In Somalia, wire transfers go underground

Four years ago, famine in Somalia took an estimated 260,000 lives. It would have been worse without a key source of financial support: money transfers from relatives abroad. Family members “could send money in five minutes from Minneapolis to Baidoa,” says East Africa scholar Laura Hammond of the University of London School of Oriental and African Studies.

Now, though, commercial banks that process remittances have pulled out of the sector. Banks fear extremist groups may be abusing the system to fund terror operations, and that they’ll be punished by U.S. regulators for allowing risky transactions.

“Banks have decided to exit relationships in high-risk jurisdictions,” says bank consultant Dennis Lormel of DML Associates. He trains banks to reduce money laundering and terror finance risk. “It’s just not worth it to them. The benefit certainly doesn’t meet the risk.”

Will more Somalis starve? Perhaps not. Many transfers have gone underground. It’s an open secret that couriers are hand-carrying wads of cash across borders, and sending money via non-armored vehicles. Lormel says the risk of so much money moving this way is that it’s not tracked and becomes a channel for potential money laundering.

“If I’m a bad guy, I’m going to be more inclined to want to move money though those guys,” he says. The suggestion: well-intentioned bank oversight may be backfiring and aiding terror finance.

To Hammond, it’s also worrying for Somalis. Remittance make up as much as 40 percent of Somalia’s GDP, and money transfer groups say less money is going in. If this financial safety net is fraying, the question is whether it will still be there when the next drought inevitably comes.