The money that Somali migrants in the United States and around the world send to their friends and family in Somalia comprises over a third of the country's entire economy. More than 40 percent of families depend on help from abroad to meet their most basic needs. But U.S. Treasury Department regulation is forcing American banks to close down accounts of companies that transfer money to Somalia, endangering the entire Somali remittance system.
Unlike most countries, Somalia is not linked to the international banking system, so direct bank transfers are impossible. Western money transfer companies are nearly absent from the country. That means Somali-American remittance companies, which have established an impressive network of branches, including in small villages and rural areas, represent the only legitimate channel through which to send money to Somalia. Somalis view them proudly as indigenous, home-grown institutions that have helped them survive through over two decades of near constant warfare.
These Somali-American remittance companies are licensed and thoroughly regulated in the U.S. by state and federal authorities in order to prevent money laundering. Many of them have invested heavily in anti-money laundering safeguards. Official Treasury Department policy states that money transmitters ought to enjoy reasonable access to banking services, which they need in order to wire money abroad. Yet line examiners in the Treasury Department's independent regulatory agencies such as the Office of the Comptroller of the Currency (OCC), routinely warn the banks against working with them.
Next month, Merchants Bank of California will be the latest in a long line of banks that have been pressured by the OCC to scale back its relationships with companies that transfer remittances. If Merchants Bank closes these accounts as planned, many of the companies will go out of business and those left standing will be on borrowed time. Somali-Americans will find it more difficult to send money home. Even a minor reduction in remittances could reverse the fragile gains Somalia has made since the 2011 famine; a major disruption of these transfers would create an even deeper catastrophe.
Somali-Americans' only options will be to use the informal transfer system and to ferry suitcases full of cash to Somalia. No one benefits under this scenario besides criminal networks, which prey on unregulated and unmonitored funds. Communities throughout Somalia will be destabilized, and the Obama administration will have only itself to blame.
The US Agency for International Development and Treasury Department are planning important longer-term interventions to strengthen the system of remittances to Somalia and stand up Somali financial institutions. And the House of Representatives last week passed the Money Remittances Improvement Act, streamlining money transfer regulation and even more importantly signaling that money transfer companies are a legitimate and important part of the financial services landscape. Unfortunately, these steps will do little to mitigate the short-term consequences of a disruption in remittances to Somalia. Emergency measures are needed.
No one expects the government to force banks into accepting customers they don't want, nor to give banks carte blanche to do business with anyone. But the choice between coercing banks and turning a blind eye to money laundering is a false one. There are a number of actions the government could take to help all remittance companies obtain bank accounts. For example, government agencies that regulate banks, such as the OCC, could instruct their examiners to follow official Treasury Department policy rather than singling out remittance companies as troublesome customers for banks.
But the remittance corridor to Somalia is uniquely stressed -- and uniquely important. At the moment, Somalia's remittance system is its life-support, its economic engine and the glue holding its communities together. The Obama administration must be willing to at least carve out a temporary exception for Somali-American remittance company accounts from its intentionally vague requirement that banks conduct "appropriate, risk-based" due diligence on their customers. In place of that requirement, the administration must clearly spell out the steps banks must take to prevent money laundering through the companies until longer-term solutions are realized for keeping the lifeline open. At stake is nothing short of survival and stability in a country in crisis.
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