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.
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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-to-
day 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 self-
sufficient. 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-to-
serve 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]
*****************************************************
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