The human cost of ending money transfers to war-torn countries

High school fees, food, housing – Australian Somalis tell of despair that payments to family have stopped with Westpac’s decision to exit industry.

Each month, Ahmed Ismail makes his ritual trip to a money-transfer agent. Like a lot of Somalis living in Australia, he sends money home to his relatives in Bosaso, in the country’s north-east. He knows exactly what it pays for.

“Normally, I’d cover my two cousins’ high school fees,” says Ismail, who owns a travel agency in Melbourne. “And my cousins in the UK and the US cover food, housing, all the other expenses.”

That also means, if he doesn’t send the money – usually meagre sums of $200 or $300 – he knows exactly what his cousins cannot afford that month. That pressure has been building since October, when Westpac, the last big bank to facilitate money transfers, suddenly announced it was exiting the industry.

A three-month stay imposed by the federal court in December expired on 31 March. Ismail’s family in Bosaso cannot understand why the lifeline they have depended on for 20 years might not come through this month.

“They don’t understand how it’s not possible. Some of them think it’s a joke, or that I don’t want to send them money,” Ismail told Guardian Australia.

“At the same time they have friends and colleagues who are still receiving money, and they want to know how … It causes a lot of issues within the family.”

Somalia has no formal banking system, nor international money-transfer companies such as Western Union. Instead Somalis abroad rely on a system called “hawala”, Arabic for transfer, to send $1.3bn home each year. That includes about $33m from Australia, more than twice what the country gives to Somalia each year in foreign aid.

Under hawala, Ismail’s money agent in Melbourne corresponds with another in Somalia, confirming that the Melbourne agent has received the $300 from Ismail. Shortly after, the Somali-side agent makes an equivalent sum available to Ismail’s relatives. The debt between the two agents is settled later, usually by moving money between traditional bank accounts.

High-profile cases of the system being used to fund militant groups have led to regulators around the world cracking down on banks helping to square the accounts of money agents. Westpac persisted with the service long after its rivals had quit, starting with the Commonwealth bank in 2011.

By October the risk calculations had become too high, as had the cost of complying with stringent new domestic and global regulation, much of it aimed at stopping the funding of militia such as al-Shabaab, the group responsible for last week’s attack that killed almost 150 people in neighbouring Kenya.

The last US bank to facilitate money transfers to Somalia also ceased doing so in February. Remittances from Britain, too, have been severely constricted by the decision by Barclays in 2013 to close money agents’ accounts.

Purely as a cost-benefit proposition, the banks’ decision makes sense, said Matt Collin, an economist with the Center for Global Development in Washington DC.

“Transfers are a pretty marginal business for these banks,” he said. “Instead of taking a very costly approach of looking at each individual remitter and deciding if they’re OK, they’re saying: this is too costly, the cost of compliance is too high. It’s easier for us to just let these accounts go.”

These calculations made in skyscrapers in Sydney or London have a huge impact on the family of Melbourne chaplain Abdiahman Mohamud, in Mogadishu. He says the $300 he sends his cousins each month literally keeps them from starving.

“I can understand where the banks are coming from. They have an obligation to their shareholders to minimise risk,” he said.

“But at what cost? Somalia is an abstract place, but real people’s lives are at risk. People are going to go hungry.”

His relatives are “in a state of shock”, he says. “They’ve got a little bit of money left from last month, but after that it’s done.”

To keep their families afloat, Ismail, Mohamud and the 6,000 other Somalis in Australia now have two options. “First, to find an alternative legal channel which costs more. Send the money via Dubai for example,” Ismail says.

Apart from trusting a Dubai-based broker, that involves converting money from Australian dollars into Emirati dirhams and back into the US dollars used in Somalia, incurring fees that mean his relatives receive substantially less each month.

“And the second option is unregulated or illegal ways to send money. Finding out who’s flying to Somalia, families pooling together to give them $15,000 or $20,000 in cash,” he says.

That’s an even bigger gamble, especially for the cash mule. Get caught and the money gets confiscated. “You have let down 10 or 15 families who are depending on you,” Ismail says.

He declines to say which option he is taking. “I’ve got cousins and family that need to survive, and I’ll need to find a way to send them money. I have to do it.”

Even as means of halting terrorist financing, Collin says, cracking down on money-transfers might be “counter-productive”.

Hawala is hard to track. But accounting for cash wired through a maze of different countries and systems, or smuggled by travellers, is impossible. “You’ve just pushed a large chunk of remittances into informal sectors that by definition cannot be inspected,” he says.

The Australian government is not blind to the problem. In December the attorney general’s department formed a remittance working group to find an alternative way for the money to keep flowing. But progress is slow, a solution far off.

In the meantime, Mohamud worries for his cousins, particularly the teenage boys no longer able to afford school. “They have to do what they can to survive, and that can be really bad stuff,” he says.