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USA/Somalia: Rising Threat to Remittances

AfricaFocus Bulletin
February 24, 2015 (150224)
(Reposted from sources cited below)

Editor's Note

When President Obama addressed the White House Conference on Countering Violent Extremism last week, the media buzz focused on his message that it was a counterproductive error to equate Islam and terrorism. Some critics also pointed out the contradictions in trying to win hearts and minds by parsing language while continuing to fuel terrorism with drone strikes and collaboration with repressive regimes. Virtually invisible, however, was the deep collateral damage from the "financial war on terror," which continues to impede remittances from Somali immigrants needed both for survival and economic development in their homeland.

Earlier this month, the last American bank providing services to Somali money transfer operators began to cut off remaining accounts, having tried unsuccessfully to meet demands from U.S. agencies to tighten control of "risks" that money might go to terrorists. The threat is not new, and the administration has pledged to take action, but the "financial war on terror" continues to take priority, leaving calls for urgent action by the administration unanswered.

This AfricaFocus Bulletin contains excepts from a new report on this issue from three non-governmental groups: "Hanging by a Thread: The Ongoing Threat to Somalia's Remittance Lifeline." The full report, which includes sections on the UK and Australia as well as the United States, is available at http://tinyurl.com/mvnwwaw

For additional background on the threat to remittances from the "financial war on terror," with a particular focus on the UK, see this AfricaFocus Bulletin from a year ago (http://www.africafocus.org/docs14/som1402.php).

For a February 6 letter to Secretary of State Kerry from Keith Ellison and other members of Congress calling for urgent U.S. action on the crisis, see http://tinyurl.com/ls9r6cf

For an article on the high cost of remittances, see http://www.africafocus.org/docs14/remi1404.php

For additional AfricaFocus Bulletins on migration-related issues, visit http://www.africafocus.org/migrexp.php

For previous AfricaFocus Bulletins on Somalia, visit http://www.africafocus.org/country/somalia.php

For a summary and links for recent developments in USA/Somalia relations, see the February 23 post from Africa Militarism Watch ( http://tinyurl.com/mp9gx3b)

++++++++++++++++++++++end editor's note+++++++++++++++++

Hanging by a Thread

The ongoing threat to Somalia's remittance lifeline

Joint Agency Briefing Note, 19 February 2015

Adeso (African Development Solutions, Nairobi, http://adesoafrica.org/)

Global Center on Cooperative Security (London, http://www.globalcenter.org/)

Oxfam (Oxford, http://www.oxfam.org)

[Link to Adeso press release and full report: http://tinyurl.com/mvnwwaw]

Every year, Somalia receives approximately $1.3bn in remittances - money sent from the Somali diaspora to loved ones back home. Remittances account for between 25 and 45 percent of Somalia's economy and exceed the amount it receives in humanitarian aid, development aid and foreign direct investment combined. As Somali money transfer operators lose their bank accounts, Somali families are losing their only formal or transparent channel through which to send money. Somalia needs long-term support to build sustainable financial institutions as well as urgent help to maintain its current remittance flows.

Introduction

As Somali families visit their local money transfer office to pick up money from relatives in Minneapolis, Toronto, London, Melbourne, Nairobi, Copenhagen or elsewhere, they are hoping that this is not the month that their funds fail to arrive. Money transfer operators (MTOs) estimate that over 80 percent of the start-up capital for small businesses in Somalia is sent by the diaspora. Money received from abroad is also used to meet basic needs, including food, water, shelter, and education. Additionally, most remittance recipients provide support to poorer relatives.

The Problem

Somalia is not only one of the most remittance-dependent countries in the world, it also faces a unique set of challenges in its effort to maintain remittance inflows. Unlike the remittance industry in many countries, Somalia's money transfer system is relatively affordable and accessible to customers. Somalia does not have a functioning commercial banking system: Central Bank of Somalia currently has very limited correspondent relationships with foreign banks, little to no commercial banking services, and inadequate supervisory capacity to oversee the sector. Foreign banks and MTOs are basically absent.

