Global Financial Services In Conflict Zones: Banking In Egypt, Libya, Syria, Somalia And Other Countries Where Financial Services Have Fled

On one side of Cairo’s Tahrir Square, a 20-foot-tall statue of Egyptian national hero Omar Makram towers above the crowds that have lately made the square their revolutionary base. Under his left arm, Makram clutches an unknown book, and with his right index finger, he points upward, as if he’s about to lecture someone.

Makram is remembered for having led Egypt’s successful resistance to British and French occupation during the Napoleonic Wars, and he would no doubt be surprised to learn that both countries have since built bases of power in Egypt, as purveyors of international commerce and wealth through institutions such as the U.K.-based Barclays PLC (NYSE:BCS) and the Paris-headquarterd BNP Paribas (BIT:BNP), both of which have bank offices on nearby Al Kasr Al Aini Street.

The banks, along with dozens of other Western financial institutions scattered across Cairo, are reminders of a new and modern Egypt that is more open to foreign investment and influences. Yet their presence has proved somewhat tenuous: Both Barclays and BNP Paribas have been forced to close their doors and evacuate their foreign employees more than once during the ongoing Egyptian protests. Banks, unsurprisingly, are vulnerable to disruption by the kinds of forces brought to bear a couple of centuries ago by the likes of Makram and today by legions of young revolutionaries who organize via the flagship offerings of Facebook Inc. (NASDAQ:FB) and the privately held Twitter.

“Cash has always been an issue in war zones, and in collapsing countries,” observed Anna Therese Day, a conflict journalist who has worked in Egypt and, more recently, Syria. As a war reporter, Day is on the front lines, which isn’t a good place to run short of cash. The same is true for soldiers, rebels and civilians caught up in the fight.

In Day’s experience, U.S. dollars typically become the default currency, but getting them is sometimes a challenge. As a war reporter, she said, “You need to come in with enough cash to last you -- cash for translators, drivers, hotels, food, everything ... You’re a walking target for the crimes of desperation that are always amplified by the breakdown of government, whether kidnapping, roadside theft or bribery.”

The collapse of conventional supply systems spawns new conduits for cash that may yet encompass multinational banking institutions, wire-transfer services, brave friends and family members, and shifty-eyed men in back alleys. ATMs, those symbols of stability and easy access, quickly run out of cash or are robbed and disabled, while the “Closed” sign invariably appears in the bank window as employees are spirited away to the airport.

Bank evacuations such as those that have taken place in Cairo are a logical response to deteriorating security. It was likewise the case in Afghanistan, Iraq, Liberia, Libya and Syria. Faced with the potential for looting, kidnappings and general societal breakdown, many conventional banks take the money and run, leaving it to others -- banks with an appetite for risk, cash traffickers, donut shops in Brooklyn -- to fill the gaps in monetary flow.

Unsurprisingly, there is money to be made in conflict banking, sometimes with significant returns for those willing to take the risk, and the resulting system can form the basis not only for a conflict economy but for whatever comes after.

Banking In A Conflict Zone

Banking in a conflict zone requires the ability to adapt to highly volatile circumstances for which there may be no clear precedent, said Stephanie Freid, who personally relies on money belts, hidden suitcase linings and even her bra to get money into conflict zones. “I’ve ‘smuggled’ money into a few different war zones -- Libya several times and also Syria because ATMs are shut down, banks are closed or bombed out, essentially the infrastructure has collapsed, so along with the loss of electricity and water there’s also no banking.”

Beginning in late 2010, a series of Arab Spring demonstrations, protests, riots, revolutions and civil wars has frequently forced Western banks to slowly pull out their foreign staffs and local institutions to curtail operations.

In January 2011, most Cairo banks flew their foreign staffs home. Besides Barclays, the exodus included units of big institutions such as Citigroup Inc. (NYSE:C), HSBC Holdings PLC (NYSE:HBC) and JPMorgan Chase & Co. (NYSE:JPM). On the advice of the Central Bank of Egypt, all financial institutions in the country were told to beware of opening for business during periods of civil unrest, which, although it has ebbed and flowed, continues today, so far killing 600 and injuring more than 4,000. For people caught up in such conflicts, smashed ATMs are the least of their worries. But if you need food, medicine or ammunition and have nothing to barter, being short of cash can spell disaster.

Mohamed Raslan, a partner in the Cairo-based Levari law firm, observed that Egypt has seen serious problems with the flow of money and banking since the uprising began, and the uncertain political landscape has prompted an exodus of wealthy Egyptians and foreign investors despite the interim government putting in place laws aimed at preventing a run on the banks. “There is a $100,000 lifetime limit and a $6,000 annual limit on taking money out of the country,” Raslan said. “Instead, people are now smuggling money out, which is also damaging the economy. People are so keen to get money out, they are even willing to pay up to 40 percent of the total transfer on the black market.”

Once the money is smuggled out of the country, it can be deposited in a foreign bank and wired abroad. If necessary, some of it may sometimes be wired back to people in the originating country.

