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U.S. Officials Caught Flat-Footed on Somali Money Transfers

Second of two parts. Part one here.

Undersecretary of State Wendy Sherman stood before an audience in Washington early this summer and delivered a major speech on U.S. foreign policy in Somalia.

The United States has not had an ambassador to the war-torn African nation since 1991, but Sherman declared that would soon be changing, because of a number of recent improvements in Somalia's governance.

Sherman also spoke about the importance of international money transfers to Somalia's impoverished people. "Today, an estimated one-third of the country's total income is derived from remittances," she said.

But Sherman's remarks were as notable for what they did not include as what they did. In her 31-minute speech, Sherman completely skipped over the increasingly dire situation faced by Somali money transmitters in the United States.

Over the last several years, the ability of these companies to access the U.S. banking system, and in turn to keep their doors open, has grown precarious. Few banks are willing to serve the Somali money transmitters at a time when regulators have become more aggressive in their efforts to prevent money laundering and terrorist financing. The loss of the remittance pipeline could prove catastrophic to a country where famine claimed more than 250,000 lives between 2010 and 2012.

The State Department's reticence on the issue may have stemmed from the fact that lots of other U.S. government agencies also have a stake in money transfers to Somalia.

At least eight different agencies play some role, making it difficult for the government to speak with one voice. What's more, there's a basic disconnect between agencies that have foreign policy or humanitarian aims and those that are focused on protecting the financial system, according to critics of the Obama administration's efforts.

The government's approach to the Somali remittance issue has been marked by a shortage of coordination, a lack of transparency and a hefty dose of buck-passing, these critics argue.

"When we're talking about choking off a lifeline for hundreds of thousands of families who are already on the brink of crisis, we have to have a plan. And we have to have a plan that will work," said Scott Paul, a policy advisor at the aid group Oxfam America. "The thing that actually keeps me up at night is that there's no short-term plan."

Policy Fiefdoms
The tenuous situation carries huge implications for the future of Somalia, but four agencies at the center of it have no real role in U.S. foreign policy.

The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Reserve Board and the National Credit Union Administration are all responsible for enforcing rules designed to stop money laundering and terrorist financing. It is not their job to look at the wider effects of their actions.

"Theirs is not really a broader public-policy mandate," said Carol Beaumier, a former bank examiner who is now an industry consultant at Protiviti.

At the same time, the banking regulators are independent agencies that are largely shielded from interference by other parts of the government, such as the State Department.

"All of the agencies involved have been deliberately careful not to influence how the bank regulators do their job," Beaumier said.

Some of the sharpest criticism from members of the Somali-American community is being aimed at the OCC.

In June, the OCC issued an enforcement action against Merchants Bank of California, which specializes in banking money transmitters, and is one of the few U.S. banks that still does business with transmitters operating in Somalia. Around the same time, Merchants notified numerous money-transmitter customers that their accounts would soon be terminated. Merchants declined to comment for this story.

Right now, it is unclear to U.S. banks what standards Somali money transmitters need to meet, since regulators have not provided specific guidance on that issue, said Aden Hassan, anti-money-laundering compliance officer at Kaah Express, a money transmitter that serves Somali-Americans.

"The banks don't know what to do. They don't know what standards to ask of us," Hassan said.

An OCC spokesman responded that banks are generally expected to implement controls that are strong enough to manage the risks presented by a particular customer.

"Such controls must be commensurate with the risks presented, and can vary from customer to customer as well as from bank to bank," the OCC spokesman said in an email. "It is not something that is reducible to a single set of standards that can be applied across the board to all banks and all customers."

The OCC spokesman added: "The Somali situation is a terrible human tragedy that cannot be solved by bank regulators; rather, it requires an international government and private-sector effort involving organizations that have greater expertise in providing humanitarian assistance and building the infrastructure necessary."

Other federal agencies have also suggested recently that any solutions to the Somalia problem lie beyond their own reach.

Fed Chair Janet Yellen testified to Congress in July that her agency supervises banks to determine whether they're living up to their anti-money-laundering obligations, but it doesn't prohibit them from serving Somali money transmitters.


(3) Comments



Comments (3)
Further complicating the scenario PRLynn describes is the capriciousness of examiners that have been found to act on their own, personal interpretations of regulations which are frequently at odds with public statements of the heads of their agencies. Disingenuous as those statements are.
Posted by jim_wells | Monday, September 08 2014 at 7:18PM ET
It is extremely difficult for a bank to anticipate what will satisfy the regulators and examiners. No matter what decision is made, that decision can be second-guessed during an exam, many times at the detriment of the bank.

As an example, here is the statement from the OCC in the above article:
"Such controls must be commensurate with the risks presented, and can vary from customer to customer as well as from bank to bank," the OCC spokesman said in an email. "It is not something that is reducible to a single set of standards that can be applied across the board to all banks and all customers."

The plain-English translation goes like this:
"We're not going to give you any type of concrete standards or guidelines because we want to be able to criticize whatever you're doing no matter how much time, effort and diligence you put into it."

Some common descriptions of this mindset include "Back-Seat Driver" and "Monday Morning Quarterback".

Considering the very thin profit margin for this type of business and it quickly becomes a lose-lose scenario where the regulatory costs consume any profit and the bank could still wind up on the losing end of an enforcement action.
Posted by PRLynn | Monday, September 08 2014 at 6:49PM ET
Whilst the US State Department may legitimately claim that it was 'caught flat-footed' by the disruption of the remittance flows between the US and Somalia, that can certainly NOT be said of the Federal Financial Regulatory Agencies mentioned in this article.
By 2005, the wide-spread discontinuance of banking relationships for money transfer companies and other money service businesses had reached epidemic proportions as a result of the OCC's ill-advised publication, in 2002, of a "High Risk Customers" list that erroneously listed these businesses as presenting the highest risk for money laundering. Overzealous examiners have been pressuring banks to jettison these types of businesses ever since - despite public denials of the practice from the agency heads.
More recently, big banks have used this presumed risk of illicit money movement and potential 'reputational risk' as an excuse to discontinue accounts for a wide range of businesses - as well as low-income consumers, particularly immigrants and foreign-born nationals.
In 2009, H.R. 2893, "The Money Service Business Act of 2009," was introduced with bipartisan support of 5 Representatives. It was identical to legislation that was passed unanimously in the House the previous fall, but was not acted on by the Senate before it adjourned. The Bill would have provided banks with a 'Safe Harbor' to provide banking services to licensed, registered money service businesses. So the problem about which the State Department is concerned is NOT insurmountable. It is one created by Federal Bank Regulators and the mega-banks they supervise, exacerbated by Congressional inaction.
Posted by jim_wells | Saturday, September 06 2014 at 4:10PM ET
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