IRIN – Millions of people in Somalia rely on money sent from friends and relatives living abroad to meet the expenses of day-to-day living. These remittance flows are thought to be two or even three times greater than the amount spent on humanitarian aid.
But recent months have seen a flurry of warnings that remittances flows from the UK will be drastically curtailed because of what some regard as the overzealous application of regulations by one UK bank.
On 16 September 2013, the Intergovernmental Authority on Development (IGAD), a group of east African states, entered the fray, saying in a communiqué that “an essential lifeline” for “families and communities who are already in poverty” could be cut off as a result.
This briefing analyzes the current anxiety and looks ahead to how a sustainable system of remittances can be put in place.
How important are remittances to Somalia?
Extremely. Estimates of their annual value range from US$1 billion to $2 billion. The US is the largest source country, while an estimated $160 million is sent from the UK every year. In some parts of Somalia, 40 percent of the population receives regular remittances, with 80 percent of them spending the money on basic services.
The latest manifestation of this perception of risk is a decision by Barclays bank to close the accounts of more than 100 remitters, or money transfer organizations (MTOs), four of which have dealings with Somalia, at the end of September 2013.
Similar moves have recently been taken by a number of banks in the US.
Why are the accounts being closed?
Without pointing any figures at its individual clients, Barclays explained that “some money service businesses don’t have the necessary checks in place to spot criminal activity with the degree of confidence required by the regulatory environment under which Barclays operates.”
The bank said it had reviewed its clients on a “case-by-case basis.” It added: “We remain happy to serve companies who, in our opinion, have sufficiently strong anti-financial crime controls and who meet our amended eligibility criteria.”
The UK Financial Conduct Authority, in its annual report on anti-money laundering, published in July, said that the Money Service Business (MSB) as a whole is “at particularly high risk of abuse by those seeking to launder money or finance terrorism, and some MSBs have been seen to be complicit in these activities.” They classified MSB as an indirect risk.
The Monitoring Group on Somalia and Eritrea, in its report to the UN Security Council on 12 July, pointed to specific cases of remittance services being used to fund terrorist groups. At the end of 2012, “money was collected amongst supporters of Al-Shabab within the Somali business community in Qatar and send via… a [major] money remittance company to Mogadishu.”
The report also cites three other instances at the end of 2012 where money was transferred from Somali business communities in the diaspora to support terrorism activities, and claims that approximately $100,000 was transferred for these four operations.
Many players in the Somali remittance sector, including large, regulated firms, use the ‘hawala’ system, where trust within a closed network, rather than legal contracts or paperwork, underpins transactions. It is a system that has facilitated international trade for centuries, but one that worries regulators and entities fighting money laundering and terrorism. (For more on this, see Capitalizing on Trust, a report published in 2012 by the Center on Counterterrorism Cooperation).
According Ishmael Ahmed, CEO of online money transfer company WorldRemit, the business model used by MTOs in the UK is “inherently flawed.”
It is “one that depends on independent agents – often small corner shops in areas with large migrant communities – to acquire customers, conduct customer due diligence and collect cash,” Ahmed wrote in an online op-ed.
“In this business model, money transfer businesses rely on these shop owners – for whom money transfer is a side business – for their core compliance functions, in relationship arrangements that pre-date new stringent anti-money laundering regulations,” he added.
What has been the reaction to Barclays’ move?
It has generated widespread calls – from African governments, aid agencies, Somali civil society, a leading think tank and some MTOs – for the bank to reconsider.
Few countries in the world are more reliant on remittances than Somalia. More than two decades of civil conflict have left the country’s formal economy and banking sector in ruins. Remittances have replaced this sector, not only boosting the meager incomes of families but also allowing the private sector to do business and, increasingly, providing aid agencies with a more efficient way of responding to drought and famine.
The vast majority of the money is sent via money transfer companies, according to recent research, which also indicated that many recipient households depend on a single relative abroad for such assistance. “If the viability of the transfer system were to break down in an area where the single sender of support is located, effectively preventing them from being able to provide support, the effect on many of the households would be severe. Basic food security would be threatened,” said a report by the UN Food and Agriculture Organization (FAO).
So what’s the problem?
A growing perception of risk. Because it is impossible to know what remitted money will be used for, or even, given the lack of national identity documents in most of Somalia, exactly who will receive it, authorities fighting terrorism and money laundering are wary of the remittance system. This is especially true in the context of Somalia, where an insurgency with links to al-Qaeda is active, and where effective state regulatory bodies have yet to be set up.
The IGAD communiqué, issued on the margins of a major Somalia conference in Brussels, said Barclays’ decision “will threaten the fragile economic and humanitarian progress made in Somalia, with potentially catastrophic implications for security and prosperity across the Horn of Africa as a whole.”
