1. 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

2. 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

3. 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

4. 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

5. 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

6. THE SOMALI REMITTANCE SECTOR
Global operations 1 3

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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)

18. 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

19. 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

20. UNDP’s Focus on Moving the Somali Remittance Sector Forward19
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