In early February, a group of United States Senators, Congressmen and Congresswomen sent a letter to the Secretary of State John Kerry asking for a meeting to discuss an “emergency plan to address the acute shortage of lifesaving money transmission services to Somalia, and discuss how we can move forward toward a sustainable, longer-term framework for facilitating lawful money transfers through transparent channels.”
This followed the announcement by the Californian Merchant’s Bank that it was closing the accounts of money service businesses (MSBs) that handled transfers to Somalia. The result, said the politicians, citing Oxfam, was the loss of the greater part of $215 million that was sent in 2014 from the US to Somalia, “most of which was used to meet basic humanitarian needs.”
The plea from the members of Congress highlights the dilemma faced by financial institutions when handling transactions involving unstable countries.
The penalties for financial institutions for running foul of anti-money laundering/countering the financing of terrorism (AML/CFT) laws and regulations can be huge. Traditionally an industry known for risk-aversion and erring on the side of caution, most banks have come to view dealing with Somalia as being simply too risky.
Over the course of the past several years, the noose has slowly been tightening around remittance corridors to Somalia from wealthy countries such as the UK, Australia and the US.
In late 2012, HSBC was fined an eye-watering $1.9 billion for failing to implement an effective programme against money laundering, and also failing to conduct adequate or any due diligence on some account holders.
Some six months later, Barclays announced the closure of the accounts of all money transfer organisations (MTOs) in the UK that dealt with Somalia, though it was later ordered by a court to stay the closures.
A British Member of Parliament attributed Barclays’s move to “decisions made in the US… had a knock-on effect on our banks and their choice to withdraw banking facilities.” Over the next two years most other banks in the UK, US, Australia and elsewhere followed suit until finally, as a Centre for Global Development blog post put it, “and then there were none.”
Merchant’s Bank of California had previously handled the vast majority of transfers from the US to Somalia, but in June 2014 was issued with a Consent Order by the Treasury Department that required Merchant’s Bank to ensure money service businesses holding an account with them “maintain sufficient transparency to reasonably ensure the legitimacy of the sources and uses of customer funds.”
It is the latter requirement from the Treasury’s Comptroller of Currency that is causing difficulties for the money service businesses. The authority of Somalia’s Federal Government does not extend much beyond the capital, Mogadishu, and the country has no central bank.
This has created something of a Catch-22 in the country, where the total value of remittances is greater than foreign aid and foreign direct investment combined. Any significant reduction in remittance flows could further weaken the capacity of the government to carry out those very activities that would satisfy US banks and their regulators.
It is the long shadow of Al Shabaab, the Somalia-based militant Islamic terrorist organisation, that darkens the doors of US banks who facilitate money transfers to Somalia.
Responsible for attacks not just in Somalia, but also in neighbouring countries, it is reported to have an annual income of some $100 million, in part gathered through the extortion of money transfer businesses.
What frustrates many of those in the Somali remittance business, as well as those who have families in Somalia dependent on remittances, is that no Somali MTO/MSB has ever been charged, let alone convicted, of money laundering or financing terrorism by US authorities.
When Barclays announced it was shuttering the majority of MTOs in Somalia that relied upon it to function, court action and government intervention forced a delay in the move, in order to give the remittance businesses time to reorganise their affairs and make alternative arrangements.
No similar action has been taken in the US, despite an outcry from the Somali community and aid organisations.
Activists and NGOs point out that 16 per cent of the total money that Somalia receives from its diaspora originates in the US, and some fear that shutting off the tap will have devastating economic consequences for the already impoverished nation.
Moreover, when interviewed, many members of the Somali diaspora expressed concern that were remittances to dry up, young men could be attracted to drink at the well of extremism, attracted by a $50 conscription bonus.
A State Department spokeswoman appeared to brush off such concerns, telling journalists that “It’s a bit of a stretch to draw [economic opportunity] directly to remittances”.
Whether such concerns are overblown remains to be seen; however, it is worth noting that since Mondato Insight last covered the issue more than 18 months ago, concerns that were expressed at that time appear to have been largely unfounded, and the Somali diaspora has found alternative means, largely within the parameters of “traditional finance” to ensure the funds keep flowing.
Their channels for working through traditional financial institutions continue to narrow, however, and it is entirely possible that they will soon run out of options.
The US-Somalia remittance corridor is ripe for disruption, yet no significant challenger has emerged to replace the bank-based system that has dominated it so far.
Bitcoin remains in an uncertain condition, too new and untested a technology to satisfy the needs and concerns of impoverished Somalis and their families abroad (and, indeed, its use would somewhat defeat the regulators’ desire for transparency and accountability).
Alternative value transfers such as airtime have not taken off, while international mobile money transfers do not yet exist. A 2013 report into remittances in Somalia claims this is in part because Al Shabaab has threatened mobile operators not to allow the practice.
It is this last point that highlights the potential that mobile money has in circumstances like this. Within an appropriate regulatory framework, international mobile money remittances offer a traceable, safe and secure means of transmitting money (or value) to the families abroad who need it. And it is precisely this fact, and the reduced capacity for extortion by terrorists, that leads them to oppose it.
All of which goes to demonstrate that when criminal intent and regulatory vigour come into conflict, disruptive technologies may have little role to play. As is often the case, it all comes down to politics.
Mondato is a boutique management consultancy specialising in strategic, commercial and operational support for the mobile finance and commerce industry.