2012 was a year of stability above all else. Our entire staff remained unchanged throughout the year. Our revenue and costs remained roughly stable through the course of the year. It seems that Somaliland was also experiencing a similar course to us. Although there were local counsel elections during 2012, there were not so many changes in the political sphere. As the private sector continues to steadily grow, the job market increases alongside foreign, diaspora, and local investors find Somaliland an increasingly attractive destination.

After the tumultuous first eighteen months of Watershed’s history with many ups and downs, it was refreshing to have a year with little other than steady progress. There was basically no drama within the firm or with our clients (other than the normal amount). I for one welcomed this. Steady progress, the kind that we experienced in 2012, is much more sustainable than quick progress. For one, as a legal services company our main product is our minds (our secondary product is our fingers to type reports and our mouths to argue cases). Because minds do not develop so quickly, and because we are practicing law at a level above par for Somaliland, we were never going to be able to grow our business incredibly quickly.

Another aspect where stability came into play was that all of the Members of Watershed struggled with the balance between work and life. It is hard enough for us human beings to understand that life is not a sprint, but for lawyers — especially hardworking lawyers — this is not an easy lesson to internalize. However, we each in our own ways started to find solutions to the paradigmatic problem of people like us. Also as all of our systems have coagulated, and as our team has solidified, we became much more efficient. This efficiency led to our ability to have a better balance of work and life.

Upon reviewing the data below there is not much that jumps out at me when I compare it to 2010 and 2011. That is nice. We still have a long road ahead of us. There are a few glaring (to me) holes in our systems that need to get filled but overall we are very much on the track I hoped we would be by this point.

Eighteen months ago I was meeting with a potential client and he told me at that time that although he was unsure whether we would survive that long he was certain that within three years we would have an extremely viable business. We have beaten his expectations as we have built a viable business at this point and we have nowhere to go but up.

Sometimes in our daily existence we forget to take a longer view and compare where we are with where we were. These Annual Reports are my opportunity to take that longer view. From my perspective we have achieved an incredible amount.

 Ref: WSL /_____/_____/2012                                                          Date:   05/01/2012

 Traffic Acts: Core Elements

Legal Memorandum

Prepared by the

  Watershed Legal Services

Confidential

Traffic Acts: Core Elements

Executive Summary

The purpose of this memorandum is to provide an overview of the core elements of traffic acts.

 States have many ways to keep their roads safe. States register motor vehicles to ensure that they have been checked before licensing the vehicles. They also include in their laws a provision relating to driving licenses. Specifically, states include criteria for applicants to obtain driving licenses by conducting driving tests.  Many states establish road safety councils that are responsible for recording accident reports, emplacing road signs near roads, limiting the speed of particular roads and vehicles, and restricting the usage of certain roads to certain vehicles.

States also impose certain requirements for any person who is involved in or contributes to an accident, and requires drivers to pay due care and attention to the safety of the public.  States require drivers to abide by the regulations and prescriptions provided by the traffic authorities, and require drivers to comply with police inspectors’ directions. States also give a duty to the police to protect their citizens from reckless driving as well as the duty to regulate the traffic to use the roads safety.

This memorandum describes the contents of the Traffic Acts, or equivalent, from Kenya, South Africa, Tanzania, and Zambia.

Statement of Purpose

 The purpose of this memorandum is to provide an overview of the core elements of Traffic Acts.

Introduction

 Traffic safety is a huge issue in every state.  Most states enact uniform regulations and requirements throughout their territory to ensure the safety of their road network.  Although the specifics of most Traffic Acts depend on the circumstances of the country, some elements of the Acts can be seen across states.  Usually states will enact a regulatory scheme for licensing both the vehicles on the roads and the drivers who are operating those vehicles.  This licensing requirement gives the state the opportunity to ensure that the vehicles and drivers using the state’s road network comply with the safety requirements that the state has predetermined.  Additionally, most states will keep records of accidents which will assist the relevant ministry or agency in planning for upgrades to the road network.  For instance, high incidents of accidents in a particular area may highlight to the relevant ministry the need to redesign a given intersection or curve.  Traffic Acts rarely will prescribe the details required to ensure the optimal safety of the road network, but will often mandate a particular agency or ministry to oversee the details of road signs, speed limits, etc.  Most Traffic Acts will, however, lay out criminal provisions for specific and egregious abuses of the road network.  This memorandum describes the contents of the Traffic Acts, or equivalent, from Kenya, South Africa, Tanzania, and Zambia.

 Registration of Motor Vehicles

                   Most states register all motor vehicles to ensure that they are safe to be on the road. In Kenya, no person shall possess a motor vehicle unless such a vehicle is registered, and no motor vehicle imported for home use shall be used on a road unless it is registered.[1] Similarly, in South Africa, no person shall operate on a public road a motor vehicle which is not registered and licensed.[2] In Tanzania, no person shall use on any road a motor vehicle or trailer unless such motor vehicle or trailer is registered.[3]

Applications for Registration

 In Tanzania a person who has attained the apparent age of fourteen years may be registered as the owner of a motorcycle.  However, no person under the age of eighteen years shall be registered as an owner of a motor vehicle or trailer.[4]  No person of an “unsound mind” may be registered as the owner of a motor vehicle or trailer; however, any person authorized to act as the trustee of such person of unsound mind may be registered as the owner in his capacity as a trustee.[5]

South Africa requires every manufacturer, builder or importer to register with the relevant agency as a manufacturer, builder or importer of vehicles.[6]  Every manufacturer, builder or importer is also required to register every motor vehicle manufactured, built or imported before distributing or selling the vehicle.[7]

Registering and Licensing Motor Vehicles

 In Tanzania, the Registrar shall verify the particulars in the application for registration and shall satisfy himself that: the motor vehicle or trailer is in a fit and proper condition, the motor vehicle or trailer has been lawfully exported from its country of origin or the country in which it was last registered, the motor vehicle or trailer has been lawfully imported into Tanzania, and any tax or duty due in respect of the motor vehicle or trailer law has been paid.[8] The Registrar shall then enter particulars thereof on his register and shall assign the motor vehicle or trailer identification marks to be shown on the registration plates to be affixed to the motor vehicle or trailer. The Registrar shall also issue a certificate of registration for the motor vehicle or trailer.[9]  Similarly, in Kenya, the licensing officer, before he registers any motor vehicle or trailer, may verify all the particulars in the form of application and may send the vehicle to an inspector for examination.[10]

 Change of Ownership of Motor Vehicles

 In Tanzania, a person selling a registered motor vehicle shall notify the Registrar of the sale or disposition, the name and address of the new owner, the mileage recorded of the motor vehicle, and shall deliver the registration certificate of the vehicle to the Registrar.[11]  The Registrar shall, in registering the change of ownership of a motor vehicle or trailer, make an entry thereof in the appropriate register and shall amend the certificate of registration accordingly or issue a new certificate of registration and deliver it to the new registered owner of the motor vehicle or trailer.[12] Similarly, in Kenya, upon the transfer of ownership of a motor vehicle or trailer, the registered owner shall inform the Registrar of the name and address of the new owner and deliver to the new owner the registration book of the vehicle.  The new owner shall, after inserting particulars of the change of ownership, forward the registration book with the prescribed fee to the Registrar, whereupon the vehicle shall be registered in the name of the new owner.[13]

