Halt of Remittances Threatens Stability in Somalia

02.26.15
World News /26 Feb 2015
02.26.15

Halt of Remittances Threatens Stability in Somalia

By Madeleine Moreau for Global Risk Insights

Last week, the last U.S. bank accepting money transfers from Somali immigrants to relatives living back home officially halted all transactions. Government institutions have made it a priority to monitor these cash transfers more closely, including investigating banks when transfer agencies they service have been caught sending cash to illicit recipients.

The U.S. Treasury Department and the FBI cite concerns that Somali immigrants could be sympathetic to radical Islamic groups such as Al Shabaab operating within Somalia and use the money to fund their operations.

Humanitarian institutions such as Oxfam America, however, explain that remittance payments are a large part of Somalia’s national economy. Somali immigrants living in the U.S. warn of family and friends not being able to survive.

To strike a balance of these political risks, a better system needs to be put in place to both ensure greater transparency in cash transfers while also encouraging the economic opportunity that remittance payments offer.

Remittances key to national economy

Somalia is one of the poorest, most unstable countries in the world. As a result of years of civil war and violence, thousands have fled the country in hopes of a better life. The U.S. hosts some 80,000 Somali migrants who work and send portions of their income to family and friends back home.

A study by Oxfam America indicates that of the $1.3 billion in remittances being sent to Somalia annually, $215 million comes from immigrants living in the US. These cash transfer are significant, because after years of war Somalia still does not have a central banking system. There are also no official international transfer companies such as Western Union in the country.

As a result, families living abroad have had to rely upon informal networks known as “hawalas” to deliver money to relatives back home. One-third of the nation’s economy is believed to be dependent on these remittances. The Merchants Bank of California, the last U.S. bank to shut down remittance transfers, handled 60-80% of these payments.

Humanitarian experts say that the money being sent from families abroad is key to filling in the gap of a poor central banking system, and could have a devastating effect on the health of citizens living there.

In an interview with Al Jazeera, Ifrah Ahmed, a 25-year-old law student in New York who was born in Somalia but raised in Seattle, used to send $100 to $300 a month back home to relatives. She stresses the importance of these funds in supporting her family:

“Even though you send remittances to one person, the amount of people that money affects is incredible. If we send money to my aunt, not only will she feed her children, she will feed her neighbors as well, because they may not get remittances from abroad.”

Fear of terrorist funding

Government institutions, however, have put increasing pressure on banks that offer cash transfers to Somalia so as to ensure that the funds are not being used to fund terrorist operations. Officials explain that because the cash transfers are operated by the informal hawala networks, it is harder to monitor where remittance payments are being sent exactly.

The added pressure has made these transactions very risky for U.S. banks, which is why many of them shut down transfers.

Treasury Undersecretary David S. Cohen said in a recent statement that there are “real money laundering and terrorist financing risks” associated with these cash payments. The government is working to establish a more secure system so that “legitimate customers” are receiving funds.

In addition, State Department spokeswoman Jen Psaki has also said that these cash transfers are not as significant to the nation’s economy, saying it would be a “stretch” to connect remittances to economic opportunity in Somalia.

The U.S. government deems Al Shabaab a terrorist organization, as it continues to carry out violent operations in Somalia that threaten US interests. Officials also note the rise of piracy off the coast of the country, which has seized U.S. ships in the past.

Last month, law enforcement officials arrested a man from Northern Virginia who was allegedly funneling money toward illicit activities.

At the same time, critics say that cutting off these funds could exacerbate the humanitarian crisis in Somalia and actually strengthen the appeal of terrorism and piracy. Terrorist groups could exploit this removal of economic opportunity by offering payments of their own to win over support.

Striking a political risk balance

Overall, authorities seek a balance between engaging in an effective counter-terrorism campaign without running the risk of funding terrorist organizations such as Al Shabaab. Greater banking transparency, in other words, is needed to make sure funds do not end up in the wrong hands.

Engaging with officials on the ground in Somalia that handle the hawala transfers is a first step in ensuring legitimacy of the customers receiving the payments. This would require an investment in infrastructure to improve regulation, which would ultimately strengthen Somalia’s poorly managed financial institutions and thus encourage indigenous economic growth.

Failing to establish some sort of system to allow remittance funds to go through, however, could have an adverse counter-terrorism effect and push Somalia into a deeper humanitarian crisis.

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