Stalemate in Money Transfer

No progress has been made in finding solution for the crises trigged by the closure of Somali money transfer accounts by Merchants Bank of California on February 6th. Merchants Bank of California wired approximately 80% of remittance transactions by Somali-Americans to Somalia. The remaining 20% went through and continues to be wired by smaller community banks.

On February 19th, Somali money transfer businesses concluded their businesses were no longer profitable at 20% volume. Hence, money transfer businesses halted all operations but resumed operation with some adjustments one week later.

First, money transfer businesses increased service fee. The fee to send $100 to Somalia was $5. It costs $6 now, a whopping 20% increase. This increase applies if a client is sending $100 to $900. The fee is reduced to $5 if a client is sending above $1,000. The goal here appears to be to recoup lost revenue from reduced volume.

Some money transfer businesses have put a threshold on receivables. At least one branch of Dahabshiil, the largest in the industry, was not accepting more than $1,000 per client as of March 6th.

Meanwhile discussion on the topic continued. There were meetings in Washington DC and conversations in Minnesota.

The meeting on February 26th between lawmakers and regulators ended in discoard. Regulators came to the meeting unprepared. One person described it as ‘staring contents’ suggesting regulators simply don’t understand the magnitude of the problem or the sense of urgency for resolution.

In Minnesota, Tom Webber of Minnesota Public Radio dedicated over half an hour to the issue with Professor Abdi Samatar and Browny Bruton from Atlantic Council. You can listen to the entire discussion here.

Webber asked critical question of why the crises in Somali money transfer businesses appears to be on-again/off-again? It's important question because it speaks to the American banking structure and how Somali money transfer business owners approach banking.

If you were to stack up American banking system based on assets, the likes of JPMorgan Chase, Goldman Sachs would be on the top. These are primarily Wall Street investment banks and don't get involve in money remittances.They are enormous and sometimes characterized as 'too big to fail'.

Underneath investment banks is the likes of Wells Fargo and US Bank. These are primarily large commercial banks and have been providing wiring services to Somali money transfer businesses but severed relationship after auditors found vulnerabilities that could be exploited by terrorists and money launderers.

The Merchants Bank of California was the last commercial bank to close money transfer accounts. This bank was the last one because money transfer businesses are retail and retail is core business for Merchants Bank of California. It was good fit until regulators started to raise red flags.

Somali money transfer businesses found the Merchants Bank of California by shopping around. Shopping around led to money transfer businesses establishing accounts with small community banks as well.

Shopping around approach for banking led to cat and mouse chase between money transfer businesses and regulators. Regulators force one bank to close accounts and money transfer business search for new one finally running out of runway.

Another point that stood out from the discussion was Professor Samatar's recommendation for American regulators and policy makers to resurrect what used be central bank of Somalia. This would be, according to Professor Samatar, three months project that would take American delegation to Mogadishu and help establish SWIFT number for Somalia’s central bank.

This is admirable proposal and it could help Somalia in the long term but it’s not one likely to appeal to American regulators and policy makers. The principle reason is a trust gap. Corruption in Somalia is rampant and often times American regulators are unable to make distinction between members of Somalia government and Al-Shabaab.

A more pragmatic solution would be to establish wiring services through American Federal Reserve Bank but revamp verification at both ends of the transaction. Verification at the American side of the transaction is fairly straightforward and can be improved with more rigorous background check. The problem is establishing real identity in Somalia. Perhaps, the senders in America compile biometrics of their family members and money transfers verify before disbursing funds.

Moreover, the red flags which forced commercial banks to stop providing wiring services weren’t triggered by remittance in the range of $100 to $900. These flags were set because of larger sums of money. Somali money transfers remitted transactions as big as $10,000 to $25,000. Source and seasoning of these types of transactions is marginal suggesting money was probably gained through informal markets. Both Professor Abdi Samatar and Browny Bruton glossed over this point. American regulators and policy makers look at everything.

In the meantime, more meetings are in the works in Washington DC and in Minnesota. Regulators are tentatively scheduled to meet late in March. Sen. Al Franken is working to bring senior regulator(s) to Minnesota to meet with money transfer business owners to help them better understand the problem. So stay tuned!