Driving License

           Most states include in their traffic acts a provision relating to driving licenses. All the states surveyed prohibited operating a motor vehicle without holding a driver’s license.[14]

Application for driving license

Most states generally, make applications for driving licenses. In Tanzania, applications for driving licenses are made in person to the registrar, accompanied by a prescribed fee and the certificate of competence.[15] While, in South Africa, the holder of a learner’s license who desires to obtain a driving license shall apply in a prescribed manner to an appropriately graded driving license testing centre.[16]  In Kenya, driving tests are conducted by a driving test examiner.[17]  Similarly, in South Africa, an examiner for driving licenses shall test an applicant for a driving license.[18]

Disqualification from holding driver license

States generally disqualify their citizens from obtaining or holding a driving license in many ways. In South Africa a person shall be disqualified from holding a driving license if the driver is under the age of 16 years.[19]  In Tanzania a person is disqualified from obtaining a driving license where the driver is convicted of aiding, abetting, counseling, procuring, or inciting the commission of a criminal offence while present in a vehicle.[20]

Road Safety

Road Safety Councils

States have many ways to keep their roads safe. States often establish road safety councils that are responsible for recording and maintaining accident reports.  These reports provide, in a statistical form, the types, causes, and costs of accidents that happen within a given time.  This statistical research may be used by the relevant ministry or agency to research for the causes of road accidents, give guidance to bodies working on the road safety and to provide training and education to the road users.  In South Africa, the Director-General of Transportation appoints a person to prepare a comprehensive research program to affect the road safety.[21] Tanzania has established a similar body, known as the National Road Traffic Council, which is appointed by the Prime Minster.[22] Similarly in Zambia, the National Road Safety Council Act establishes a road safety council.[23]  All of these bodies have a similar mandate.

Road Traffic Signs

Most states employ road signs to be placed near the roads. In Kenya, the Highway Authority has the duty to place traffic signs near roads.[24]  The South African Minster of Transport prescribes which signs or markings may be displayed on a public road.[25] Similarly, in Tanzania, the Engineer-in-Chief of Roads determines the road sign design, size, color and placement.[26]

Speed Limits

States limit the speed of particular roads and vehicles and also restrict the usage of certain roads to certain vehicles.  In Zambia, the Minster of Transport issues regulations to limit the speed of different classes of vehicles. The local authorities, with the approval of the Minster, specify the maximum speed at which vehicles may be driven.[27] South Africa provides a blanket exception from the speed limit laws for emergency vehicles.  The following drivers can exceed the speed limits prescribed: driver of fire-fighting vehicle, rescue vehicle or ambulance, or a traffic officer provided that such vehicles be fitted with a device capable of emitting a prescribed sound and with identification lamp.[28]

Accidents and Accident Reports

Most states impose certain requirement to be carried out by any person who is involved in or contributes to an accident. In Kenya, if the driver of a motor vehicle who is involved in an accident caused to any person a death or injury or causes a material or animal damage, the driver must stop and provide their address to the victim. The driver must also report the accident to the police station as soon as possible and, in any case, within twenty-four hours.[29] If the accident occurs within the presence of the police, the officer may inspect any vehicle in connection with the accident, and may also enter at any reasonable time any premises where the vehicle is.[30]

In South Africa, if a driver is involved in an accident, in which another person is killed or injured or suffers property damage, the driver must immediately stop the vehicle, ascertain the nature and extent of any damage sustained, provide their address, and if a person is injured, render such assistance to the injured person as he/she may be capable of rendering.[31] Such driver must not remove the vehicle involved in the accident from the position it came to rest, until removal has been authorized by a traffic officer, except when such accident causes complete obstruction of the roadway of public road.[32]

Reckless Driving

States require drivers using the roads to pay a due care and attention to the safety of the public who are using the road.  In Zambia, any driver who drives a motor vehicle upon any road recklessly, at a very high speed, or in a manner which is dangerous to the public is guilty of an offence.  In such cases any traffic inspector may arrest, without warrant, the driver who commits the offence.[33] In Tanzania, any driver who causes bodily injury or to death of any person by carelessly using a motor vehicle is a guilty of an offence.[34]

Conclusion

States generally have the same objectives when passing road traffic acts.  They first examine the vehicles, ensure its safety, and then register it. States also require owners of vehicles to be 18 years of age, to be of a sound mind, and to be tested before obtaining a driving license. States also grant duties to the police to protect their citizens from the negligent and reckless driving and to regulate traffic.

Self portrait by onesecbeforethedub @ Flickr

I was sitting at dinner with a potential client in May of 2008. ”We need to harmonize the three legal systems. You know, we have here in Somaliland the traditional system, the shariah system, and the courts. Each of which does their own thing and this is a problem for us.” I had been in Hargeisa only a couple of days when I first heard this lecture. I heard a similar version of the same lecture less than a month ago.

I didn’t really buy it in 2008 and I definitely didn’t buy in last month. But that is less important than the other question: why didn’t I buy it?

The short answer is that there are many reasons, including: there are bigger problems to tackle first and most countries have to deal with multiple sources of law.

The real crux of my opinion is this: no legal system will be fully matured until it has developed a set of rules and criteria for dealing with conflicts of laws. So it does not matter one lick if those various legal systems are in tension with one another or are completely aligned, or exist somewhere in the middle of those extremes.

The state of the legal systems themselves is not the preeminent question. What matters more than the state of the legal systems themselves is how we deal with the legal systems. What are the rules for navigating the system? I have written a bit about this on our blog and I have written quite a bit about it for clients.

Let me particularize why I feel that all the hand-wringing over harmonization is wasted effort and money that could be put to better use. One of the primary examples that is used is a rape case. The common rhetoric goes like this:

Here in Somaliland we have three legal systems. If there is a rape case and the case is adjudicated by the elders then the alleged perpetrator will not get any jail time and will just be forced either to marry or to pay some compensation to the family of the victim. There are different sets of punishments if the case is adjudicated in shariah courts, and even more different punishments if the case is adjudicated in the normal court system. Since there is this divergence then we have a problem.

My problem is with the conclusion at the end of that.

Indeed, I do not find it problematic that there are different punishments if the case is adjudicated in different systems. Many of my friends who work in the criminal justice system in the US long for a system where they could push some of their criminal cases to, a system of community responsibility or religious unassailability, but those alternate systems do not exist in the US. It is one of the strengths of Somali society that a single case can go to three different directions and hope to achieve three different outcomes.