Among the big Western banks operating in Egypt, few operate consumer-banking facilities. Most are investing in large state projects backed by the government’s central bank, and are reluctant to risk their own money in local operations, although Egypt was stable until 2011. For example, JPMorgan had about 10 employees in the country before the revolution, and they were primarily working in a support bank for other large foreign companies that sought to do business there but wanted a reliable partner to collect cash and administer pay. In contrast, Citigroup has people on the ground in consumer-banking roles in Cairo and more than 100 other countries (and it does business in 60 more).

Egypt is not currently a lucrative place for conventional banks to do business, Raslan said. “There’s not a lot of money to be made in Egypt at this moment, but banks are really looking to the future because we feel that there are big opportunities coming,” he said. “Since the revolution, many of the banks here have only been financing state-owned sectors such as pharmaceuticals and food and beverage, rather than civilian ventures. This is to limit the risk involved.”

Most large Western banks have maintained limited presences in the city, Raslan said. However, they have done so with skeleton staffs, most of whom are local, to keep an eye on their investments, according to sources in the U.S. Most consumer banks in Egypt are Egyptian-owned, with capital drawn from investors in the Mideast.

After President Mohammed Morsi was ousted in July, the country benefited from an injection of $12 billion from Gulf states into its central bank to help stabilize an already fragile economy, which has seen the Egyptian pound lose 20 percent of its value since 2011. That injection of cash was intended to show investors and the population that they should keep their money in Egypt instead of taking their business elsewhere, Raslan said.

Conflicted Consumers

Everything is at risk in a conflict zone, and even the potential rewards of banking in such an environment tend to pale in comparison with the money to be made in more stable regions such as Europe and North America. But there is also less competition for those rewards, and occasionally the return is remarkably high. Although institutional transactions usually rely upon wire transfers, the greatest difficulty for consumers on the ground is in gaining access to the cash.

For example, Allison Chan of San Francisco found herself in Somalia on an internship last year, when she learned firsthand the difficulty -- some would say, the futility -- of banking in one of the world’s poorest and most politically conflicted countries. Yet, she said, she found that where there is a will, there is a way.

“Basically, our finance person [who is in the U.S.] would go to a sketchy Somali donut store in Brooklyn, give them my paycheck, and then the next morning I’d wake up with an SMS [short message service text message] in Somali on my phone telling me they had my money and where to collect it,” Chan said.

Somalia has no ATMs or banking infrastructure, according to World Bank data, but Chan was able to receive cash from the U.S. thanks to a payment-system company called Dahabshil Inc., which helps facilitate the transfer of cash between vendors in the U.S. and “hundreds of locations” in Somalia, locally known as hawalas. The hawalas operate in countries with large Somali populations, including Somalia, Djibouti, Ethiopia, Kenya, South Sudan, Sudan and Uganda.

So, after receiving the text message, Chan said, “I would then go with my bodyguard and driver to said location, show them my passport and the text message, and collect cash in either Somali shillings or U.S. dollars.”

According to Chan: “It was already nerve-racking as an individual, but another NGO’s [nongovernmental organization’s] finance director had to do this every month for 15 to 20 staff’s paychecks. Really scary to be carrying around so much cash. We literally slept with it under our pillows because our offices were considered unsafe.”

Such unconventional banking is hugely important to people in countries without conventional access to money. In fact, the definition of what a bank is may be utterly transformed in a conflict zone. In the West, to be officially classified as a bank requires government licensing, but in locales without a functioning government, banks may take the form of a jewelry store or even something as transient and risky as a drug deal. Yet behind such ad hoc banks are the same wire transfers and currency conversions that drive conventional banking.

As the world becomes more interconnected and linked, less conventional forms of banking that people in conflict zones rely upon may become more complicated. Since the Sept. 11, 2001, terrorist attacks on the U.S., governments and security agencies have been more aware of how funds get into the hands of terrorists, and monetary transfers are scrutinized for evidence of money laundering and terrorist financing. Because it is harder to track cash that passes through alternative banks such as hawalas, which are not subject to the same regulations and scrutiny that most international banks are, the recipients of the transactions may be called in to account for the use of the funds.

In June, the hawala system was threatened by Barclays’ decision to stop facilitating the payments, citing possible links to criminal activity. While the decision barely caused a ripple through the international banking network, it held the potential to cut off crucial income for people in Somalia. According to a recent U.K. Channel 4 News report, more than £100 million ($153 million) is sent from Britain to Somalia every year, representing 60 percent of the population’s annual income. The withdrawal of Barclays could make receiving money in Somalia far more difficult.

Banking On It

Roughly one-half of the world’s adults have individual or joint bank accounts. In the West, almost nine of 10 adults have accounts, compared with four of 10 in the developing world. Whether a cause or an effect, Westerners are also far more likely to live in proximity to a conventional bank, and they tend to take them for granted. Meanwhile, most of those who live in rural areas of developing countries live in a cash economy. Add political turmoil or armed conflict into the mix, and for them all bets are off.

Loss of access to cash, including through outlets such as hawalas, can be life-threatening, and at a minimum, extremely stressful, particularly in areas where uneducated people, often women, are responsible for child care in an explosive environment beset by shortages.

