UN,EU and US
FATF AML Deficiency List
Non - Compliance with FATF MER Recommendations
Corruption Index (Transparency International & W.G.I.)
World Governance Indicators (Average Score)
Weakness in Government Legislation to combat Money Laundering
US Dept of State Money Laundering assessment
Somalia is not on the FATF List of Countries that have been identified as having strategic AML deficiencies
Compliance with FATF Recommendations
Somalia has not yet undertaken a Mutual Evaluation relating to the implementation of anti-money laundering and counter-terrorist financing standards.
US Department of State Money Laundering assessment (INCSR)
Somalia was deemed a Jurisdiction of Primary Concern by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR) but has not been included since. Key Findings from the last report are as follows: -
In 2013, Somalia and the international community endorsed a New Deal Compact that outlines peace and state-building goals aimed at helping Somalia become more accountable to the people of Somalia in instituting political, financial, health, and security reforms. In 2015, the Federal Government of Somalia committed itself to a slate of reforms, including improving fiscal transparency and budgeting processes. To improve fiscal transparency and build a nascent banking sector, the Central Bank of Somalia implemented reforms, including granting interim licenses to six banks and nine money transfer organizations, installing a Treasury Single Account, and developing internal procedures for banking supervision, including on and off site inspections.
Somalia’s financial system is informal, operating mostly outside of government oversight, either via the black market or unsupervised money remittance firms (hawaladars). An estimated $1.3 billion in remittances is sent to Somalia every year, primarily by the Somali diaspora that fled the country during two decades of conflict. That amount is roughly one quarter of Somalia’s gross domestic product, eclipsing all international aid to the country (projected at about $1 billion in 2015). Most remittances are routed through financial centers in the Gulf. The World Bank estimates 40 percent of all Somalis depend on remittances for their basic needs.
With its long land borders and extensive coastline, the smuggling of currency and goods into and out of Somalia remains common, due mainly to customs and border security officials’ lack of capacity to control points of entry. The UN Security Council reports piracy has declined significantly, with no large commercial vessels hijacked or held for ransom by Somali pirates in the last two years, resulting in a decrease of ransom payments.
Corruption is endemic, providing opportunities for rampant money laundering. For example, media and advocacy groups have reported that some government officials in Somalia’s Jubbaland benefited from illegal charcoal exports and possibly helped to transfer profits to foreign destinations.
The African Union Mission in Somalia (AMISOM) and the Somali National Army (SNA) made progress clearing al-Shabaab from areas of south central Somalia. However, al-Shabaab continues to threaten Somalia and the region and raises funds through multiple sources, including public taxation and extortion of local businesses and private citizens in areas controlled by al-Shabaab; donations from Somali and non-Somali sympathizers, both inside Somalia and abroad; kidnapping for ransom; and sharing in the illicit charcoal and sugar trade in southern Somalia. Al-Shabaab also taxes charcoal production before the bags reach ports for export, and it has a stake in the market value of the cargo when it reaches its destinations in the Middle East. Al-Shabaab’s revenues from the charcoal trade are declining, according to a UN report, increasing the group’s focus on other revenue-generating activities. Despite the existing UN ban on the export of charcoal from Somalia, in its 2014 report, the UN Somalia and Eritrea Monitoring Group estimates al-Shabaab received an estimated $7.5 – 15 million in revenue from checkpoints on illegal charcoal exports. Al-Shabaab moves some funds via cash couriers, but a significant portion reportedly passes through hawala networks and other money or value transfer services.
The UN, EU and US have imposed an arms embargo against Somalia and there are asset freezes on persons engaging in or providing support for acts that threaten the peace, security or stability of Somalia.
The Arab League (comprising 22 Arab member states), of which this country is a member, has approved imposing sanctions on Syria. These include: -
Cutting off transactions with the Syrian central bank
Halting funding by Arab governments for projects in Syria
A ban on senior Syrian officials travelling to other Arab countries
A freeze on assets related to President Bashar al-Assad's government
The declaration also calls on Arab central banks to monitor transfers to Syria, with the exception of remittances from Syrians abroad.
