The missing value of human dignityAML policies and financial institutions in the fight against human trafficking
Preventing money laundering has been on the European Union’s (EU) agenda for several years, with important developments such as the AML Directives or the now underway Anti-Money Laundering Authority. Particularly, the Directive (EU) 2018/1673 established a definition of criminal activity, together with a list of 22 so-called predicate offenses. The purpose of this article is to focus on banks and other financial institutions and their role as key actors in the fight against human trafficking, people smuggling and laundering the proceedings thereof and, although the focus shall be in the Netherlands, several considerations made can apply to other jurisdictions.
The policies in place involve several stakeholders such as governments, national and international agencies, civil society groups, survivors and, to a certain extent, financial institutions. These institutions are, however, not researched enough and their scope of action is not thoroughly reinforced notwithstanding the mechanisms they have in place for detecting suspicious transactions that may proceed from human trafficking or migrant smuggling.
Before conducting an in-depth analysis, it is necessary to understand what human trafficking is and how it can occur. It has been defined by the United Nations as the ‘recruitment, transportation, transfer, harboring or receipt of people through force, fraud or deception, to exploit them for profit’. This broad definition can be broken down into several categories essential to distinguish, to achieve a differential approach not only from a law enforcement perspective, but also from a financial sector perspective.
A brief overview of each modality is presented as follows:
- Trafficking for forced labor: consists of recruiting or kidnapping of persons by means of deception or coercion, by subsequently holding them in conditions of slavery. This is most commonly done for agricultural work, mining, fisheries, construction and domestic servitude.
- Trafficking for illegal activities: consists of coercing or compelling a person into committing crimes, such as picking pockets, forced begging or selling drugs. This is appealing for criminals given that they can profit from criminal activity without being directly involved therein.
- Trafficking for sexual exploitation: consists of the trafficking of people to force them into non-consensual sexual acts. Note that some sources wrongly reduce its scope to ‘trafficking women for sexual exploitation’ when in reality women, men, girls and boys are all potential victims. Moreover, this is perhaps the most common method and of high representative value for criminals because ‘unlike a drug that can only be sold once, a human being can be sold repeatedly over an extended period of time’.
- Trafficking for the removal of organs: consists of a person being deceived into selling their organs for derisory prices, or being coerced into doing so under no sanitary conditions whatsoever causing, in many cases, permanent damages.
- People smuggling: this is not to be confused with human trafficking even though closely related thereto. Even though it is a different crime, policy-making can be approached in parallel. It consists of the transport of person into a State without complying with the legal requirements, in exchange of financial or other material benefit.
Understanding what this crime consists of is the basis for prevention, investigation and prosecution. But putting it into perspective allows to draw alarming conclusions: everyone knows human trafficking is a big business, but the real numbers are unknown. The extensively mentioned 2014 ILO report estimates that the profit is about $150 billion a year for traffickers and that the number of victims amounts to 21 million. Several other reports quote similar numbers but, in reality, an exact number is far from known.
This is, nonetheless, an extremely problematic issue that is not just about numbers. It involves real human suffering and people claiming profits thereof. Imagine a Ukrainian mother with her child crossing into Poland through the Medyka border, when someone offers them a helping hand. In a matter of hours the mother will be forced to work in prostitution and the child will be sold either to work at a factory or to have their organs removed. While this is a fictitious scenario, it is not far from reality. And it does not happen only in conflict areas, but can be happening in the house next door. Human trafficking takes place everywhere, every day.
Whereas governments are the first on duty to develop laws and regulations to combat human trafficking, the role of other relevant stakeholders should not be underestimated. Law enforcement agencies are called upon to investigate and prosecute, but private sector institutions have also an essential role in identifying those potentially involved in these criminal activities. Whether they do it and in a successful manner is open for discussion. The latest 2021 Annual Review of the Financial Intelligence Unit in the Netherlands identified 2,353 transactions related to human trafficking and 519 for people smuggling, but did not explain how these transactions were analyzed or addressed. While the report contains a chapter dedicated to the results, it addresses in-depth terrorist financing but human trafficking and people smuggling are completely bypassed. This is an indicator of the low level of priority given to fight these predicate offenses on a national level.
A comprehensive policy that tackles effectively human trafficking and the laundering of its proceedings must include all sectors and impose serious obligations on relevant stakeholders in order to understand its real extent and scope. In this sense, it is necessary to highlight the role of banks and financial institutions.
The role of banks and financial institutions
Dutch banks and other financial institutions are obliged to comply with AML/CTF and counter proliferation financing (CPF) laws and regulations, conduct risk assessments in relation to money laundering, terrorist and proliferation financing as well as to focus on integrity and compliance with the criminal laws in place as well as reporting suspicious transactions to the Financial Intelligence Unit (FIU). To do so, they need to have compliance frameworks in place, conduct the Systematic Integrity Risk Analysis (SIRA), analyze the products they offer and check for risks related thereto and address them properly.
