Al Qaeda Nostra

The U.S. bounty for Abu Ayyub al-Masri used to be $5 million. Not quite as high as the American rewards offered for top terror leaders Osama bin Laden ($50 million) and Ayman Al-Zawahiri ($25 million) but nevertheless a strong signal that Washington wanted to capture al-Masri, the man who succeeded the notorious Abu Mussab al-Zarqawi as head of Al Qaeda in Iraq. Now the Bush administration seems less enthusiastic about nabbing him: last week it cut the reward for al-Masri down to a mere $100,000.

Is this a sign that Al Qaeda in Iraq (AQI) is on the wane? Yes, according to both U.S. and Iraqi sources, who base at least some of their information on intel gleaned from captured insurgents. Sources in Iraq have told NEWSWEEK that AQI is hitting a cash crunch and is increasingly turning to crime to help finance its deadly operations. Part of the reason is al-Masri's lackluster leadership. The Egyptian, they say, has not been able to rally his forces in the same way as the vicious Zarqawi, who was shown decapitating hostage Nicholas Berg in one of the war's most gruesome videotapes. Under Zarqawi's guidance, AQI unleashed a series of suicide bombings and attacks around the nation that killed more than 150 in a single day of bloodshed on Sept. 14, 2005. Al-Masri does not necessarily shy away from such brutality, but he has instead set his sights on less headline-grabbing strategic targets like bridges and Iraqis allied with American forces.

Of course, AQI's squeeze isn't only because the new leader doesn't inspire the troops. The American military "surge," increasing diplomatic pressure, growing opposition to the attacks from fellow Sunnis and perhaps a public increasingly inured to rising death tolls are all playing a part in the declining attack numbers. In Multinational Division North, an area the size of Pennsylvania that includes both the former AQI stronghold province of Diyala and the province of Nineveh, attacks dropped from a peak of about 600 a week last July to about 270 a week two weeks ago. According to American military leaders in Iraq, last year's influx of 30,000 American troops and a threefold increase in Iraqi security forces to about 600,000 led to the deaths of about 2,400 AQI insurgents and the capture of some 8,800 others. In recent weeks Iraqi security forces have detained 50 AQI senior leaders and facilitators around Mosul and in other areas, according to a senior U.S. military officer familiar with coalition and Iraqi military operations. Those captured include Ahmad Umar Nasir al-Sabawi, AQI "emir" of East Mosul.

The group has lost safe havens, too. Military offensives drove the insurgents from Anbar and Diyala provinces, leaving them holed up in and around the big northern city of Mosul, now the latest battleground in the push against them. Some 32,000 Iraqi Army and police forces have descended on the city, led personally by increasingly assertive Prime Minister Nuri al-Maliki. Operation Lion's Roar, a multipronged campaign launched on May 10, includes Iraqi air attacks, ground troops swarming through neighborhoods and armored vehicles pursuing AQI leaders, with about 5,000 American troops providing support. If AQI is routed from Mosul, it will lose the base from which it runs operations, including its biggest and most lucrative criminal enterprise: ripping off the country's multibillion-dollar oil industry, U.S. and Iraqi authorities say. "Mosul is one of the economic centers of gravity," says Rear Adm. Greg Smith, until recently a U.S. military spokesman in Iraq. "That's why they want Mosul in the worst way, more so than anything else."

Al Qaeda in Iraq is no stranger to racketeering. The group has long raised money through activities like ransoming kidnapping victims, car theft, commandeering rations, counterfeiting and hijacking fuel trucks. In some cases members dressed as police will set up a fake checkpoint, seize late-model cars and either kill or chase off the drivers. They'll then change the license plates and transport the vehicles to be sold in another city—often Kirkuk or Baghdad. (One Baqubah man happened on his stolen car in Khana'an, tricked out with new plates. The driver admitted he'd bought it from a man he knew to be AQI. "But when the original owner demanded his vehicle back, the new owner told him, 'If you have a problem, go talk to the Islamic State of Iraq [another name for AQI]'," says Lt. Col. Ziad Tarik Noman, who sees many detainees at Khamees, an Iraqi military base near Baqubah.) AQI sells stolen vehicles through a network of fences. The group's spies also finger wealthy people and tell Al Qaeda leaders about businesses they own and what kind of ransoms they could pay, along with details of their movements. At Khamees, Iraqi Army commanders monitor the criminal work of the terrorists, who even shake down Iraqi Army soldiers for ammunition, says 5th Division Lt. Col. Wa'el Abdullah.

The haul from these illegal enterprises runs to the tens of millions of dollars, but the single most lucrative activity comes from oil rackets centered on Bayji, says an Iraqi government official who does not want to be named discussing specifics. There the insurgents puncture holes in pipelines, siphon oil into trucks and sell it on the black market, a phenomenon called "illegal oil bunkering," says Oil Ministry spokesman Asim Jihad. This activity nets AQI an estimated $2 million a month. The group also sets up quasi-legitimate gas stations and fuel-trucking companies, demands "protection" payments from legitimate businesses and hijacks trucks carrying gasoline and kerosene, then resells the fuel. AQI can prey almost at will on Iraq's oil apparatus, because the government has no way to safeguard the country's more than 4,000 miles of pipelines. "What I see more and more is a Mafia-esque criminal gang," Lt. Col. Patrick Mackin, a U.S. Army intelligence officer in Diyala province, says of AQI's activities.