Countries/Jurisdictions of Primary Concern - Somalia
In September 2013, Somalia and the international community endorsed a New Deal Compact for Somalia that outlines peace- and state-building goals aimed at helping Somalia become more accountable to the people of Somalia and instituting political, financial, health, and security reforms. The Ministry of Finance (MoF) implemented basic reforms, including appointing a Central Bank Board of Governors and drafting key legislation to improve the transparency of the financial system. In 2014, the African Union Mission in Somalia and the Somali National Army made progress clearing al-Shabaab from large areas of south central Somalia, including the al-Shabaab stronghold port city of Baraawe. The Federal Government of Somalia (FGS) made some progress in drafting key legislation, establishing the foundation for creating federal states, and pursuing regional reconciliation.
Somalia’s financial system is generally informal, operating almost completely outside of government oversight, either via the black market or unsupervised remitters and hawaladars. A 2013 Oxfam study pegged remittances at roughly $1.3 billion per year, mostly sent by the Somali diaspora overseas to their relatives in the Horn of Africa, and mostly through financial centers in the Gulf.
With its long land borders and extensive coastline, the smuggling of currency and goods into and out of Somalia remains common, partly because customs officials lack the capacity to control points of entry. Ransoms are generally spent and/or laundered in northern Somalia, but may also be laundered in neighboring countries, the Middle East, or Europe. Delivery of ransoms reportedly occurs through cash drops to pirates holding ships off Somalia’s coast; the money is divided among the pirates themselves, their support networks on shore, and possibly, national or international sponsors. Much of the ransom generally remains in cash. Anecdotal reports suggest that ransoms, sometimes comingled with funds of legitimate origin, may be invested in real estate, luxury goods, and businesses.
While Somalia has taken limited steps to improve transparency in its public financial management, corruption remains endemic and provides opportunities for money laundering. For example, some government officials in Somalia’s northern regions of Puntland and Galmudug reportedly benefited from ransoms, and possibly, helped to facilitate ransom laundering or the transfer of ransom money to foreign destinations.
Al-Shabaab remains the most significant terrorist threat to Somalia and the region. This terrorist group raises funds through multiple sources, including donations from Somali and non-Somali sympathizers both inside Somalia and abroad, “taxation” and/or extortion of local businesses and private citizens, kidnapping for ransom, and exploitation of the illicit charcoal trade in southern Somalia. Despite the existing UN ban on the export of charcoal from Somalia, al-Shabaab continues to profit from illegal charcoal exports that may be worth more than $250 million a year on the international market. Al-Shabaab moves some funds via cash couriers, but a significant portion reportedly passes through hawaladars and other money or value transfer services.
For additional information focusing on terrorist financing, please refer to the Department of State’s Country Reports on Terrorism, which can be found at: //2009-2017.state.gov/j/ct/rls/crt/
Do FINANCIAL INSTITUTIONs engage in currency transactions related to international narcotics trafficking that include significant amounts of US currency; currency derived from illegal sales in the U.S.; or illegal drug sales that otherwise significantly affect the U.S.: NO
criminalizATION OF money laundering:
“All serious crimes” approach or “list” approach to predicate crimes: Not applicable
Are legal persons covered: criminally: Not applicable civilly: Not applicable
Know-your-customer (KYC) rules:
Enhanced due diligence procedures for PEPs: Foreign: NO Domestic: NO
KYC covered entities: None
Number of STRs received and time frame: Not applicable
Number of CTRs received and time frame: Not applicable
STR covered entities: None
money laundering criminal Prosecutions/convictions:
Records exchange mechanism:
With U.S.: MLAT: NO Other mechanism: NO
With other governments/jurisdictions: NO
Somalia is not a member of any FATF-style regional body (FSRB) and has not been subject to a mutual evaluation. Somalia became an observer to the Middle East and North Africa Financial Action Task Force (MENAFATF) in 2014.
Enforcement and implementation issues and comments:
While Somalia continues to stabilize, the government struggles with weak or non-functional state institutions.
