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Remittances to Fragile States in Sub-Saharan Africa: A Double-Edged Sword?

A Somali man photographed after receiving remittances in Mogadishu, Somalia.

The increasing importance of remittances in global financial flows has elicited calls by experts in the development community for Sub-Saharan Africa (SSA) countries to harness the enormous potential of remittances for development. In response to these calls, migration and remittances featured extensively in deliberations on financing implementation of the post-2015 UN Sustainable Development Goals (SDGs).

Personal remittances to Sub-Saharan Africa rose from USD$4.8 billion in 2000 to USD$31.7 billion in 2010. This figure has continued to rise, reaching an estimated USD$48 billion in 2019. About 120 million people in Sub-Saharan Africa directly depend on remittances for their economic survival. Receiving households use remittances for critical expenses such as food, health care services, and utility bills, with the lion's share going toward education. For SSA countries in conflict and war-to-peace transition, remittances are crucial for restoring stability and enhancing human security. Since international investors perceive fragile countries as risky, investments from emigrants through remittances served that critical purpose for countries like the Democratic Republic of Congo, Liberia, Sierra Leone, and Somalia. Remittances, besides being a major resource for national reconstruction and peacebuilding, also disincentivize recipient households from participating in a rebellion, crime, or violence in conflict-prone areas. They are also a vehicle for creating financial service mechanisms, building communications technologies, and investing in businesses. This has been vital in maintaining peace in vulnerable places like Puntland and Somaliland. Thus, remittances are a sine qua non for peace and rebuilding in Sub-Saharan Africa.

Security Concerns about Remittances to Fragile Countries

Despite the above positives, efforts to spur the flow of remittances to conflict and post-conflict countries have been complicated by the potential of remittances to finance terrorism and perpetuate conflict in both origin and destination countries. Peace may not always be an inherent aspiration of all emigres. On the contrary, some emigres are known to support belligerent actors back home in a bid to realize their extremist political or ideological goals. These emigres' hidden agenda to finance homeland insurgencies or terrorism has fueled concerns about the legitimacy of the funds they remit. Such concerns have been reinforced by multiple incidents relating to terrorist financing through remittances in both migrant destination and origin countries. In Somalia, for example, diaspora remittances have been known to finance rebel movements, warring factions, and localized clan conflicts.[1] Three Somali immigrants were sentenced in San Diego in 2013 for providing support to the al-Shabaab terrorist group through the remittance system. Such threats are not only limited to migrants' origin countries, but also include their destination countries. For example, reports indicate that the 2010 failed bombing attempt in New York City's Times Square was financed through the remittance system.

In SSA's most fragile states, remittances are mostly transferred through informal channels due to these countries' weak state administration, underdeveloped financial markets, and inability to coordinate the operational and reporting mechanisms of remittance transfers due to insufficient national regulatory institutions. These informal channels–known variously as Alternative Remittance Service (ARS), hawala, parallel banking, informal funds transfer, or underground banking–involve the transfer of value (monetary or other) from one country to another through informal channels distinct from conventional banks. Funds are transferred from a migrant destination country to beneficiaries in migrant origin countries without money actually moving between the two countries. These systems are embedded in existing social institutions and reciprocity networks. For some fragile countries, this informal system is the only channel for remitting funds. These channels are not only cheaper and quicker, but also more reliable and trusted by beneficiaries than other formal channels of remittances. Unfortunately, their potential for abuse is high due to the lack of supervision and the fact that transactions are executed across multiple jurisdictions using value or cash that is outside of the formal banking system. These characteristics make it difficult for law enforcement to follow the money trail.

U.S. Efforts to Stem Terrorism Financing via Remittances

In the wake of 9/11, there has been heightened interest in understanding the links between remittances and terrorist financing. The focus has been on strengthening oversight of the formal system of remittances, as well as attempting to formalize informal remittance services. One result has been the imposition of regulations meant to ensure the global financial system is not exploited by terrorist groups. At the international level, the Financial Action Task Force (FATF) and the Bank for International Settlements (BIS) set out the standards and principles governing remittances. In the United States, the operations of remittance service providers are now closely regulated and supervised, with increased focus on combatting money laundering and terrorist financing. For example, Congress amended the U.S. Bank Secrecy Act (BSA) to help combat terrorism financing by requiring remittance providers to maintain appropriate records that can aid in criminal, tax, or regulatory investigations or proceedings. Another key tool is the Electronic Fund Transfer Act, as amended by the Dodd-Frank Act, which establishes certain protections for consumers sending international money transfers. It also requires the disclosure of certain information before and after the transfer; provides consumer protections such as the right to cancel a transfer or obtain a refund; institutes a new error-resolution scheme for remittance transfer providers; sets standards of liability for remittance transfer providers and their agents; and introduces civil liabilities for violation of these requirements. However, some studies have indicated that the law is ineffective in addressing the remittances market in conflict and post-conflict countries that have weak or non-existent financial regulatory systems as well as poor political and legislative frameworks.[2]

Unintended Consequences of Regulatory Interventions

Several studies have found that although these new regulations and procedures strengthening oversight of remittances are meant to guard against abuse, crime, and terrorist financing, they also have far-reaching implications for legal money transfers, particularly to conflict-ridden countries.[3] Regulations put in place to stem this practice are increasingly posing greater problems for legitimate and needy recipients than for criminal brokers. [4]

