Fighting financial crime helps combat human trafficking

Karina Walker, Kristina French, Sean Foley
| 2/24/2023
Fighting financial crime helps combat human trafficking

Financial crime professionals can play a critical role in combating human trafficking.

Human trafficking is a crime that affects millions of people around the world. It generates at least $150 billion globally in illicit profits for traffickers and undermines the integrity of financial systems. While human traffickers are constantly evolving their methods to evade detection, financial crime professionals can take specific steps to identify and prevent human trafficking.

By implementing robust know your customer (KYC) programs, conducting due diligence, training staff to identify unusual transactions, and recognizing the typologies and red flags defined by the Financial Crimes Enforcement Network (FinCEN), financial crime professionals can play a critical role in combating human trafficking.

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Modern slavery, human smuggling, and human trafficking

The United Nations estimates 50 million people worldwide are subject to modern slavery. Of this 50 million, 27.6 million people are subject to forced labor, which relies on human smuggling and human trafficking to secure workers.

Often, but not always, human trafficking begins as human smuggling, when individuals are moved from one country to another, either illegally or voluntarily. Because individuals often owe smugglers money for transport, they are immediately caught in debt they cannot escape and then become trapped in human trafficking situations.

Human trafficking does not rely on movement between countries or even states. Vulnerable individuals might be trafficked within their own communities, or even their own homes. No matter how they got there, human trafficking victims are trapped in forced labor situations through threats, violence, coercion, and deception.

Human trafficking business models

Human smuggling and human trafficking operate within hidden networks of criminals, but smugglers and traffickers use legitimate financial services to conduct crimes. Human trafficking can take place in public, supposedly legitimate businesses. Various forms of human trafficking exist, but all instances involve exploitation of an individual’s circumstance for the trafficker’s profit.

Polaris, a not-for-profit nongovernmental organization that works to combat and prevent sex and labor trafficking in North America, has identified 25 distinct types of human smuggling and trafficking business models that range from escort services to hospitality to agriculture. In these industries, vulnerable individuals are often drawn in by the promise of an attractive job opportunity, life in a new country, or a way to support their family. Traffickers take advantage of vulnerabilities to trap individuals in the commercial sex trade or poor labor conditions. These individuals become unable to escape due to financial dependency, travel costs, or threats of violence.

FinCEN guidance

Human traffickers use a variety of techniques, or typologies, to avoid detection and hide illicit profits. In an effort to provide insight into and guidance regarding how traffickers use the financial system for criminal purposes, FinCEN has issued several advisories.

FinCEN’s October 2020 advisory (an update of its 2014 guidance) defines four human trafficking typologies. FinCEN identified these four typologies based on Bank Secrecy Act data collected from transaction monitoring and suspicious activity reports (SARs). In its 2020 advisory, FinCEN also defined red flags for each typology that financial services organizations can use to identify and detect potential cases of human trafficking. These human trafficking red flags can be incorporated into transaction monitoring rules or front-line employee training to enhance current controls for suspicious activity detection.

FinCEN’s four human trafficking typologies include front companies, exploitative employment practices, funnel accounts, and alternative payment methods.

Front companies

Front companies hide illicit activities under the guise of legitimate business purposes such as salons, escort services, bars, restaurants, and massage businesses. Often, front companies provide legitimate services using forced labor. Human trafficking red flags that help identify front companies include:

  • Business accounts funded primarily via cash deposits and funds transfers from other individuals
  • Payroll checks issued inconsistently, checks signed to third parties, checks that only include first names
  • Credit card payments for transactions made after ordinary hours of business at establishments such as strip clubs, massage parlors, beauty salons, and model agencies

Exploitative employment practices

Exploitative employment practices take place in labor-intensive industries that employ foreign nationals and immigrant workers – some of whom might have been smuggled into the country. Exploitative employment practices can be detected through the following human trafficking red flags:

  • Businesses in high-risk industries with significant turnover such as salons, cleaning services, and large-scale farming operations
  • One-way flight purchases from a high-risk country by nonfamily members
  • Unusual numbers of unrelated individuals as joint account holders or credit card users
  • Multiple accounts with repeated transfers to the same third party
  • Numerous individuals reporting similar information, such as address and phone number
  • Payments made at unusual times or recurring payments of unreasonably low amounts

