A clumsy US effort to de-fund terrorists is creating a humanitarian crisis in Somalia

Did the US Treasury Department just give a huge recruiting boost to Somali terrorist organization al-Shabaab?

Treasury rules intended to combat money laundering have cut off nearly all remittances from the US to Somalia. That will have potentially devastating consequences for many of the 40 percent of Somalis who rely on remittances from relatives abroad, many in the US, to meet their basic needs.

California’s Merchants Bank, the last major bank that provided wire transfer services to Somalia, announced this week that it will no longer handle such transactions — essentially closing off the last legal avenue by which Somalis in the US could support relatives in Somalia, all thanks to dysfunctional US regulations.

Ironically, that may end up strengthening Somali pirates and terrorist organizations like al-Shabaab, which is exactly the opposite of what those regulations intended. Experts worry that young men who find themselves destitute due to the loss of remittance funds will turn to armed groups or piracy as an alternative means of making a living.

How Somalis in the US got cut off from relatives back in Somalia

A customer waits to collect cash at a money transfer office in Mogadishu (Mohamed Abdiwahab/AFP/Getty Images)

Congress and the Treasury Department have tightened restrictions on money laundering as part of the war on terror, and some of those restrictions mean that cash transfers now carry a lot of regulatory risk for the banks that process them. Transfers to Somalia have become especially risky because of rules designed to prevent money from flowing to terrorist organizations like Somalia’s al-Shabaab. That means that, often, it just isn’t worth it for banks to provide that service: the risks are too high for a relatively low-profit area.

Part of the problem is that Somalia doesn’t have a developed banking system, so it’s often not possible to simply transfer funds between bank accounts in the way that one would in order to send money to, say, the UK.

Instead, specialized remittance agencies handle the transfers. Typically, Somali immigrants in the US give money (often cash) to an agency. The agency first checks to make sure that neither the sender nor the recipient has any known ties to a terrorist organization, and that they haven’t engaged in a pattern of suspicious-looking transactions. If they’re cleared, the US-based agent takes a commission, then contacts a corresponding office in Somalia, where the recipient can then pick up the balance of the remittance in cash.

When it works, the system is incredibly efficient. Oxfam senior humanitarian policy advisor Scott Paul explained to me that the payment, background checks, and cash disbursement on the other end can be completed in about 15 minutes.

But the transfer agencies aren’t banks, so they can’t actually send the money overseas themselves. They need a bank to act as the middleman. In recent years, though, the Treasury Department has tightened restrictions on cash transactions in an effort to combat money laundering. Many banks, out of fear of violating new regulations, either stopped handling those transfers entirely, or limited their services to certain countries.

That has hit Somali remittances hard. Transfers to Somalia invite particular regulatory scrutiny because of concerns that the money could fall into the hands of a terrorist group such as al-Shabaab. That risk just isn’t worth it for financial institutions.

This has become a complete disaster for Somali families

A Somali family in an IDP camp south of Mogadishu (Mohamed Abdiwahab/AFP/Getty Images)

The problem became a crisis this week because Merchants Bank, the last US bank that was capable of accepting cash from around the country and wiring it abroad, stopped providing that service on February 5. As a result, Somali money transfer operators now have to rely on smaller local banks to wire money abroad. But those banks can only handle about 20 percent of the cash that Somali-Americans send home each year, making it likely that overall remittance flows will drop by a catastrophic 80 percent.

Merchants Bank came under pressure from the Office of the Comptroller of the Currency, an office in the Treasury Department, to limit its money services business. The bank has been under scrutiny for potential violations of money laundering rules in recent years. It agreed to a consent order from that Treasury office in 2014 that required it to limit its money services business and obtain specific permission for most types of overseas money transfers. It appears that none of those rules were specifically targeted towards Somali remittances, but they still made it too risky for Merchants Bank to engage in those transactions.

As of this week, Merchants Bank is out of the Somali remittance business.

The UN estimates that 40 percent of Somalis rely on funds from abroad. For many others, remittances are the only available source of capital for running small businesses. The sudden loss will leave many unable to meet their basic needs. In other words, this has the potential to be a humanitarian crisis for people who are already struggling to overcome poverty, conflict, and the legacy of civil war.

The US regulatory action could strengthen Somali terrorist groups

A Somali soldier detains suspected members of al-Shabaab (Mohamed Abdiwahab/AFP/Getty Images)

Scott Paul, of Oxfam, explained that many of the young men who rely on remittances have no other means of livelihood. “This is going to be a survival issue for a lot of people,” he said, and “if you’re familiar with Somalia’s recent history, you know that when young men don’t have their own livelihood, the most attractive other opportunities tend to be calls to go fight in armed groups. More young, armed fighters is exactly not what Somalia needs right now.”

A group of members of Congress voiced those same concerns in a letter to to Secretary of State John Kerry. “Cutting off money from the diaspora,” they argue, “could significantly strengthen the appeal of terrorism and piracy for young Somali men. A disruption in remittances could reverse the limited gains that the Somali government and the international community has made to rid Somalia and the greater Horn of Africa of terrorism.”

The remittance cutoff could also be a public relations opportunity for al-Shabaab. “People will think nobody cares about them and al-Shabab will take advantage of that situation,” Hassan Omar, the director of the Somali Community Association of Ohio, told al Jazeera. He worried that the terrorist group would win popularity by giving people food at a time of crisis.

That is extremely worrying. Al-Shabaab is a brutal Islamist insurgency that threatens Somalia’s neighboring countries, including US allies Kenya and Uganda, as well as Somalia itself. The group has claimed responsibility for theattack on the Westgate shopping center in Nairobi, Kenya, during which it murdered 67 people, and for a 2010 bombing of a bar in Kampala, Uganda where hundreds of people had gathered to watch a World Cup match. If the cutoff in remittances helps al-Shabaab, the regulations intended to curb terrorism will have had the opposite effect — and will have punished a number of innocent Somalis in the process.