That leaves Somali MTOs - a group of companies that grew out of informal hawala networks - as the only formal, practical, and regulated set of institutions through which to send money to Somalia. To operate, MTOs require bank accounts in countries from which money is sent. Unfortunately, in recent years, Somali MTOs have found it increasingly difficult to access banking services in the USA, the UK, Australia and elsewhere. Banks are exiting sectors viewed as high-risk, including the money transfer sector, and they have branded Somalia as a particularly risky destination for money transfers because of its weak financial regulation and the presence of groups listed as terrorists. Despite the significant efforts that Somali MTOs have made to comply with Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regulations, most international banks view Somali MTOs as high-risk customers. The decreasing access to banking services and the increasing cost of compliance has reduced MTOs' profits and limited their ability to further expand their service and coverage.

The risk of legal money flows being significantly curtailed and in some contexts, potentially cut off completely, remains a terrifying, and all-too-real prospect. As Somali MTOs lose their banking arrangements, remittances to Somalia could decrease in volume and go underground. This would defeat the object of upholding AML/CFT regulations, and would create a system that regulators and law enforcement officials cannot penetrate, increasing the potential for abuse. Informal business networks, supported by couriers carrying hundreds of thousands of dollars, would likely replace the current formal systems that are accountable to regulators and the communities they serve. Families that depend on remittances would suffer, while the criminal networks that seek to exploit the system would benefit.

Since July 2013, governments, MTOs, and banks in the UK and the US especially have made some strides toward solutions. US and UK policymakers have increasingly prioritized the flow of remittances to Somalia. Somali authorities have taken important steps toward effectively regulating money transfers, and the use of mobile money transfer technology continues to expand in Somalia. Much of this progress has come in response to political pressure and public campaigning.

This briefing reviews international efforts to facilitate remittances to Somalia since July 2013, identifying successes but also some significant gaps in the response. It focuses on the US and the UK as the two countries with the highest populations of Somali diaspora and where the threat to the remittance system is most acute. It also covers recent events in Australia, where the future viability of the Somali remittance industry now seems uncertain, and where the Australian government has begun working with MTOs and banks to address these challenges.

The recommendations in this paper have a worldwide application, particularly as they relate to the role of G20 countries in fulfilling their commitments to financial inclusion.

Box 1: The humanitarian situation in Somalia

Rising food prices, poor rains, displacement, conflict, trade disruption, and reduced levels of humanitarian aid have combined to create a poor food security situation which some have compared to the situation in 2011 that resulted in famine. More than 730,000 people in Somalia are dependent on aid for survival. At the time of writing, an estimated 202,600 children under the age of five are acutely malnourished, including almost 38,200 severely malnourished children considered to be at death's door. This is in a context of long-term chronic poverty and lack of services, with one in every five children in Somalia dying before their fifth birthday. Only 30 percent of the population has access to clean drinking water, and there are more than 1.1 million internally displaced people in Somalia and 1 million refugees.

[end box]

With one out of every three Somalis saying that without these remittance flows they would not be able to pay for food, school or basic healthcare, further strain on this vital lifeline would throw many more families into crisis and undermine efforts to foster a stable and peaceful Somalia. The fact that this money is immediately available for recipients to spend on their most immediate needs, or to invest in the most promising opportunities, makes it all the more important to Somalia's recovery.

The economic obstacles facing the Somali people, including their need for a sustainable financial system, require long-term solutions. That should not, however, dilute the urgency with which the current Somali remittance system must be strengthened. The Somali government must lead, but the US, UK and Australian governments, the G20 and its member governments, the Financial Action Task Force, and the World Bank must all act swiftly to maintain the financial lifeline between Somalia and its diaspora population.

The impact on women in Somalia as the main caregivers in their families is particularly great. Although statistics are scarce, it appears that more than half of Somali women receive remittances. Remittances are often the only funds that female caregivers are able to access and control, making them a vital tool for women's economic empowerment, which in turn boosts the ability of women to claim their social and political rights. Studies have found that whenwomen receive and control remittances, they are more likely to invest the funds in overall household well-being through increased expenditures on health, education, and nutrition. However, control over remittances is not a given for women recipients. This is critical, in particular for women who are relying solely on remittances for family survival.

