Squeeze on money-transfers to Somalia requires new vigilance by U.S. banks

By Guest Contributor
January 27, 2012

By Brett Wolf

ST. LOUIS/NEW YORK, Jan. 27 (Thomson Reuters Accelus) – Somalis and Somali-Americans in Minneapolis, Minnesota are struggling to send money to their families now that the small, ethnic-based, money-remittance firms they relied on are no longer operating. Banks are no longer willing to process their transactions;  they worry that such transactions involving “hawala” transfer agents, commonly known as “hawaladars,” will cause the banks to run afoul of U.S.  sanctions and laws against money laundering and terrorism financing.

The hawaladars in Minneapolis and other cities that have experienced similar problems accessing bank accounts continue to seek ways to wire money to counterparts — often in Dubai, United Arab Emirates — so it can be forwarded to recipients elsewhere in the Middle East, Africa and Asia though informal  networks, experts in anti-money laundering enforcement say.  As a result, U.S. banks must beware of customers who might be running clandestine hawala operations from personal or business accounts.

“There is nothing to stop the users from skirting the system and using personal and/or business accounts to wire money. It is very difficult for most (bank) compliance officers to detect something like that with the little information they have available,” said John Cassara, a former U.S. Treasury agent who was among the first U.S. officials to track the hawala system and has written a book that describes the terror-finance threat they pose.

Hawaladars in the United States are classified under federal law as money-service businesses, Cassara  said. “They have to register with Treasury’s Financial Crimes Enforcement Network and be licensed in 46 of the 50 states. When they fail to do that, they are in violation of the law.”

Specifically, any hawaladar who operates without being properly registered and licensed can be prosecuted for violating federal law which prohibits running an unlicensed money transfer business. A number of hawaladars have pleaded guilty to violating this statute in recent years, including one who funneled thousands of dollars to attempted Times Square bomber Faisal Shahzad.

Minneapolis is at the center of the hawaladar issue at the moment because it has the largest concentration of Somalis in the United States. The government of Somalia, a conflict-ridden country with no formal banking system, has said an estimated $2 billion — one-third of the country’s gross domestic product — is sent from abroad through hawaladars.

Several banks that operate in Minnesota in recent years closed local hawaladars’ accounts, preventing them from making further wire transfers to Dubai so that the funds could be disbursed to the designated recipients in Somalia. The general concern was that even legitimate, above-board hawaladars might violate U.S. anti-money laundering and/or sanctions laws by inadvertently transferring funds to suspected terrorists or other prohibited parties.

The last banking group that had served the Minneapolis hawaladars, Sunrise Community Banks, late last year announced it would no longer process the transactions due to the risks involved. The announcement was decried by members of the local Somali community who have no other viable way to send money to desperately poor relatives. Sunrise has said that it is discussing the matter with U.S. government agencies, ”in an effort to reach an accommodation that would satisfy the concerns of those sending funds, the government and the bank.”

“The laws and regulations associated with this service are complex and carry strict penalties for non-compliance, but as Sunrise has told the federal government, the bank is convinced that a solution is within reach,” Sunrise stated in an announcement posted on its website earlier this month.

In September 2010, FinCEN released guidance aimed at helping financial institutions detect and report suspicious activity involving hawaladars and others involved in so-called “informal value transfers systems.”

Sunrise’s decision to stop serving hawalas came two months after two Somali-American women from Rochester, Minnesota, were convicted of raising money for al Shabaab rebels, militants linked to al Qaeda who control parts of the Horn of Africa country. Sunrise has denied that the convictions prompted its move.

The Justice Department has ramped-up its efforts to prosecute those who raise money for al Shabaab in the U.S. and use hawaladars and other means to transfer it to the group. Furthermore, hawala transactions involving people or entities in Iran, which are commonplace, may violate U.S. sanctions that are being vigorously enforced by Treasury.

As a result, now more than ever banks face pressure to unearth personal and business accounts secretly controlled by hawladars who use them to send and receive funds.

UNCOVERING HIDDEN HAWALAS

Scott Kinney, an anti money-laundering compliance officer with expertise in wire-transfer analysis, said there is a “red flag” that can suggest a bank account is being secretly used by a hawaladar. He said banks should screen accounts for customers who have an unusually high number of unique wire-transfer counterparties.

When such customers are identified,  the bank could then review the transactions and take other steps to determine whether the transfers make sense for the accountholder, or if they might signal that the customer is receiving wires to settle hawala transactions.

Kinney added that when an investigation suggests an underground hawaladar, there are steps it should consider taking, starting with filing a Suspicious Activity Report as mandated under U.S.  banking laws.

“You would probably file a suspicious activity report and close the account,” he said.

 

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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