US Warns of Sanctions on Buyers of Islamic State Oil

The Obama administration on Thursday threatened to slap sanctions on anyone buying oil from Islamic State militants in an effort to disrupt what it said was a $1-million-a-day funding source.

Islamic State has seized large swaths of Iraq and Syria in a brutal campaign, and could pose a threat to the United States and its allies if it is not stopped, U.S. Treasury Undersecretary David Cohen said.

"With the important exception of some state-sponsored terrorist organizations, ISIL is probably the best-funded terrorist organization we have confronted," Cohen said, referring to another name for Islamic State. He spoke at the Carnegie Endowment for International Peace.

Islamic State, or IS, is generating tens of millions of dollars a month through a combination of oil sales, ransom, extortion and other criminal activities, and support from wealthy donors, said Cohen in laying out the most comprehensive outline yet of the U.S. financial strategy against the group.

IS's fundraising mostly avoids the formal financial system, and relies less on donor support compared with militant groups like al-Qaeda, making it less susceptible to Treasury's traditional tools of designating wealthy financiers and blacklisting banks.

"We have no silver bullet, no secret weapon to empty ISIL's coffers overnight," Cohen said.

But, the U.S. government and its allies are working on finding new ways to disrupt Islamic State's activities, including its key oil revenues, Cohen said. IS has tapped into the black market in oil in Syria and Iraq, refining some and selling it to smugglers who transport it to Turkey and the Kurdish region of Iraq.

The research firm IHS estimated this week that Islamic State militants were producing about $2 million worth of crude oil a day before recent U.S.-led air strikes.

The United States and its allies, including Saudi Arabia and the United Arab Emirates, began launching air strikes against IS in Iraq in August and Syria in September, including targeted strikes against IS-controlled oilfields and refineries. The strikes have succeeded in bringing crude production down to 20,000 barrels a day, less than a third of what it was last summer, the International Energy Agency said.

While the air strikes have disrupted some of Islamic State's oil revenue, Cohen said it was still important to find other ways to target the group's funding sources and prevent access to the formal financial sector by targeting middlemen, traders, refiners and transport companies.

U.S. sanctions block people and firms from accessing the U.S. financial system, and are usually followed by banks around the world who are wary of dealing with U.S. enemies.

Cohen said Turkey and the Kurdistan regional government in Iraq were starting to crack down on oil smuggling networks that existed long before Islamic State started taking advantage of them.

The United States will also seek to disrupt other funding including an estimated $20 million from kidnapping this year by urging countries not to pay ransoms.

(Reporting by Anna Yukhananov; Editing by Tim Ahmann and Gunna Dickson)