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‘Disaster for millions of Somalis’ as Barclays pulls out of money transfer over terror links

Saturday August 03 2013
bbk uk

Barclay Bank, the last UK High Street bank to offer such a service, plans to close the accounts of at least 250 money transfer companies from mid-August over fears the funds might be ending up in the hands of “terrorists”. TEA Graphic

Somalia’s economy faces tough times ahead following Barclays Bank’s decision to withdraw from Britain’s $1.5 billion remittances market from this month.

Barclays Bank UK plans to close the accounts of at least 250 money transfer companies in the UK from mid-August over fears the funds might be ending up in the hands of “terrorists.”

The bank, the last UK High Street bank to offer such a service, is now coming under increasing pressure to reverse its decision.

Lobbyists say that the bank’s decision to close accounts of cash transfer companies in the UK will hurt families in East Africa, particularly in Somalia, which relies on its diaspora remittances.
With the accounts closed, transfer agency businesses in Kenya, Ethiopia and Sudan are likely to be hampered, as are the operations of UN agencies and NGOs in Somalia, which rely on these businesses to channel funds and pay local staff.

The businesses are vital especially for Somali expatriates sending money back home, where banking facilities have collapsed.

Last year, the US government forced HSBC, another big British bank, into a $1.9 billion settlement over money-laundering controls.

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So far, attention has focused on Somalia, where years of conflict have destroyed banks and left no real alternatives to cheap money transfers.

But the 250 firms put on notice by Barclays also include some serving Ghana and Nigeria, as well as India and Bangladesh.

More sophisticated and expensive competitors like Western Union may now benefit from the move, and a reduction in competition in the African remittance market would drive up prices, experts warned.

Remittances are said to account for 50 per cent of Somalia’s gross national income. An estimated 40 per cent of Somalia’s population depends on money sent from abroad.

Over $500 million is sent annually from the UK alone, with a recent study showing that three-quarters of recipients need the money to buy essentials, such as food and medicine.

READ: Amid the chaos, money transfer is booming business in Somalia

Global remittances

Money transfer companies in the UK move at least a third of global remittances to Somalia, estimated at $1-1.5 billion.

In 2012, for the first time, remittances became the largest external financial source to Africa, ahead of foreign direct investment and donor aid.

Somali-born British athlete Mo Farah is the latest to throw his hat into the fray, arguing that the decision will be “a disaster for millions.”

“The small sums sent home by British Somalis each week enable family members to buy food, medicines and other life essentials. Everyone following the issue understands that Barclays has a bank to run, but this decision could mean life or death to millions of Somalis,” said Mr Farah in a statement.

But apart from the impact on families, the rationale of Barclays’ decision has been criticised as counterproductive, with analysts arguing that closing off legal remittance channels will only send cash transfers underground, where monitoring and tracing will be nearly impossible.

In addition, terror groups such as Al Shabaab do not necessarily rely on diaspora remittances for funding, says security expert on the Horn of Africa Paul Goldsmith.

“A group like Al Shabaab isn’t a monolithic, vertical organisation. They have links everywhere, particularly with Wahabi networks in Saudi Arabia and the [Persian] Gulf."

"My sources in Somalia tell me that since the Kenya Defence Forces took over the port of Kismayu, Al Shabaab has been hurting financially. But they still have their networks in Kenya,” said Mr Goldsmith.

A report commissioned by UNDP titled Cash and Compassion: The Role of the Somali Diaspora in Relief, Development and Peace-building states that given the fact that remitters must provide their name and contact details, as well as proof of identity, Hawala officials said it unlikely that large sums of money are being transferred back to Somalia through this route to support the insurgency or terrorism.

READ: Business in Somalia: Why 'hawala' firms are crucial to rebuilding the economy

“‘If I were going to send money to Al Shabaab, I would just put it in a suitcase and bring it into the country rather than try to use a system where there is a trail for every transfer,” said one official quoted in the report.

This view seems to be supported by Al Shabaab itself; in 2010, the group banned  mobile phone transfers of money from abroad, saying that such transfers feed Western capitalism and were turning Somalia’s Muslims against Islamic banking practices, even if the “Western agents” are in fact members of the Somali diaspora.

Al Shabaab have proved to be expert shape shifters, constantly adapting and finding new ways to keep coffers full.

In 2011, the UN Monitoring Group named Kenyan Muslim networks as a key source of funding for the terror group.

The UN investigators focused most of their attention on the activities of the Muslim Youth Centre (MYC), commonly known as Pumwani Muslim Youth, saying that the group owns a large section of land in Majengo, downtown Nairobi, including the huge second-hand clothes Gikomba market.

The report said rents paid in Gikomba go to MYC, which then channels the funds to the terror group.

Key financier

Eritrea had also been named as a key financier of Al Shabaab, a charge it has strenuously denied.

In 2011, the UN Monitoring Group detailed Eritrea’s activities in funding the terror group, following the money trail from its citizens in the diaspora in Europe and North America, through Dubai and the Eritrean embassy in Nairobi, and into the hands of Al Shabaab, all the while concealed in convoluted and opaque informal financial networks.

READ: How Eritrea’s strongman uses Kenya as a terror finance hub

But by 2012, the terror group seemed to have changed its modus operandi, focusing on the incredibly lucrative poaching business in Kenya, which is even more profitable than gold.

A kilo of elephant ivory is estimated to fetch about $2,000 on the black market. But rhino horn is the clincher. A kilo of rhino ivory costs up to $65,000, with one animal producing six to seven kilogrammes.