The Arab League has also boycotted Israel in a systematic effort to isolate Israel economically in support of the Palestinians, however, the implementation of the boycott has varied over time among member states. There are three tiers to the boycott. The primary boycott prohibits the importation of Israeli-origin goods and services into boycotting countries. The secondary boycott prohibits individuals, as well as private and public sector firms and organizations, in member countries from engaging in business with any entity that does business in Israel. The Arab League maintains a blacklist of such firms. The tertiary boycott prohibits any entity in a member country from doing business with a company or individual that has business dealings with U.S. or other firms on the Arab League blacklist.
BRIBERY & CORRUPTION
Rating (100-Good / 0-Bad)
Transparency International Corruption Index 12
World Governance Indicator – Control of Corruption 1
Somalia ranks among the world's most corrupt countries. Insecurity is also a major issue; the ongoing instability greatly restricts business. Corrupt government officials tolerate illegal activities in return for bribes. Dysfunctional institutions facilitate an environment of lawlessness, and the absence of any form of regulatory framework hinders prospects of economic competitiveness. Business is based on patronage networks, and tight monopolies dominate the market. Somalia’s Provisional Constitution criminalizes several forms of corruption (including abuse of office, embezzlement and bribery); however, implementation is non-existent. The governing elite are continuously involved in allegations of embezzlement of public funds from the already meagre Somalian coffers. Finally, bribery is commonplace in all sectors, and procurement contracts frequently involve corruption. For further information - GAN Integrity Business Anti-Corruption Portal
Despite the lack of effective national governance, Somalia maintains an informal economy largely based on livestock, remittance/money transfer companies, and telecommunications. Somalia's government lacks the ability to collect domestic revenue and external debt – mostly in arrears – was estimated at 93% of GDP in 2014.
Agriculture is the most important sector, with livestock normally accounting for about 40% of GDP and more than 50% of export earnings. Nomads and semi-pastoralists, who are dependent upon livestock for their livelihood, make up a large portion of the population. Economic activity is estimated to have increased by 3.7% in 2014 because of growth in the agriculture, construction and telecommunications sector. Somalia's small industrial sector, based on the processing of agricultural products, has largely been looted and the machinery sold as scrap metal.
In recent years, Somalia's capital city, Mogadishu, has witnessed the development of the city's first gas stations, supermarkets, and airline flights to Turkey since the collapse of central authority in 1991. Mogadishu's main market offers a variety of goods from food to electronic gadgets. Hotels continue to operate and are supported with private-security militias. Economic growth has yet to expand outside of Mogadishu, and within the city, security concerns dominate business. Telecommunication firms provide wireless services in most major cities and offer the lowest international call rates on the continent. In the absence of a formal banking sector, money transfer/remittance services have sprouted throughout the country, handling up to $1.6 billion in remittances annually, although international concerns over the money transfers into Somalia continues to threaten these services.
Agriculture - products:
bananas, sorghum, corn, coconuts, rice, sugarcane, mangoes, sesame seeds, beans; cattle, sheep, goats; fish
light industries, including sugar refining, textiles, wireless communication
Exports - commodities:
livestock, bananas, hides, fish, charcoal, scrap metal
Exports - partners:
UAE 45.8%, Yemen 19.7%, Oman 15.9% (2015)
Imports - commodities:
manufactures, petroleum products, foodstuffs, construction materials, qat
Imports - partners:
Djibouti 18.7%, India 16.5%, China 11.8%, Oman 8.7%, Kenya 6.1%, Pakistan 4.4% (2015)
IMF Report: Somalia: 2017 Article IV Consultation - Extracts
The authorities are taking steps to move forward with the needed financial sector reform. They have agreed to (1) fully implement new accounting and financial reporting systems in line with international financial reporting standards (IFRS) and audit functions; (2) make tangible progress on strengthening the governance and organizational structure of the CBS together with its oversight authority; (3) continue to develop the necessary financial regulations and strengthen the annual relicensing process of banks and MTBs; (4) expand on-site examinations of banks and MTBs; and (5) address gaps and overlaps in the AML/CFT framework. On the latter, in line with Financial Task Force (FATF) standards, the CBS is planning to finalize the Targeted Financial Sanctions Regulation law. This measure will enable provisions to implement Somalia’s international obligations under UNSCRs 1267, and 1373, and enhance AML/CFT compliance by MTBs. In this context, they will improve the MTBs’ compliance with the AML/CFT regulations and the reporting of suspicious transactions to the Financial Reporting Center (FRC).
