Money Transfer Explained

Dahabshiil shut down Minnesota office after Merchant Bank in California discontinued providing international routing services. Dahabshiil is the largest money transfer service provider used by Somalis in Minnesota.

Minnesota office closure means Dahabshiil will not play a role transferring estimated $1.2 billion Somalis send to Somalia. A lion's share of this figure comes from Minnesota due to the large Somali population in the state.

Dahabshill business model is based an ancient system known as Hawala. It's a network of financial couriers largely build on trust moving money from one location to another.

Money transfer transaction is fairly simple. When I'm sending $100 to my elderly aunt in a remote corner of North East Somalia to help pay for basic needs including food, cloth and medicine, I deliver the $100 often in cash plus a $5 service fee to Dahabshiil office in Minnesota. I provide aunt’s location and contact information. A representative of Dahabshiil in her village delivers the money same day.

While transaction processing is seamless in the front end, multiple entities have hand on it in the back end. A clerk in Minnesota takes the money in cash and makes an entry in a network with real time response and my aunt receives notification. The clerk delivers the cash to local bank at the end of the day. The money gets routed overnight to Dubai in the Middle East. Dubai has become an important hub connecting America, Europe and Africa. The money gets disburse from Dubai to Somalia.

This kind of service became part of Somali life in the 70's and 80's when a lot of them immigrated to Saudi Arabia to work in the construction spree that followed the oil boom. Somalis used money transferring services to circumvent Somalia's government by avoiding state banks. Money transferring service blossom after Somalia erupted into chaos in early 90's and became the sole financial system in the country.

Companies like Dahabshiil grew and started offering other services including savings and investment. Other companies like Barakat became conglomerate branching out to commodity trade, real estate, farming and energy. All the while these companies operated under the radar of regulators.

Horizontal integration meant money transfer was no longer serving individuals remitting few hundred dollars to family members in Somalia. International organizations with large operations in Somalia started using. Criminal elements including organized crime and warlords rely on to move money around.

The September 11th terror attacks changed everything. Barakat empire succumbed to executive order freezing all assets of organizations with links to the Middle East and by extension Al-Qaida financing network. Barakat was linked to now defunct Holy Land Foundation.

Pressure from regulators never lid-up since. Money transferring services were required to register with the state as banks do and collect customer personal information.

Regulators tightened the screw on partners money transfer which provided international routing services. Office of the Comptroller of the Currency(OCC) within the Treasury Department increased auditing of major banks to ensure compliance with Anti Money Laundering Act and provisions of the Patriot Act. OCC identified some critical compliance difficiencies. One example is when large sums of money was transfered without accurate information about who sent it and to whom it was sent. Banks like Wells Fargo and US Bank concluded the cost associated with the required upgrades out weight the profit and ended relationship with Somali money transfer services.

Big banks ending international routing service sparked outcry from Minnesota's Somali community. There were protests and condemnations. Doom and disaster of significant proportion were predicted. Money transfer services were dubbed the 'life line of Somalia' and massive starvation forecasted.
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Politicians fearing public wrath sprung to action. Rep. Keith Ellison, a high profile member of Congress who always had good contacts in the Somali community led the effort to avert purported looming disaster.

Rep. Ellison proposed a bill in Congress that shielded major banks from some of the risks of partnering with money transfer services. The initial proposal was solid and would have substantive positive effects of potentially resolving the issue but the legislation was watered down after strong resistance from GOP members of the House.

Rep. Ellison ultimately settled with an examination clause in a bill signed by President Obama. The examination clause allowed federal regulators to use auditing reports compiled by states and only request additional information from major banks when necessary. The hope was examination will reduce compliance costs and entice big banks to resume routing services for Somali money transfer services. Unfortunately, it didn't work and the Somali community is back in the same situation in 2015.

I visited a Somali mall, a grocery store and a coffee shop for a pulse. Money transfer was major topic of discussion but there were more calm compared to last time when a major bank like Merchant Bank stopped providing international routing services. There was no talk of pending protest but there was a lot of talk of potential solutions.

One proposal is to maximize existing small channels. Some money transfer services are still able to remit money at dramatically reduced capacity. Kaah Express and Mustaqbal are operating at 20 percent volume. Both refused to divulge international routing partners to avoid the limelight. There is a consensus in the Somali community to max out these channels.

Another proposal is to send money to other relatives with bank accounts in Europe and have them forward the funds to relatives in Somalia. There is an associated cost of $35 per transaction from America to Europe then the standard $5 fee from Europe to Somalia in the money transfer network.

These are short term solutions and won’t replace the large volume Dahabshiil handled. Meanwhile Rep. Ellison sent a letter signed by U.S. Rep. Eric Paulson, U.S. Senators Amy Klobuchar and Al Franken to Secretary of State John Kerry requesting urgent meeting to discuss the matter. But the Somali community in Minnesota known for creativity and resilience might have already found a solution. A short term solution has been identified for sure.