First, the new regulations can be excessively burdensome, time-consuming, and costly to remittance providers. Moreover, with regard to transfers to conflict and post-conflict countries, banks are often unable to meet the new, stricter regulatory requirements. This has led to "derisking;" i.e., banks are limiting services or severing ties with customers involved with such countries in order to avoid regulatory concerns about facilitating money laundering and/or terrorist financing.[5] A study conducted by the U.S. Government Accountability Office revealed that several banks are closing the accounts of money transmitters and brokers because of the high cost of due diligence actions required to minimize the risk of fines under Bank Secrecy Act regulations.[6] Though mobile-phone and internet-based technology offer some degree of alternative options for these money transmitters, the World Bank notes that they still have to rely on banks for their transactions and thus face virtually the same regulatory obstacles. Second, the measures increase the overall risk associated with remittance flows as emigres from these fragile countries are overtly driven into the informal markets.[7] And since informal channels are easily susceptible to illicit use such as money laundering, terrorist financing, and other criminal activities, there is an increased risk of terrorism financing in particular for remittances to fragile countries.[8] Finally, the new regulations drive up the cost of sending remittances, not only to conflict and post-conflict countries but to more stable African countries as well. This is corroborated by a recent report by the World Bank's Global Knowledge Partnership on Migration and Development (KNOMAD), which suggests that remittance costs are also driven by the de-risking measures taken by commercial banks. In short, a key unintended consequence of new remittance oversight measures is that less remittance money finds its way into the hands of people looking to escape poverty in Africa's most fragile countries. In addition, attempts to reach the SDG target of reducing remittance fees to three percent of the transacted amount will likely be derailed.

At a time when many economies are being devastated by the COVID-19 pandemic, remittances to fragile countries in SSA are more crucial than ever. While some degree of regulation on remittance transfers is necessary to combat the threats of terrorism in both migrant destination and origin countries, the measures taken should not preclude remittances to the people who need them most. Additionally, the new measures are increasingly pushing remittances into unofficial channels, which are harder to track. Ironically, this increases the risk of remittances financing terrorist activities–which the regulations were intended to address in the first place–and possibly derailing post-conflict reconstruction and development efforts in Africa's most fragile countries.

Way Forward

Experts like Dilip Ratha (Head of the World Banks's KNOMAD) argue that migrant destination countries should relax regulations for smaller remittances since there is little established association between small remittances and terrorism financing. On average, emigres send home between USD$200 and USDA$300 every one or two months. It is essential that the U.S. government not only take a further look at the ramifications of existing financial transfer regulations on fragile countries in SSA, but also take measures to address them. There are opportunities for collaboration between and integration of the formal sector and informal arrangements without criminalizing the latter and forcing it out of the legal remittance market. Moreover, counter-terrorist financing regulation design and enforcement ought to be tailored to the unique features of individual local markets, avoiding a one-size-fits-all approach as has been the case.[9] It is also important to assess how the ability of the government to monitor money laundering and terrorist financing is hampered by the shift of remittance flows to informal channels.[10]

For fragile countries in SSA, it is obvious that underdeveloped financial markets significantly limit the ability to use official channels for receiving remittance transmissions. Recipient countries should scale up efforts to develop their financial markets and partner with major organizations like the U.S. government and World Bank to build financial systems that can more effectively address money laundering and terrorist financing. It will also be crucial for Africa's most fragile states to partner with countries like Kenya, Ghana, and South Africa that have made significant strides in stemming terrorist financing risks with regard to remittances.

Richmond Commodore was a Southern Voices Network for Peacebuilding (SVNP) scholar with the Wilson Center Africa Program during the spring 2020 term. He is a Research Analyst at the African Center for Economic Transformation (ACET) in Ghana, a member organization of the SVNP.

[1] Lindley, A. (2009), Between 'Dirty Money' and 'Development Capital': Somali Money Transfer Infrastructure under Global Scrutiny. African Affairs 108: 519-539.

[2] Natter, R. (2013), Dodd-Frank Act and Remittances to Post-Conflict Countries: The Law of Unintended Consequences Strikes Again, Available at:

[3] Fagen, P., and M. Bump (2006). Remittances in Conflict and Crises: How Remittances Sustain Livelihoods in War, Crises, and Transitions to Peace. Security-Development Nexus Program Policy A

[4] Fagen, P., and M. Bump (2006) Remittances in Conflict and Crises: How Remittances Sustain Livelihoods in War, Crises, and Transitions to Peace. Security-Development Nexus Program Policy

[5] United States Government Accountability Office, (2018) "Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews,", .


[7] Global Migration Group (2017). Handbook for Improving the Production and Use of Migration Data for Development. Global Knowledge Partnership for Migration and Development (KNOMAD), World Bank, Washington, D.C.

[8] United States Government Accountability Office, (2018) "Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews,",

[9] Vaccani, Matteo (2010) Alternative Remittance Systems and Terrorism Financing: Issues in Risk Management. World Bank Working Paper; No. 180.

[10] "Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews," United States Government Accountability Office, February 2017,

About the Author

Richmond Commodore

Short-term Scholar;
Research Analyst, African Center for Economic Transformation (ACET)
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