AfricaFocus (Washington, DC)

Somalia: Threat to Remittances Lifeline

analysis

"Collateral damage" from the war on terror takes many forms. Civilian deaths from drone or missile strikes are the most dramatic when they come to light. Damage from the "financial war on terror" is less visible but also deadly.

As illustrated in the case of Somalia, regulations intended to curb financing for terrorism end up threatening sources of income vital for survival, such as remittances and humanitarian aid. The effects, although indirect and rarely noted in the media, are systemic and large-scale.

In Somalia, many of the quarter of a million people who died during the 2010-2012 famine could have been saved if U.S. regulations had not blocked humanitarian aid to areas controlled by al-Shabaab (http://tinyurl.com/peq4dk6). Currently, the remittances lifeline, which is essential for survival to some 41 percent of Somalia's population, is threatened by the potential cutoff of access by Somali money transfer operators to Western banks.

For Somalia, the UK and the US are the two top remittance-sending countries, but most banks refuse to deal with the money transfer operators. One of the largest still handling such transactions has been Barclays Bank, which decided last May to close off these ties because of the alleged risk of financing terrorism. In November 2013, an injunction blocked Barclays from closing its business with Dahabshiil, the largest money transfer operator (http://tinyurl.com/o7rrl9h). But that injunction expires in October this year. Prospects for a more permanent solution to facilitate remittances, under study by the British government, are uncertain.

This AfricaFocus Bulletin contains a summary article from the Africa Research Institute in London, which has been following the situation closely, as well as excerpts of an interview with Abdirashid Duale, the chief executive of Dahabshiil. Notably, Duale says that Barclays raised no concerns about their anti-moneylaundering practices before deciding to cut off business ties.

More generally, the Charity and Security Network (http://www.charityandsecurity.org), based in Washington, DC, has raised ongoing concerns about the negative impact of counterterrorism laws. Together with a number of other organizations, it is supporting legislation to reduce such collateral damage. For an overview of the issues see http://www.charityandsecurity.org/blog/2014_Big_Picture

Charity and Security Network, "Somalia: The 2011 Famine and its Response," July 10, 2013. http://www.charityandsecurity.org/ / direct URL: http://tinyurl.com/na3kjkd

"U.S. Counterterrorism Laws Block International Humanitarian Aid," World Policy Journal December 19, 2013 http://www.worldpolicy.org/ / direct URL: http://tinyurl.com/lasvomc

Humanitarian Aid Facilitation Act https://www.govtrack.us/congress/bills/113/hr3526/text "To permit persons subject to the jurisdiction of the United States to enter into transactions with certain sanctioned foreign persons that are customary, necessary, and incidental to the donation or provision of goods or services to prevent or alleviate the suffering of civilian populations, and for other purposes."

Additional related sources include:

"Why Remittances to Somalia are Important," Oxfam, Oct. 25, 2013 Short video - http://www.oxfam.org / direct URL: http://tinyurl.com/mkuhwa9

"U.S. Bank to Reopen Financial Lifeline to Somalia," Charity and Security Network, May 1, 2013 direct URL: http://tinyurl.com/qgfnqld

Juan Zarate, Treasury's War: The Unleashing of a New Era of Financial Warfare. Public Affairs, 2013. http://www.africafocus.org/books/isbn.php?1610391152 - Editor's Note

Somali remittances: 10 things you need to know

27 Jan 2014

by Hannah Gibson, Policy Researcher, Africa Research Institute

http://www.africaresearchinstitute.org / direct URL: http://tinyurl.com/phzehnq

In May 2013, Barclays announced that it would close the accounts of all but 19 of its 165 clients in the remittance transfer business. As HSBC and other UK banks had already substantially withdrawn from the sector, the effect of Barclays' decision was magnified. With very few exceptions, remittance transfer companies have found it impossible to secure banking facilities elsewhere - a prerequisite for their continued operation and regulatory compliance.

While there are consequences for receivers of remittances in many countries, the threat to the economic fabric of the Somali regions is particularly grave. With no functioning banking system, there is no alternative to the well-established money transfer operators (MTOs) for the remittance of vital funds from the Somali diaspora.

An injunction preventing Barclays from closing the account of the largest money transfer organisation serving the Somali regions - Dahabshiil - has provided temporary relief. The UK government has established a Working Group on Safer Corridors to find a long-term means of securing the flow of remittances to the region, but an interim solution is also urgently required. To understand the implications of this issue, here are 10 things you need to consider.

