A global problem. What can we do as US financial institutions to help bring it to an end?
Last month we discussed the global blight of human trafficking under its various names. It is second only to global drug trade in terms of its profitability for the criminals who traffic in persons. It produces well over $150 billion and victimizes over 40 million persons. Over the past ten years it has probably affected over 100 million people throughout the world.
How can the financial sector help in the elimination of this terrible criminal enterprise?
The financial sector cannot solve the problem. What the financial sector can to, is to identify unusual activities, transactions, patterns of behavior and document and report these through the SAR process. Of course, blatant or egregious observations of potential human trafficking should be shared immediately with the authorities.
In Part 2 of this article we will discuss some of the most recently released guidance including human trafficking red flags. Hopefully, compliance and anti-money-laundering professionals will be aware of most of these. Nonetheless, these bear repeating. We will finish up with some final comments and a few questions that may be helpful for you to think about with respect to your own organization’s treatment of Human Trafficking.
Regulatory Guidance
It is important to remember that once illicit profits have been generated, the criminal elements seek to launder the money, and our responsibility becomes one of identifying unusual or unexplainable transactional activity or behavior and reporting it appropriately. To some degree it matters little whether this is proceeds from Human Trafficking or drug trade or other illegal activity — the money laundering or terrorist financing activity needs to be identified and reported. This is covered in the FFIEC’s BSA/AML Examination Manual (“the Manual”), albeit human trafficking is not mentioned by name therein. Many of the money laundering red flags that are described in the Manual’s Appendix F apply here.
There is quite a lot of information on various aspects of human trafficking available on the internet and through various publications. FinCEN has introduced guidance on this subject in its September 11, 2014 FIN-2014-A008 on “Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking — Financial Red Flags” and only a few weeks ago, FinCEN’s October 15, 2020 FIN-2020-A008 “Supplemental Advisory on Identifying and Reporting Human Trafficking and Related Activity” was released. The documents provided guidance and red-flags for human trafficking and smuggling behavior and laundering activity. The highlights of these two guidance documents are discussed below.
Human Smuggling Red Flags
Below are Human smuggling Red Flags described in FinCEN’s 2014 September 11, 2014 FIN-2014-A008. Although they are described as smuggling red flags, they can also be considered for human trafficking.
Transactional and Customer Red Flags – Smuggling
FI likely to see Red Flag?
Multiple wire transfers, generally below the $3,000 reporting threshold, sent from various U.S. locations to a common beneficiary located in a U.S or Mexican city along the U.S. – Mexican border
Banks/Credit Unions, Money transmitters
Multiple wire transfers conducted at different branches of a FI to or from U.S or Mexican cities along the U.S. – Mexican border on the same or on consecutive days.
Money flows that do not fit common remittance patterns:
Wire transfers that originate from countries with high migrant populations (e.g., Mexico, Guatemala, El Salvador, Honduras) directed to beneficiaries located in a U.S or Mexican city U.S or Mexican cities along the U.S.-Mexican border
Beneficiaries receiving wire transfers from countries with high migrant populations (e.g., Mexico, Guatemala, El Salvador, Honduras) who are not nationals of those countries.
Banks/Credit Unions, Money transmitters
Unusual currency deposits into U.S. FIs, followed by wire transfers to countries with high migrant populations that is inconsistent with expected customer activity. This may include sudden increases in cash deposits, rapid turnover of funds and large volumes of cash deposits with unknown sources of funds.
Banks/Credit Unions, Money transmitters
Multiple, apparently unrelated, customers sending wire transfers to the same beneficiary, who may be in a U.S or Mexican city along the Mexico-US border. Remitters may also use similar transactional information including but not limited to common amounts, addresses and phone numbers. When/if questioned, remitters may have no apparent relation to the recipient of the funds or know the purpose of the wire transfers.
Banks/Credit Unions, Money transmitters
A customer’s account appears to function as a funnel account, where cash deposits (often kept below the $10,000 reporting threshold) occur in cities/states where the customer does not reside or conduct business. Frequently, in the case of funnel accounts, the funds are quickly withdrawn (same day) after the deposits are made.
Banks/Credit Unions
Checks deposited from a possible funnel account appear to be pre-signed, bearing different handwriting in the signature and payee fields
Banks/Credit Unions
Frequent exchange of small denomination for larger denomination bills by a customer who is not in a cash intensive industry. This type of activity may occur as smugglers ready proceeds for bulk cash shipments.
