U.S. Cuts Off Economic Lifeline to Somalia

By Lisa Vives Reprint | | Print |

NEW YORK, Feb 6 2015 (IPS) - A California bank is shutting down a money transfer operation that brought desperately needed funds from the Somali Diaspora to their relations in the Horn of Africa.

The action was announced by the Merchants Bank of California last month in response to a Consent Order from the Office of the Comptroller of the Currency (OCC), an independent office within the U.S. Treasury. The order was issued in June.

Writing to Somali-American money transfer operators this month, the bank said it could not “in good faith meet the obligations of the Consent Order” given the complexity of the transfer business.

“This is a humanitarian catastrophe,” said “Mohamed”, a field director of the Somali Action Alliance in Minneapolis, Minnesota, in a phone call with IPS. “With the action of the bank, our community will have a hard time sending money to their Moms, their siblings, and other family to put food on the table and shelter over their heads.” He asked not to be identified by his full name.

Minneapolis Congressman Keith Ellison called the decision “catastrophic.” His district has the largest concentration of Somalis in the United States.

“For the past few years, I have been warning every regulator and official about the devastating effects of closing the last safe and legal pipeline to provide humanitarian remittances to Somalia,” he said in a statement released by Oxfam. “There is no doubt that a decline in remittances will exacerbate the humanitarian crisis and erode the gains Somalia has made in recent years.”

US regulators said they suspect that some of the money transfers could be finding their way into the hands of Islamists tied to the al-Shabab militia. The US bank, the regulators determined, had inadequate safeguards against money laundering.

In the US, bank directors are responsible for ensuring all the funds they handle are used for legitimate purposes.
According to a recent report funded by the Food and Agriculture Organisation (FAO), more than 700,000 Somalis are facing acute hunger. An additional 2.3 million Somalis need help to protect their livelihoods and build reliance against future shocks.

Remittance payments to Somalia dwarf aid spending. Overseas development assistance to Somalia is 75 dollars per capita, including both humanitarian and development aid, compared with an estimated 110 dollars per capita in remittances entering the country, which amounts to 35 percent of GDP, the highest level in the world.

Somalis in the US send more than 200 million dollars, according to the charity Oxfam; the UK sends more than 162 million, followed by Germany and the Netherlands.

The bulk of the monies sent are used for basic needs, including food, clothes, medicine and education.
As stability returns to some parts of the country, remittances are increasingly used for investment. They are an essential part of rebuilding Somalia.

Degan Ali, head of the African humanitarian aid organization Adeso, said: “What we have here is a system where Somalis voluntarily help other Somalis. If we really want to build resilience in Somalia, then we should be supporting that system, not trying to destroy it.”

“Remittances form the backbone of Somalia’s economy,” said Ali. “Unfortunately, this decision comes at a time when nearly three quarters of a million Somalis are facing acute food insecurity, and we are likely to see that number rise if money transfer companies cannot remit funds from the United States to Somalia.” The NGO Adeso is headquartered in Nairobi, Kenya.

There is no functioning banking system in Somalia, so remittances through money transfers are the only way people outside the country can support those at home. They play a crucial role during the frequent droughts as international aid agencies use them in cash for food programmes.

While it is understandable that banks fear potential fines by regulators, closing the accounts of Somali remittance companies risks driving underground the flow of cash to Somalia, exacerbating the problems of violent Islamism, piracy and the trafficking of arms, drugs and people.

In 2013, the UK banking giant Barclays also sought to cut ties with Somalia by closing the account of the leading Somali money-transfer operator Dahabshiil.

Barclays, which said it was part of a crackdown on money laundering, eventually agreed to keep the account open so that Dahabshiil could find a replacement bank.

Somalia does not have a proper banking system and has been in turmoil since the fall of Siad Barre’s government in 1991.

“Every time a bank closes, the media asks, ‘What’s the impact?’ said Ali. “They think we’re exaggerating. But it’s just a slow death. It’s a complicated chain and the links keep breaking and becoming weaker.”