At this point in the discussion I will grant those agitating for a full-scale harmonization effort that we can all agree that no single case should be given multiple opportunities to go through multiple adjudications. This can easily be handled by a small adjustment to the Organization of the Judiciary Law tightening the res judicata principles. These principles are what tell us that a case can only be adjudicated once and that multiple adjudications are inefficient and difficult for the parties as well as for our society as they strain the already limited resources that any society is able to give to its judicial sector.

The dirty little secret is that while a small amendment to the Organization of the Judiciary Law would do the trick, there is an even more simple solution. Currently, the Civil Procedure Code Article 317 says that if both of the parties to a dispute agree to go through a mediation or ADR process that they cannot adjudicate that in court. Also Article 331 obliges mediators and ADR facilitators to register their final agreements with the Court system so that the Court system can assist in the enforcement of the final resolution. While the relationship between ADR and the Courts is complex in any country, the point here is that when Somalis go through a traditional dispute resolution process with the elders, they do have access to the state structures. Further, the Courts should not be fully retrying cases that have gone through ADR as it is inefficient. While there is corruption within the courts and while some judges obviously can be incentivized to take decisions unfairly, those instances are not – in our experience – the norm.

The norm is that the Courts have been retrying some cases, but largely they have been doing so based on the lack of any Article 331 registration by the ADR providers in Somaliland (which are largely the elders network). Were more elders to register their final decisions with the courts, the entire system would benefit from such efficiencies and particularities, as I’ve argued before.

So, in my mind the discussion about harmonization largely misses the point. Especially when the result of such discussion is work plans that focus on either trying to document the complex and varied nature of the traditional dispute resolution rules which are constantly changing and designed to be malleable and responsive to particular situations or on attempting to bring the formal law more in line with the traditional. Both ways are a waste of money in my opinion. I will caveat this idea that I do feel that rape, genuine rape that is not simply teenagers having sex outside of marriage, should be reserved for the courts because of the increased protections that the formal system can provide to victims and because such activities are extraordinarily difficult to prove under any of the systems (which require the more particularized rules of evidence and procedure which the formal court system does have – albeit not always uses precisely).

This discussion is largely a reflection of the tension which we as humans are constantly experiencing. The tension between certainty (rigidity) and flexibility (resiliency). As many know, my first degree was in structural engineering where I studied how real engineers (I never was among them) design buildings and bridges. These structures are designed to withstanding all kinds of loads including wind and earthquakes which require that the structures be flexible enough to withstand these variable loadings as well as strong and stable enough to continue holding up whatever it is they are supposed to be holding up. The San Francisco earthquake in 1989 when the top layer of a double decker bridge collapsed onto the bottom layer was a vivid portrayal of the consequences of too much rigidity at the expense of flexibility.

Similarly, civil wars are often also the result of too rigid of a social, legal, and political system. This is why it is important to understand that perhaps harmonization is not always a uniform net positive. Perhaps it is, at times. And perhaps it is not, at other times. What is important is that we understand the effects that having multiple legal systems have on our society.

Riders on the Storm by @super_xfm

I have been really impressed by the online inclusion and the great (Global) conversations over the course of the last year or so that have been led by Al Jazeera, the UK Government, and others that have included many varied and interesting views. The value of those views (and how people were expressing those views) was less dependent who you work for but rather the value (relative to each other) of those views stemmed from how good the idea was. This is a fascinating turn of events for Somali culture (as it learns – alongside the rest of the world and really neither ahead of nor behind but simply on par – with the rest of us). So, we wanted to try something similar.

We have this view at Watershed that the development of the Somali region is interlinked in some fundamental ways. We feel that while the politics do matter, they matter less than we frequently admit. The entire Somali region has so many similar problems and no matter the politics of this-or-that land we just want to help everyone deal with the problems that REALLY affect them. In some ways a harmonized, centralized, uniform governing sector overseeing the entire region could be beneficial. In some ways a decentralized, locally-focused, and flexible governing sector that is responsive to micro conditions within each smaller zone could be beneficial. The point is that the real crux of the issue is that while politicians will be politicians, their electorate can still just be electorates.

At Watershed we do not feel that it is the government’s duty – alone – to fix the issues that are facing us. We feel that it is all of our duty – collectively – to address these issues. The public sector, the private sector, and the traditional sector all have a role in addressing the problems that we all face. When each of these sectors learns from each other and talks to each other in a respectful manner that befits true discussion then the problems will get solved faster than without such discussions. So we want to do our part to spark some discussion.

OK, so there is rampant poverty and lack of resources that do spawn so many small-scale resource conflicts that get aggravated and amalgamated in a kaleidoscope of varying meta conflicts. Our position is that the reality is that these small conflicts get aggravated more by local conditions and clan identity politics than from the identity laden issues sublimated by the this-or-that land questions.

The dirty little secret about the Somali regions has less to do with identity and the flag on one’s back or on one’s twitter avatar. We, at least at our headquarters, happen to wear Somaliland’s flag very proudly, but that doesn’t have a single thing to do with how well we can help you build your law, your contracts, or resolve your dispute no matter whether you are Somaliland focused, Puntland focused, Galmuduugland focused, Djiboutian, or Ethiopian Somali. From our position, lawyers are less like politicians than we are like engineers. Engineers can build the best dam, and if you’re the district governor of X you will be better (in the long run) to invest a little bit more money in good engineers than likely any other money you can spend. As the engineers of societies we care less about the politics within societies than we do about understanding the systemic constraints within a particular jurisdiction and finding a solution to a particular vexing problem that is workable within those systemic constraints. Engineers, and good lawyers, understand what can give and what cannot give within any system they are forced to cope with. Some questions are simply artistic and stylistic and some are rigid and scientific – engineers and lawyers understand how to parse these distinctions. As lawyers it is our job to figure out what can give (cultural things sometimes, legal things other times, economic things other times) from what cannot give (same list applies here). It is in that vein of gaining a keen understanding that we posit the following.

We understand that one of the things that is important to the development of the entire region is the business community. One of the best things that a vibrant business community will do (especially the younger, keener generation, the up and comers, but all of them to be fair) is to connect people. Business does not hinge on the identity question nearly to the extent that politics – and to a certain extent the NGO sector does. Sure Dahabshiil is a Somaliland led company, but he does business with all portions of the region. He hires people from all portions of the region. These employees meet each other, connect with each other, learn to understand each other. Such things only rarely happen within the political sector and happen far less than they should in the NGO sector. People connecting to people is a net benefit in the long run – full stop.

The business community – particularly here in the Somali region – is entrepreneurial, socially focused (this is the best things about a real Islamic culture – corporate social responsibility can just be assumed), and vibrant. Traders in every culture, historically and geographically, have had an important role to play within their societies because they mediate a lot of things. They are free from politics and can easily move between regions. They also, by having financial interests in all, want them all to succeed. Of course, some are good and some are bad and some are just OK, but that is just people.

