Bill Aims to Ease Terrorism, Laundering Fears Around Foreign Money Transfers

Legislation awaiting Senate approval would improve regulation of companies that facilitate money wires. 

Stock image showing a crowd outside a Western Union location in Singapore.

A new bill aims for more efficient oversight of money transfer operators such as Western Union, which wire money internationally.

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A recently proposed piece of legislation would streamline the regulation of money transfers to individuals and businesses in foreign countries, a practice that's become increasingly unattractive for banks who see the business as too risky.

The bill, which accomplishes something President Barack Obama has requested in his past three budgets, has already passed in the House and is expected to pass in the Senate this summer. If the measure fails, supporters say it raises the specter of a humanitarian crisis for countries like Somalia, where remittances make up more than one-third of the economy.

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“People are worried because [they] left behind refugees who are living in refugee camps, who are living in tents,” says Aden Hassan, chief compliance officer at Kaah Express, which facilitates money transfers to Kenya, Ethiopia and Somalia. “People will not have food on the table the moment they stop receiving the $100 or $200 per month they receive from relatives here.”

The legislation comes on the heels of numerous banks – including Bank of America, PNC, Wells Fargo and U.S. Bank – closing the accounts of money transfer operators, or MTOs, which are nonbank financial institutions that facilitate currency transfers to foreign countries. Banks are responsible for running their own risk assessments to make sure they know their clients and where the money is going.

Since 9/11, many countries like the U.S. have adopted regulations to combat the flow of capital to drug traffickers and terrorist groups, as in the case of two Somali-American women in Minnesota who were found guilty of wiring money to terrorist group al-Shabab. Potential noncompliance penalties have gotten bigger and have prompted banks to discontinue such operations altogether.

Individuals in the U.S. sent an estimated $51.1 billion in remittances in 2012, up from $50.5 billion in 2011, according to figures from the World Bank, and Mexico is the biggest recipient of the money transfers. In Somalia, remittances from the U.S. have increased steadily since the early 1990s, says Scott Paul, senior humanitarian policy adviser at Oxfam America.

“For Somali-Americans and their MTOs, there’s about one or two banks still serving them and there’s not a whole lot of incentive for most of those banks to keep doing this business,” Paul says. “Treasury Department policymakers will say that this is a market failure and to this point, there hasn’t been a whole lot of ownership on part of policymakers that their regulations are shaping the market."

Kaah Express currently holds accounts at credit unions and smaller state banks, including Merchants Bank of California. That’s one of the last banks remaining in the business and by the end of the summer, it's slated to close 20 more MTO accounts, though not those of Kaah Express, Hassan says.

Hassan's company used to hold accounts at bigger banks like Wells Fargo and U.S. Bank, but by 2005 and 2006, those banks – deterred both by potential noncompliance penalties and reputational risk – had closed their accounts and those of similar MTOs.

“Considering how the trend has been, we’ve never been comfortable in the last several years,” Hassan says.

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The proposed legislation, introduced by Rep. Keith Ellison, D-Minn., would reduce duplicity in the regulation of financial institutions that aren't banks, such as MTOs, gaming establishments, jewelry merchants and mortgage brokers. Currently, money service businesses are regulated on the state and federal levels by the IRS, which is already short-staffed and has 284 examiners to oversee more than 241,000 nonbank financial institutions.

Under the bill, state regulators would oversee these institutions and report compliance to federal regulators, in an effort to give banks confidence in the institutions and allow federal regulators to focus their resources on the involvement of drug traffickers and terrorist groups in the money transmitting sector.

“It is far better to bring money transfers into the banking system where there is transparency, than to drive them underground where there is no due diligence,” Ellison tells U.S. News in an email. “Current policy stops millions of dollars from going to help impoverished people survive and thrive.”

Paul says part of the problem in relation to money transfer operators is that they're not well understood.

“They’re much more like Western Union or MoneyGram. They’re incorporated, they’re licensed in the jurisdictions in which they operate, they fulfill reporting requirements to the government and they’re regulated by state and federal agencies," he says.

Money transfer operators were the driving force in Ellison’s legislation, since his region is home to about 38,000 Somalis. Other major diaspora regions in the country include Seattle, Atlanta, San Diego, Columbus, Ohio, and parts of Maine and Northern Virginia, Paul says. Supporters of the bill include Rep. Sean Duffy, a Republican whose district in Wisconsin is home to a large Hmong population.

In the Senate, the bill already has support from Sens. Amy Klobuchar, D-Minn., Mark Kirk, R-Ill., and Heidi Heidkamp, D-N.D.

Corrected on July 9, 2014: A previous photo caption in this story misstated what the proposed legislation would do.