The Politics of Poverty

Ideas and analysis from Oxfam America's policy experts

Disruptions to diaspora remittances threaten Somalia

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New report from Oxfam shows banks and regulators can do more to keep the funds flowing.

Scott Paul is a senior humanitarian policy advisor at Oxfam America. 

It felt like magic. My friend in Minnesota stepped into a shop and threw down some of my cash. Fifteen minutes later…poof! The money transfer had been vetted, and after a quick ID check, my money was there for the taking across the world in Somaliland.

A remittance clerk examines Scott Paul’s passport during his trip to Somaliland last year. Photo: Scott Paul
A remittance clerk examines the passport of Scott Paul (at counter) during his trip to Somaliland last year. Photo: Scott Paul

My personal money transfer was a mere demonstration of the money transfer system. But for people in Somalia, remittances from relatives abroad are nothing short of a lifeline.

A new joint Oxfam, Adeso and Inter-American Dialogue report estimates that Somali migrants around the world send approximately $1.3 billion to Somalia each year to help their families back home. Of that approximately $215 million comes from Somali-Americans and Somalis in the United States. This is nearly the same amount of development and humanitarian assistance that the US government sends to the country.

Remittances represent a significant share of Somalia’s economy. Depending on how GDP is calculated, I’ve seen between 25-40 percent. Regardless, remittances help reduce Somalia’s reliance on assistance from foreign governments and international organizations.

The role of remittances during the food crisis in Somalia in 2011 was plain to see; the generosity of the Somali diaspora played a vital role in helping Somali families survive. But when a bank in the United States closed the accounts of several Somali-American money transfer operators (MTOs) that year, it became clear that the entire remittance system could come to a screeching halt at a moment’s notice.

Somali-American MTOs—really the only game in town when it comes to distributing cash in Somalia—need bank accounts in the United States to facilitate transfers from Somali-Americans. They have found those accounts hard to come by in recent years. Though they have invested significantly in anti-money laundering compliance systems, policies, and training, most US banks haven’t taken heed.

Oxfam found that many US banks have branded Somalia a risky destination for money transfers and have unceremoniously closed the accounts of Somali-American MTOs without providing any specific reasons.

Is it the banks’ fault that remittances are under threat? Well, let’s just say they can do better. Oxfam’s research shows that banks have closed Somali MTO accounts at twice the rate of Latin American MTO accounts, and without offering any justifications. We surmise that they simply think of Somalia as a risky destination and don’t even bother looking into the checks and processes that companies have in place to prevent money laundering.

For the most part, the banks in question have refused to substantively engage with the money transfer companies, which have been asking how they can further improve their compliance systems. Admittedly banks are operating in an environment of regulatory uncertainty. The Treasury Department on one hand has assured banks that they could open accounts for high-risk money transfer companies, provided they do their due diligence. But Treasury auditors’ scrutiny of money transfer company accounts and the threat of multimillion dollar fines on banks send a different message.

Ultimately, putting the remittance system on strong footing is going to take a concerted and collaborative effort from government and the private sector. With so much at stake and so many people depending on their services, banks and the regulators can make a greater effort to keep the lifeline to Somalia open.

Poof!

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You can read the report from Oxfam, Adeso, and the Inter-American Dialogue here, which includes recommendations for banks, governments, MTOs and US and Somali authorities.

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