Largely, when taken as a whole the business community – again with a special emphasis on newer, younger companies – is a vital and under-appreciated driver of development of the entire Somali region. Development will never come from the NGO sector. That is isn’t the point, no matter how much development workers like to tell themselves that. And yes, I used to be one and I’m not “having a go” as my wife likes to say. Supporting this indispensable sector is one of the main reasons we started Watershed. It is only in the recent weeks – after being open for more than two years – that we feel we are even beginning to realize that the business community is open to such support. One of our missions is to support the businesses community by providing them with qualified, professional transactional attorneys who understand all the Somali portions well enough to advise them legally but also who understand the East African region, the Middle East, the world enough to assist them in their expansions abroad.

We take this role, of being a support and advocacy mechanism for the private sector, seriously and we want to assist in whatever way we can. But it is important to understand the systemic constraints. Because when we understand the constraints of how to really operate, to function, to grow your company from a local, mid-size enterprise that can operate on a regional scale. This growth and expansion will require local businesses to put some things in place. One must invest one’s resources wisely. But also one needs to increase one’s resources by seeking investment capital to fund this expansion. To get investment funds one needs to have willing investors.

And so, finally, we reach the question. Diaspora, Regional Actors, Business People, Foreigners, Somalis. What’s stopping you? Where are the problems? Where are the kinks? Where is the friction? We promise to share as much as we’re able as soon as we’re able if you promise to help us have an open and honest discussion. We would very much love to hear what you have to say. Why? Well, because if we cannot diagnose the problem how are we going to fix it? Because while many in the world are bickering over the table scraps, the rest of us are trying to build something. Because many of us believe that there should not be a choice between traditional cultural values and modern healthcare, education, and job possibilities. Because the Somali region is going to be left behind the other vibrant East African communities if we don’t catch up soon. Because we should help each other, and care about each other, and assist each other, and share with each other. Ideas and concepts shouldn’t be currency in which to barter but should be free. So please share with us your thoughts. It does not matter if it is short or if it is long. Record a youTube and put the link below or tweet the link or publicly facebook the link.  Take a picture and post it to your tumblr. Anything, just let us know in the comments below. We’ll aggregate all the responses we are able to achieve in a followup post.

What you could do:

• Post your thoughts on your facebook wall. Add “sominvsurv” to the end of your post. Make sure the post is make public.
• Tweet or G+ with hashtag #sominvsurv.
• Blog about it and put a link in the comments of this post.
• Put on your tumblr or flickr with tag of #sominvsurv.
• Leave a comment on this post.
• Repost this article and gather your own feedback.

What we will do:

• Search all of the above mention outlets (and probably others) using the tags or hashtags of sominvsurv.
• Code and collate the results.
• Post the results in an open and interesting fashion.

Sound like a deal? Then how about beginning by leaving a comment below.

AMISOM and Somali Troops Collaborate in Anti-Shabaab Operation by United Nations Photo @ Flickr

Usually we do not talk about conflict, piracy, or terrorism. Late last year we decided, as a firm, to completely stop speaking about these three areas in an effort to focus on the good things that have been taking place within Somali societies across the Horn. Today we semi-break our own embargo to talk about conflict.

We have done much work recently assisting in capacity building efforts for traditional leaders involved in dispute resolution. As a firm, it is important to us that these individuals receive as much support as possible. We have spent a lot of time listening to their stories and helping them to identify the challenges that lie before them. Below is one theory that we have been slowly building. It takes many of our formal and informal interviews with conflict resolution practitioners and traditional leaders and builds in some of our own background in this area. We welcome everyone’s opinion and views on this matter.

Everyone wants to help, but before helping it is important to identify with some precision what the problems are, what the causes of those problems are, and where the entry points to addressing the causes may be. The below is our attempt to speak to that.

The Somalia civil war is a misnomer. While it may be a handy icon for a complicated time period, it is neither a uniform nor a coherent conflict which fits neatly into none of the established paradigms of conflict. Indeed, depending on the location and time in question one can find evidence of any of the major conflict paradigms in effect. Resource competition, ethnicity conflicts, political marginalization, and most of the other conflict paradigms can be found in the sands of the Somali desert.

The problem of understanding the conflicts in the Somali region is further complicated by the interaction between and cyclic nature of the different drivers of conflict. Each of the drivers – while largely being identifiable by modern, academic conflict theory – maintains a relationship with the other drivers that waxes and wanes over time and across the map.

Small, isolated conflicts have often remained small and isolated but at other times are able to provide an incendiary effect that broadens an individual dispute into a larger conflict. One of the major determinative factors of whether a particular dispute will oscillate into a larger conflict is the presence of latent disputes that were never fully resolved despite a perceived reduction in the acute tension of the particular, earlier dispute. When this latency between certain groups or within certain areas reaches a threshold, or is accessed by opportunistic individuals (warlords) or groups (insurgencies), a conflict ripe environment is easily conflagrated by the smallest dispute.

Often, the sector vested with conflict resolution in Somali society – the traditional leaders or elders – are able to temper the acute conflict but are not able to fully address the conflict latencies before another driver of conflict lit by another dispute requires the attention of the elders in another locale with different litigants. Breaking this cycle of conflict recidivism has proved to be the truly intransigent problem within Somali society. After working in this sector for numerous years and speaking at length with dozens of elders, we have developed a theory that could possibly work to reduce conflict recidivism within Somali society and would allow traditional leaders to more fully address the latent conflicts. When looking closely at the conflict latency issue that directly leads to high levels of conflict recidivism, one apparent challenge provides a single thread that could help to solve the problem.

Almost exclusively the disputes addressed by the traditional sector result in an oral agreement. Oral agreements present societies with two major risks. The first challenge of providing dispute resolution services in an oral society is that each of the past disputes is susceptible to perception bias. While all dispute resolution activities, and perhaps all societal activities are susceptible to perception bias, transactions which result in an oral agreement have no common reference point which can be a marker for future challenges to this perception bias. There is another major problem in oral transactions; these transactions lack an objective reference point. When two individuals agree to partner in a business venture and agree to split the profits 50%-50% that agreement may well be immune to perception bias however there is nothing that confines one of the party’s ability to claim that the agreement was actually a 60%-40% split in their favor. These two interrelated problems curtail the beneficial effects of the dispute resolution process by reducing the certainty and longevity of the process which leads directly to increased conflict recidivism.

Within these challenges lie opportunities to increase the elasticity of peace within a given area. Our theory is that if a common, objective reference point for dispute resolution can be established that conflict recidivism will be reduced because the common reference point becomes a touchstone for positive relationships and the objective reference point becomes a touchstone for outsiders to adjudicate any latent or lingering consequences of the original dispute resolution process.

What do you think? How do you view the conflicts within Somali society. What are your ideas for helping to reduce the ability of small disputes – which happen in any society – from becoming larger conflicts?

