FATF PRIVATE SECTOR CONSULTATIVE FORUM.
SOMALIA: Remittances and De-risking
In light of continuing concerns about the impact of de-risking on the remittance sector, the FATF and FSB, with the support of the GPFI and the German G20 Presidency, chaired a special session on remittances and de-risking with experts from the remittances and banking sectors (summary). The discussion aimed to understand how the money and value transfer services sector is affected by loss of correspondent banking services, and the variety of reasons why this can occur. It also reviewed the responses which have been used to address the causes, and maintain access to banking services and remittance services; and sought to identify any remaining gaps or co-ordination needs, at national or international levels that are not already covered by existing initiatives.
The decision by certain UK banks to close a significant proportion of their Somali Money Transfer Operator accounts from 2012 and subsequent legal action taken by Dahabshiil and others was a watershed in the de-risking debate, bringing it to public, political and regulatory attention (background). Concerns about the potential humanitarian catastrophe of global restriction on remittances have made up a substantial part of the narrative on de-risking impacts.
A framework is essential for banks to enjoy sufficient comfort in doing business with Somali remitters, given the associated Money Laundering/Terrorist Financing risks. Some Somali remittance companies are working towards establishing a full banking service in all jurisdictions.
The DfID and World Bank ‘Safer Corridor’ has apparently stalled; we are unlikely to get to a tested pilot; there is little to show. Informed by many interested parties, it was weak on what facts on the ground in Somalia suggested. Based on a Trusted Third Party structure and technology driven, it never got much past concept stage.
The UAE and Somalia authorities have been bound into this process after a fashion but they have little detail on the practicalities and tensions remain. The same goes for industry. Legislation has been passed, and regulations drafted, but little has been implemented in a practical fashion, and the Financial Reporting Centre (FRC) has yet to generate action. Despite efforts from US State Dept, there is still no common ID standard with which the remittance industry can work.
With its expertise in financial management capacity building, the World Bank and the US State Dept are well-placed to direct and coordinate efforts by governments, NGOs, banks, MTOs, as well as Somali communities locally and around the world. Success will depend on the quality of information sharing, dialogue with stakeholders and degree of collaboration – transparency is key at Somali Government and Central Banks level, as well as with the remittance industry.
It is hoped that the new Somali Government will be truly willing to grasp the nettle, despite looming meltdown in the industry as many companies lose their banking facilities in Dubai as well as in the UK, US, and Australia. Support for rapid incremental improvements on AML/CFT in the Somali territories has fallen victim to the emphasis on long-term financial governance, discouraging international banks and unsettling regulators.
Reaching for Occam’s Razor, we say ‘Keep it simple for now’. Whilst the local private sector may well be part of the problem it’s also the quickest short term solution; an improved status quo with the authorities facilitating low risk operations and assuring processes where required. Some remitters may well go out of business, but there are firms that can bear regulation. It requires work on risk and transparency in the ‘Second Mile’ and on regulation in the ‘Third Mile’ – all possible with effective partnership, thinking and working arrangements. Importantly, this path is in, our view, fully convergent with longer term governance goals.
Generating this short term to medium term breathing space is possible given a change of opinion in some quarters, not least towards industry-funded efforts. An immediate fix, involving use of non-conventional, public sector banking channels or more regulatory certainty for private sector banks, is unlikely without a firm high level direction to this effect.
To achieve this goal, the remittance industry needs to:
- Improve their governance issues and hire experienced compliance officers and financial sector professionals in order to upgrade systems and processes;
- Employ a reputable, internationally recognised audit company to review and advise on procedures;
- Employ internationally recognised advisors (who are themselves consulted by the regulators) to review systems and processes at all 3 miles, and to work with the regulators and Central Banks at the 3rd mile;
- Work with all donors, including World Bank, DfID, UNODC, USAID amongst others on the design and implementation of their programmes;
- Retrain staff and agents at all locations to ensure that they understand and apply the compliance obligations and systems;
- Review comparable systems in Pakistan and Afghanistan, where similar challenges exist, but where de-risking has been minimised.
- Cooperate on the design and implementation of an end-to-end transaction data monitoring system, where data on every aspect of every transaction is available for interrogation by stakeholders.
Not all companies in the Somali remittance industry will have made the resources available to build all of the architecture for a fully compliant system. Some companies will fall by the wayside, but it is to be hoped that smaller companies with a willingness to engage fully with recognised compliance procedures will be able to form consortia with larger and more established companies.