Banks/Credit Unions, Casinos
When customer accounts near the Southwest Border are closed due to suspicious activity, new customers may begin transacting on behalf of those customers whose accounts have been closed. This may be done as a means to continue illicit activities. In this case, new accounts often reflect activity similar to that of the closed accounts where transactions may be frequently-occurring, currency-intensive and involve individuals that used to receive/send funds from/to accounts previously-closed due to suspicious activity.
Banks/Credit Unions
Unexplained/unjustified lifestyle not commensurate with employment or business line. Profits/deposits significantly greater than that of peers in similar professions/business lines.
Inflows are largely received in cash where substantial cash receipts are inconsistent with the customer’s line of business. Extensive use of cash to purchase assets and to conduct transactions.
Funnel Account: An individual or business account in one geographic area that receives multiple cash deposits, often in amounts below the cash reporting threshold, and from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals
The Table below presents Human Trafficking Red Flags included in the 2014 guidance.
Transactional Red Flags – Trafficking
FI likely to see Red Flag
A business customer does not exhibit normal payroll expenditures (e.g., wages, payroll taxes, social security contributions). Payroll costs can be non-existent or extremely low for the size of the customer’s alleged operations, workforce and/or business line/model.
Banks/Credit Unions
Substantial deductions to wages. To the extent a FI (“FI”) is able to observe, a customer with a business may deduct large amounts from the wages of its employees alleging extensive charges (e.g., housing and food costs), where the employees only receive a small fraction of their wages; this may occur before or after the payment of wages.
Cashing of payroll checks where the majority of the funds are kept by the employer or are deposited back into the employer’s account. This activity may be detected by those FIs that have access to paystubs and other payroll records
Banks/Credit Unions, Money transmitters
The following two red flags may signal anomalous customer activity; however, they should be applied in tandem with other indicators when determining whether transactions are linked to human trafficking.
· Transactional activity (credits and/or debits) inconsistent with a customer’s alleged employment, business or expected activity, or where transactions lack a business or apparent lawful purpose.
· Cash deposits or wire transfers are kept below $3,000 or $10,000 in apparent efforts to avoid record keeping requirements or the filing of Currency Transaction Reports (CTRs), respectively.
Frequent outbound wire transfers, with no business or apparent lawful purpose, directed to countries at higher risk for human trafficking or to countries that are inconsistent with the customer’s expected activity.
Banks/Credit Unions, Money transmitters
A customer’s account appears to function as a funnel account, where cash deposits occur in cities/states where the customer does not reside or conduct business. Frequently, in the case of funnel accounts, the funds are quickly withdrawn (same day) after the deposits are made
Banks/Credit Unions
Multiple, apparently unrelated, customers sending wire transfers to the same beneficiary. These wire senders may also use similar transactional information including but not limited to a common address and phone number. When questioned to the extent circumstances allow, the wire senders may have no apparent relation to the recipient of the funds or know the purpose of the wire transfers.
Banks/Credit Unions Money transmitters
Transactions conducted by individuals, escorted by a third party (e.g., under the pretext of requiring an interpreter), to transfer funds (that may seem to be their salaries) to other countries.
Frequent payments to online escort services for advertising, including small posting fees to companies of online classifieds as well as more expensive, higher-end advertising and website hosting companies.
Frequent transactions, inconsistent with expected activity and/or line of business, carried out by a business customer in apparent efforts to provide sustenance to individuals (e.g., payment for housing, lodging, regular vehicle rentals, purchases of large amounts of food).
Customer Interaction Red Flags – Trafficking: Behaviors observed while interacting with the public
A customer establishes an account or visits a branch to conduct transactions while always escorted by a third party (e.g., under the pretext of requiring an interpreter). Correspondingly, the third party escorting the customer may always have possession of the customer’s ID
Common signer(s)/custodian(s) in apparently unrelated business and/or personal accounts. Similarly, common information (e.g., address, phone number, employment information) used to open multiple accounts in different names.
Banks/Credit Unions
Accounts of foreign workers or students where the employer or employment agency serves as a custodian.
Banks/Credit Unions
Unexplained/unjustified lifestyle incommensurate with employment or business line. Profits/deposits significantly greater than that of peers in similar professions/ business lines.
Inflows are largely received in cash where substantial cash receipts are inconsistent with the customer’s line of business. Extensive use of cash to purchase assets and to conduct transactions.
Practitioners will observe that the red flags described above are consistent with AML rules/scenarios that are frequently included various monitoring systems – such as many-to-one, one-to-many, velocity, activity inconsistent with expectations, etc.