London Conference on Somalia delegates by Foreign and Commonwealth Office @ Flickr

And yet. Yet, I am strangely optimistic. It has less to do with the conference itself and more to do with the change in tone and tenor. Today was one day and it was never meant, nor could it, change Somalia. We will see what happens. The cynicism that I felt today among my Twitter stream was palpable and came from both Expat and Somali corners. Here are a couple of icons of what I saw:

Why does it feel like only Turkey are willing to help Somalia? #LDNSomalia

— Amal آسية (@HopesDesire) February 23, 2012

RT @joshuafoust: What do the London conferences on #Yemen #Somalia & #Afghanistan have in common? All talk and zero action #LDNSomalia

— Mark Anderson (@mark_anderson13) February 23, 2012

To be honest, neither are a true representation of reality. And both are largely informed by the freedom that attends to not living the existence that Somali’s in the Horn live.

Somalis, like most Africans, are much more politically aware and involved than their “developed” world brethren. Here is why this is important. See all of the big, powerful men (and except for Clinton they were nearly all men – who often talked about empowering women) in the room can stay in their bubbles for only so long. The affects of social media and the proliferation of internet which disseminates this information levels (somewhat) the playing field. Even Somalis who aren’t hooked up to the inter-tubes are able to raise their voices thanks to great initiatives like #SomaliaSpeaks (a brilliant, socially-conscious joint venture between Al Jazeera and ushahidi). YouTube + Twitter + Storify is bringing unprecedented exposure to events.

Think about the London Conference not for what you didn’t have access to, but to what you DID have access to. The point of events like this is to capture the attention of the world. This is an increasingly difficult thing to do, but when it is accomplished it can be a powerful thing. Look at this:

Fascinating graphic of aid to #Somalia & media, twitter, search coverage – by @GdnDevelopment & @datastore. #LDNSomalia twitter.com/espry/status/1…

— Espen Beer Prydz (@espry) February 23, 2012

The money follows the attention. This is nothing new, it is simply a new way of accomplishing an old thing. Here is where the UK government (despite what all the don’t come at me with your neo-colonial detractors were saying) succeeded. And they really did a masterful job. For weeks leading up to this conference they were using every social media outlet I could think of not only to get the word out as to what was happening but to encourage conversation on a scale and level that I simply have never seen before. In a way, what is happening is that we are ALL being invited into the room – to some extent or another.

The result of such a collective effort that is less reliant on big powers and further decentralized into communities. This is what I was driving at when I noted in passing that Somalis were politically engaged. Why is this important? Agility. When dealing with complex problems (which Somalia’s problems certainly are) you need to have agility to find solutions, reinforce success, and pivot quickly from failures. You can only do these when you have decentralized power & really good information flows. Technology is handling the latter, we as a society need to insist upon the former. And they reinforce one another.

In this land, where there is little to no democratic accountability, other accountability methods matter. In the Somali context, it is the community that matters. The major problem with the south in most Somali’s minds is that there has been no check (which in the North came from the Elders – a mechanism that may or may not translate into the South) on the gangsters ability to hijack state assets. Social media focused like a laser may help provide some of this assistance via information flows and an alternate way of thinking about communities.

A note to Somalia’s leaders: Montezuma was stoned by his own people b/c of his complicity with the Spaniards #LDNSomalia

— Maxamed Ibrahim (@masaafur) February 23, 2012

It isn’t a perfect solution, but it may be the best solution we (as humanity) have right now to prevent state capture and ensure a representative, indigenous, legitimate political reconciliation process.

At the end of the day everyone I heard speak was (as expected) focused on stability, piracy, and terrorism. Yet a few joyous nuggets emerged. My favorite (and not because I’m an American and a Democrat) was Clinton’s speech. Although it hit the boilerplates above, there were some very interesting key nuggets of insight. And if the Foreign Minister of any big country gets at some insight then you can bet her or his staff surely get these insights well. Clinton talked about the environmental devastation and the ban on charcoal exports. This matters deeply at the lowest, and most under represented levels, of Somali society.

What I appreciated even more was her optimism at the end. Let us stop putting all our energy in worrying about preventing this and that. Let us put our energy into building. This my friends, this insight, if the #LDNSomalia Conference gives us absolutely nothing else but the insight that the US administration wants to assist Somalis in building rather than in containing and preventing, if this is the truth. Then I will consider #LDNSomalia a qualified success. It met its standards of getting the focus back on where it should be. Building a better Somali region. So without further adieu I leave you with the comments by the United States’ Secretary of State Hilary Rodham Clinton.

1. Download .pdf
2. Send to Kindle and Convert using Amazon’s Personal Document Conversion Service
3. Read Report & Highlight
4. Plug Kindle into Computer to Download Highlights & Notes
5. Convert .azw to .html file using Calibre
6. Markup .html file to show highlights & notes
7. Build small style & javascript methods to present.
8. Upload to blog.

I am currently working on programming a small script which will automate steps 5-8 into as smooth of a workflow as possible. This presentation is the first part of that process. More with each annotated reading to come. So without further adieu, the reading.

Affaires Plus by Kelly Schykulski @ Flickr

For developing countries like Somaliland, a sound financial sector is integral in fostering economic growth, principally through the efficient mobilization and deployment of financial resources. Researchers in the field of international development continuously cite weak and fragmented financial institutions within developing countries as barriers to economic activity and as a source of great vulnerability to fluctuations in the global economy.

For quite a while now there has been talk of Somaliland instituting a legislative bill with respect to the establishment of banking institutions in the country. Accordingly, the time has come for Somaliland to establish a supervisory and regulatory agency that carries out the prudential and systemic regulation of financial institutions. Yet, how that legislation is drafted makes all the difference in the world.

This entry speaks to the necessity of a strong regulatory framework and highlights some of the major decision points we stress that Members of Parliament should be keeping in mind when they debate this legislation which is on the agenda for the upcoming sessions in the House of Representatives. In particular, this article layout a framework for the guiding principles in the regulation of financial institutions and some of the problems the oversight of these institutions is designed to address.

Regulatory Regime is Instrumental in the Financial Sector

A properly structured and functioning financial sector has the potential to expedite Somaliland’s developmental agenda by ensuring economic growth through the supply and efficient allocation of credit. Further, a functioning and integrated financial sector has the potential to enhance the scope and strength of Somaliland’s monetary policy thus improving its ability to combat inflationary forces and stimulate economic growth.

Financial sectors are composed of a regulatory framework such as legislative bills, regulatory bodies that govern the provision of financial products, and financial institutions (i.e. a central bank and commercial banks). In this article, the term ‘financial institutions’ refers to deposit taking institutions, this includes for instance banks, investment firms and financial planning firms.

Despite the fact that Article 5 of the Constitution stipulates that the laws of the country should be grounded in Sharia, the successful implementation of dual banking system (composed of both conventional and Islamic financial institutions) in Malaysia and Indonesia is worth noting and highlights the potential for a dual system to exist in a largely Muslim society. Those nations have not found that the presence of a dual banking system violates Sharia principles. A dual banking system has several advantages, namely that it fosters a highly competitive banking sector which breeds innovation and consumer satisfaction, hence it can theoretically stimulate a higher degree of economic growth than a banking system which allows only one of the major types of financial institutions (conventional or Islamic).