1. The consequences will be far-reaching. Money sent from the diaspora provides essential support to some 41 percent of the population of the Somali territories, according to the most recent authoritative study. Remittances are primarily used to cover basic, everyday expenses such as food, medical care and education. Protecting these transactions is vital to safeguarding the livelihoods of recipients in an acutely vulnerable region.

2. In the Somali regions there is no alternative. Whilst Barclays' decision affects many remittance-receiving countries, the Somali regions are in a unique predicament since they have no formal banking system. Following the collapse of the Somali state in 1991, remittance flows became even more central to the functioning of the region. Authorised MTOs are the only means by which substantial remittance flows can be sent from overseas in a legally compliant, transparent, secure and cost-effective manner. In effect, they are the banking system.

3. The impact caused by any reduction in remittances will be multifaceted. MTOs service international aid agencies, multi-lateral donors and local charities as well as individuals. In addition to facilitating the delivery of humanitarian assistance, MTOs are the backbone of the economy. They are the conduit for trade finance and investment.

4. MTOs need banks. For many years, larger MTOs in the UK have been encouraged to accept tighter regulation and closer scrutiny. Any MTO handling more than 3m Euros per month needs to be approved by the Financial Conduct Authority as an Authorised Payment Institution (APIs). APIs must be banked in order to remain licensed. This has created a quandary for a number of Somali MTOs which are APIs but have lost their banking facilities. Even Small (regulated) Payment Institutions handling less than 3m Euros per month require the bulk cash handling services and international payment services provided by a bank.

5. It is not really about terrorist financing or money laundering. Following 9/11, the remittance industry came under increased scrutiny. The fear that remittances were being used to finance terrorism was a key factor in the decision by US banks to shut down al-Barakaat, the largest Somali remittance transfer business at the time. However, the 9/11 Commission Report found that the funds used in planning the attack were channelled through a US bank - not a Somali MTO.

In the UK, no Somali API has ever been accused of money-laundering or terrorist financing by the regulatory authorities - despite increasing regulation since the 2008 global banking crisis. Preventing accredited organisations from operating will constrain their ability to function and is likely to force remitters to use unregulated or illegal channels, beyond the reach of the financial regulators.

A strategy pursued by UK banks ostensibly to decrease their exposure to risk has involved their appropriation - intentional or unintentional - of regulatory powers. This has been counterproductive as a measure for combating terrorist financing and money laundering in general. Furthermore, a preference among banks for dealing with very large multi-national MTOs is no panacea. For example, in 2010 Western Union agreed to pay US$94 million to resolve a decade-long probe into illegal money laundering by the company's agents in Mexico.

6. We are not talking chips here. More than US$1.2 billion is remitted to the Somali regions annually from around the world. This figure represents over half of Somalia's gross national income. It exceeds international aid flows to the region which averaged an annual US$834m between 2007 and 2011.

7. The UK government can play a vital role. The UK and the USA are the top two remittance-sending countries to the Somali regions by value. Some 26 percent of remittance senders are based in the UK. The UK government has an opportunity to play a central role in working with other governments, the G20, regulatory authorities, banks and MTOs to find a durable, safe and cost-effective means of guaranteeing remittance flows to the region and other countries.

In a Westminster Hall debate on 22 January 2014 Sajid Javid, Financial Secretary to the Treasury, described the UK as "a global leader in the fight against money-laundering and terrorist financing". He also acknowledged the importance of remittances as a lifeline to millions of people around the world. The UK must redress the growing imbalance between regulation and financial inclusion.

8. Mobile money has a place but is not a "silver bullet". The African mobile money market is the second largest in the world after that of Asia. Whilst the mobile money market is growing across the Somali regions, it remains concentrated in certain (primarily urban) areas and operates as a "mobile-wallet" - essentially being used to pay local bills as opposed to receiving and sending international payments. At present, the Somali economy remains overwhelmingly cash-based. In the short- to medium-term, mobile money is not the solution to maintaining remittance flows.

9. Trust is key. Somali remittance channels are subject to a high degree of self-regulation. An operator is only able to continue working because of his or her ability to participate honestly and reliably in a trans-national network of exchange. Similarly, closing down larger MTOs and forcing individuals to remit via smaller - and unfamiliar channels - ignores the close ties between remitters and specific remittance companies. Such ties may be based on clan or regional allegiances, but are also service-related and underpinned by trust.