AML/CFT Regulation and Supervision
Addressing AML/CFT regulatory issues is critical to supporting remittance flows and external financial linkages for Somalia. Remittances make up nearly 40 percent of household income, and the closure of some corresponding accounts has increased costs of transactions over the past several years (see Figure). Overall, however, costs remain contained and inflows averaged over $1.3 billion per year during 2015–2017.
The authorities have made progress on AML/CFT regulations and supervision over the past few years. The CBS has issued foundational regulations since 2014, including Anti-Money Laundering, Customer Registration, and Operations for MTBs. MTBs’ compliance with AML/CFT regulation is improving and accelerating, supported by regular financial data collection and examination. The CBS is also strengthening the annual MTB relicensing process and on-site examination. In 2017, on-site inspections of the three largest MTBs, representing over 80 percent of transactions, were conducted for the first time. Despite progress that has been achieved, important gaps remain. Reporting of suspicious transactions needs to improve and the process regularized. Cooperation between the FRC and the CBS needs to be strengthened, and the lack of reliable national identification and business registration systems limits implementing Know Your Customer (KYC). On the legal side, overlaps in the counter terrorism and the AML/CFT Laws, such as the definition of “financial institution” and “property and funds,” need to be streamlined.
The authorities are committed to addressing these gaps. They are strengthening the renewal of MTBs’ annual licenses which will focus on improving MTBs compliance with AML/CFT regulations, including reporting requirements. The authorities are also seeking to improve cooperation between the CBS and
FRC, including on effective risk-based AML/CFT supervision. A strategy for a national identification system is being considered with World Bank assistance, and a business registry is under construction.
IMF Report: Somalia: 2016 Article IV Consultation - Extracts (February 2017)
The absence of a functioning central bank has prompted remittance companies to work with little or no supervision from the authorities. The culture of non-regulation has made international banks handling transactions from Money Transfer Businesses (MTBs) uncomfortable due to risks and strong requirements by their governments to tighten regulations. Over the past two years, banks in Australia, the United Kingdom, and the United States have closed the accounts of some Somali remittance companies, citing legal and regulatory weaknesses, as well as risks of money laundering with possible financing of terrorism.
Additionally, the lack of a proper regulatory framework could increase risks to money transfers to Somalia. The inability to transfer money through the commercial banks will affect the transparency of such operations from one country to another with increasing risks of MTBs resorting to other underground systems. One of the major impacts of international banks suspending services to MTBs was the inability of individual account holders and aid agencies to send money, which reduced incomes in recipient households. According to some of the MTBs surveyed as part of an Oxfam report in the United States, this new regime of regulatory caution has led to reduced volume, a rising cost of transfers, and increased informality among the Somali remittances market. While no clear data provided by MTBs, fees and costs of transferring money have increased, as has physical transfer of cash remittances.
Remittances from the Somali diaspora, channeled through the money transfer businesses (MTBs), are a major source of funding for both households and businesses in Somalia. Over the past two years, the key correspondent banks have closed the accounts of some Somali remittance companies, citing legal and regulatory weaknesses, as well as risks of money laundering with possible financing of terrorism. In response, the authorities have stepped up efforts to improve access to the international financial system, including approval of the AML/CFT law on December 26, 2015. Implementation of the new law is expected to limit the threat of CBR withdrawal and closure of the accounts of Somali remittance companies by global banks. In addition, customer due diligence will be improved by recent efforts to involve a ‘trusted third party agent’ with the assistance of the World Bank working with the CBS to monitor transaction flows and provide independent third party audits of MTBs. Efforts are underway to introduce new CFT legislation consistent with the Financial Action Task Force standards.
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