Rationale for the Regulation of Financial Institutions

The recent financial crisis and ongoing European sovereign debt crisis has highlighted the growing importance of the stability of the financial sector and the need for policy makers to consider the systemic impact that failures in the financial sector can have on the overall well being of the economy. While financial institutions in the developing world were not directly associated with the recent and ongoing global financial crisis, they have suffered through indirect channels (i.e. contraction of remittances or reduction in foreign direct investments). Moreover, financial crisis have taken place in developing countries in the past. A study conducted by IMF in 1996 entitled Bank Soundness and Macroeconomic Policy (available here), details the various crisis and measures taken by 133 IMF member countries who have undergone some form of a financial crisis.

Prudential and System Regulation

The regulation of financial institutions by governments or institutions at arm’s length of the government is premised on two fundamental principles:

• The need to protect depositors and policy holders (investors)
• The need to avoid systemic failure in the financial sector

These two principles highlight the fact that the case for the oversight of financial institutions rests on prudential and systemic regulation.

Prudential regulation refers to the idea that there exists information asymmetry between depositors and financial institutions. Namely,  most consumers are not experts in the field of financial products and thus not in a position to judge the safety of financial institutions.

The systemic concerns underpins the second fundamental principle and posits that it is best to guard against systemic failure in the financial sector in which case the social costs of a systemic failure to the system may outweigh the private costs of such a failure. This was the economic and policy justification used by the Obama administration when it pushed for legislation that “bailed out” large US banks in 2008/2009 – despite the general idea prevalent within the US that the government should stay out of private enterprise. A systemic failure can occur for instance if suddenly the majority of depositors in financial institutions withdraw or demand their deposits (bank runs) or contagion caused by linkages (i.e. European sovereign debt crisis). In cases of drastic systemic failure, efforts to restore systemic stability and confidence in the banking sector may require expenditure of public funds (bailouts) or stagnate economic growth (liquidity crisis). Accordingly, a systemic failure can pose disruptions to the nation’s payment system (both internally and externally), and disrupt both economic growth and poverty reduction goals.

Risks and Challenges to Conventional and Islamic Financial Institutions

Financial institutions such as banks accrue earnings primarily through financial intermediation, which can entail substantial risk. Traditionally financial institutions in the business of financial intermediation made their profits from the income spread of their assets and liabilities as well as from user fees. Accordingly they often faced market risk resulting from the business cycle, credit risk from defaults and interest rate risk from changes to the expected rate. Since the 1980’s the emergence of secondary markets (i.e. derivatives market), new financial products, globalization and securitization have provided financial institutions with risky new opportunities to generate more wealth. Consequently, banks and their subsidiaries (i.e. investment and financial planning firms) have begun to engage in activities that are outside the scope of their traditional activities. Both conventional and Islamic banks can be exposed to some if not all of the following risks:

• Liquidity risk
• Capital risk
• Interest risk
• Foreign exchange risk
• Actuarial risk
• Operational risk
• Market risk
• Sovereign risk

Islamic banks (as detailed in our Islamic Finance series which begins here) are premised on the Islamic economic model as dictated by the Quran and Sunnah which provide for the values and principles that are to guide the dealings and relationships of individuals in economic matters. It is often cited that one of the main defining features of the Islamic economic model is the prohibition of interest or riba. While Islamic banking is an growing field within Islamic and non-Islamic countries, in particular Britain, their share of the global financial market is still smaller than to that of non-Islamic financial institutions. Within nations where a dual banking system exists such as Malaysia, Islamic banks have taken to increasing diversifying financial products and activities in order to to compete with conventional banks for market share. However, the designation of a particular financial product as being in compliance with the values and principles of ‘Sharia’ in terms of how it is structured requires the opinion of scholars. This is where we can expect some of the risks common to Islamic banks to arise.

The risks and challenges that are unique to Islamic banks that are discussed here do not necessarily represent the full spectrum of the risks that Islamic banks may face. These risks however serve to highlight the potential for a discrepancy in the activities and products Islamic banks are engaged in and their compliance with the principles of Sharia. Accordingly, a discrepancy between the financial institutions status as being in compliance, can both distort the risk assessment of their balance sheet and thus the need to take prudential measures and it can also be misleading to consumers. Differences in opinions of Sharia scholars, and changes during the financial products lifecycle can be sources of such a discrepancy. Therefore this poses a challenge to the supervisory and regulatory agency in terms of protecting consumers.

The issue of contract and documentation risk is one that is much more pertinent to Somaliland, where secure definitive documents that attest to one’s identity and enforcement channels such as individual credit scores are not as developed. Thus risks that emanate from defaults and missed payments to the banking institutions may be heightened and will need to be taken into account in the feasibility evaluations of banks, with regards to how they go about ensuring a level of documentation and probability of repayments (i.e. requirement of collateral).  Further,  the need for trained professionals and scholars in the field of Islamic banking is a recurrent issue that many institutions face in the field of Islamic banking and one that exasperate the aforementioned risks.

It is important to note that there some potential adverse effects that an overly prescriptive regulatory framework can have on the financial sector. Moreover, it is important such regulatory frameworks be structured in a manner that promotes due diligence on the part of the shareholder and consumers of financial institutions. In this regard, there is widespread agreement a principles-based approach to regulation rather than rules based approach is the better method. This is because strict rules regarding what specific activities or products to engage in for instance can stifle financial innovation and foster ‘creative compliance’. On the other hand a principles based approach to regulation promotes dialogue between financial institutions and regulators, and puts pressure on management and board of directors to meet a set of standards. In that regard it allows for a degree of flexibility in terms of financial products and activities and places responsibility for the safety and soundness of individual financial institutions on management. However, for principles-based regulation to work properly, the set of standards to abide by should be broad enough to encourage flexibility and innovation, and be backed up a set of clearly stated severe penalties for financial institutions found to be in non-compliance.

Guidelines for Somaliland Financial Institutions Regulatory Agency

The mechanisms whereby a regulatory regime ensures that financial institutions are taking into account the various risks they may be exposed to, may include investigative work by the regulatory agency with regards to the accounting measures of financial institutions, governance mechanisms and compliance regarding standards.

For instance the Basel Committee on Banking Supervision (BCBS) is a global forum for banking regulators that acts as a ‘standard-setting’ agency for the supervision and regulation of banking institutions. The latest round of talks referred to as Basel III at BCBS has resulted in an agreed upon set of guidelines for banking regulators. These standards speak to the ability of banks to absorb shocks to their funds as a result of ‘financial and economic stress’. Some of their publications include a liquidity coverage ratio for specific scenarios so as to ensure a level solvency.

In addition, where Islamic Finance is concerned there are extensive guidelines and best practices which have been adopted by the Islamic Financial Services Board (IFSB). The IFSB is an international body of the heads of Islamic finance regulatory bodies from the primary nations leading the development of Islamic finance.

The main gist of this article is to underscore the importance of having a financial sector framework that facilitates and promotes the emergence of financial institutions that are conducive to the developmental goals of Somaliland and that makes it easier for its business community to engage with the international community through formal financial channels.

