What Your Financial Institution Needs to Know About Human Trafficking

by Benjamin Shakespear, Consultant, Regulatory Advisory Services 

The last few years have seen billions of dollars of civil and criminal penalties levied against individuals and financial institutions for inadequacies in internal controls that have allowed high net-worth clients to engage in multinational crimes with their financial institution’s unwitting participation. This is particularly true for human trafficking and its associated crimes.

Human Trafficking – Definition and Scope

Human trafficking is generally defined by the Victims of Trafficking and Violence Protection Act as the act of recruiting, harboring, transporting, providing, or obtaining a person for forced labor or commercial sex acts through the use of force, fraud, or coercion. In the United States, it now occurs in a broad range of legal and illegal industries, including hospitality, agricultural, janitorial services, construction, restaurants, care for persons with disabilities, salon services, massage parlors, retail, fairs and carnivals, peddling and begging, child care, domestic work, and drug smuggling and distribution.

Many regulators, elected representatives, international bodies, non-government organizations, and foreign governments now view financial institutions as, perhaps, the best positioned entity to respond to the urgent need to prevent and disrupt human trafficking, and this has resulted in an increase in the legal and regulatory exposure for financial institutions in the U.S. and abroad.

How Does a Financial Institution Participate in Human Trafficking?

According to the State Department, a “significant portion” of the $150 billion dollars generated yearly from human trafficking operations pass through “legitimate financial services businesses,” including payments associated with the transport of victims and other logistics; collection of proceeds generated by the exploitation of trafficking victims and by the sale of goods produced through their exploitation; movement of proceeds; and bribery and corrupt dealings to facilitate human trafficking.

Having said that, a financial institution and its employees are also uniquely positioned to observe the type of behavioural and financial red flags and transactions, particularly on an international level, that allow for the effective disruption of human trafficking, because: (1) one of the most effective ways to identify criminal networks is to follow the financial trail they leave behind; (2) a financial crimes approach is highly effective at generating the evidence that allows law enforcement to act; and (3) many financial institutions operate on an international scale, which may give them access to a wealth of information that would otherwise require the cooperation of many different national governments to gather.

Guidance from FinCEN on Human Smuggling and Human Trafficking

The Department of Treasury, through FinCEN, has not left financial institutions without support, releasing 2014 Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking – Financial Red Flags (FIN-2014-A008). Following this, in 2018, FinCEN updated its Suspicious Activity Report form to include a checkbox to identify suspicious activity potentially related to human trafficking. This update allows reporting, tracking, and investigating potential instances of suspicious activity related to human trafficking to take place in a more comprehensive way, and it resulted in 6,672 human trafficking SARs between August 2018 and December 2019.

This guidance was reinforced in 2020 by a FinCEN Supplemental Advisory on Identifying and Reporting Human Trafficking and Related Activity (FIN-2020-A008), citing the global COVID-19 Pandemic as an exacerbating factor in the conditions that contribute to human trafficking, including the collapse of victim support structures, travel limitations, shelter-in-place orders, and teleworking. This advisory included information on four typologies, identified by Bank Secrecy Act (BSA) data since 2014, that traffickers and facilitators most often use to launder money:

1. Front Companies:

Traffickers routinely establish front companies, which are often legal entities, to hide the true nature of their illicit activities, owners, and associates. Often, illicit proceeds are combined with those gained from legitimate business operations, like bars, massage businesses, and restaurants.

2. Exploitative Employment Practices:

Some apparently legitimate businesses use exploitative employment schemes, like visa fraud and wage retention. Labor recruiters may mislead or defraud victims about the nature of a job, engage in contract switching, withhold salaries as recruitment fees, and destroy workers’ identity documents. Temporary workers or student visas can also be exploited.

 3. Funnel Accounts:

Typically involves accounts in one geographic area receiving multiple cash deposits (often below a reporting threshold) before it is withdrawn in a different geographic area almost immediately. Traffickers may force victims to open accounts in their own name (sometimes escorting them to banks) but maintain control of the account through coercion.

Funnel Accounts – A Case Study 

In 2018, 36 defendants were found guilty in Minnesota for their various roles in operating an international trafficking ring:

• Traffickers in Thailand lured women to the U.S. through false promises of a better life.
• To transport the victims, they engaged in visa fraud by creating false identification documents and forcing victims to enter fraudulent marriages and debt bondage.
• The victims incurred a debt of $55,000.00 to the traffickers, and, when they arrived in the U.S., were sent to various cities, isolated in a residence, and forced to pay of their debt by engaging in commercial sex acts.
• To conceal the proceeds, victims were forced to open U.S. bank accounts in Los Angeles in their own names. U.S-based traffickers took control of the accounts, kept a percentage, and sent the remainder back to traffickers in Thailand. There was testimony that one launderer alone has sent more than $40 million to Thailand.
• Funnel accounts throughout the U.S. were established to facilitate the launderers cash withdrawals in Los Angeles.  

4. Alternative Payment Methods: 

Traffickers have accepted payment via credit cards, prepaid cards, mobile payment applications, and cryptocurrency (See FinCEN Advisory on Illicit Activity Involving Convertible Virtual Currency; FIN-2019-A003). Additionally, FinCEN has identified as any area of concern the use of third-party payment processors (TPPPs) to wire funds, so it appears the TPPP is the originator or beneficiary of the transfer and not the trafficker, whose identity remains concealed.

How Can Financial Institutions Help Prevent Trafficking?

1. Customer Due Diligence and Identifying Beneficial Owners:

To facilitate the identification of beneficiaries of illicit proceeds, FinCEN’s Customer Due Diligence (CDD) Rule requires covered financial institutions to “establish and maintain written procedures that are reasonably designed to identify and verify beneficial owners of legal entity customers and to include such procedures in there anti-money laundering compliance program.”

2. Information Sharing:

FinCEN’s 2020 Advisory highlighted that sharing information under the safe harbor authorized by Section 314(b) of the USA PATRIOT Act includes information relating to transactions that an institution suspects may involve the proceeds of one or more Specified Unlawful Activity (SUA) for money laundering. As a reminder, 314(b) permits Financial Institutions (upon providing notice to Treasury) to share information with one another in order to identify and report activities that may involve money laundering or terrorist activities.

3. Suspicious Activity Reporting (SAR)

A financial institution is required to file a SAR if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution (1) involves funds derived from illegal activity, or attempts to disguise funds derived from illegal activity; (2) is designed to evade regulations of the BSA; (3) lacks a business or apparent lawful purpose; or (4) involves the use of the financial institution to facilitate a criminal activity.

FinCEN has requested institutions reference their 2020 advisory in SAR Field 2 to indicate a connection between the suspicious activity being reported and the activities highlighted in the advisory (“HUMAN TRAFFICKING FIN-2020-A008”), and also include behavioural indicators, email addresses, phone numbers, and IP addresses in their report whenever possible. 

How Capco Can Help

Our team of compliance experts at Regulatory Advisory Services provide expert advice on federal regulatory compliance questions via live chat, phone, or live ticketing system. We are here assist you with identifying potential trafficking schemes and advise you of any required regulatory reporting. Contact us to learn more!