The owner of the Somali Restaurant in Windsor, Ont., says he sends $300 each month to a sister-in-law in Mogadishu whose husband died in 2008 on a smugglers’ ship that capsized in the Mediterranean. Without Gaal’s contribution, she and her four children wouldn’t be able to get by. “When you go to Somalia, if you see people begging on the street or living in the bush, that usually means they don’t have someone from the diaspora sending them money,” says Gaal.
Remittances from expatriate Somalis total about $1.3 billion annually, according to the humanitarian group Oxfam International, which estimates as many as 43 percent of households depend on the transfers. That lifeline is getting squeezed as some countries step up enforcement of anti-money-laundering laws as part of a crackdown on terrorist groups. Merchants Bank of California, the last U.S. bank handling large volumes of money transfers to Somalia, stopped in January. Financial institutions in the U.K. and Australia have also ceased the transfers. Banks in Canada continue to process them.
Laws in most countries require banks on each side of a cross-border transaction to check the customer’s background and to report suspicious activity. Somalia’s two surviving banks are struggling and not up to the task of due diligence. Neither is the central bank equipped to police the industry. (It doesn’t set interest rates either.) “When I was governor, there wasn’t even a single computer in the whole building,” recalls Yussur Abrar, who briefly served as central bank chief in 2013. Many foreign banks prefer not to do business with Somali financial institutions, lest they get caught inadvertently funneling funds to local groups such as al-Qaeda-linked Al-Shabaab, which the U.S. has designated a foreign terrorist organization.
Estimated annual remittance flows to Somalia
Wire transfer services with large Somali clienteles have been forced to improvise. Dahabshiil and Amal Express are wiring funds to banks in Dubai to pay for goods that are then shipped to Somalia, where they are sold. The proceeds of the sale end up with the relatives of the Somali expat. Since Merchants Bank’s decision to leave the market, some remittance companies have resorted to flying agents bearing suitcases full of cash to Dubai.
It’s not clear that Somalia’s ostracism from international capital markets has helped cut off Al-Shabaab funds. “The anti-money-laundering regime has been one of the fastest-spreading international legal reforms ever, but there’s little evidence to suggest it’s actually curbed money laundering,” says Jason Sharman, a professor at Australia’s Griffith University who studies money laundering.
Aid groups have begun assessing the collateral damage. A July survey of 2,300 Somali households in six regions by a United Nations agency found that in five of the areas remittances had dropped anywhere from 22 percent to 50 percent. The first reason was less money was being sent. The difficulty of transferring money into the country was the second-most frequently cited reason.
Relief groups including Oxfam America have pleaded with regulators at the U.S. Department of the Treasury to relax the rules on money transfers to Somalia on humanitarian grounds, as has the office of Representative Keith Ellison (D), whose Minneapolis district is home to about 25,000 Somalis, the largest concentration in the U.S. “The fear is that without remittances, the terrorist group Al-Shabaab will take advantage of the desperation of Somalis,” he says. In March, Treasury Secretary Jack Lew told the House Committee on Financial Services that Somalia needs to bolster regulation of its financial industry if it wants to regain access to global markets. The U.S. Department of State has since invited consultants to apply for a $3 million grant to assess the situation and come up with a set of recommendations. Abrar, the former central bank chief, says it would take a year or two at the very least to implement changes.
The bottom line: Banks in the U.S. have stopped handling remittances to Somalia, where up to 43 percent of households rely on the transfers.