A visit, board, search and seizure team assigned to USS Anzio by Official U.S. Navy Imagery @ flickr

They are quite the buggar those Somali pirates. They just won’t seem to go away, will they. For most of the time I have been working with Somalis they have been little more than a simple nuisance. That changed a while ago when a friend and colleague was taken by them. This blog isn’t personal, however, it’s business so let us talk about what the avenues the international community and external supporters of stability within the region could agitate for.

As most know, the former Republic of Somalia functions as three different state entities, and a number of smaller micro-states. If you want the general background on Somalia, Somaliland, Puntland, or the pirates check out lots of other places. Really, this is about what could be done.

Overall, throughout the region, in my opinion, there needs to be an integrated five-prong response to truly address the issue: (1) increased self-defense measures on ships (something I don’t particularly like to endorse but it seems to be working), (2) continued diplomatic pressure on the state structures in the Gulf States, Puntland and Mogadishu, (3) a full scale DDR effort for those on the ground with a well thought out alternate employment plan, (4) an increased effort to track and freeze pirate assets (particularly in East Africa), and (5) increased engagement to Somaliland’s relatively stable law enforcement structures. This five prong would address both the supply and demand sides of the piracy issue.

The first response is the most immediate response. Although there is danger in arming ships on many levels – legally, culturally, etc. – it is likely the best short term solution – “best” being highly qualified by the operating context. As the UK Foreign Policy committee said in its recent Piracy report, there is “compelling evidence” that this is a viable short term solution. The UK Prime Minister has ordered his government to ensure that the legal and practical safe guards are put in place to allow this to happen on UK flagged ships. But UK flagged ships have never really been the issue. Although I haven’t done a full research, I cannot remember (off the top of my head) any UK flagged ships being taken hostage since I’ve been here. The majority of ships in the world are flagged under flags of convenience such as Liberia or Panama and the actions taken by those governments in this context are very important. On top of ensuring this was in place for UK flagged ships, the UK would be wise to assist the other governments who may be less capable of making the necessary changes to their legal frameworks to allow this. One thing that the UK Committee pointed out – and I hadn’t thought about before – was a method by which the security guards are able to safely (and with their weapons) get off of the ships once those ships are out of the danger zone. Any country willing to play ball here would reap a lot of money since I would expect that most contractors would have their teams running a circuit. Start in Dubai/Gulf ride the ship to Alexandria or Zanzibar. Stay over night there, fly back to Dubai/Gulf and repeat. There is no shortage of decently well trained security contractors in the world right now so they could have a role to play – although I remain a bit reticent to fully endorse this. If the contractors are able to arrest / apprehend any pirates that came onto the ship they were protecting, they could then hand them over to the closest task force navy vessel. However, the contracting companies should also be sure that their teams were trained in how to collect evidence and also how to track that evidence. They should also be aware that if the pirates were prosecuted in NA/Europe their contractors may be called on for chain of custody certification. Lastly, the security contractors need to have very clear rules of engagement because without it the entire system will oscillate towards further violence.

The second response is to keep the diplomatic pressure on the state entities in Mogadishu and Garowe. These states nominally have control over the areas where pirates are freely operating. Diplomatic pressure should be exerted to begin chipping away at the current resolve within these areas not to take concerted action against the gangs. There is little that can be done here in the short (or even medium) term. And I’m not incredibly optimistic about the result. Similar to this, some pressure should be put on the Gulf States to make a more concerted effort to figure out how the information as to ships, cargoes, and routes is being leaked to the foot soldiers. If this information stream was disrupted, it would substantially impede the ability of the people who make the actual kidnappings to succeed.

Third, would be a full scale DDR effort. This is a long (or medium) term situation. The basic gist is that the foot soldiers of the pirate gangs, the ones who are really taking all of the risks now should be treated roughly the same as how we have learned to deal with demobilizing, dearming, and reintegrating rebel groups. There are tons of lessons learned there for when the time comes (if ever) that the international community is able to go into the real pirate areas and provide programming and services. The most important aspect of the DDR program would be viable alternative livelihoods. This will be incredibly difficult, given the type of lifestyle most people that currently go into piracy expect as well as the distinct lack of resources in the coastal communities throughout the Somali region. This effort would provide the pull that complements the push of the first prong. Indeed, they really go hand in hand in my mind. Somalis are excellent at risk analysis. If an alternate method of gaining employment/revenue for one’s family was combined with significantly increased risk fewer DIY efforts would be launched (financed by community efforts or the pirate stock exchange) and fewer foot soldiers would join the existing/established gangs. This is a demand side initiative, but in combination with the supply side initiative detailed above, would provide some added deterrence to the mix of solutions.

The fourth response is somewhat linked to the second response and is the demand side response to its supply side initiative. More efforts need to be made to track what happens to the money once it is paid. Although it is often paid in cash, and a good sum of it is quickly distributed deep into the communities to pay for debts amassed during the detention of the ship as well as normal clan contributions which are expected, the big piles of money which go to the big financiers and leaders should be easier to track. Although it certainly will not be a simple endeavor, the capabilities are well developed from tracking of drug cartels and terrorist organizations and those should be leveraged to reduce the incentives to launch further attacks.

The last response is to bolster Somaliland’s existing frameworks. Somaliland has the political will to do some things to assist in the international piracy effort. This political will can be a bit amorphous, and it can be fleeting. It will not be a simple engagement, but it will be worthwhile. Somaliland has the capability to prosecute many of the captured pirates. It has, considering its neighborhood, a quite good human rights reputation (which will enable prison transfer agreements without violating non-refoulement principles), and it does not have a language or cultural barrier. Currently, Somaliland doesn’t prosecute pirates for per se piracy because the penal code is not structured to recognize these acts as crimes. However, the pirates are routinely prosecuted for the underlying act of piracy, such as illegal use of weapons, kidnapping, murder, etc. Somaliland has expressed an interests in reviewing its penal code to ensure that it is up to date with modern international / transnational crimes and that the criminal procedure code allows for modern law enforcement and trial methods to be steadily integrated into the Somaliland system. There is a Somaliland Coast Guard (headquartered in Berbera) who have the will but lack the resources and capacity to play a productive role. Strengthening Somaliland’s law enforcement (including Coast Guard), trial procedures, and jail system would be the best solution for what to do with the pirates once they are caught.

These five prongs are – to varying extents – currently being either acted upon or considered for action. Yet, if the international community wants to seriously address the issue it will need a deeper approach. It remains to be seen whether there is political will in the powerful capitals for that to happen.

Islamic Bank by Kojach @ Flickr

This is the third in our Islamic Finance Series. To see the Introduction Post, please click here. To see the Post on Islamic Finance Instruments, please click here. In this post we speak briefly about off shore banking.

Introduction to Offshore Banking

In principle, Somaliland could set up an offshore business to encourage the deposit of extra wealth by super rich individuals, and in so doing would bolster the reserves of the Soamliland Central Bank. The modus operandi being not to encourage the wealthy to hoard their money in Somaliland offshore system per se but to encourage them to deposit their extra wealth in a safe and secure system where they would not incur extra expenses / taxes for so doing. Before speaking to whether this would be a good idea for Somaliland, let us first talk about what an offshore banking system is.