By last June, the situation was so dire that the former Kenya Wildlife Service director Julius Kipng’etich took the fight all the way to the floor of the US Senate, arguing that lax rules had allowed foreign nationals to set up shell companies that were used as vast money laundering operations, with terror finance using the same channels as proceeds from poaching, drugs and human trafficking.

With Kenya losing up to two elephants every week, Mr Kipng’etich said the proceeds are being channelled to transnational criminal networks, including Al Shabaab.

But Barclays has denied targeting Somali money transfer companies, arguing that its decision was solely about the internal controls of the money transfer businesses, “not where they send money to.” 

The closures will also affect money transfer companies operating in Ghana, Nigeria, India and Bangladesh, but the lack of a formal financial system in Somalia following years of conflict means that Somalis will be hardest hit, as they have no real alternatives to send money home cheaply, as well as being the most reliant on diaspora remittances.

In a statement, the bank said that some money service businesses “don’t have the proper checks in place to spot criminal activity and could unwittingly be facilitating money laundering and terrorist financing.”

In the wake of 9/11, the US Treasury froze the accounts of Al-Barakaat — then the largest Somali remittance company — saying that the owner was a “friend and supporter” of Osama bin Laden and was a “terror-supporting financial network.”

Another 105 countries followed in blacklisting the company, including key financial hubs such as the United Arab Emirates. The firm folded, but the money flows did not stop.

Other money remitters such as Dahabshiil captured the market.

Today, Dahabshiil is one of the companies hardest hit by Barclays’ decision.

Industry experts estimate that Dahabshiil handles around two-thirds of all remittances to Somalia, and at least $50 million to other African countries including Uganda, Kenya, Rwanda, Ethiopia and Djibouti.

READ: Diaspora investment is proving to be magic lamp

The company charges fees significantly lower than other large remittance companies, and the majority of international organisations operating in Somalia, including the UN, World Health Organisation, World Bank, Oxfam, Save the Children and Care International rely on Dahabshiil to make payments to local staff and suppliers in Somalia.

Barclays has been handling Dahabshiil’s accounts for the past 15 years, and the firm’s chief executive officer, Abdirashid Duale, said that Barclays has not told them what additional checks they need to put in place in order to remain bankable.

“We’ve never had a problem. We’re fully licensed by the UK government; [Barclays] were happy with our system, and we’ve had a good relationship. Now Barclays has changed their eligibility criteria, but they haven’t shared with us what those criteria are,” Mr Duale told The EastAfrican.

But Daniel Hunter, a communications official at Barclays London, said that one of the things the cash transfer businesses have to do is have an independent expert who can exercise oversight on operations.

“We want to see companies hire a suitably qualified expert on money laundering and terror financing as part of their staff. This person has to be independent. We also want independent audit reports from audit companies that understand money laundering and terror financing,” said Mr Hunter.

Vigilant controls means going above and beyond the legal requirements, Mr Hunter said. “In the UK, you can send up to £600 without proof of identification.

But if somebody is sending £599 every day, this should be a cause for investigation. We have found that some of the money transfer companies would not see this as a problem — after all, it’s under the legal limit.

But more thorough controls mean putting pieces of the puzzle together, and seeing the larger picture of what could be happening.”

But Mr Duale said that Barclays has not officially told Dahabshiil where exactly the internal checks are lacking.

“They haven’t been transparent [with what they need us to do].

"If they put something on the table, we’re happy to talk. We know our customers, we check their identification cards. The average amount per transaction is $200 or $300. People are just sending money to help their families.”

Barclays has downplayed its decision, saying that although 250 companies have been asked to re-bank, only 80 are cash transfer companies, the others are capable of shifting money but not necessarily hard cash, such as in online e-wallet operations.

Furthermore, Barclays argues that it only handles one per cent of global remittance flows, and that over 90 per cent of global remittances are made through a small handful of players like Western Union and MoneyGram.  

Cost of moving money

But big players like Western Union and MoneyGram are significantly more expensive, particularly when it comes to moving money to Africa.

Dahabshiil, for example, charges an average five per cent fee per transaction, compared with Western Union’s 7.1 per cent and MoneyGram’s 7.2 per cent for sending the same amount to Ethiopia.

Also, the costs are lower with the Somali companies because of their extensive network, meaning that the “last mile” in getting money to a recipient is not as difficult and expensive as it is in many other developing countries.

Since 2008, Africa has been the most costly region in the world to send remittances to.

In 2012, it cost an average 12.4 per cent of the transferred sum to send money to Africa, whereas for South Asia it was only 6.6 per cent, according to the World Bank.

So what alternatives do the cash transfer businesses have?

In their statement, Barclays said that they “remain happy to serve companies who have strong anti-financial crime controls, but are asking those who don’t to find another bank.”

Speaking to The EastAfrican, Mr Hunter said that there are several banks that could handle accounts, including foreign banks having a presence in Britain.

But as the deadline of August 12 looms Mr Duale insists that Barclays should reconsider, and says that a company like Dahabshiil has no real alternatives.

“We can’t just go to another bank. We’re a big company, and Barclays is the largest bank in the UK. It’s extremely difficult to find another bank, because of our large scale. We need a reasonable extension [of the deadline], of up to 12 months."

"We’re asking the UK government to intervene,” said Mr Duale.

Additional reporting by Paul Redfern

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