Banking: Detecting tell-tale signs of human trafficking (Part 2)

The Financial Action Task Force (FATF), in conjunction with the Asia Pacific Group (APG) recently issued a issued a report on financial flows in human trafficking, highlighting the opportunities and challenges of preventing predicate crimes by identifying the perpetrators and victims through their money trails.

The report breaks down human trafficking into three categories, each with distinct revenue generation and money laundering typologies: trafficking for sexual exploitation (HTSE), for other forced labor or slavery (HTFL) and for organ removal (HTRO).

However, no HTRO case studies, or reliable estimates of its total proceeds, are included.

The report does present a good overview of the methodologies by which persons get ensnared in human trafficking schemes.

In a previous article, I looked at some of the red flags or indicators of possible trails of money laundering linked to human trafficking.

It’s worth delving deeper still into the study and examining other points raised by the research.

Back to basics

Sexual exploitation financial flows

The report notes that identifying an HTSE network is a process. It is easiest to identify a victim’s financial patterns, but following that trail leads to the offenders who control them, which then can used to knit together a picture of the wider criminal and money laundering endeavor.

However, the target audience for FATF’s reports is not the banks and other firms subject to AML program requirements.

Their intent is to foster improved national regulatory infrastructure and law enforcement efforts.

One noticeable consequence of this focus is that, of the 17 HTSE case studies documented, four had no mention of financial flows of the victims or those exploiting them.

Nonetheless, there is significant diversity in the financial activities that are described, including the following, which appear more frequently among the case studies:

• Expenditures on websites which advertise trafficked persons
• Cash deposits made in multiple cities, especially geographically-separated ones, often avoiding use of bank tellers.
• After hours credit card purchases
• Increasing use of virtual currency to launder criminal proceeds
• Unusual trafficker spending patterns for victim daily needs
  • Transportation – unusual not only in frequency and amount, but also in the time of day (late night or early morning)
  • Multiple hotel expenses in a single day
  • Frequent use of cash intensive businesses (e.g. bars, restaurants) for daily meals

It’s notable, however, that some of the most important red flags are not financial:

• Phone numbers match those in online escort or massage ads
• Unusual numbers of joint account holders or authorized users on bank accounts
• Transactions made in locations known to law enforcement as sex worker locations

Forced labor exploitation financial flows

Unlike the unique financial transactions in sex trafficking crimes, there are far fewer unique financial flows in forced labor trafficking cases. Victims, as in HTSE cases, tend not to have personal living expenses such as rent, utilities or food.

The HTFL case studies also are notable for the lack of tax or other governmental payments by exploited workers, which would not show in sex exploitation cases where victims don’t have present themselves as being gainfully employed.

One common financial red flag, however, is withdrawal of funds of a entire group of exploited workers, in rapid succession, often from the same ATM machine.

Similar to HTSE cases, those who benefit from labor exploitation leave behind non-financial clues.

Members of the same group of workers are treated identically, from getting their passports in the same location in the same general time period, to using identical addresses and contact information.

In one case study, investigator’s suspicions were confirmed when they inspected the common address in Google Street View, and found it too small for the number of persons alleged to be living there.

Additional notable red flags of forced labor trafficking noted include:

• Victim activity
  • Poor standard of dress and hygiene, as well as visible bruising or other signs of abuse
  • Staff salaries paid by employment agency and not by employer
• Trafficker activity:
  • Payments to employment agencies, recruiters or websites by traffickers, with specials emphasis on those in foreign countries
  • Unusual expenditures: one-way airfare from high risk countries, and payments for unrelated persons’ passports and/or visas

Follow the money?

One of the first set of statistics in the report lays bare the dilemma faced by regulators wishing to combat human trafficking effectively.

According to forced labor estimates by the ILO, almost two-thirds ($99 billion) of total human trafficking revenue (which has grown almost fivefold since the 2011 report) are for sexual exploitation.

At the same time, however, they represent less than twenty percent of the estimated 24.9 million persons being trafficked.

This demonstrates how much the funding amounts vary significantly by the type of exploitation: each sexual exploitation victim generates about $21,800 in profit annually, while domestic labor trafficking victims only earn $2,300 each.  So, should we help the most victims, or tamp down the most financial crime?

Unfortunately, the question is more complex than comparing raw numbers.

While the average amount laundered for the other eighty percent, who are exploited for their labor at reduced wage ( if any are paid at all), is significantly less than those trafficked for sex, the macroeconomic effects of the money laundering, and its predicate crime, are more notable.

One of the reasons countries combat money laundering is to avoid “crowding out,” where firms involved in money laundering are able to unfairly compete with similar firms who do not have similar monetary assets. For example, one HTFL case study documents using trafficked persons in the construction industry.

This allows these companies using workers not being paid fair market wages an unfair advantage over legitimate operators.

Just under eighty percent (16 million) of forced labor trafficking victims are estimated to be exploited in the private sector, with the rest being exploited by governmental authorities.

That private sector estimate, however, also includes an unspecified number of people being exploited for domestic labor, so the number of exploited persons in other industries (such as construction or agriculture) who could be contributing to unfair competition and crowding out is unclear.

So, where should emphasis be placed in terms of addressing human trafficking and its related money laundering?

Sexual exploitation represents low-hanging fruit – it presents a more well-defined set of red flags (both financial and behavioral), and the larger sums being laundered are more easily detectable by compliance professionals.

On the other hand, it is more in regulators’ interests to address private sector forced labor exploitation, in order to avoid the adverse effects to the national economy.

To do so, however, because of the lower amounts involved, and the prevalence of gradual enrichment of traffickers, HTFL probably needs to be addressed by looking elsewhere.

It would likely be more effective to combat forced labor exploitation by raising the awareness of behavioral red flags, and by providing better regulatory and/or law enforcement oversight of low-wage labor-intensive industries which are likely targets for traffickers.

This situation represents, paradoxically, the best of both worlds, as it allows different elements of society to address both the highest-value trafficking crimes, and those affecting the largest portion of trafficked persons.

It is by no means a perfect solution, since it does not address people trafficked in the public sector, nor those exploited for domestic labor.

Nonetheless, it represents a potential path forward, as the understanding of human trafficking crimes, the associated money laundering, and the red flags that can identify both, evolves.

Eric A. Sohn, CAMS, director of business product, Dow Jones Risk & Compliance, New York, NY, USA, eric.sohn@dowjones.com

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.