Historically, an ‘offshore bank’ was given this nomenclature because it was typically located on an island, for example: Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, London, Mauritius, Seychelles. However, subsequently and with the development of this banking system, the term offshore has become a misnomer. Because, as well as, being likely located on an offshore islands, today, offshore banks can be as likely located in landlocked cities such as, Zurich, Luxembourg, or Andorra.

The Organisation for Economic Co-operation and Development (OECD) defines the Offshore Banking Centers as: countries or territories whose financial institutions deal primarily with non residents. As a corollary, an offshore bank can reasonably be described as: a financial institution located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

• Greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act);
• Low or no taxation (i.e. tax havens);
• Easy access to deposits (at least in terms of regulation); and
• Protection against local political or financial instability.

Offshore Banking and Secrecy

Bank secrecy (or bank privacy) is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply (for example, a criminal complaint has been filed). In some cases, additional privacy is provided to beneficial owners through the use of numbered bank accounts which never have the depositor’s name on the account. Offshore banks, typically, have no obligation to report income to tax authorities due to protection given under the country’s bank secrecy laws. Typically, this will not create a situation where the depositor is participating in tax evasion by not paying tax on that income. Offshore banks, typically, have no obligation to report income to tax authorities due to protection given under the country’s bank secrecy laws. Typically, this will not create a situation where the depositor is participating in tax evasion by not paying tax on that income.

Created by the Swiss Banking Act of 1934, which led to the famous Swiss banking system, the principle of bank secrecy is always considered one of the main aspects of private banking. After September 11, 2001, there have been many calls for more regulation on international finance in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows.

Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that the Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

The Offshore Group of Banking Supervisors (OGBS)

The first meeting of the Offshore Group of Banking Supervisors (OGBS) was held in 1980 in Basel when representatives of a number of offshore centers met with members of the Basel Committee on Banking Supervision.  The proposal to form an Offshore Group was welcomed by all concerned as a means of allowing offshore centers to define their common ground more clearly, to participate in the defining and implementation of international standards for cross border banking supervision, and to hammer out a positive, constructive and coordinated response to the approaches made by other supervisory authorities for assistance in the effective supervision of international banks.

Since 1981 the Chairmanship of the Offshore Group has been held by Colin Powell, who is also the Chairman of the Jersey Financial Services Commission: the body with responsibility for regulating Jersey’s financial services. The Offshore Group has worked closely with the Basel Committee on the supervision of cross border banking.  The Offshore Group also works closely with the Financial Action Task Force on money laundering, and is represented on three working groups set up by the Financial Task Force as part of the general review of the FATF’s Forty Recommendations (available here). Membership of the Offshore Group calls for a clear commitment to the Basel Committee on Banking Supervision’s Core Principles, the Financial Action Task Force’s (FATF) Forty Recommendations on money laundering, and the FATF Eight Special Recommendations on terrorist financing.

Members of the OGBS: Aruba, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong (China), Isle of Man, Jersey, Labuan (Macau), China, Mauritius, Netherlands Antilles, Panama, Singapore, and Vanuatu.

Advantages of Offshore Banking

An Islamic offshore banking system which acts as a savings depository system where the system shall enjoy stringent protective regulatory procedures and low taxation. Under such system, the depositor shall have immediate unfettered access to his saving upon demand. The risk involved shall be minimal to the depositor, as long as, the Central Bank ensures the reserves held in the Central Bank for such banks are relatively high. An Islamic offshore system will enhance the country’s ability to attract foreign investment because the stability of the system and the confidence it generates will have a ripple effect enhancing the general investment capabilities of the country as a whole.

This is a unique opportunity and if used craftily will benefit from the mass of wealth which escapes Africa annually to find home in Europe and other offshore centers. Somaliland can, furthermore, discourage the depository of dirty money in its offshore system by implementing fair and stringent supervisory majors in the offshore business procedures.

Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil, who fear their assets may be frozen, seized or disappear. For example, during the 2001 Argentine economic crisis where on December 2, 2001, the Argentine government announced measures restricting deposit withdrawals. At that time the Argentine government announced that withdrawals were to be limited to 250 pesos per week per account. However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability.

Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits. Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.

Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, lower rate loans based on risk and investment opportunities not available elsewhere. Offshore banking is often linked to other structures, such as offshore companies, offshore trusts, or private foundations which may have specific tax advantages for some individuals.

Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry. The advocates of this argument expound that tax competition, in fact, allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a “race to the bottom” in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.

Bahrain (the geographically nearest offshore banking zone to Somaliland) is the leading financial services hub in the Middle East. One of its traditional specialties is its offshore banking. Al Baraka Banking Group is an example of an Islamic-oriented institution with prominent offshore bank in Bahrain.

Disadvantages of Offshore Banking

The disadvantage of ‘conventional’ offshore bank accounts is the fact that they maybe less financially secure. In the banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 the Isle of Man authorities were keen to point out that 90% of the claimants were paid, although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009.

Both offshore and onshore banking centers often have depositor compensation schemes. For example the Isle of Man Compensation Scheme guarantees £50,000 of net deposits per individual depositor or £20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However, only, offshore centers such as the Isle of Man have refused to compensate depositors 100% of their funds following the collapse of any bank in that jurisdiction. For example, deposits made at Jersey branches of Bank of Scotland PLC and Lloyds TSB Offshore Limited are covered by the Jersey Depositors’ Compensation Scheme which came into effect on 6 November 2009. The scheme compensates people who have money in current and deposit accounts in Jersey with up to a maximum of £50,000 of deposits per individual depositor per Jersey banking group. The compensation is payable, irrespective of which country they live in.

Offshore banking has been associated – in the past – with the underground economy and organized crime through money laundering. Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.

Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.

Conventional offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggeration. However, a model of offshore banking based on Islamic financial principles will, to a large degree, overcome the debilitating ‘Achilles heel’ difficulties associated with the conventional system, which potentially made vulnerable by the regulatory system which regulates it being feeble and uncertain (usurious).

General Conclusion

In conclusion, it is my opinion that Somaliland and its people will, with some sustained effort and persistence, benefit immensely from setting up an Islamic finance system – a credible system and one which will be unique to Somaliland /Africa. This success will depend on setting up a system which is rigidly based on rule of law. This is the key. It would be inescapable, but to set up a Commercial Court which has the jurisdiction to settle any financial / commercial disputes which may arise, in future, as result of setting up the envisaged financial system. Even those in the diasopora, alone, can constitute the constituents of an Islamic finance system and this will gradually thereafter attract an international clientele.

Generally, the Hawalla system utilized by those in the diaspora and the NGOs is based on Islamic financial principle which proves my point. It is a simple system which if employed systematically and awarded the protection of the law will be highly beneficial to the people of Somaliland.