When financial regulations threaten a Somali lifeline

When a severe drought hit East Africa in 2011, triggering famine in Somalia, money transfer operators provided a lifeline to affected families. With help from MTOs, nongovernmental organizations were able to deliver nearly $80 million worth of emergency cash and vouchers to beneficiaries. Somalia does not have a formal banking system. Although its central bank was reopened in 2009, inadequate resources have prevented it from formulating and implementing monetary policy. As such, the Somali diaspora sends remittances through money transfer companies such as Dahabshiil. Each year, about 40 percent of the Somali population receives between $1.3 billion and $2 billion in remittances, higher than the $998.6 million in net official development assistance donors gave to the country in 2012. The majority of this income is spent on food, clothes and education, and communities that receive larger amounts of remittances are usually more food secure than others. While not all NGOs operating in the country use money transfer companies, a number of them do rely on these operators, not just to run cash transfers and voucher programs, but also to pay their staff. MTOs keep bank accounts in the countries where most of the Somali diaspora reside — mainly the United Kingdom, the United States and Canada. But in an effort to curb money laundering and financing to terrorist organizations, these same countries are imposing increasingly stringent regulations on the banks, forcing them to close accounts associated with money transfer companies. Dahabshiil’s U.K. account at Barclays, for instance, will be shut down next month after a yearlong fight against the bank was eventually settled out of court. In a letter to Dahabshiil, Barclays argued its decision was a commercial one, stressing that it was “not a negative reflection of your anti-money laundering standards, nor a belief that your business has been unwittingly been a conduit for financial crime.” During the 2011 crisis, U.S.-based Sunrise Community Banks closed the accounts of some of its Somali money transfer clients at the height of the famine. Merchants Bank of California, one of the last major American banks to host accounts associated with Somali MTOs, announced in July that it would stop dealing with a dozen of them. And in Canada, the number of Somali MTOs fell from 11 to three over the past decade. Money transfer companies insist they are fully compliant with international and national regulations and ready to abide by whatever due diligence process is necessary to keep their accounts open. Even so, recent high-profile cases against major banks such as HSBC — which was fined a record $1.9 billion for weak money laundering controls — have pushed banks to err on the side of caution. “The system has tipped too far in a more strict interpretation of regulations, which means that you are ending up risking cutting off the lifeline,” said Ed Pomfret, Somalia campaigns and policy manager at Oxfam. “What we’ve been asking for is, in the U.S. and in the U.K., for the regulators to be much clearer about what exactly compliance means, how do they assess compliance, and what are the risk factors they're assessing against, because it’s all a bit murky at the minute.” MTOs ‘key actors in humanitarian operations’ NGOs working in Somalia worry that the difficulties faced by local money transfer operators might hamper humanitarian efforts, just as signs of a food crisis in the region are re-emerging, only three years after the latest famine. Last month, the Somali government announced the drought has affected several regions in the country and appealed to the United Nations for immediate food assistance. “[Money transfer companies] are key actors in humanitarian operations now,” said Degan Ali, executive director of Adeso (formerly known as Horn Relief), which pioneered MTO-based cash transfers in the country. “You cannot implement cash transfer programs in any way in Somalia without the MTOs to actually do it for you.” NGOs working in Somalia are not directly affected by these closures, since the money they wire to the country usually transits via Nairobi. However, allowing money transfer companies to operate abroad is crucial to mitigate the effects of the ongoing humanitarian crisis, and ensure the subsistence of the companies these organizations rely on for local operations. Dahabshiil partners with 95 percent of the international aid organizations operating in Somalia — including the United Nations, Oxfam, the World Bank and CARE International — and has branches all over the country, unlike smaller MTOs that only operate in certain regions. With drought and the decadeslong conflict threatening to cause a new famine, aid agencies warned the humanitarian situation in the country might relapse. Only about a third of Somalia’s humanitarian needs for the year have so far been funded, making remittances coursed through MTOs an even more crucial lifeline. Alternatives for diaspora and MTOs There are other means for the Somali diaspora to send remittances to their families in Somalia, but not all of them are as inexpensive or convenient. Among their options are: Other local MTOs: A number of smaller Somali MTOs operate in the diaspora’s host countries, but many of them only have a regional reach. Customers sometimes choose which remittance company they use based on clan affiliation, which makes switching companies difficult. With 286 branch locations in Somalia, including a 90 percent market share in Somaliland, Dahabshiil has by far the largest coverage. Unregulated MTOs: Certain smaller Somali money transfer services still rely on the traditional remittances system, running exclusively on cash reserves. These are unregulated, unofficial financial institutions, and therefore not compliant with anti-money laundering and terrorism financing regulations. International MTOs: Western Union runs one branch out of Hargeisa in Somaliland and none in Somalia. Its transfer fees are notoriously prohibitive compared with those of local MTOs, which charge as low as 5 percent of each transfer. Mobile money: Those who wish to send money to Somaliland can use its nascent mobile money service, Zaad, through certain international money transfer services like World Remit. Mobile transfer recipients, however, need an ID card — which most locals lack — to open an account with Zaad. International and larger money transfer companies, however, have fewer options. They can choose to transact with a different bank, for one. Dahabshiil has actually been in talks with other U.K.-based banks to open a new account, but has made no announcement. But with increasing pressure from Western governments, MTOs are reportedly having fewer and fewer banks to turn to. Long-term solutions Some donor countries have recognized the need for unimpeded remittance flows to Somalia and proposed ways for money transfer companies to continue operating. Last month, the U.S. Congress signed into law the Money Remittances Improvement Act. Sponsored by Rep. Keith Ellison of Minnesota, the act was designed to simplify the regulatory process that money transfer businesses must comply with in order to ensure transparency. A timeline for its application is still to be determined. Following calls from Dahabshiil and various NGOs — as well as a much-publicized appeal by Somali-born British athlete Mo Farah — the United Kingdom mandated the Department for International Development and the Treasury to set up an action group to work on short-term solutions to keep remittances flowing between the U.K. and Somalia. A pilot project for a “safer corridor” designed to increase the transparency of money flows for the time being is currently in the works and should be phased out toward the end of the year. Dealing with regulations, however, is only part of the long-term solution. What money transfer businesses ultimately need in order to operate is for Somalia to set up a domestic banking infrastructure as well as a national identification system to facilitate transparency. Both, however, might take years to implement, given the current political context. At stake is not only the future of the remittances system, but also the long-term stability of the country. Limiting the ability of money transfer companies to operate would lead the diaspora to revert back to underground channels, which would in turn increase the risk of money laundering and terrorism financing. “Closing these accounts will just do the opposite of what these governments want,” Adeso’s Degan Ali warned. “The last thing you want is to have a suitcase with $100,000 leaving Minneapolis or leaving London to come to Somalia and carry remittances. The more it goes underground, the more shady things will become.” Check out more insights and analysis provided to hundreds of Executive Members worldwide, and subscribe to the Development Insider to receive the latest news, trends and policies that influence your organization.