10. An interim solution must be found. The injunction against the Barclays closure of Dahabshiil's account provides a reprieve - but only until October 2014 at the latest. While a long term solution is being contemplated by the Action Group on Cross Border Remittances and its Working Group on Safer Corridors, an interim solution which ensures the survival of leading Somali MTOs and the uninterrupted flow of remittances through legitimate channels is imperative. Sajid Javid asserted in the Westminster Hall debate that the UK government cannot intervene in the affairs of UK banks. Stephen Doughty MP, Secretary to the All-Party Parliamentary Group for Somaliland and Somalia, politely responded to the effect that this was in fact nonsense. Some bank somewhere - or more than one - will need to be "persuaded" to play ball if an interim - or long term - solution is to be found.

Somalia, remittances and unintended consequences: in conversation with Abdirashid Duale - by Edward Paice

31 Jul 2013

Edward Paice is director at Africa Research Institute

[excerpts: for full interview visit http://www.africaresearchinstitute.org / direct URL: http://tinyurl.com/qjmtrfu

This interview was conducted on 29 July 2013. The views expressed by Abdirashid Duale are not necessarily those of Africa Research Institute.

Edward Paice, director of Africa Research Institute, talked to Abdirashid Duale, chief executive of Dahabshiil, the largest money transfer business in the Horn of Africa, about the crucial importance of remittances to the Somali region and the potential impact if money transfers are reduced.

Paice: What will be the impact on Somalia, Somaliland and Puntland if money transfers from the UK are curtailed because Dahabshiil and other money transfer agencies are denied access to UK banking facilities?

Duale: I can honestly say it would be a recipe for disaster. It is estimated that remittances from the diaspora provide essential support to 40% of the Somali territories. We have nearly 300 branches in the territories and thousands of agents servicing people in towns and rural areas. For them, money sent from relatives overseas is an economic lifeline. It is mainly spent on food, medicines and school fees - for the absolute basics, not for luxuries.

Paice: How substantial are these remittances?

More than US$1.2 billion is remitted to the Somali territories annually. This is over half of Somalia's gross national income. So you can see the importance of remittances to the region. About US$500m is sent from the UK. At Dahabshiil's branches in the UK, we process hundreds of thousands of transactions each year. The average transaction size is US$200-300.

Paice: Are people sending money to their relatives the only users of money transfer services to the Somali region?

Not at all. All the international aid agencies and NGOs use money transfer businesses (MTBs) to operate. They and their partners use us to pay staff, buy equipment and supplies, and make cash payments as part of social safety net programmes. Oxfam, Save the Children, UNDP, CARE, BBC Media Action, Islamic humanitarian agencies - you name it, they use MTBs. Even Somali veterans who fought for the British in World War II, and their widows, are paid their grants through Dahabshiil.

A great many local charities and NGOs use MTBs to collect donations, pay salaries and buy things. At the weekend, when Olympic double gold medal winner Mo Farah protested about the imminent closure of the bank accounts of Somali MTBs, he highlighted the impact it would have on the activities of the Mo Farah Foundation.

Finally, I would mention the private sector. In Somaliland and Puntland, which have been relatively peaceful for many years, many people are investing in businesses and property. Now the same is happening in southern and central Somalia as well. Investors send their money through MTBs. This investment is crucially important for economic development in the region. Factories are being built. If I am a local businessman, how do I pay for building materials or diesel from the Gulf or Ethiopia? I use an MTB. International oil and mining companies are also prospecting in the region now and they too use MTBs. No business can operate without them.

No Somali Banking System

Paice: Will the impact on the Somali region be different to that on other countries affected by the Barclays decision?

It will be much more acute. You see, in Somalia there is really no alternative to using MTBs. The whole banking infrastructure collapsed in the civil war in the early 1990s and it has never been rebuilt. So MTBs are the banking system now. That's the way things are. Under the circumstances, which have been as difficult as you can imagine, it's a system that works very well. The larger firms are very professional and efficient.

We also provide a service for the people who might not use banks even if they could - for the unbanked in the UK, Somalia and elsewhere. Forget the Somalia end of things for a moment. We fill a gap for diaspora communities. If you go to a Dahabshiil location or agent in the UK - where there are more than 100,000 people of Somali origin - most open early in the morning and work up to 10 o'clock at night, 7 days a week. You deal with people you know, the service is fast and friendly, it is easy to use, and it is half the cost of the big Western money transfer companies.

If you go to any bank in the world and say you want to send money to Somalia or Somaliland, they cannot do it. The big global money transfer companies like Western Union can't do it either. They have one branch in Hargeisa, in Somaliland. Western financial institutions have no links to the Somali banking network because there isn't one.

