In the third quarter of 2024, Somalia will go through an evaluation that will assess the country’s laws, regulations, frameworks and institutional oversight for combating money laundering and terrorism financing across the financial and non-financial sectors. As a member of the Middle East and North Africa Financial Action Task Force “MENAFATF” (a regional-style body of FATF - the global anti-money laundering watchdog), Somalia is expected to have implemented a range of local and internationally agreed frameworks, recommendations and UN Resolutions on anti-money laundering and countering the financing of terrorism by this time. This assessment, so called “mutual evaluation” will be carried out by other MENAFATF member assessors with the oversight of FATF.
The mutual evaluation will broadly have four areas of focus:
First, to assess Somalia’s vulnerabilities to money laundering and terrorist financing by verifying the design of the country’s laws and regulations, including the extent to which the regulatory standards reflect internationally agreed expectations. Second, the effectiveness of the implementation of relevant FATF recommendations and international agreements to protect Somalia’s financial system from financial crimes.
Third, Somalia’s institutional framework, including the regulatory cohesion between the different oversight bodies in the country and the prosecutorial rigour of law enforcement in combating money laundering and terrorist financing. Fourth, the detection and prevention of financial crimes through sound and effective mitigation and regulatory oversight and national risk assessment – for instance, how regulatory authorities exploit the information from financial and non-financial sectors; identifying risks to the financial system and shutting down / sanctioning firms and individuals found to be in breach of the law.
The outcome from the evaluation is publicly disclosed by FATF and used to inform whether Somalia is a “jurisdiction with strategic deficiencies” – in essence on “a grey list” and subject to regular monitoring until the issues are satisfactorily addressed. A worse outcome is if Somalia’s regulatory and oversight weaknesses are so material and pervasive as to lead to a classification of “high risk jurisdiction subject to call for action” – effectively a “black listing”.
Somalia is currently “unassessed” which means there is no official view of the country’s regulatory systems. Financial firms doing business with Somali companies and individuals do so within the parameters of their own risk appetite. However, an important consequence of FATF mutual evaluation would be the identification and public disclosure of all material risks and issues in Somalia’s financial and regulatory system, bringing the country’s regulatory deficiencies into global spotlight. If Somalia were to end up on a “black list”, it would be an official confirmation that the country’s financial system is a money laundering and terrorist financing high risk area, effectively precluding it from the global financial system plumbing.
The consequences of a “black list” designation would also be immediate: global financial firms would stop dealing with a country that is known to be a high risk ; some countries may require Somali financial companies to be excluded from accessing financial markets; what is left of corresponding banking facilities could disappear; investors concerned about the reputational and legal hit from engaging in businesses in Somalia would go elsewhere; and even non-financial Somali businesses would face increased due diligence barriers. The ripple effect for the county’s economy and financial system as a whole would be disastrous indeed.
The role of the Central Bank of Somalia and Financial Reporting Centre
On paper, Somalia has regulatory authorities that provide industry oversight. The Financial Reporting Centre (FRC), that was established in 2016, is Somalia’s financial intelligence unit responsible for the regulatory oversight of money laundering and terrorist financing. The Central Bank of Somalia (CBS) licenses financial institutions and is also responsible for a whole range of prudential and conduct risks in the financial system. These two institutions combined make up Somalia’s twin regulatory pillars. However, the existence of CBS and FRC does not mean Somalia is well-placed for this evaluation. In fact, any hope that these institutions are capable of steering Somalia through this evaluation runs ahead of reality. Here is why:
First, both institutions are visible in framework but largely invisible in substance. Their split of responsibilities reflects more on regulatory division, than cohesion. The existence of CBS and FRC is therefore a poor guide on whether there is effective industry oversight. Moreover, what happens in both institutions has a political dimension and reflects the crippling problem that holds Somalia back – lack of competent expertise in key institutions, resulting in weak regulatory oversight, powerful market interests that can stymie regulatory scrutiny and the added absence of credibility to engage with both national and international stakeholders to promote Somalia’s interests effectively.
Second, the terrible history of implementing reforms, even when the bar is lowered as was the case with debt relief, gives one very little confidence that the CBS and FRC can pull off a successful mutual evaluation. Some of the key debt relief reforms have been years in the “to-do” pipeline and most recent ones remain unfinished. The difference this time is that this assessment has a visible outcome which could be used to justify labelling Somalia as a country that poses a danger to the global financial system. The fact that the mutual evaluation relies on the leadership of the CBS and FRC in steering this well – institutions with obvious and deeply-ingrained credibility issues – raises the stakes for Somalia considerably, potentially turning a very difficult assessment into a disastrous one. It would be a fool’s game to expect a different outcome.
Third, the lack of effective and robust regulatory engagement between the private sector and FRC/CBS is a major weakness in Somalia’s current regulatory regime, limiting the effectiveness of regulatory insight and intervention. key insights about financial crimes are not adequately captured or indeed exploited. This regulatory-industry gap makes it difficult to assess institution-specific issues, or address system-wide vulnerabilities that require regulatory intervention to mitigate the risks of financial crimes.
Fourth, the mutual evaluation is critically important for “Somalia Inc” and the country’s aspiration to develop its Fintech, create employment and attract inward investment opportunities for companies operating or planning to invest in Somalia. Reflecting the international nature of financial services and capital markets, Somalia’s inclusion in a “black list” or even “grey list” will stop or lead to a substantial increase in the intensity of international firms’ vigilance when dealing with Somali businesses and individuals. In many cases, countries deemed to pose unacceptably high risk are cut-off from the global financial system altogether, resulting in a significant disruption to the supply of critical financial flows. What happened to Ghana is a case in point when the country ended up in FATF black list, chasing away investors and burying the country’s aspiration to become an African financial centre.
In Somalia, realisation of what is important for the country that needs to be done is never instantaneous. The mutual evaluation exercise will require Somali leaders to take ownership and demonstrate how money laundering and terror financing risks are mitigated effectively. There will be a need to make significant changes to local rules and regulations; undertake a comprehensive national risk assessment and implement remedial actions; beef up systems for regulatory oversight and train officials. All of this would need political buy-in and commitment, effective industry engagement, competence and good leadership in both the FRC and CBS. The assumption that this could all be managed through the production of the usual reform blue prints, holding the odd training seminars and discussions, or hoping for the bar to be lowered again, is a dangerous complacency indeed.
Millions of Somalis depend on the country’s financial system infrastructure, supporting trade and remittance inflows. The country’s economic growth depends on the extent to which domestic firms can access the global financial plumbing to grow, create investor and capital markets confidence and attract capital inflows. Somali financial services firms have invested heavily in systems and controls over the years on par with their continental peers, yet continue to face access challenges based on perception. The mutual evaluation in 2024 is an important opportunity to showcase Somalia’s development, overturn perceptions and promote the country’s potential by helping to bring Somalia properly into the financial system.
Of course, in the in-tray of political priorities, the mutual evaluation hardly registers. Unless there is sustained political focus, credible regulatory reforms and effective private sector engagement, it is hard to see how this could end well for Somalia.
Somalia has been regularly examined on account of its failings on corruption. It is why Transparency International lists the country as the world’s most corrupt country for several successive years. A FATF “black list”, coming on top of the corruption listing, would be a real catastrophe for Somalia’s economy, businesses and financial services firms whether anyone appreciates it or not.
For the upcoming government and indeed the private sector, there will be a lot at stake in getting it right before 2024.