Recent Guidance
FinCEN’s recent human trafficking guidance (Supplemental Advisory – October 15, 2020 – FIN-2020-A008) provides new information to assist in identifying and reporting human trafficking, and to aid the global effort to combat this crime. It describes several human trafficking typologies and red flags. These typologies will be familiar to most AML practitioners.
Trafficking Typology
Description
Front Companies
Used to hide the true nature of a business, and its illicit activities, owners, and associates. Used to combine illicit proceeds with those gained from legitimate business operations. Examples of front companies used by human traffickers for labor or sex trafficking include massage businesses, escort services, bars, restaurants, cantinas, and nail and beauty salons. Typically, the front company appears legitimate with registrations and licenses, etc. and generates some form of legitimate revenue. However, patrons can also obtain illicit sexual services from trafficked individuals elsewhere in the establishment. Such establishments are often part of larger network.
Exploitative Employment Practices
Seemingly legitimate businesses may use exploitative employment schemes, such as visa fraud and wage retention/diversion, to profit from labor and sex trafficking. “Labor recruiters” may mislead or defraud victims, before or after they enter the US by lying about the conditions/nature of a job, engaging in contract switching, and confiscating or destroying workers’ identity documents. A common practice is to charge exploitative fees to workers by withholding their salary or paying less than promised or taking control of the victim’s bank account. Victims’ salaries are sometimes transferred to the traffickers via teller checks or wire transfers or may also “disguised” as a legitimate business expense. FI’s may see multiple employees receiving their salaries in the same account, or payment for employment may be followed by immediate withdrawal or transfer into another account.
Funnel Accounts
Funnel accounts generally involve an individual or business account in one geographic area that receives multiple cash deposits, often in amounts below the cash reporting threshold, from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals. Traffickers may use interstate funnel accounts to transfer funds between geographic areas, move proceeds rapidly, and help maintain anonymity. In labor and sex trafficking schemes, traffickers may open accounts in their name, or escort victims to a bank, and force them to open an account. Traffickers may control victims’ bank accounts through coercion, and order victims to deposit or move money into accounts that the traffickers’ control.
Alternative Payment Methods
In addition to payment via cash, traffickers also have been paid through credit cards, prepaid cards, mobile payment applications, convertible virtual currency. Prepaid cards can be acquired anonymously and be used to register with escort websites and to purchase sexual services, flights, throw-away phones, and hotel rooms. Virtual currency is sometimes used to pay for commercial sex online. FinCEN also has identified transactions in which human traffickers use third-party payment processors (TPPPs) to wire funds, both domestically and abroad, which gives the appearance that the TPPP is the originator or beneficiary of the wire transfer, thus concealing the true originator or beneficiary added.
FinCEN’s 2020 Supplemental Advisory guidance includes behavioral indicators which may be noticed by customer facing staff, who should be familiar with such red flags from their BSA/AML training program.
Behavior Red Flags – 2020 Guidance
1
A third party speaks on behalf of the customer (a third party may insist on being present and/or translating)
2
A third party insists on being present for every aspect of the transaction
3
A third party attempts to fill out paperwork without consulting the customer
4
A third party maintains possession and/or control of all documents or money
5
A third party claims to be related to the customer, but does not know critical details
6
A prospective customer uses, or attempts to use, third-party identification (of someone who is not present) to open an account
7
A third party attempts to open an account for an unqualified minor
8
A third party commits acts of physical aggression or intimidation toward the customer
9
A customer shows signs of poor hygiene, malnourishment, fatigue, signs of physical and/or sexual abuse, physical restraint, confinement, or torture
10
A customer shows lack of knowledge of their whereabouts, cannot clarify where they live or where they are staying, or provides scripted, confusing, or inconsistent stories in response to inquiry
FinCEN’s 2020 Supplemental Advisory identifies 10 new financial red flag indicators – to supplement those presented in its 2014 guidance.
Transactional Red Flags – 2020 Guidance
1
Customers frequently appear to move through, and transact from, different geographic locations in the United States. These transactions can be combined with travel and transactions in and to foreign countries that are significant conduits for human trafficking
2
Transactions are inconsistent with a customer’s expected activity and/or line of business in an apparent effort to cover trafficking victims’ living costs, including housing (e.g., hotel, motel, short-term rentals, or residential accommodations), transportation (e.g., airplane, taxi, limousine, or rideshare services), medical expenses, pharmacies, clothing, grocery stores, and restaurants, to include fast food eateries
3
Transactional activity largely occurs outside of normal business operating hours (e.g., an establishment that operates during the day has a large number of transactions at night), is almost always made in cash, and deposits are larger than what is expected for the business and the size of its operations
4
A customer frequently makes cash deposits with no Automated Clearing House (ACH) payments
5
An individual frequently purchases and uses prepaid access cards
6
A customer’s account shares common identifiers, such as a telephone number, email, and social media handle, or address, associated with escort agency websites and commercial sex advertisements
7
Frequent transactions with online classified sites that are based in foreign jurisdictions.
