Somali money transfer companies must self-regulate to maintain the integrity of their services

Somali-Americans in Minnesota rally in 2012, after a bank that supported the money transfers services withdrew from those transactions. [Image courtesy of AP]

Somali-Americans in Minnesota rally in 2012, after a bank that supported the money transfers services withdrew from those transactions. [Image courtesy of AP]

In a world where financing of terrorism and efforts to combat it have taken center stage, sending hundreds of millions of dollars every year to a country where majority of the beneficiaries do not have access to credible, government-issued identification documents was always going to raise serious regulatory questions.

When that country is one of the most restive in the world, and where a globally designated terrorist outfit operates out of, the assigned threat index scales several rungs higher.

Somali remittance companies’ risk profile has been inching ever closer to the “unacceptable” threshold since 9/11, when the United States of America, and with it the rest of the world, embarked on an unprecedented regime of financial, security and political clampdown on so-called terror groups and their finances.

New legislation and amendments to existing ones led to reinvigoration of the U.S. anti-money laundering regulations with stricter reporting, record keeping, monitoring and oversight of the financial system.

The regulations continue to expand, and financial institutions – including Somali remittance companies – find themselves with the obligation of not just recording and reporting funds sent, but also the requirement to satisfy the U.S. regulators that the funds are collected by designated beneficiaries in a manner consistent with global anti-money laundering systems. And that is precisely where the problem lies.

Beneficiary is the problem

In the United States, remittance companies are required by law to obtain certain information about the senders or receivers of funds of $3,000 or more. Records to be obtained include, but are not limited to, the names, addresses, date of birth, primary identification (such as driver’s licenses or passports), secondary identification (usually social security numbers).

When companies fail to gather such information and maintain it for the mandatory five-year period, they are cited for Bank Secrecy Act violations and may be subject to a host of punitive measures.

Out of abundance of caution, and in many cases out of sheer desire to do over and above the regulatory requirements, companies often times lower their record keeping thresholds to as low as $500 or even lower.

Reporting requirements also demand the filing of currency transaction reports (CTR) for any cash transactions involving more than $10,000 in cash by or on behalf of a single individual or entity.
Financial institutions are also required to file suspicious activity reports (SAR) on funds whose legitimacy of source and purpose, among other indicators, cannot be established.

The purpose of all this identification, record keeping and reporting is not necessarily to preempt financial crime and fraud; those do happen and are in many cases committed by individuals who possess proper government identification documents.

Rather, the intention is to create a trail, so that, if and when financial crimes happen, there is a readily accessible database detailing what, who, where and when. Regulators and enforcement agencies only have to follow the trace to hold the perpetrators accountable.

The reality of Somalia is starkly different. Since the collapse of the Somali state, government-issued identity documents have been unheard of. That is, until recently when the fledgling Somali government started issuing documents in very limited areas. A small percentage of the population, especially the older generation, may still have old documents issued before the collapse of 1991. Many who were born afterwards do not.

Some of those living in refugee camps in neighboring countries may have some form of identification, such as those issued by the United Nations, but that is too limited both in validity and availability to make much of a difference.

A widespread system Somalis employ for remittance purposes as well for other financial dealings, involves extensive clan-based referrals where beneficiaries unknown to the paying agent are identified and vouched for by individuals known within the community as elders or merchants.

Once identified through the referral system, the beneficiary is treated as an established customer for repeat transactions. It is a system that is convenient and has served the Somali financial system relatively well.

However, such a communal referral system is, by its nature, designed to buttress the already established trust system and is useful mainly as a tool to minimize the risk of financial loss to the company by guaranteeing that the persons referred are indeed who they say they are.

For very obvious reasons, this system can not be a substitute for proper documentary identification in a world thrown into seismic paranoia by the fear of terrorism and its financing. There is no credible customer identification or authentication. There is no reporting, no monitoring and oversight, no licensing, no financial intelligence in the country. Most importantly, the country does not even have an anti-money laundering law.