In an open letter to British Prime Minister David Cameron in July, scores of Somali civil society organizations warned of “dire consequences” and “immediate and severe humanitarian implications.”
Kevin Watkins, the head of the Overseas Development Institute, said in a letter to Barclays: “If remittance channels close, one of the most effective tools available to the international community in responding to future crises will be lost.”
He added: “Desperately poor and vulnerable people will lose a vital source of finance. The international community’s efforts to support recovery and respond to humanitarian emergencies will be compromised.”
Thirteen international aid agencies have appealed to Barclays to delay the account closures by at least 12 months.
“These decisions [to close accounts] are commercial but are not made in a moral vacuum,” said Ed Pomfret, acting Somalia director of Oxfam, adding that “preconceived ideas about risk in Somalia are false”. He pointed to recent research about humanitarian cash transfers as evidence of this.
“Even though it may seem unprofitable, the impact is too great for banks to avoid [the] moral responsibility of continuing to providing these services in the short term,” he added.
“The imminent closure of the Barclays accounts will severely and significantly restrict the flow of remittances to Somalia,” Abdi Abdullahi, the chairman of the UK-based Somali Money Service Association (SOMSA), told IRIN.
One of the biggest players in the Somalia remittance business, Dahabshiil, is “happy to do whatever US or UK governments require us to do,” according to CEO Abdirashid Duale.
Campaigners and industry associations have expressed concerns that if regulated corridors were to close, the money would continue to flow, but via poorly monitored channels, thereby, counter-productively, making it easier to launder money or fund prohibited organizations linked to terrorism
Do all UK remittances rely on Barclays accounts?
No. SOMSA says its 16 member organizations constitute “most” of the MTOs in the UK. Four of them have been banking with Barclays, which has asked them to take their business elsewhere. Barclays says at least one of these four has found another bank. SOMSA says none has. (Campaigners worry that other banks might follow Barclays lead, creating a “domino effect.”)
“Clearly Barclays isn’t the last bank in this space, and there are multiple other UK remitters who claim to send money to Somalia currently banking with other banks,” Barclays told IRIN in an email.
Of the 12 SOMSA members who do not bank with Barclays, some, according to Abdullahi, are small enough – small payment institutions (SPI) handling less than three million euros a month – to operate under a different regulatory system, one that does not require lodging clients’ money in the SPIs’ own bank account.
According to Capitalizing on Trust, many remitting organizations take the form of “charity and family networks”, where a single community leader serves as an informal agent. Such networks have “little exposure to formal institutions and regulatory oversight.” However, such monies tend to be bundled and passed on through MTOs in the source countries.
World Bank data shows that global remittances to developing countries have enjoyed robust annual growth over recent years – a time when banks were closing remitters’ accounts in the US – and are expected to grow by an average of 8.8 percent between 2013 and 2015.
This growth is attributable in part to the changing nature of the remittance sector and the entry into the market of new kinds of players, such as mobile money transfer services.
What should happen next?
Dahabshiil’s Abdirashid Duale argues that it is in the interest of regulators to intervene and find a solution to transfer money. If remittances go down, it is likely that the UK will have to put in more aid to Somalia. And humanitarian agencies, which use money transfer companies to get funds to Somalia, do not have many other options to transfer funds.
The UK government is looking into ways to allow money to flow legally and safely. In the medium-to-longer term, the UK’s Serious Organised Crime Agency is leading cross-government efforts to develop ‘safer corridors’ for remittances to high risk jurisdictions, bringing together regulators, law enforcement bodies, academics and industry.
According to Laura Hammond, the lead researcher in the FAO report and head of Development Studies at the School of Oriental and African Studies in London, “There is increasingly talk about trying to increase compliance and transparency at the receiving end, involving Somali government structures but also having an independent body verify compliance.”
Producing biometric identity documents across Somalia, which would only cost a few million dollars, would also help to satisfy concerns about remittances not reaching their designated recipients.
Industry analysts expect the use of cashless systems such as mobile or online transfers, to increase. They are already in wide use in Somaliland, where operator Telesom boasts more than 275,000 monthly users of its mobile money services.
“The online money transfer model addresses the perennial problems associated with the agent model,” wrote WorldRemit’s Ahmed, whose company provides this kind of transfer.
“As there is no longer an intermediary between the [MTO] and the customer, the [MTO] becomes responsible for customer due diligence. Most importantly, this model eliminates the anonymity and lack of audit trail associated with cash transfers.”
Digital currency schemes, such as Bitcoin, and e-payment cards could also be used as a means to transfer money without requiring formal banking infrastructure. But it would require a regulatory environment that both promotes the initiative and is able to monitor for criminal activities resulting from the transactions.
Large international firms such as Western Union and MoneyGram may come into the country to fill the void – although they cost almost twice as much as the current money transfer services. Currently, there is only one Western Union branch in Somalia, located in Hargeisa.