Funnel accounts

Traffickers use funnel accounts to disguise the origin of funds, the actual account owner, and purpose of the account. Many of the techniques to identify funnel accounts are already used in transaction monitoring systems, such as same-day withdrawals or rapid transactions. Funnel accounts can be detected through the following human trafficking red flags:

  • Accounts funded primarily via cash deposits and funds transfers from other individuals
  • Deposits conducted in one city followed by same-day or next-day withdrawal in another
  • Deposits and withdrawals of the same amount that occur within a day or two

Alternative payment methods

Alternative payment methods are a new way for traffickers to carry out illicit activities. The advent of virtual assets requires looking beyond unusual cash transactions, and due to the inherent anonymity, such transactions can be hard to trace. KYC and customer due diligence (CDD) procedures are particularly important to prevent traffickers from hiding their identities. Alternative payment method human trafficking red flags include:

  • Unusual cash transactions or alternative payment methods, including virtual assets
  • Transactions that take place late at night
  • Transactions that are directed toward an account with joint access
  • Peer-to-peer transactions that appear to be payroll but are inconsistent with supposed occupation

Typologies at work

These four typologies highlighted by FinCEN tend to appear in concert with each other. In fact, at least three of four typologies played a role in one particularly egregious case.

In December 2018, a federal jury convicted 36 people for their involvement in an international sex trafficking ring based in St. Paul, Minnesota. For several years prior, Thailand-based traffickers had smuggled hundreds of women to the United States, promising them a better life in a new country. The traffickers gave the women fraudulent identification documents, forced them to enter debt bondage, and trapped them in exploitative working conditions. The women all had U.S. bank accounts in their own names, but traffickers took control of the accounts and kept the generated cash or sent the remainder back to traffickers in Thailand. Traffickers created funnel accounts to launder money across the United States, make cash deposits and withdrawals, and smuggle proceeds back to Thailand.

Because of the work of local and federal agents, this criminal enterprise was shut down, and its organizers were brought to justice. However, this case demonstrates once again how deception and financial crimes lie at the heart of human trafficking. Human traffickers manipulate vulnerable individuals’ life circumstances to gain control, often using debt and financial dependency so the individuals cannot escape. Then traffickers engage in financial crimes such as money laundering via legitimate financial services organizations.

It is no secret that the financial services organizations that legitimately serve the public are the same ones traffickers use to carry out crimes. In a Polaris report, one man gave a personal account stating that the trafficker arranged for a bank loan in the man’s name and promised a high-paying professional job. After arriving in the United States, the man did not receive any of the loan funds and was forced to work in a restaurant, entrapped by debt. In this case, the trafficker clearly understood how to navigate the bank’s policies to obtain a five-figure loan and profit off the man’s vulnerable situation.

Training, investigation, and reporting

Given the insidious nature of human trafficking, a financial services organization’s most important assets are its control environment, including its people, and its defined processes and documentation. A clear reporting system for suspicious activity (and even the option to remain anonymous) can break down the initial daunting nature of identifying potential trafficking situations.

Financial services employees must be trained on and aware of various human trafficking red flags, and they should be trained to recognize human trafficking indicators. For example, if a bank teller encounters a customer that looks nervous, requires a translator, or is accompanied and controlled by a third party, it is possible the customer is in a trafficking situation, and the bank teller needs to be empowered to report such unusual activity. To aid anti-human trafficking efforts, financial services organizations can implement specific escalation processes for instances of potential trafficking situations. Identifying potential human trafficking situations separate from other potentially suspicious activity allows investigators to appropriately report the activity.

In addition to front-line employees, financial crime professionals play a vital role. To prevent illicit activities such as money laundering, financial services organizations should implement and maintain a robust compliance program. When reviewing potentially suspicious activity, investigators should possess the ability to identify financial indicators as they analyze the purpose and source of alerted activity. Compliance officers should use KYC and CDD information with transaction monitoring systems, update transaction monitoring rules, and make sure SAR processes are efficient.

Financial services organizations should continually educate themselves on human trafficking typologies and situations to confirm their compliance programs reflect the most relevant risk. Through continual education and training, financial crime professionals can manage to stay on top of risk.

Combating human trafficking

By understanding and applying the four typologies and various red flags set forth by FinCEN, training front-line and investigatory staff well, and shoring up their compliance programs, financial services organizations can be better equipped to combat human trafficking.