Since the start of the civil war, women have taken on greater roles in terms of being providers for their families, starting small businesses (for which investment from the diaspora is crucial), and at the same time providing primary care for their children. Some women who receive remittances choose to go beyond the simple day-today management of the money and invest part of the resources in income-generating activities in order to mitigate the irregularity and precariousness of this source of income. If remittances were to be curtailed, women and their families would bear much of the shock.


'People's entire lives are dependent on these remittances, and until the day that Somalia can take care of its own people, we remain dependent on them.

This is not just extra money: this is money that I need to survive on a daily basis. Not only am I dependent on it, but more than ten relatives - my entire extended family - are as well. I have sick relatives who need medication, and children that I am trying to provide an education for. This money is vital for that. If I did not receive this money we would not be able to survive and I am scared to even think about what could happen.' - Hawa Abdullahi Warsame, Badhan, Somalia


Remittances to Somalis from the United States and the US Government Response

Following the 11 September 2001 terrorist attacks, several large US banks responded to tougher money laundering regulation and enforcement by closing the accounts of MTOs. Somali remittance company executives had warned throughout the early 2000s that the US-Somalia money transfer corridor was under threat. However, it was not until the height of the 2010-2011 Horn of Africa drought, when Sunrise Community Bank announced it would close Somali MTO accounts, that Somali communities and humanitarian agencies mobilized at scale. Thankfully, MTOs were able to survive, relying on a number of small- and medium-sized banks around the US to process their business. However, this episode exposed an alarming lack of foresight on the part of the US government, in stark contrast with its public recognition that a closure of formal mechanisms to transfer money to Somalia would be disastrous for US and Somali interests.

Box 3: US government bank regulators: Singing from the same songsheet?

The public commitments to support MTOs made by Treasury Department policy makers in 2014 are encouraging, but a great many governmental actors need to buy into Treasury's message if the banking environment is going to change. The Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) are two bodies within Treasury which establish their own regulations. FinCEN additionally supplies data in criminal investigations and OFAC conducts enforcement actions for violations of its rules. The agencies that supervise and insure banks - the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board - as well as the National Credit Union Administration, maintain their independence from Treasury Department policy makers (including the OCC, which is housed within Treasury). They each have direct contact with financial institutions and, through their examinations and enforcement actions which aim to guarantee the soundness of the financial system, regulate the risk of money laundering.

Finally, criminal prosecutors have become increasingly important players in recent years. The US Department of Justice, through an effort called Operation Choke Point, has aggressively targeted banks that maintain relationships with customers it views as high-risk. US attorneys prosecuting federal crimes frequently work hand-in-hand with state prosecutors, who are independently responsible for upholding state law and whose influence is significant in certain jurisdictions where international banks conduct high volumes of business, such as New York.

These government actors have different objectives in their engagement with banks. While some of them coordinate with Treasury Department policy makers, none of them are responsible or accountable for US foreign policy, despite wielding great influence in that realm. The distance between diplomatic channels and the regulation of banks has greatly complicated efforts by the Somali government, and to a lesser extent the UK government, which have made a powerful case that the discontinuance of Somali MTO bank accounts undercuts the countries' shared policy goals.

[end box]

Over the past three years, the US government has taken some modest but important steps to help put Somalia on a stronger financial footing. The formation of a National Security Council-led interagency working group on remittances to Somalia demonstrates that the government has come to appreciate the consequences of a disruption in remittance flows. The US Treasury Department and USAID have collaborated with the Central Bank of Somalia to help improve its public financial management system and to pave the way for the country to develop a banking system and become financially selfsufficient. The Treasury Department is helping the Central Bank build its supervision unit, a much needed capacity for any country that aims to connect to international financial networks. President Obama also signed into law the Money Remittances Improvement Act, a common sense measure that streamlines oversight of the money transfer industry and may yield a marginal increase in access to banking services for MTOs.

