A small West Coast bank that caused alarm with its plan to stop serving a raft of Somali money transmitters has now reversed that decision, according to the chairman of the Somali-American Money Services Association.

Merchants Bank of California recently informed roughly 10 Somali remittance firms that their accounts can stay open, said Abdullaziz Sugulle, the group's chairman. That is despite an earlier warning that the companies would lose their accounts at the end of September.

The bank's decision to continue the relationships indefinitely was confirmed by a second source with knowledge of the situation. Merchants Bank of California declined to comment.

Because war-torn Somalia lacks a formal banking system, Somali-Americans depend on money transmitters to get money home to their relatives. The informal remittance system, which is centered in Dubai, has come under close regulatory scrutiny because of the risk it will be used to launder money or finance terrorism.

Sugulle did not identify the money transmitters that got a reprieve, but he said that most of them did not have backup accounts at other banks, so they would have had to close their doors if Merchants Bank had cut them off.

Sugulle said he's pleased that Merchants Bank reversed course, but added that the situation remains precarious. Merchants is one of the few U.S. banks that still does business with any of the transmitters that operate in Somalia, and it could change its mind again. "Anything can change anytime," Sugulle said.

"The reality is that millions of Somali families are still hanging by a thread," added Scott Paul, a policy advisor at the aid group Oxfam America, which has been pushing for a policy solution. "The U.S. government still has no idea what it's going to do if that thread snaps."

The U.S. State Department estimates that fully one-third of Somalia's total income comes from remittances. The fear among those who are working to maintain the existing money transfer pipeline is not that cash will stop moving altogether; its movement is too important to too many people for that to happen, they say.

Rather, the worry is that the flow of money will move through underground channels, which would raise prices and make it more difficult for authorities to determine whether it is getting into the hands of criminals or terrorists.

Merchants Bank of California, a $94 million-asset institution based in Carson, Calif., specializes in banking money transmitters, and has consequently been viewed as playing a key role in the Somali remittance saga. The thinking is: if Merchants is unable to become comfortable with the risks involved, it is unlikely that any other bank will.

In June, Merchants signed a consent order with the Office of the Comptroller of the Currency over its Bank Secrecy Act compliance. The regulator's close scrutiny may have contributed to the bank's initial decision to cut ties with the Somali money transmitters.

Later on, Daniel Roberts, the chief executive officer of Merchants, traveled to Dubai to scrutinize the precautions that its customers take with respect to the flow of money from Dubai to Somalia, according to Sugulle.

"He went to the offices, he talked to the compliance officers," Sugulle said. "When he came back, he said, 'They know what they're doing.'"

In the U.S., much of the Somali remittance business is based in the Minneapolis area, which is home to a large Somali-American community. In 2012, Minnesota-based Somalis organized protests against banks that had pulled out of the market.

In August, President Obama signed legislation that is designed to streamline the regulation of money transmitters, allowing federal authorities to accept state examinations. The bill's sponsor, Rep. Keith Ellison, D-Minn., has called the measure "a good start" but not a "panacea" for the Somali remittance problem.

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