Fast forward to today, expansive global regulations have been established, specific directives have been released for the EU, and the number of country members for the Financial Action Task Force (FATF) has increased. Many guidance efforts and regulations centre on financial institutions, the source, the intermediaries, and the destination of the illicit funds. And with this growth in regulation, there is a corresponding increase in the cost of anti-money-laundering, both in terms of what it costs to go after it and the level of fines for those who do not comply with regulatory guidelines.
According to a 19 January 2023 report by the Financial Times, financial institutions globally were fined nearly $5B in 2022. Although this uptick was almost 50% over 2021, it was an almost 40% drop compared to 2019 and 2020. The fines can be significant, and the cost to fix an AML shortcoming can be daunting.
Human Trafficking is Expanding
For years, the industry has estimated that the amount of money being laundered is between $1T and $2T; however, in some studies, it was estimated that the number could be as high as $6T. Unfortunately, despite the significant efforts being made, less than 0.1% of the money being laundered today is recovered, and a surprising 90% of money laundering crimes go undetected. Criminal activities continue, and the illicit funds generated are still being laundered to make them valuable to criminals.
What is the source of all these funds? It is no surprise that the drug trade industry is a vast contributor and sits at the number one position. But after drug dealing, human tracking is the second largest contributor to money laundering. According to the US Department of Homeland Security, “After drug dealing, human trafficking is tied with the illegal arms industry as the second largest criminal industry in the world today, and it’s the fastest growing.” It is estimated these crimes generate over $150B annually. 5.4 out of every 1000 people globally are victims of modern slavery, which equates to approximately an estimated 40.3 million victims.
It is essential to understand what human trafficking is. Human trafficking is a crime that involves coercing a person to provide labour or services, engage in sex acts or forced labour to pay debt. Human trafficking has nothing to do with crossing borders; that is, smuggling which is more of a crime against the border than the person(s) involved. There are instances in which human smuggling turns into trafficking when a debt needs to be paid and the person(s) being smuggled, or their family members, are forced into labour to pay off that debt. In many instances, the “payment” could go on for years as they receive very little compensation for their services. Human traffickers use the global financial system to conduct business and launder the proceeds.
Regulators have identified many red flags associated with human trafficking to help combat these activities. Transportation is one of the tip areas for scrutiny as one tracks human traffickers. Investigators look for high value and volumes of fast-food purchases at major transportation hubs and purchases inconsistent with an individual’s stated purpose or business.
Another area that often throws up red flags is what is known as “loading.” Are there multiple hotel rooms booked by the same individual? Are there numerous non-related individuals residing at the same address? Last, there may be a public appearance profile that may look unusual. Are there frequent purchases at cosmetic stores or beauty salons? Are there transactions to escort agencies or classified sex industry advertising services? Are there relatively high expenditures unrelated to the stated business purpose? Following the money provides a pathway to identifying human traffickers.
Payment activity is an important way to discover a human trafficking situation. Are there repeated cash withdrawals and deposits across multiple cities at multiple ATMs or branches? Are cross-border transfers inconsistent with the stated business purpose or from areas with an elevated risk of trafficking? Last, are there frequent cash transactions in amounts just under reporting requirements? Is there a circulation of funds between seemingly unrelated accounts? All of these may indicate an underlying issue of human trafficking.
Red flags around personal behaviour may also signal incidents of human trafficking activity going beyond simple and direct transactional activity. Mannerisms play a significant role in detection. For example, does the person seems submissive or tense? When questions are directed to another individual, do they rely on another person to provide information? If a minor, are they unaccompanied at odd hours or locations where they seem out of place and do they falter when explaining their behaviour?
A person’s residence may also provide clues to human tracking. For example, does the residence have a substantial amount of garbage compared to the number of people living at the location? Another sign is seeing unusual traffic around a particular residence without a clear explanation. Or there may be an extraordinary amount of people entering and leaving the residence. Additional signs include residents working long or excessive hours or appearing to be available “on-demand.” Law enforcement also notes if an individual has multiple phone lines or numerous social media accounts.