With assistance from the international community, Somalia has begun to identify priority areas for new legislation to develop institutional capacity and create regulatory bodies. As of the end of 2014, however, Somalia has no AML/CFT laws and maintains very limited investigative and enforcement capacity related to predicate crimes. Somalia’s penal code, based on the 1930 Italian penal code, needs extensive revision. The code does not include any provisions or penalties addressing money laundering or terrorist financing. The key obstacles to enacting AML/CFT laws include the federal government’s limited control over parts of southern and central Somalia beyond Mogadishu; a lack of legal and financial expertise necessary to draft substantive laws; pressing security threats to the government, including from the continuing al-Shabaab insurgency; a lack of capacity at all levels of government; and insufficient enforcement, policing, and investigative capacity. Parliament also has struggled in political discussions with the FGS on priorities, resulting in delayed passage of legislation. Political infighting between the president and various prime ministers has distracted FGS officials from pursuing necessary reforms and passing required legislation.
Somalia lacks a formal financial sector, with the exception of informal commercial banks operating without supervision or regulation. Somalia has no functioning government regulatory/supervisory agencies to oversee its financial sector, thereby allowing money transmitters and hawaladars to operate without any customer due diligence or suspicious transaction reporting requirements. In any event, they cannot provide AML/CFT-relevant information to any credible governmental authority. Somalia imposes no financial record-keeping requirements; to the extent that international standards are applied in Somalia, they are self-imposed by money transmitters, hawaladars, and other businesses that must abide by those standards to do business elsewhere in the world. Most money remittance companies, for example, use electronic AML/CFT filter systems which flag possible matches between customers and the individuals and entities on the UN 1267 Sanctions Committee’s consolidated list. In May 2013, Barclay’s Bank in the UK announced it would close bank accounts held by Somali money transmitters. Merchant’s Bank in California, one of the largest banks to service Somali money transmitters in the United States, announced in May 2014 that it would discontinue service, but after conducting an AML/CFT investigation, it announced it would continue servicing Somali money transmitters.
The legal system in Somalia consists of traditional courts (xeer), as well as a variety of local and regional court systems. A legal system with both civilian and military courts operates under the federal government, but existing laws are difficult to enforce, given the weak capacity of judicial and law enforcement institutions and general instability. The federal government appointed a new Attorney General in August 2014. The new Attorney General has suspended five of twelve practicing prosecutors due to alleged corruption, and has launched investigations of alleged malfeasance in the Somali Supreme Court of Justice.
In theory, the police are reportedly responsible for investigating financial crimes. The police lack the capacity, including financial, technical, and human resources, to investigate suspected money laundering and/or terrorism financing. No government entity is charged with, or capable of, tracking, seizing, or freezing either the proceeds of crime or terrorist assets. Somalia has no laws requiring forfeiture of the proceeds of crime or terrorist assets. The federal government has called on regional governments to help stem the flow of terrorism financing, including requesting local governments to trace, freeze, and seize funds believed to be related to al-Shabaab financing.
The MoF, and the wider government, struggle to combat corruption and the embezzlement of public funds. The October 2014 Somalia Eritrea Monitoring Group report claims the government misappropriates 70 to 75 percent of its revenue. The report also focuses on the practice of “secret contracting,” where the government signs contracts in exchange for signing bonuses. Although the government has made public declarations against corruption, it has yet to implement anti-corruption reforms. Somalia’s constitution provides for the establishment of an Anti-Corruption Commission to investigate allegations of corruption in the public sector; Somalia has yet to establish that Commission.
Somalia has cooperated with foreign law enforcement on investigations concerning suspected terrorists, kidnapping, and piracy and terrorist attacks committed both inside and outside Somalia. Somalia has no mechanisms in place under which to share information related to financial crimes, money laundering, and terrorism financing with other countries, but has indicated an interest in collaboration. The Central Bank of Somalia has worked with international donors to draft an AML/CFT law, in addition to collaborating with international partners to apply for observer status to the East and Southern Africa Anti-Money Laundering Group (ESAAMLG).
Somalia should continue taking steps to combat corruption, enhance its ability to cooperate with international partners, begin to draft AML/CFT-related legislation, and take all necessary steps to become a member of an appropriate FSRB. As an urgent matter, Somalia should criminalize both money laundering and terrorism financing. The government should work toward equipping its law enforcement and judicial authorities with the resources and capacity – staffing, budget, and training – to investigate and prosecute financial crimes. Although the government has significantly increased the amount of revenue it collects, it lacks the funding necessary to effectively improve government capacity and will continue to rely heavily on donor funds.