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Decoding the links between modern slavery and money laundering
AML RightSource : April 14, 2020
Viruses are deadly because they are not easy to kill, let alone eradicate from nature. Slavery is a bit like a virus that refuses to die down in human society. As of 2020, virtually all nations on earth have abolished this inhumane practice. Yet, according to UN figures, 40 million of our fellow human beings are caught in the modern forms of slavery.
And that number is not going down. Nearly 70% of the victims are women/girls, showing a clear gender imbalance. Modern slavery and trafficking can take many forms besides outright slavery – it could be forced marriages of young girls, bonded labor or forced servitude of both sexes, and other odious forms.
There are many contributing factors to slavery – poverty, gender discrimination, lack of education, unemployment, refugee and migrant crises all play a part. But the underlying motive for perpetrators who exploit the victims is the same – money – and this is where financial intelligence and anti-money laundering (AML) forces can make a massive difference.
The monetary aspect of modern slavery
A report by the International Labor Organization (ILO) pegged the profits accrued by modern slavery in economic sectors at US$150 billion. That 2014 estimate was based on 21 million victims caught in economic activities (2012 ILO figures) and did not include the millions of women and girls trapped in social forms of slavery, ie, forced marriages.
By 2016 ILO estimates, the number of forced labor victims had increased to 25 million, and if those rates hold strong, the real number might be closer to 30 million by now. A 2018 report by the FATF cited the old ILO figures of $150 billion as profits for modern slavers, but this could be a very conservative estimate.
It still makes modern slavery the third most profitable criminal activity in the world, behind counterfeit goods at $1.3 trillion and drug trafficking at $600 billion, (2017 estimates.)
It is a global issue, not a regional or “third world” problem
Granted, regions like the Asia-Pacific account for around 60% of all victims of modern slavery. Countries like Afghanistan and North Korea have a significant percentage of slaves, many of them exploited by states themselves.
Other major regions include Central and Eastern Europe, West Africa, and South and Central America. While many are exploited in their home regions, millions are trafficked to North America and Europe, often as refugees and illegal migrants.
Many of these individuals do end up in forced labor and sex trafficking in the West. So the developed and industrialized nations are not at all immune to the effects of modern slavery.
The importance of money laundering and financial vigilance
The profits that accrue from modern slavery need laundering, just like other large-scale criminal activities. And like drug trafficking, modern slavery is also highly cash-based, further increasing the interest of traffickers in various money laundering tactics.
Law enforcement agencies face significant challenges in identifying trafficking and slavery networks. The victims are often too scared or traumatized to come forward. Due to social taboos, cultural attitudes towards the police, or their status as illegal aliens, they refuse to contact the authorities.
All this drastically increases the importance of AML initiatives – often, following the money trail is the only effective way to identify entities involved in slavery and forced labor. And since billions of dollars are involved, most of it in cash, laundering activities can and do raise significant red flags.
Slavery red flags for banks and financial institutions
Over the years, the FATF has published several studies analyzing the various forms of human trafficking and their implications for AML initiatives in Europe, North America, and the Asia Pacific regions in particular. Based on multiple case studies from around the world, they identified some common trends in the financial activities of the criminals, like –
- Widespread use of cash for all transactions
- Use of small legitimate businesses like car washes and takeaway outlets for money laundering
- Numerous small remittances to home countries of victims
- Use of multiple accounts and cards, usually based on the IDs of victims themselves
- Purchase of assets including real estate, cars, and small businesses
There were also some regional variations in these trends. For instance, European traffickers preferred using small kebab shops, snooker parlors, front companies, and investments in real estate and cars. In the US and Canada, casinos, car dealerships, import-export firms were preferred for money laundering.
Many of these red flags are applicable to other criminal enterprises like drug trafficking as well. But human trafficking has some specific red flags, many of which are focused on the victims and how they are handled by the traffickers.
Victims may not have regular expenses for food and other personal needs, as these are handled by the trafficker. During the opening of new bank accounts, they may not be in control of their documents or have any knowledge of personal contact details.
Then there is a host of red flags related to transactions, both involving the victim as well as the trafficker. For instance, excessive spending on basic expenses like food, lodging, and other personal needs might point to a trafficker in charge of multiple victims. Unusual timing patterns of these transactions are also common, with late night/early morning being suspicious.
Similarly, frequent travel expenses (often one-way airfare) involving high-risk countries, involving travellers who are not related to the person making the payment is a red flag. Others include payment of salaries by an employment agency, frequent payments made to such agencies (by traffickers) often in high-risk countries, and withdrawal of funds for multiple victims from the same ATM in quick succession.
The role of financial institutions and technology
Financial institutions have a key role to play here, as they are often best positioned to spot these red flags. Better monitoring will lead to more actionable Suspicious Transaction Reports (STRs) to law enforcement agencies who are often starved of information on modern slavery from other fronts.
Many of the red flags exclusive to modern slavery are of a non-financial nature. And some of the patterns are not easy to identify. This is where modern fintech solutions like big data analysis and AI enter the picture.
When programmed specifically for AML and compliance, fed with the right parameters and red flags, AI could identify patterns related to forced labor and sex trafficking much more effectively than human analysts and investigators.
Advances in technology have empowered us to crack the genomic code of the deadly novel Coronavirus barely months after it was discovered. There is no reason why we cannot do something similar to the virus of modern slavery in the coming years using AI and Fintech.