Many banks consider money transmission to Somalia too risky because of concerns about terrorism. But U.S. Bancorp continues to pursue a relationship with Dahabshiil, the largest Somali money transmitter, whereas Barclays dropped the business citing the risk.
The concern is understandable. Two years ago, two women from Rochester, Minn. were convicted of funneling money to a terror group in Somalia by remitting from the U.S. Because of the incident, community banks in Minnesotawhich has a large concentration of Somali immigrantsbegan closing the accounts of remittance companies that work in the war-torn country.
But because of the countrys lack of a financial system, remittance is a much needed service in the African country.
When banks started cutting off remittances to Somalia, several humanitarian groups pushed back urging financial institutions to reopen the relationships. NGOs and political leaders have called this a humanitarian crisis as many life-saving remittances would be halted.
However, some smaller banks are seeing the benefit in keeping ties with Somali remittance companies. The relationships help differentiate smaller banks from larger rivals that ignore this segment of the population.
Smaller banks can tap a segment being ignored by the big ones, says Juan Llanos, executive vice president and compliance officer at Unidos Financial Services Inc. [U.S.] Bancorp will invest in managing the risks of these businesses because in the future they see by tapping the underserved they will have an edge.
Money remittance to unbanked recipients is one of the only expanding segments of financial services, says Llanos. Its the largest potential treasure trove for banks all other segments are plateauing, he says.
Regulatory pressures increased after HSBCs $1.9 billion fine for not having sufficient money laundering checks in place.
HSBC said it would reform its compliance procedures and hired a former U.S. Treasury official, Robert Werner, for a newly created financial crime compliance position. But even after that, Everett Stern, a former HSBC employee, spoke out alleging the bank continued to break anti-money laundering rules.
Barclays confirmed the end of its relationship with Dahabshiil and three other money transmitters working in Somalia. These money service businesses were asked to find new banking relationships.
Two of the four money transmitters have already found other options in the U.K., says Daniel Hunter, head of media relations at Barclays.
"It is important to note that of the 16 members of the U.K. Somali Remitters association, 12 of them banked with banks other than Barclays," says Hunter. "Clearly Barclays isn't the last bank in this space, and there are multiple other U.K. remitters who claim to send money to Somalia that have never banked with Barclays."
Other firms asked about the criteria for getting under compliance, and Barclays has extended the deadline of termination of those relationships to the end of September, says Hunter. Money transmitters must have a properly qualified auditor to review compliance controls every year and must have robust corporate governance, he says.
The problem with [the lack of financial system] is you dont have visibility of where that money is coming from and going to, says Lauren Verner, a spokeswoman at Barclays.
While Barclays wont discuss specific companies, Verner says, It is recognized that some money service businesses dont have the necessary checks in place to spot criminal activity, with the degree of confidence required by the regulatory environment under which Barclays operates.
As a global bank we must comply with the rules and regulations in all the jurisdictions in which we operate, she says. The risk of financial crime is an important regulatory concern and we take our responsibilities in relation to this very seriously.
By contrast, U.S. Bancorp began a trial relationship with Dahabshiil in April.
We continue to work with Dahabshiil through the due diligence process but have not reached the point of transactions yet, says Teri Charest, spokeswoman for U.S. Bancorp.
We recognize the need and want to be able to help families send money to their relatives in Somalia, Charest says. We also recognize the risk, which is why we are taking a very careful and measured approach in working through the sure diligence process.
Somalia remains a high-risk country according to knowyourcountry.com, a database of country risk factors and assessments. Somalia received a score of 174 out of 176 in corruption in 2012. There are only seven countries more risky than Somalia, according to the websites ratings, which were updated in August.
Dahabshiil did not respond to interview requests for this story.
This past May, many Somali-Americans in Minnesota lined up outside U.S. Bancorp and Wells Fargo to withdraw their deposits to protest that the two largest banks in the area cut ties with a Somali remittance service.
There is constant regulatory pressure and banks have to sort of rearrange their inventory every time a regulator does another review, says Pervees Faisal Islam, director at Centra Payments Solutions. Islam is also a part of the compliance advisory board at the company.
Because risk appetite is determined in part by a banks margins, its common for banks to have different risk structures, Islam says. Therefore one bank might decide to work with a business while another wont take on the risk, he says.
Money transmitters that have had long relationships with banks have followed every single word and every single direction that the bank has directed on them, Islam says. A money transmitter has to start deciding, 'Do I enjoy jumping from bank to bank or do I invest the resources to do it right once and for all?'
But remitting to Somalia goes beyond business opportunities, Islam says. Because of the strife in Somalia, banks should see a social responsibility to assist family members inside and outside Somalia, he says.
Larger banks, like Barclays, have much more to lose than smaller banks, Llanos says. Some banks have the luxury of ignoring some segments of the population.
Large banks dont want the reputational or non-compliance risks associated with businesses that work with unbanked consumers, he says.
Money transmitters are constantly facing rejection from banks, says Islam. Banks can suddenly drop money transmitting companies because of changes of direction in business operations such as mergers, he says.
This fickleness in banking relationships has also been seen in the Bitcoin economy, affecting businesses categorized as money transmitters by the Financial Crimes Enforcement Networks March virtual currency guidance.
A bank will always look at the potential revenue first, says Llanos. After that, the bank calculates if the margin of benefits outweighs the margin of costs by looking at things like the businesses sustainability, legitimacy and management team. Then the bank looks at whether the business itself can handle risk by reviewing the companys customer service, government relationships, monitoring operations and compliance procedures, he says.
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Corrected September 20, 2013 at 11:00AM: An earlier version of this story gave the wrong location for the Rochester, Minn. incident mentioned in the second paragraph.