The GDC Blog

Bundles of Foriegn Currency

The recent $1.9 billion settlement between British Bank HSBC and the U.S. Government has brought new attention to the growing conflict between banking regulators and humanitarians. Banks, notably Barclays, have responded by severing ties to numerous money services businesses (MSBs) citing restrictive anti-money laundering guidelines.

Barclays is scheduled to close the accounts of about 80 money-transfer businesses this month citing concern with financial controls. However, the bank is not alone in the wholesale closure of accounts. Following their case with the U.S. Government, HSBC exited the remittance market entirely.

Since 9/11, western government and financial institutions have approached MSBs with a level of suspicion. Fears that money transfer agents could be laundering money, supporting terrorism or financing other forms of criminal activity, led the Bush administration to freeze the assets of Al-Barakat, a Somali remittance company in November 2001. In the preceding months, major lenders began to restrict lending to MSBs.

While financial institutions maintain they comply with any and all regulations, Barclays says it doesn’t want to do business with firms that lack adequate controls to monitor where their money is coming from and going to. Barclays is not alone. Last year, a Minnesota bank ended transfers to Somalia, citing the increased risk of fines and penalties.

Somalia has become the case study for the humanitarian impact of the reduction in banks willing to serve MSBs. With no formal banking sector, many Somalis rely on money transfer agents. In total one third of the country’s gross domestic product, enters the country through remittances.
Globally, remittances are a critical conduit for capital in the developing world. The World Bank estimates remittance flows of $529 billion in 2012, with more than 75% going to the developing world. Migrants to developed countries send home the equivalent of three times the size of official development assistance each year.

Banks do admit that many MSBs lack sufficient controls to spot criminal activity. However note that without service through the traditional financial sector, people will instead send funds through illegal, unsafe and untraceable channels.

Barclays has been asked to postpone the anticipated account closures to explore options. But in the near term, solutions seem in short supply. Until transfer agents and MSBs embrace anti-fraud and identity verification tools, concerns with the remittance market will continue and the risk to banks will remain.