A bank which handles money transfers between US-based Somalis and their families in east Africa is to close its service over concerns the funds are being channelled to militants.
Merchants Bank of California handles up to 80% of such transfers from the US, worth about $200m annually.
But it says it will no longer be able to continue due to new money-laundering regulations.
One US congressman described the decision as “catastrophic”.
Keith Ellison who represents Minneapolis, which has the largest concentration of Somalis in the US, said the closing of such services would be devastating.
“There is no doubt that a decline in remittances will exacerbate the humanitarian crisis and erode the gains Somalia has made in recent years,” he said in a statement released by Oxfam.
Regulators are concerned that some of the money transfers may be finding their way into the hands of Islamists tied to the al-Shabab militia.
The Office of the Comptroller of the Currency (OCC), a federal regulator, told the US bank last year that it found its anti-money laundering procedures inadequate.
In the US, bank directors are responsible for ensuring all the funds they handle are used for legitimate purposes.
The OCC ordered the Merchants Bank to determine more exactly the destination of the funds it was wiring.
But in a letter to its clients last month, officials from the bank said they could not meet the regulators’ requirements and would have to close their money wiring service, US media reported.
Abdullahi Ismail, a Somali-born US citizen who lives in California, told the BBC that the local Somali community was baffled by the decision.
“Nobody knows what to do at this point but everybody’s just shocked by that news,” he said.
“I really don’t know if anybody sends money to the terrorists or launders money. Most Somalis send the remittances to their families, who are not doing anything wrong in Somalia.”
Analysis: Mary Harper, Africa editor, BBC World Service
Somali remittances are a lifeline. The United Nations estimates Somalis in the diaspora send home $1.6bn annually, significantly more than foreign aid.
According to a UN study, more than 40% of Somalis receive remittances, the bulk of which are used for basic needs, including food, clothes, medicine and education.
As stability returns to some parts of the country, remittances are increasingly used for investment. They are an essential part of rebuilding Somalia.
There is no functioning banking system in Somalia, so remittances are the only way people outside the country can support those at home. They play a crucial role during the frequent droughts as international aid agencies use them in cash for food programmes.
While it is understandable that banks fear potential fines by regulators, closing the accounts of Somali remittance companies risks driving underground the flow of cash to Somalia, exacerbating the problems of violent Islamism, piracy and the trafficking of arms, drugs and people.
In a similar move in 2013, UK banking giant Barclays also sought to cut ties with Somalia by closing the account of leading Somali money-transfer operator Dahabshiil.
Barclays, which said it was part of a crackdown on money laundering, eventually agreed to keep the account open so that Dahabshiil could find a replacement bank.
Somalia does not have a proper banking system and has been in turmoil since the fall of Siad Barre’s government in 1991.
Published: February 6, 2015