Overzealous Western banks pose new threat to war-ravaged Somalia

Overzealous Western banks threaten to choke off Somalia’s struggling recovery by targeting the Hawala transfer system.

Columbus, Ohio – Every month I visit a small grocery store in a non-descript building in Columbus, Ohio, where I live, to use a service that keeps Somalia alive: “Hawala”, the traditional money transfer system used throughout the Middle-East, Africa and South Asia. Similar to Western Union, Hawalas present a way to easily transfer money from one country to another, using a wide network of agents and central clearinghouses that make such transfers quick, cheap and reliable.

Like many other members of the Somali diaspora, I use Hawalas to transfer badly-needed funds to friends and family at home. But the system is threatened by a new wariness among international banks used to clear the cash, which could sever an essential financial lifeline to Somalia just as it emerges from decades of civil war.

In Britain, Barclays bank has given hundreds of Hawalas until August 12 to shut down – a step which could halt the flow of as much as $12m a month sent to Somalia from Britain. The decision by Barclays, the seventh largest bank in the world and one of the most influential globally, signals to other Western financial institutions, already suspicious of the Hawala system, not to do business with these organizations altogether.

Here in the United States, scrutiny of the Hawala system over fears of money-laundering has seen banks threaten similar shutdowns. Oxfam, in a recent study with the humanitarian organisation Adeso and the Inter-American Dialogue, found that US banks are closing the accounts of Somali money transfer operators at twice the rate of their counterparts in Latin America.

For those who have kept Hawala accounts open, the relationship can be described as antagonistic at best. Many banks have instituted draconian due diligence requirements for Hawala business accounts, often preemptively shutting down accounts they deem suspicious. The Barclays decision could be a tipping point, leading other banks in Europe and North America to follow suit, potentially cutting off the flow of billions of dollars from Diaspora communities to Somalia.

While often depicted in the West as the financial tool of terrorist groups, Hawalas are in fact part of a sophisticated international money transfer system to speed foreign exchange inflows and investment capital. Instead of attempting to shut down Hawalas, Western banks and regulators should work to understand the Hawala system and work with remittance companies to help strengthen security within that framework.

After 22 years of a civil war that saw the destruction of financial infrastructure in Somalia, Hawalas like the one I use have filled large gaps left by government institutions, banks, charities, and development agencies. Losing them would mean disaster – both for my family, and for the country at large.

More than total international aid

As much as $2bn is sent annually to Somalia by diaspora communities around the world – that’s more than a third of the country’s GDP. Ninety percent of Somali foreign currency earnings come from remittances, and 80 percent of businesses in the country are launched with start-up capital sent from abroad.  By contrast, total humanitarian aid to Somalia in 2011 was just $1.3bn, making remittances  the single largest source of currency entering the country. 

A previous effort to shut down Hawalas in 2001 was followed by a significant spike in malnutrition rates among children living in remote regions of Somalia. UN officials attributed this partly to the sudden cut off of remittance funds. During the 2011 famine NGOs and international aid organizations used Hawalas to send food vouchers to families at risk of starvation, to pay employees, and to finance emergency aid programs.

In late 2010, I received a call from an uncle who lives in a small town near the Somali-Ethiopian border – drought had killed off all his livestock and food stores were running low. With five children to feed he was desperate and running out of options. I sent him money through a Hawala to feed his family – part of a wave of international assistance that poured in through the Hawala system.

While most Hawala transactions are legitimate, there have been times when the system’s informality and relative anonymity have been exploited to fund illegal activities including terrorism.  Hawala transfers have been linked to the 1998 bombing of the US embassy in Nairobi, and to the Somali extremist organisation Al-Shabaab.

Of course, Hawalas are not alone in being misused: Al-Qaeda used formal banking transactions and currency exchanges to finance the September 11, 2001 attacks, and last year UK-based HSBC agreed to pay a record   $1.92bn fine to resolve money-laundering charges by US regulators.

US government authorities did not criminally indict HSBC for fear the bank’s possible failure would threaten the financial system and the livelihoods of millions. Barclays’ move against Hawalas could have a similar effect in Somalia, and illustrates how banks in both Britain and the United States have become the de facto regulators of remittance companies.

Work within the framework, don’t destroy it

Several important steps can be taken to fix the situation. Regulators should educate banks about the actual regulatory risks of Hawalas, which are often not as high as banks make them out to be. For example, following recent threats from US-based banks to shut down Hawala accounts, the US Treasury Department sent reassurances that as long banks maintained appropriate anti-money laundering programmes they would not face government sanctions. British regulators and government officials need to step in with the same reassurance to Barclays and other banks.

The regulatory burden for monitoring Hawalas should be placed on the government and not banks, with clear guidelines that limit bank obligations and government officials in charge of due diligence and risk evaluation of remittance agencies. Banks, regulators and Hawala operators also need to work together to develop due diligence and monitoring strategies that work within the Hawala framework, which has its own system of checks.

I spoke with my uncle last month – he had just come back from Kenya after successfully selling his cattle at the Nairobi livestock market. Following the end of the drought my family had put together some funds to rebuild his business and it was now flourishing. This would not have been possible without the Hawala system. Attempting to shut down Hawalas will have disastrous social and economic costs and will wreak havoc on Somalia’s fragile economy as it seeks to rebuild.

Author Note: Mohamed Ali, J.D., is the founder of the Iftiin Foundation which aims to encourage youth entrepreneurship in Somalia, and in 2013 was named as one of the Aspen Institute’s New Voices Fellows.  

Follow him on Twitter at  @mohamedaali