The last bank in the US to processe financial remittances to Somalia has been forced to close. It has cited an inability to meet the regulatory requirements necessary in preventing money-laundering. The potential impacts on the Somali economy are very significant. It raises uncomfortable questions about how US government agencies collaborate in aid giving, as well as challenging assumptions about the best way of providing humanitarian assistance. Last Friday, the Office of the Comptroller of the Currency (OCC), a US federal agency reporting to the US Treasury, sent a cease and desist order to Merchant Bank, California. The reason for this was a belief that some of the $200mn transferred in remittances to Somalia annually, might find its way to militants of the terrorist group al-Shabaab. This bank is notable because it handled up to 80% of transfers to Somalia; transfers that were mostly from the Somali diaspora going to support family and communities in the war-torn African state. In Somalia, this system of remittances is known as the Xawala system. Xawala brokers charge 5%, a commission rate that is relatively low for this service. Moreover, transfer can be made via phone, as well as through offices, enabling communities from rural and remote areas to benefit. A UN study concluded that 40% of Somalis received remittances of some kind; remittances that are used to invest in rebuilding Somalia, from the bottom up. The significance of these informal remittance networks can’t be understated. They are estimated to be worth $1.3bn a year, more than the entire aid budget entering the country, and about 35% of the country’s GDP. Nicholas Kay, the U.N. Special Representative for Somalia described these financial networks as the “lifeblood and survival mechanism for many, many Somalis”. The decision to close these financial networks has significant consequences on both humanitarian and security levels. Whilst it is understandable that banks fear potential fines and closure for money laundering, the humanitarian value of the services they provide must be considered. Banking regulations in the US demand that banks have a clear understanding of the destination of their funds. This acts as a method of deflecting and handing over the responsibility of terrorist financial networks from the government to private institutions. Whilst this is logical reasoning, in reality it reflects an attitude of the US government to just “shut the door and walk away”. Moreover, such regulations also cause a form of “mass punishment” to a large portion of the Somali population, via a method of casting any recipient or donor of cash under suspicion. The closure of these financial networks puts the income for many Somalis at risk. This decision poses the risk of exacerbating the exact security problem that the regulatory practices are meant to prevent. Mary Harper makes the important observation that it risks driving underground the movements of cash in Somalia, contributing to problems of “violent Islamism, piracy, and the trafficking of arms, drugs and people”. It is likely that a new unregulated black market that makes it much easier to finance terrorists groups is created. Alongside this, it risks being a catalyst for terrorist recruitment of individuals who lose vital income, as well as encouraging anti-US sentiment through a perceived lack of care for the well-being of average Somalis. This case draws attention to a wider discussion of foreign aid and its use, implementation and dissemination in war-torn fragile states. The OCC themselves suggest the solution to this particular problem is “humanitarian assistance”. Is the remittance network that the OCC has helped shut down not itself humanitarian assistance? The direct and personal networks on which the Xawala system is based, is a cost effective and sustainable form of aid assistance. This stands in stark contrast to the clear lack of coordination between US government agencies. Whilst US Aid attempts to deliver its mission in Somalia to “improve the investment climate”, it is being consistently undercut but the domestic regulations channeled through the OCC. State-based aid in this fashion can hardly be considered a more effective form of humanitarian assistance than the Xawala network. After all, the Xawala network can reach parts of the country that international aid organisations can’t, such as the hostile Sanaag region. As for the security concerns relating to al-Shabaab, there is little to suggest that the Xawala network is anymore likely to be funding terrorists and criminals than financial leakage from international aid organisations. I would suggest that the reasoning behind this thought process is an assumption that state-based channels are always more reliable than informal ones. This couldn’t be further from the case, especially when working in a country that sits in last place in the 2014 Corruption Perceptions Index. Personal aid networks should be encouraged, and facilitated, not cut off.
The reality is that any form of financial assistance in a country as unstable as Somalia is inevitably going to leak some money to criminals and terrorists. The judgement is then a calculation of risk. As George Monbiot helpfully illustrates, cutting these remittances is the same as attempting to “ban agriculture, in case fertiliser is used to make explosives”. Given the evidence that terrorism grows in politically and economically unstable regions, a greater amount of thought should be put into ensuring financial networks continue between Somalia and its global expatriate community. The US government hold a responsibility to ensure that alternate remittance networks can be developed. As Ali A. Mohamed, a Somali-American, commented, “shutting down this option is like burning down the whole house to get one rat”.
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August 2015
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