Jefferson Mok is well aware of what happens when the most-basic systems -- in his case, hawalas, but, elsewhere, elements of firms such as the Western Union Co. (NYSE:WU) -- vanish or fail. Mok was sent to work in Burundi in 2008, and there found that while some banking facilities existed, they were largely off-limits to foreigners unless they had official papers from a registered organization. Upon his arrival in the country, Mok was greeted by a well-known soccer coach who, within 30 minutes of sweet-talking a local bank manager, had succeeded in opening Mok a U.S. dollar bank account. But where one problem was solved, the next one was just around the corner.

To get Mok started, his company gave him a check for few thousand dollars, which he deposited into his newly acquired U.S. dollar bank account. The catch: The check would take three weeks clear. “I ran out of money and barely ate for about a week,” he said. “I lost so much weight, it was kind of gruesome. I don’t show family photos of me from that time.”

Unfortunately for Mok and his aid-related organization, which relied upon money coming from the U.S., Burundi has a $50,000 limit on how much cash can be withdrawn from a U.S. dollar account during one year. “With development grants, you can burn through that in a week,” Mok said. “So we got around the limit by buying a $3 bus ticket to the Congo each time we wanted to make a withdrawal and showing it to the teller as proof that the money would leave the country.”

In fact, the money did not leave the country, but such deception was a small price to pay for taking care of banking in such a hostile environment, Mok said.

In other cases, money changes hands through PayPal accounts, or even as bitcoins. But operating outside the conventional monetary systems puts stressed consumers in the same league as warlords, terrorists and guerrilla armies seeking to receive money anonymously. That came home to Anna Therese Day when she recently tagged along with the Free Syrian Army and witnessed the power and violence that an unchecked banking system can bring when in the wrong hands.

“I traveled with foreign fighters who were responsible for bringing in cash to militia leaders to buy more arms internally on the black market,” Day said. “They went to Western Unions along the Syrian-Turkish border, and each took out cash that had been wired by financiers in the Gulf.”

The fighters would then enter Syria to deliver the money to the leaders of international networks, Day said. So the business of banking was reduced to its most elemental level.

Even legitimate military forces sometimes find it difficult to get hold of money in areas of conflict. Niall Williams, who was a logistician aboard the HMS Argyll, traveled on the frigate to West Africa as part of a humanitarian project in November 2006. Because there were no ATMs in the world’s third-poorest country, money had to be shipped in by the British consulate in Freetown, and one strict rule applied: Each of the 165 crew members was allowed to swap only around £9 ($13.76) in total, equaling about 3,000 leones each, which is about 10 days’ pay for the average Sierra Leonean. Any more than that and the local economy could have collapsed, the crew was warned.

Inside Williams’ small eight-by-five-foot office, sprawled on every surface, were thousands of the notes, totaling about 4 million leones. Each bundle had a pristine 5,000-leone note placed on the top and the bottom of the stack, presumably to make the transaction look a little more respectable. Almost every note in between was damp and dirty, and the vibrant oranges and blues were caked in grime. The damp smell that emanated from the notes was overpowering, forcing one of the sailors to wear a gas mask while he counted them.

“We had to use gloves to count because we’d heard that people in Sierra Leone would hide them in unsavory places so they would not be robbed easily,” Williams said, alluding to one of the most unconventional -- and disgusting -- banking methods imaginable.

For a day, the ship was turned into a bank. The process was simple: Each crew member would sign a piece of paper and the £9 would be deducted from their pay administered in the U.K. In receipt of that, each would be given a stack of leones to spend ashore. Essentially, the British consulate was lending the ship the 4 million leones. The consulate would never actually see the crew’s money, which would be deducted by the Royal Navy and distributed to the British Foreign Office that gave the British consulate its budget. Ultimately, all the money came from the U.K. treasury in London.

That basic concept, of a free-floating bank, linked to a global finance network funneling currency physically soiled by conflict, represents the far extremity of global banking, the financial front line. When the storefronts are shuttered, capital -- whether huge sums transferred electronically or $100 in dirty cash that someone needs to buy medicine or a used Kalashnikov -- will find a way to make its way from Point A to Point B.

So it was that, when ATMs in downtown Cairo ran out of foreign currency last month, some residents reported wandering for as long as 24 hours in search of an ATM that had foreign notes to dispense. Failing at that, they had two options: Wait in line until the National Bank of Egypt restocked the ATMs (and nobody knew how long that would take), or resort to the black market, which always thrives during such crises.

Ultimately, the storefronts of global finance are mere edifices. The real system is at once larger and smaller. Banks keep and dispense people’s money, but, for those in conflict zones, there is little conventional storage: It’s mostly under the mattress or transferred from one person to another. When the familiar infrastructure of banks is removed from the equation, the system transforms itself, stripping away anything that’s nonessential. The monolithic monetary network and the guy with the dirty bills down on the corner are the two ends of the pipeline. Everything else we associate with banking -- storefronts, tellers, ATMs -- is subject to closure, without notice, but, one way or another, the system continues on.