SOMALIA
Summary

Sanctions

UN, EU & US Financial and Arms

FAFT AML Deficient

No

Higher Risk Areas

 

Compliance with FATF 40 + 9 Recommendations

Weakness in Government Legislation to combat Money Laundering

Supporter of / Safe Haven for International Terrorism

Not on EU White list equivalent jurisdictions

Corruption Index (Transparency International & W.G.I.)

World Governance Indicators (Average Score)

Failed States Index (Political Issues)(Average Score)

Medium Risk Areas

US Dept of State Money Laundering assessment

 

 

ANTI-MONEY LAUNDERING

 

FATF Status

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).

Key Findings from the report are as follows: -

 

Perceived Risks:

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.

 

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SANCTIONS

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.

 

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BRIBERY & CORRUPTION

 

Index

Rating (100-Good / 0-Bad)

Transparency International Corruption Index

10

World Governance Indicator – Control of Corruption

1

 

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INVESTMENT CLIMATE - Executive Summary (US State Department)

Despite the lack of effective national governance, Somalia maintains an informal economy largely based on livestock, remittance/money transfer companies, and telecommunications. 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. Livestock, hides, fish, charcoal, and bananas are Somalia's principal exports, while sugar, sorghum, corn, qat, and machined goods are the principal imports. Somalia's small industrial sector, based on the processing of agricultural products, has largely been looted and the machinery sold as scrap metal. Telecommunication firms provide wireless services in most major cities and offer the lowest international call rates on the continent. 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. Somalia's government lacks the ability to collect domestic revenue, and arrears to the IMF have continued to grow. Somalia's capital city - Mogadishu - has witnessed the development of the city's first gas stations, supermarkets, and flights between Europe (Istanbul-Mogadishu) since the collapse of central authority in 1991. This economic growth has yet to expand outside of Mogadishu, and within the city, security concerns dominate business. 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 currently threatens these services.

 

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FURTHER REPORTS

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.

AND: -

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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