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Somalia: Threat to Remittances Lifeline
AfricaFocus Bulletin
February 5, 2014 (140205)
(Reposted from sources cited below)
Editor's Note
"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
++++++++++++++++++++++end 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?
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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