Perhaps most promising is the Treasury Department's September 2014 promise to clarify expectations for banks dealing with high-risk MTOs; a promise which reflects real political commitment to addressing the systemic challenges facing the most difficult-toserve money transfer corridors. Treasury's Financial Crimes Enforcement Network November 2014 statement on banking for money service businesses, including MTOs, helpfully emphasized that banks are not expected to regulate the money services industry or know each individual remitter.

Still, the system facilitating remittances from the US to Somalia remains in critical condition and the US government remains startlingly unprepared to manage the potential fallout. Most Somali MTOs have no bank accounts in the major population centres they serve. Until recently, this forced them to keep large amounts of cash on hand and to truck it across state lines in armoured vehicles. MTO executives say this has kept them from expanding services to smaller Somali communities and made it difficult to maintain their existing presence and rates. And the situation has now become even worse: Merchants Bank of California, the principal bank facilitating remittances to Somalia, announced that it would close all Somali MTO accounts on February 6 2015.

At the time of writing, Somali MTOs are closing most of their branch locations, leaving many Somali migrants without a legal way to support their loved ones. Without US government intervention or a new bank's involvement, Somalia and the greater Horn of Africa may be poised to suffer a sharp economic decline and an acute humanitarian crisis. To date, the US government has offered no assurance that it is prepared to take the necessary steps to keep money flowing legally and transparently to people who need it.

---

'It's kind of scary to the community here and abroad. People are wondering why, if it's legitimate, would the US government make it difficult for them to send money to their loved ones. This part of East Africa has been in conflict and they don't need their life to be more difficult. People are already dying of hunger. Sometimes even in normal years lives are fragile because the infrastructure is limited. So people depend on each other greatly. If the government and [MTOs] work together, they can fix it.' - Sadiq Yusuf Mohamud, Minneapolis, MN, USA

---

Recommendations

The Somali Federal Government and other Somali authorities should:

Improve financial management and transparency:

[see detailed recommendations in full report]

Somali Money Transfer Operators should:

[see detailed recommendations in full report]

The US government should:

  • Take emergency measures to ensure that Somali migrants in the US can continue to send money freely and legally to their loved ones in Somalia. We have called for the US government to prepare for the possibility that Somali MTOs will be forced to close branch locations and reduce the flow of remittances because of a lack of banking options. That moment has now arrived. There are a number of different ways the US government can maintain the continued flow of remittances to Somalia through formal channels, such as: - preparing a special regulatory regime, including safe harboursfor banks doing business with licensed and regulated Somali-American MTOs; or - preparing an agreement with a public financial institution, such as the New York Federal Reserve, to facilitate remittances to Somalia.

  • Develop an outreach programme to educate and clarify policy for bank examiners to emphasize the importance of banking for MTOs. Bank examiners face negative repercussions if money laundering takes place in the banks they monitor. They do not benefit from maintaining accounts for companies they view as risky, even if they are compliant with US regulation. The examiners have no incentive to protect access to banking for companies or organizations that promote financial inclusion. The OCC, the FDIC, and the Federal Reserve strategies to remedy this problem should include modifications to the examiners' handbook and examiner training.

  • Clarify expectations for banks dealing with MTOs. In his 8 October 2014 blog post, Assistant Secretary of the US Treasury, Daniel Glazer, pledged that the Treasury Department will work with federal banking agencies to update the guidance for banks dealing with MTOs and that that this guidance would emphasize that, 'with sufficient controls, banks can effectively manage high-risk money transmitters.' To make a difference, this guidance should be specific enough on what constitutes 'sufficient controls' to give banks confidence that they can comply with the law and avoid enforcement and prosecution.

  • Clearly communicate the US government's objectives in extraterritorial application of US AML/CFT laws. The US government's aggressive approach to the prevention of money laundering has included imposing hefty fines on foreign banks conducting business in US dollars. This has convinced many banks that maintaining accounts for money service businesses, particularly smaller companies serving higher-risk destinations, is not worth the risk. In order to reassure responsible banks that it is safe to do business with money transmitters, the US government should announce its intention to only enforce against the worst conduct by foreign banks - which is generally what it has done thus far.

[full report also contains recommendations for UK, Australia, other countries with significant Somali diaspora population, and the World Bank]


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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