," he said, "and I think the same thing has happened to the financial system."

Reporting was contributed by Mark Mazzetti from Washington and James Glanz from Baghdad.