There must be an alternative system to identify and authenticate the beneficiaries through the use of instruments and procedures that meet the basic thresholds of global anti-money laundering frameworks.

Remittance companies have for long claimed their services are subject to high degrees of self-regulation underpinned by the clan referral and trust system. While this may be true to an extent, the inherent debilities in clan referrals and trust mean it cannot substitute documentary identification in the eyes of Western regulators.

Biometric verification

Globally, identification systems are increasingly incorporating a variety of biometric information. This refers to a system of identifying an individual by use of certain unique biometric traits such as fingerprints, retina and iris patterns.

With the proliferation of technological tools, both hardware and software, such solutions are not only attainable but absolutely vital to help maintain the lifeline of remittance in Somalia and across the East African region.

The United Kingdom government has been working on a project called “safer corridors” designed to introduce an acceptable standard of identification, authentication and other “know your customer” components in the last mile (payment locations).

The system would be independently “audited and risk-rated” by a trusted third party independent of the remittance companies. U.K. banks would then, based on such third party oversight, be able to provide banking services for those companies who present acceptable levels of risk.

While the safer corridors initiative is not necessarily a magic wand, it does drive the remittance discourse in the right direction: mitigating the lack of government financial oversight in Somalia through proactive technological solutions adopted by the remittance industry and overseen by the U.K. government regulatory system.

The fact that the U.K. government is literally imposing this solution speaks volumes about the lack of initiative and foresight on the Somali remittance industry’s side. They have done relatively well to fill the void left by the collapse of the Somali formal banking sector and have, to a large extent, been responsible for the overall resilience of the Somali economy.

However, their glaring failures are illustrated by the current regulatory bottlenecks. The lack of banking services is not a sudden unexpected bolt from the blue; it has been brewing for a very long time – since immediately after 9/11.

It has been a gradual process of banking attrition and everyone in the industry knew exactly where it was logically headed. The underlying regulatory fears were also clear to everyone and the remittance industry is guilty of failing to institute proactive measures to address the problems before they reached the precipice.
This crisis actually approached its peak several years ago, and there was ample time to react appropriately, but the companies again elected not to do anything – other than complain loudly about the impending humanitarian disaster.

The industry should have established a system of self-regulation with effective technological, financial and anti money laundering infrastructure to maintain the integrity of its service.

With the abundance of technology, it is not beyond the financial or technical ability of companies who handle monthly volumes of hundreds of millions of dollars to invest in solutions that help ensure the Somali remittance industry retains sufficient anti-money laundering credibility.

Neither proactive not reactive

The remittance industry has not only failed to be proactive and confront the crises before they mature; it has also failed to react with any conviction when the debilitating problems do in fact come home to roost. For a service that is thought to be synonymous with the resilience of the Somali economy, this level of passive inaction is hard to understand.

One of the foremost things the money transfer companies should do immediately, and should have done ages ago, is to own their narrative and stop hiding behind humanitarian and community activists and realize that the regulators are no longer listening.

In the U.K., the solutions being “imposed” were conceived and prescribed by entities outside the money transfer businesses. Here in the U.S., all the conversation, lobbying and media coverage around the issue are driven by humanitarian organizations like Oxfam America, ADESO and others.

While it is commendable that these organizations are investing so much time and resources in support of Somali remittances, their efforts cannot compensate for the industry’s shocking lethargy.

The next step is to form a robust trade association to handle communications, steer research and information and to introduce and oversee industry anti-money laundering standards.
Most importantly, it should guide the industry in the identification and implementation of the necessary anti money laundering instruments, including but not limited to the installation of biometric identification and authentication systems at the payment end of the remittance flow.

Unless the remittance companies rouse themselves out of this lifeless stupor and start to view themselves as business enterprises and not merely philanthropic outfits, they risk being jettisoned by a post-9/11 financial world where a culture of compliance is neither optional nor subordinate to humanitarian and other rationalizations. Being jettisoned is what is happening right now.

Aden Hassan is a Minnesota-based anti-money laundering specialist and a Sahan Journal contributor. He can be reached at adenhassan@outlook.com

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