REGULATION AND SUPERVISION IN THE SOMALI CONTEXT CONFERENCE ON MIGRANT REMITTANCES: DEVELOPMENT IMPACT, OPPORTUNITIES FOR THE FINANCIAL SECTOR AND FUTURE PROSPECTS REGULATION AND SUPERVISION IN THE SOMALI CONTEXT ABDUSALAM OMER

Somalia is a Failed State: THE SOMALI REMITTANCE SECTOR INTRO: Why are Remittances Important to Somalia? Somalia is a Failed State: No central government No formal financial institutions Approximately 750,000 Somalis emigrated from Somalia 73% of those remaining live on less than $2 per day Support from the Diaspora is essential 1

Without access to remittances Somalia would face a humanitarian crisis THE SOMALI REMITTANCE SECTOR Scope of remittances Between $700 million and $1 billion transferred by Somali remittance companies annually (remittances, investments and small business facilitation) $360 million remitted annually to households in Somalia alone; this accounts for 22.5% of all household income Without access to remittances Somalia would face a humanitarian crisis 1

Why are the Somali remittance companies critical to Somalis? THE SOMALI REMITTANCE SECTOR Why are the Somali remittance companies critical to Somalis? Somali Remittance companies are now the only financial institutions operating in Somalia. There are: No commercial banks No credit and saving institutions No functioning central bank Therefore, they are the only means of remitting funds into Somalia, and the only means of providing livelihoods for millions of Somalis They are the only institutions with networks capable of reaching international cities worldwide, as well as internally displaced people, refugees in camps and Somalis in the most remote rural districts 1

THE SOMALI REMITTANCE SECTOR Services Provided by Somali Remittance Companies Transfers for daily subsistence from the Diaspora Transfers for development and humanitarian organizations to support their operations in Somalia Transfers for investment in commercial projects from the Diaspora Domestic and international trade facilitation Basic checking accounts and other deposit facilities Social development initiatives

THE SOMALI REMITTANCE SECTOR Global operations 1 3

Challenges facing the Somali remittance companies THE SOMALI REMITTANCE SECTOR Challenges facing the Somali remittance companies Legal challenges: High cost of registration and licensing – bonds and fees Variations in registration and licensing requirements within and between countries and states Strict and sudden enforcement of regulations by various host authorities Feeling that host countries do not necessarily understand the Somali remittance businesses Cultural challenges for Somali staff and customers: Reluctance to adopt new ways of operating, such as enforcing identification procedures with friends and neighbours Distrust of information confidentiality 1

Challenges facing the Somali remittance companies (continued) THE SOMALI REMITTANCE SECTOR Challenges facing the Somali remittance companies (continued) Image problem Absence of functioning internal central government with regulatory capacity or ability to advocate on their behalf Lack of capacity to address all of the growing concerns and regulations imposed on them post-September 11th 1

Must report suspicious transactions THE SOMALI REMITTANCE SECTOR Financial Action Task Force (FATF) Best Practice Recommendations for Remittance Companies Remittance companies and their agents must register or license with the government Maintain separate transaction accounts at banking institutions for purposes of their remittance business, held in the name of the registered/ licensed entity Put in place sound Know Your Customer programmes to prevent money laundering and terrorist financing Maintain all necessary records on both domestic and international transactions for at least 5 years Must report suspicious transactions 1

THE SOMALI REMITTANCE SECTOR Progress Made Since UNDP Involvement to Comply with the FATF Best Practice Recommendations by the Somali Remittance Companies Registration compliance Varies throughout the sector, but with a strong focus on registering/licensing where required Most large companies have registered in the UK and in several US states; some are also registered in the UAE despite the prohibitive bond requirement Account compliance Appear to have ensured that they hold separate bank accounts and that they are held in the name of the registered entity

Progress in the remittance sector (continued) THE SOMALI REMITTANCE SECTOR Progress in the remittance sector (continued) Know Your Customer compliance Several companies have implemented thorough KYC policies Many companies store customer information in a central database Several companies are offering identification cards for their customers that include photos, signatures, identification numbers to track their transaction history and thumbprints Record-keeping compliance Appears to be undertaken by larger companies and of high standards (technology-enabled) Maintain records for at least 5 years or for as long as they have been in existence 1

THE SOMALI REMITTANCE SECTOR Progress in the Remittance Sector (continued) Suspicious transaction compliance Most companies are aware of the requirement and are putting measures in place to comply Some of the larger companies have developed software for cross-checking customer names with international suspicious person databases

THE SOMALI REMITTANCE SECTOR What Other Measures have the Companies Taken on Their Own? Establishment of a Somali Financial Services Association (SFSA) to focus on compliance, public awareness and training for individual remittance companies, as well as maintain a high standard for membership Formalizing ownership, capital and management structures within several of the larger remittance companies Ensuring accounts are produced in accordance with Internal Accounting Standards (IAS) Putting internal and external audits in place

What Do the Somali Remittance Companies Need Now? THE SOMALI REMITTANCE SECTOR What Do the Somali Remittance Companies Need Now? Increased and continued compliance with international financial rules and regulations Increased capacity to fulfil the compliance requirements Domestic regulatory institutions to unify their operations and reporting mechanisms 1

THE SOMALI REMITTANCE SECTOR How Can these Measures Be Implemented without a Central Authority ? Short-term: External Oversight Mechanism Medium-term: Self-Regulation through an Association Long-term: Introduction of Formal Banking Institutions

THE SOMALI REMITTANCE SECTOR Oversight Mechanism Purpose: To provide an immediate solution to the regulation difficulties faced with the financial authorities in the United States Duration: 1-2 years, until other mechanisms are in place How Achieved: Performing management audits on the companies, identifying weaknesses and then conducting training on the gaps found

THE SOMALI REMITTANCE SECTOR Somali Financial Services Association Purpose: To provide a medium-term solution to the compliance difficulties faced Duration: The self-regulation function will be maintained for as many years as necessary, but the networking, information-sharing and awareness campaigns will continue indefinitely How Achieved: Through self-regulation, advocacy, training programs and awareness campaigns (domestic and international)

THE SOMALI REMITTANCE SECTOR Formal Domestic Banking Sector Purpose: To provide a long-term solution to the need for domestic regulation mechanisms, fiscal stability in the country and compliance with international financial rules and regulations Duration: Indefinitely How Achieved: Once there is a central government, the central bank and Ministry of Finance can be strengthened, laws can be drafted and enforced and international compliance can occur

Pushing it farther away from the formal sector THE SOMALI REMITTANCE SECTOR Possible Repercussions from Over-regulating the Somali Remittance Sector Change its positive characteristics that have popularized it – speed, low cost and reach Pushing it farther away from the formal sector Place additional administrative burden on financial sector regulators 1

UNDP’s Focus on Moving the Somali Remittance Sector Forward 19 THE SOMALI REMITTANCE SECTOR UNDP’s Focus on Moving the Somali Remittance Sector Forward Encourage the increased transparency and accountability of the Somali remittance companies Build capacity through technical training and conduct awareness programs for the Somali remittance companies Advocate for increased international awareness of Somali remittance business operations and the plight of the Somali people Provide institutional support for the strengthening of the Somali Financial Services Association as a self-regulatory measure Assist the local financial institutional authorities in strengthening their capacities and operations 1