First of two parts
Slowly but steadily, the list keeps shrinking.
First the bigger banks bowed out. As their regulators demanded more safeguards against money laundering and terrorist-financing schemes, these institutions could no longer stomach doing business with money transmitters that help Somali-Americans send funds to relatives back home.
Next to pull up stakes was a small bank in the Twin Cities, which is home to the nation's largest community of Somali immigrants.
And now a small West Coast bank that specializes in serving money transmitters is having second thoughts. Merchants Bank of California has informed numerous clients that send remittances to Somalia that their accounts will be closed at the end of September, according to three sources with knowledge of the situation.
Today, only a few U.S. banks are still doing business with Somali money transmitters, said Degan Ali, executive director of Adeso, an aid organization that is working to preserve the remittance pipeline. "Our fear is that the few remaining banks will follow suit and shut down accounts in the near future."
Inside the banking industry, it's no secret that the government's focus on anti-money-laundering and anti-fraud rules has tightened. Banks have been hit by delays of merger applications, subpoenas tied to the Department of Justice's Operation Choke Point probe and regulatory orders that restrict their revenue opportunities. In some cases they have responded to the scrutiny by cutting ties with business customers who are more likely to cause regulatory headaches.
The increasingly dire predicament facing the Somali money transmitters is both a typical and extraordinary example of the regulatory push's consequences.
While the government's efforts do offer protection from financial crime,they also carry significant costs for banks, their customers, members of the public and even the regulators themselves.
The stakes are far higher with respect to Somali money transmitters than they are for most other business lines affected by the ongoing crackdown. If the regulators push too hard, they may inadvertently precipitate a humanitarian crisis in Somalia. Fail to push hard enough, and they could have a deadly terrorist attack on their hands.
A Critical Lifeline
Somalia faces enormous problems. It's one of the poorest countries in the world. It's been enmeshed in civil war for more than two decades. Its central government is extremely weak, and various regions have de facto autonomy.
Given the ongoing warfare and the lack of central authority, it's not surprising that Somalia's financial system operates mostly outside of the government's watch. According to the U.S. State Department, Somalia has no anti-money-laundering laws, nor does it have any requirements for reporting suspicious transactions.
At the same time, Somali citizens are heavily dependent on money transfers from relatives who live overseas. Globally, Somali migrants send about $1.2 billion home each year, according to an estimate by Adeso and other aid groups, which also rely on the money transfer system in order to operate inside Somalia.
Somalis who receive cash from family members abroad are hugely dependent on that money. It comprises roughly 60% of the recipients' annual income, the aid groups estimate. And much of the money comes from the United States. Around 130,000 people of Somali heritage live in this country, according to the State Department.
There's also research suggesting that remittances offer a better way to help poor families in the developing world than foreign aid. A 10% increase in remittances led to a 7% increase in savings, according to one 2010 study that looked at countries in sub-Saharan Africa, while the same increase in foreign aid yielded only a 1.6% boost in savings.
The Money Flow
The Somali money transmitters, often called hawalas, are usually based in Dubai. In both the U.S. and the U.K., which has also been grappling with the question of how to maintain the remittance pipeline, the transmitters have agents in cities with large communities of Somali migrants. Firms with significant American operations include Amal Express, Dahabshiil, Kaah Express and Tawakal Express.
For most Somalis, hawalas are the only realistic way to receive cash from overseas. Their offices are scattered throughout the fractured nation, near where people live, and better regulated options are virtually nonexistent. Western Union has one office in the entire country.
From the customer's standpoint, the hawalas have two important advantages. First, the money arrives fast.
A U.S.-based agent collects the cash and uploads the transaction information into a clearinghouse, often in Dubai. Once the clearinghouse approves the transfer, a company agent in Somalia views the transaction information in an online system, and notifies the intended recipient, often by text message, that the funds are available. Within about 30 minutes of when funds are dropped off in Minneapolis, a relative in Mogadishu will have been notified to pick them up.
The hawala system is also cheap, at least compared with more regulated money transmitters. In 2013, Somali migrants to the U.K. paid about 7 pounds sterling to send 120 pounds home, according to a paper by researchers at Oxford University and the University of London. That compared to about 9 pounds for Nigerian migrants, 10 pounds for those from Ethiopia, and 12 pounds for Kenyan migrants.