It was one of the last US banks willing to serve as a medium for transactions on behalf of these companies, which cannot legally expatriate funds on a large scale without the assistance of a commercial bank.
The bank is closing the accounts on Feb. 6 and halting certain services as soon as Saturday.
Every year, people in the US send a reported $215 million to relatives in Somalia, an amount that outstrips the $200 million in aid the US government has requested for the often-troubled country in the Horn of Africa in 2015.
The problem is that Somalia is home to a dysfunctional fledgling government that only achieved international recognition in 2013 — along with Al Shabaab, one of Africa's most dangerous jihadist groups. The government's weakness means that most banking and money transfers in the country take place in a regulatory environment far different from what is considered standard in Europe and the United States.
And Shabaab's presence makes American banks nervous over possible violations of the Patriot Act's update to the Banking Secrecy Act, which makes banks legally responsible for money laundering activities enabled by its services even if the bank has no complicity in or knowledge of those activities.
Money services companies depend on banks to facilitate international transfers. And bank compliance offices have proven worried enough about possible money laundering to just freeze out companies that send money to Somalia even without a single specific allegation of wrongdoing. Most notably, the British bank Barclays, which also has business interests and legal exposure in the US, dropped Somali transfer companies in late 2013.
Ever since 2012, when Minnesota-based Sunrise Bank canceled Somali transfer company accounts in the midst of a devastating famine in the Horn of Africa, the dozen or so US-licensed companies transferring money to Somalia have depended on perhaps as few as two banks: Merchants Bank of California and a second bank in Minnesota with only two retail branches that's only legally allowed to transfer money collected within the state of Minnesota.
But earlier this week, Merchants told Somali transfer companies that it was dropping their accounts. Merchants had been the subject of an Office of the Comptroller of the Currency inquiry over possible money laundering compliance concerns and agreed to a consent order with the OCC in mid-2014 promising to review and reorganize their practices. But for a mid-sized bank, the additional business from Somali transfer companies apparently wasn't worth the additional regulatory headache.
The shutdown is starting even earlier than Feb. 6, though. Aden Hasaan, the compliance manager of Kaah Express, told Business Insider that starting Saturday, Merchants would halt an armored car pickup service that allowed the company to move its customers' cash to Kaah's Merchants account.
Kaah is one of the larger Somali transfer companies operating in the US, with licensed branches in 14 states. Staying in business after the Merchants accounts are totally dropped will be difficult, Hasaan says: "I need a way to get money from our agents in all these other states, and without Merchants that link is cut." But for smaller companies the Merchants account closure could make it wholly impossible to transfer money to the Horn of Africa. Altogether, Hasaan estimates that the cutoff threatens 75%-80% of American remittances to Somalia. Jamila Trindle of Foreign Policy reported that Merchants processes 60%-80% of outflows to the country.
Hasaan sympathizes with Merchants' decision, even with a rapid and industry-crippling cutoff in service looming. "Merchants is just like any other bank," Hasaan says. "They are being put under a lot of pressure by the OCC and the banks feel that they cannot comply with its requirements. They resort to just getting out of this business altogether."
And the result is that an unstable and strategic part of the world will lose a major source of economic assistance until a fix can be found.
The US clearly has an interest in Somalia having an economy strong enough to provide alternatives to extremist groups like Shabaab — the US has stepped up its drone campaign against the group, killing Shabaab leader Ahmed Godane in a strike last September. But other efforts at fighting Shabaab and terrorism more generally might end up threatening the country's ever-fragile stability and undermining this exact objective.
As Scott Paul, a senior humanitarian policy advisor at Oxfam America explained to Business Insider, the Treasury Department hasn't quite caught on to the degree to which US policy is operating at cross-purposes here.
"We've seen in the past that political and foreign policy interests, even when they're all aligned with one another, don't necessarily shake the Treasury Department from it's orthodoxy and its inertia," he says.
Business Insider has reached out to Merchants Bank for comment and will update if we receive anything.
Source : businessinsider.com