Roughly $1.3 billion in remittances flow to Somalia every year, at least a quarter of the country’s GDP. But harsh regulations in the West are making it ever more difficult for banks to work with money service businesses to send remittances to fragile, high-risk states, thus threatening to cut off this vital flow of money. The latest blow came in late January, when Merchants Bank of California sent letters to Somali remittance companies that said, “We regret to inform you that the bank has decided to exit its relationship with you at this time.” Somali money service businesses were hit particularly hard since Merchants was the last bank in the United States that allowed U.S.-based Somalis to transfer funds to their families back home. Similar shutdowns have occurred in other countries. The British bank, Barclays, deeply angered the UK Somali community in 2013 when it decided to close over 200 money service accounts, an action that was likewise predicted to have a drastic effect on the UK Somali community’s ability to remit funds home.

A recent report by Oxfam and African Development Solutions (Adeso) reiterated the importance of diaspora remittances to the Somali population, noting that annual remittances significantly dwarf international aid. There is no question that this flow of funds is vital, but the path that remittances travel is complicated and opaque. It is this lack of transparency that concerns banks, which risk being slapped with hefty fines for transferring funds to countries such as Somalia, where designated terrorist organizations such as al Shabaab operate. The post 9/11 financial regulatory environment holds banks accountable for determining the origins and the destinations of the money flows they facilitate. Tracking the exact movement of these funds to Somalia is difficult, if not impossible to do.

The lack of a formal financial system in Somalia means that remittances cannot be transferred directly. Instead, an ingenious, trade-based system is used to channel money. The process begins when a customer, say from the United States, visits a local money service business to send funds to someone in Somalia. An agent then notifies his counterpart in Somalia, who in turn uses funds on hand to complete the transfer, since no infrastructure exists for sending money directly between the two countries. As a result, the agent in the United States now owes his Somali counterpart the cost of the remittance. To meet this debt, the U.S. agent instructs his bank, such as Merchants Bank of California, to wire funds to the bank account of its partner clearinghouse in Dubai. The clearinghouse provides loans to traders who use them to finance the imports of goods into Somalia. When the trader sells his goods, he reimburses the Somali remittance agent. The system works well, but, for a banker in London or New York, the circuitous route sounds an alarm on money laundering and terrorist financing.

The role of the clearinghouses in Dubai is critical, yet insufficient attention is paid by those seeking to develop safer corridors to Somalia, to the risks these clearinghouses present. The use of the funds in Dubai by both the clearinghouse and the trader lacks transparency and are therefore difficult to trace. International banks and regulators also question whether there is appropriate regulation in Dubai to monitor these type of exchanges. As the Oxfam and Adeso report points out, the UAE nexus “is a key weakness in the current system of money transfers into Somalia.” The apparent unwillingness of governments and relevant multilateral organizations such as the World Bank to tackle this weakness means that any efforts to ensure that remittances are not blocked by money laundering and terrorist financing concerns are bound to fail.

Secondly, the lack of a recognized financial regulatory system in Somalia inevitably dampens the willingness of international banks to facilitate money transfers directly to Somalia. Banks are extensively monitored and criticized for transferring funds without fully knowing where they end up. They are therefore rightly cautious in sending money to an unregulated environment.


After the account closures by Barclays, the UK Government set up an action group—made up of members from the private sector, government, civil society, and international organizations—to ensure the continued flow of remittances to Somalia. In the summer of 2014, the action group produced two guides: one on how remittance companies can comply with anti-money laundering and counter-terror finance laws and another on how banks can identify and manage the risk of financial crime when working with remittance companies. Other countries, including the United States, are watching the action group’s progress with interest. Although the United Kingdom’s measures are admirable, they appear to have had little real impact since they continue to neglect two key risk issues: the use of opaque clearinghouses in Dubai to transfer funds and the lack of financial regulation in Somalia. Now more than a year after it was set up, the action group’s efforts appear to have stalled.

A better way to address the problem is to build a firewall to prevent banks from having to operate in opaque or unregulated environments while continuing to gather and transmit funds. The World Bank could become that firewall. Rather than have money service businesses aggregate funds in Dubai, the World Bank could take their place, providing commercial banks with an unquestionable destination for the funds gathered by the Somali diaspora. The World Bank—acting in its capacity as “a vital source of financial and technical assistance to developing countries around the world”—would then remit funds either through the bank account of an audited, monitored, and approved clearinghouse in Dubai or, when the Somali financial system matures, directly to the Somali central bank and a more regulated local financial system.

For the foreseeable future, remittances will continue to play a critical role in the Somali economy. With formal channels closed, money, like water, will inevitably find cracks in the system through which to flow. Such routes are often more expensive, more risky, and less secure. If the international community truly wants to address the challenge of sending remittances to frail or conflict-ridden states, it must grasp the fundamental risks in the system. The current system lacks transparency and regulation. Despite earnest efforts by governments like the United Kingdom’s, international agencies and regulators have neglected to tackle the key challenges that keep the remittance process opaque, and thus, deter banks from moving much-needed funds to places like Somalia.

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  • TOM KEATINGE is a former investment banker at J.P. Morgan and Director of the Centre for Financial Crime & Security Studies at the Royal United Services Institute. Follow him on Twitter @keatingetom.
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