Forced Labor & Covid-19 – What the Future Holds for AML Compliance

Greek myths tell the story of the Lernaean Hydra, a vicious monster with many heads. The serpentine monster was nearly impossible to kill, as its heads would regenerate when chopped off. In many ways, human slavery is like the loathsome Hydra.

We have been taught that slavery has been abolished across the globe for decades now. Yet it persists in various forms well into the 21st century. Forced labor is the most prevalent form of modern slavery. And like the Hydra, it has many heads that can pop up in the unlikeliest places.

What is the common thread that binds a Soccer World Cup, major supermarket chains, chocolates, clothing brands, and high seas fishing? They all have been mired in forced labor controversies in recent years.

Forced Labor in the UK and EU

There is no doubt that reports of forced labor have seen a steady uptick in the last decade. The fashion and retail industries have a well-documented history of forced labor issues. Everyone from Nike to Nestle, H&M, and Apple has been accused of having supply chains that used forced labor, knowingly or unknowingly.

Despite the evolution of standards like Fair Trade, the practice of sweatshops and labor exploitation is still rampant. And it is not just facilities in far-off countries that are under the scanner. In March 2021, the popular British clothing brand Boohoo was accused of using forced labor in its factories in Leicester, in the UK itself.

And this is far from an isolated case. In 2019, Reuters had reported the discovery of a trafficking and labor exploitation ring involving over 400 Polish immigrants in the UK. The beneficiaries included many major supermarkets. Tomato supply chains originating in Italy have also been accused of using oppressive labor practices.

Forced Labor Under the Auspices of Governments

Not all instances of forced labor occur at the behest of criminal gangs and private corporations. There have been glaring instances of government complicity in exploitative labor practices in recent memory. Two main instances deserve mention – Qatar and China.

After winning the rights to host the 2022 Soccer World Cup, Qatar has poured billions of dollars into the construction of stadiums and other infrastructure. Of the 2 million migrant workers involved in these projects, many are victims of forced labor, according to Amnesty International. Over 6500 workers have died since 2010 – an average of a dozen every week.

Chinese factories have frequently been flagged in the past for exploitative labor practices. But things have taken a more sinister turn after Beijing’s crackdown on the Uyghur minority in Xinjiang. Reports indicate that Uyghurs detained in prison camps are being forced to work in factories in Xinjiang, home to nearly 20% of global cotton production.

The Ongoing Impact of Covid-19

In June 2021, UNICEF reported a rise in child labor numbers – the first spike in over two decades. While the coronavirus does not discriminate between humans, the impact of its economic aftershocks will be more keenly felt in vulnerable populations in the developing world.

With the closure of schools and colleges, children are more likely to enter the illicit job market. And as wage opportunities dry up, more laborers will end up in debt traps that lead to bonder labor and other forms of exploitation.

The FATF uses a 2015 statistic to describe the economic impact of forced labor around the globe – $181 billion (150 billion USD). That figure is probably much higher in 2020-21, thanks to the pandemic. As a major market for many industries suspected of using forced labor, North America has a big role to play here.

Regulatory Action Against Forced Labor

Both the US and Canada have stepped up regulatory action against forced labor in the last two years. In early 2021, Canada added new measures focusing on Xinjiang businesses suspected of using forced labor. Canadian enterprises are now required to undertake extra due diligence when dealing with supply chains linked to China and the Xinjian region in particular.

The US has also passed similar legislative measures in the form of the Uyghur Forced Labor Prevention Act (2020). Other Chinese businesses have also been targeted – in 2021, US Customs and Border Protection unearthed instances of forced labor in Chinese fishing fleets. The deep-water fishing industry is highly prone to labor exploitation.

In response, fish imports from Chinese companies were impounded under a Withhold Release Order. Between October 1 2020 and March 31, 2021, the US authorities detained over 371 shipments and issued 4 Withhold Release Orders on forced labor-related imports.

Long Term Implication for Compliance Specialists

When the UK passed the Modern Slavery Act with much fanfare in 2015, there were high hopes about its ability to root out forced labor from the supply chains of major corporations. But the recent experiences belie those lofty expectations – clearly, the majority of FTSE 100 firms involved only paid lip service to the Act’s compliance requirements.

But such an attitude may no longer be sustainable. The recent regulatory actions across North America indicate a clear hardening of stance against forced labor. Existing AML/CFT rules already cover forced labor and human trafficking. These new regulations add further teeth, leaving little room for any ambiguity.

Companies will have to step up their due diligence efforts, especially with high-risk entities from regions like Xinjiang. For example, a prior Withhold Release Order on an entity warrants an automatic Suspicious Actions Report (SAR). The ILO and other sources have compiled a list of over 11 red flags to aid AML professionals in identifying transactions with possible links to forced labor.

With the ongoing pandemic, the risk of undoing decades of progress in combating modern slavery is all too real. In the Greek myth, the Hydra was finally slain by Hercules, but it was a team effort involving his nephew Iolaus. Regulators face another Herculean task with forced labor during a global pandemic – financial institutions and AML teams will have to do their bit to slay this “modern Hydra.”