8
A customer frequently sends or receives funds via cryptocurrency to or from darknet markets or services known to be associated with illicit activity. This may include services that host advertising content for illicit services, sell illicit content, or FIs that allow prepaid cards to pay for cryptocurrencies without appropriate risk mitigation controls
9
Frequent transactions using third-party payment processors that conceal the originators and/ or beneficiaries of the transactions
10
A customer avoids transactions that require identification documents or that trigger reporting requirements.
FinCEN notes that no single red flag is a clear indicator of human trafficking/smuggling or related activity. Additional factors should be considered when determining whether transactions may be associated with human trafficking. FinCEN points out that FIs can take advantage of information sharing with other FIs under Section 314(b) to assist in identification of money laundering and terrorist financing activities.
Financial Institutions filing SARs on suspected human trafficking or smuggling activities should do the following:
Include “ADVISORY HUMAN TRAFFICKING” and/or “ADVISORY HUMAN SMUGGLING in the narrative and suspicious activity information.
Reference the 2020 guidance by including the key term: “HUMAN TRAFFICKING FIN-2020-A008” in SAR field 2 (Filing Institution Note to FinCEN) to indicate a connection between the suspicious activity being reported and the activities described in FIN-2020-A008.
Mark the check box for human trafficking (SAR Field 38(h)) on the SAR form.
FinCEN indicates that a potential victim of human smuggling or trafficking should not be reported as the subject of a SAR; rather, all available information on the victim should be included in the narrative portion of the SAR.
Final Thoughts
Financial Institutions must be aware of the risks that confront them arising from money laundering for human traffickers. These risks should be included as appropriate in BSA/AML Risk Assessments. Relevant staff must be trained to be aware of the red flags — not just compliance staff and case analysts reviewing alerts/cases from your transaction monitoring systems, but also customer facing staff who should be aware of tell-tale trafficker/victim behaviors. Transaction monitoring systems should have the relevant rules/scenarios enabled and thresholds and parameter set to help identify potential human trafficking.
Human Trafficking is a global problem. There are many initiatives and many organizations throughout the world whose purpose is to monitor and help end human trafficking in its various forms and under various titles. We must, as a civilized society, work to eliminate this criminal activity that strips away individuals’ freedom, dignity and basic human rights and subjects its victims to misery, pain and suffering. World-wide effort and cooperation is needed and we must do our part to assist in this cause. FIs are in a unique position able to see and follow money to help our countries’ financial intelligence units and law enforcement agencies bring traffickers to justice and rescue the millions of victims.
Knowledge and awareness are our most important tool to do our part in this effort.
Some things to consider or ask yourself:
Does my institution’s Risk Assessment recognize money laundering from Human Trafficking as a risk?
Has my institution considered whether it could be unintentionally aiding human traffickers in laundering the proceeds of illicit activity?
Has my institution determined that the Human Trafficking risks identified in its Risk Assessment are linked to – or mitigated by – specific scenarios/rules and threshold/parameter settings in the transaction monitoring system have rules that address the red flags discussed in this article?
Does my institution’s general training program cover Human Trafficking – subject, typologies, red flags?
Does training for my customer facing staff include the subject of Human Trafficking behavior?
Are my compliance case analysts familiar with Human Trafficking red flags that may be present in alerts/cases?
Does my institution operate in areas known for human trafficking or smuggling?
Does my institution have customers in locations considered at risk for the various forms of human trafficking?
Does my institution consider whether customers/potential customers may be contributing – intentionally or unwittingly – to the continuation of Human Trafficking?
Can you think of others?
Additional Reading/Reference
This is a very important and complex subject and there are a considerable number of articles, studies, reports, etc. available – far too many to be listed here. However, below is a brief list of some suggested reading.
The National Action Plan to Combat Human Trafficking US Government (10/19/2020) -https://www.whitehouse.gov/wp-content/uploads/2020/10/NAP-to-Combat-Human-Trafficking.pdf?utm_medium=email&utm_source=govdelivery
Profits and Poverty The Economics of Forced Labour 2014 – ILO- https://www.ilo.org/wcmsp5/groups/public/—ed_norm/—declaration/documents/publication/wcms_243391.pdf