Using Red Flags to Enhance Detection
As you can see, detection can be overly complicated. There can be legitimate explanations for any of the above red flags. Being tense or lacking identification could signify many things and have legitimate reasons. Booking multiple rooms under the same name does not necessarily indicate criminal activity. So how can financial organisations use these red flags to detect human trafficking if legitimate explanations could nullify any of them? To understand who your customers are and the intended use of their accounts, financial institutions must implement a robust Know Your Customer (KYC) program. A strong Client Due Diligence (CDD) program can also identify and track red flags. Individually, they may not pose any risk; however, a combination of them may start to indicate a problem by leveraging innovative technologies with robust monitoring and detection models that can identify combinations of red flags that can lead to trigger alerts that indicate unusual activity.
Financial institutions must also train the staff reviewing these alerts to understand the red flags and perform thorough investigations to ensure nothing suspicious is occurring. Criminals never rest, and new schemes are being introduced frequently; therefore, keeping current on the latest red flags, suspicious activities, and schemes is essential. Ensure these typologies are also incorporated into your processes and procedures and addressed by your technology operations.
In addition to watchdogs at the financial institution, can more be done to target human trafficking at the governmental level? From a US perspective, FinCEN modified the Suspicious Activity Report (SAR) form to include a checkbox for human trafficking. That simple step facilitates the ability of law enforcement to more easily identify criminal activity related to human trafficking. Previously this check box was just included in the narrative of the form, which made this activity much harder to identify. But FinCEN then declared Human Trafficking a top priority in the AML Act of 2020 which brought some improvements.
In December last year, the European Commission proposed further strengthening of the rules that prevent and combat human trafficking. Under the proposal, changes will be made to include forced marriage and illegal adoption as criminal offences of human trafficking. It also proposes to make it a criminal offence for people who knowingly use services provided by victims of human trafficking. It also provides for imposing mandatory sanctions for persons held accountable for trafficking offences.
Industry Joins Together
The increased attention and strengthened regulations look to be a good sign of change in the fight against human trafficking; however, fears remain in the industry. Many institutions have programs in place to combat human trafficking; however, the concern is that with increased regulations, the focus may shift to just “checking the box” to ensure they are meeting the regulatory requirements, which may take focus away from their current efforts to detect patterns and greater activity levels.
Human trafficking continues to be a significant problem, and current efforts are not enough. We must join forces, and everyone needs to take an active role. No one can do this alone, and there is strength in collective intelligence.
Fortunately, the financial services industry is seeing unity around this issue. A number of non-profit organisations have teamed up to fight the fight, leveraging strength in numbers to capture traffickers and their activities. The Knoble, which describes itself as a network of financial crime experts passionately fighting human crime, is one of these organisations which is working hard to pull together financial institutions and technology leaders to focus their talents on human trafficking. Many financial institutions and financial crime technology vendors such as NICE Actimize have joined with The Knoble in a variety of research and outreach activities which target a range of crimes ranging from human trafficking to elder and child abuse and more.
As stated by Ian Mitchell, founder and board chair of The Knoble, “The financial industry is well positioned to have material positive impact in the fight against Human Crimes like scams and human trafficking. But to accomplish this, it is going to take bold leadership, development of intentional programs and banking with heart.”
As we look to the future, technology will play an even more prominent role in combatting human trafficking, but so will the impact of dozens of organisations collectively sharing information on trafficking patterns.
From Technology to Shared Intelligence
In recent years, Artificial Intelligence has taken on a vital role and has entered the fight against anti-money laundering. AI provides the ability to sift through large sums of data, identify patterns, and more importantly, identify anomalies in “normal” behaviours and activities. We are in a world where data is everywhere; however, the problem is making sense of it and converting it into actionable intelligence. AI brings that ability to us.
As previously mentioned, there are many red flags surrounding human tracking, many of which can individually be rationalised. However, the data points and activities can be analysed through advanced technologies to determine which are truly indicative of illicit activities such as human trafficking and which are more “coincidental” occurrences. By prioritising the more suspicious and deprioritising the less suspicious or coincidental, compliance officers and law enforcement can focus their attention on where illicit activities are most likely to occur. And by that effort, come closer to catching the bad guys.
Financial institutions have the opportunity to leverage the investigative work that has already been done in this area. For now, continue to pay attention to the red flags, stay vigilant, and address anything that is suspicious. And join the united fight to put human traffickers and their ilk out of business.