Paice: If the Somali MTBs are forced to pack up in the UK and elsewhere, how would money get to the Horn of Africa?

Well, a great many people would simply stop sending money altogether. ...

Others would resort to sending cash with unregulated couriers - which will be much more expensive and less reliable than the current system - and by illegal means. Lorries and planes of cash would come in from neighbouring countries. Lots of small informal operators would fill the gap left by Dahabshiil and the regulated firms whose transaction records can be inspected. We have seen this before - when al-Barakat's money transfer business was closed down in the USA after 9/11. As far as aid agencies and businesses are concerned, I have no idea how they could carry on operating as usual.

Basically, the transfer business would be driven underground. It would be much smaller and it would be exploited. I understand the global concern about money-laundering and terrorist financing by a small minority of MTBs, but bashing the regulated and reputable firms like Dahabshiil is not the way to counter this. When law enforcement agencies come to us, we always help them.

The Barclays Decision

Paice: When did you first receive notice from Barclays that they would be closing your banking facilities with them?

Well, this is a funny thing. Barclays wrote to the board of Dahabshiil on May 8th. That was exactly the same day that I had been asked by the Foreign Office to speak at their Somali "Trade and Investment Forum" during the UK-Somalia government conference. I was asked to speak about financing, and the role of the diaspora in development. There were members of the Barclays senior management also present at these events. They met Hassan Sheikh Mohamud, President of Somalia, and they were talking about the importance of developing the private sector in Somalia, and the opportunities. So were people from the Department for International Development (DFID).

The special role of money transfers in Somalia, the diaspora, and their importance to the country's reconstruction was recognised by everyone at the conference, including the Prime Minister, David Cameron. The recent World Bank and UK government-sponsored review of Somalia's public financial management system even envisaged using Somali money service businesses to pay civil servants and the salaries of the security services.

Anyway, I gave my talk and the next day I received the termination letter from Barclays. They said that Dahabshiil did not meet their "amended eligibility criteria". That was that. We were given two months' notice to find another bank and no opportunity to try and meet the new criteria - despite the fact that we had banked with them for 15 years and are an authorised payment institution (API) regulated by the Financial Conduct Authority (FCA).

It was all very sudden. The process was not at all transparent and it came out of the blue. We've never been given the chance to understand what the game was about. There are many companies in our position.

Paice: Did anyone at the FCA or at Barclays voice any concerns about the way you conduct your business in the months preceding the decision to close your accounts?

No. If they had, our response would have been to comply with their requests no matter what the cost. Barclays has regularly inspected and monitored our systems, as have the regulatory and tax authorities. If any of them had demanded a special forensic audit, we would have done it gladly. If they had asked for changes in our "Know Your Customer" - or KYC - procedures, we would have made them. But we've never actually been reprimanded or accused of anything by Barclays or the regulators. Our business has been based on compliance.

It is ironic that a letter we received from Barclays on 20 June stated "please understand that the decision to exit our business relationship with you is not a negative reflection of your AntiMoney -Laundering standards, nor a belief that your business has unwittingly been a conduct for financial crime. It is, however, a commercial decision we have taken due to the risks of the sector in which we operate".

Paice: Can't Dahabshiil and others simply transfer their accounts to another bank?

Well, it is not so easy. Despite what was said at the UK-Somalia conference, Barclays has told us that the money transfer business is "at particular risk" of being used for money-laundering and financing terrorist activity. Other leading banks share this concern and have already withdrawn from the sector or are not taking on new clients. HSBC pulled out of the sector in February.

I understand that the new management at Barclays have problems like the LIBOR fixing scandal and the mis-selling scandals to deal with and they want to put all that behind them. But I also share their determination to prevent money-laundering and terrorist financing.

...

Paice: What is the solution? How can the transfer of remittances and investment to Somalia be maintained?

...

The UK government needs to take the lead. It has significant foreign policy involvement in Somalia. It is pumping DFID money into Somalia and in the UK there are many Somali businesses and voters. ...

The British government has often called on Somalis to help themselves. This is what we are determined to do. But we can't rebuild everything if the key component of the region's economic infrastructure is knocked out. That is a fact.

If everyone gets together - government, banks, money service businesses, lawyers and other experts - and there is real consultation, I am sure that a solution can be found. This needs to happen quickly, or at least an interim solution must happen quickly, because if everyone just talks for 2 years it will be too late. Where will that leave the UK government and other foreign governments, let alone Somalis?

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