Ismail Taxta / Reuters A moneychanger carrying Somali currency at the Bakara open air market in Mogadishu, October 10, 2008.

Don't Blame the Banks

How Overregulation Chokes the Flow of Remittances to Somalia

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

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