When a suspicious transaction is detected (ongebruikelijke transactie) and further reported to the FIU, it is for this entity to either analyze the data and create a file without additional action, or it can take a more proactive approach by contacting law enforcement authorities for them to conduct the relevant investigation and prosecution. However, as mentioned before, an analysis of the Annual Report shows the low level of analysis for human trafficking and people smuggling dossiers and the lack of any action related to these crimes. Even though there is awareness of its occurrence, it seems to be relatively unnoticed notwithstanding the incredibly high amount of money laundered as a result.
In this sense, banks and other financial institutions, including FIUs, need to enhance their knowledge and awareness of the so-called predicate offenses, emphasizing on those that gravely attempt against human dignity. They also need to recognize their particular role as gatekeepers for them to understand they do have the power to make a change and to proactively take action instead of fulfilling a passive role. In sum, action should be taken not to avoid a fine or sanction from a regulatory entity, but rather as a conscious decision and conviction.
Concerning the Systematic Integrity Risk Analysis
De Nederlandsche Bank (‘DNB’) is the regulatory entity in the Netherlands for banks and other financial institutions. According to Section 10 of the Decree on Prudential Rules for Financial Undertakings, banks, insurance companies, payment institutions, electronic money institutions, among others, must ensure systematic analysis of integrity risks. This translates into identifying possible scenarios that can impact the business’ efficiency, reduce costs, gain a better overview of the organization or limit the risk appetite. But, more importantly, this process should not be seen as an automatic exercise but rather a conscious evaluation of the company and the possible threats thereto.
Financial crime can take many forms, which is why financial institutions must be aware of the latest trends and developments and translate them into risk scenarios in order to put controls in place. Practice, however, has shown the low level of consideration for specific risk scenarios formulated for each of the predicate offenses. For example, the DNB, in line with international guidelines, elaborates an Integrity Risk Questionnaire on a yearly basis in order for banks and other financial institutions to provide insights into their integrity risks and the measures taken to mitigate them. The question related to predicate offenses is phrased in the following terms:
‘Do the scenarios in the SIRA that relate to money laundering also address the identification of the underlying crimes, such as human trafficking, narcotics, production and trade, and wildlife crime?’
While it is important to highlight the recognition of predicate offenses translated into risk scenarios, the formulation of the question leaves much to be desired. It is formulated extremely broadly and, whether it is the intention of the regulator or not to pose it in such a way, it opens the door for financial institutions to take these assessments equally as broadly. A negative response to the questions will trigger further inquiries by the DNB and will influence the institution’s assessment in the risk profile, which means that the financial institution will be seen as less attractive to potential clients, it will be under constant monitoring, constant consumer files checked, among other measures.
In this sense, what can be considered prima facie as a mere expectation is, in reality, more of an obligation for financial institutions. However it is necessary to reformulate policies in place in order to transmit a clear message: predicate offenses, such as human trafficking, are extremely serious and should be taken as such by all relevant stakeholders. Moreover, a risk assessment should not be done in broad terms but rather on a strategic and differential basis. This stems from the fact that human trafficking is indeed not only one of the predicate offenses for money laundering, but it is also listed as one of the EU crimes as an independent and equally important crime with a serious nature and listed under the European Convention on Human Rights. This means that policies in place, not only for governments but for all relevant stakeholders should be proactive and far-reaching.
There are, indeed, general risk scenarios identified for human trafficking in a broad sense. Some of them include large deposits immediately withdrawn in places close to international borders, patterns of even transactions between 10 pm and 6 am, the use of anonymous financial instruments to pay bills or sudden changes in account activity. Notwithstanding the importance of having in place these general red flags, it has been explained before that the different ways in which human trafficking takes place should be equally approached in the formulation of risk scenarios.
A non-exhaustive overview of the risk scenarios shall be presented, emphasizing on the need to be up to date on new trends and updates:
- Trafficking for forced labor: general tracking of activity for construction work, agricultural work, fishing, mining, nail salon, massage parlors, etc.; ATM activity where income is withdrawn in its entirety quickly after its receipt; accounts of foreign workers or students where the employer or employment agency serves as a custodian; recurring payments for wages at unreasonably low amounts, much lower than the minimum wage scale.
- Trafficking for illegal activities: continuous cash deposits under low amounts; excessive expenses for food, transport and accommodation.
- Trafficking for sexual exploitation: expenses for accommodation, personal products and nourishment; continuos hotel expenses in border areas or frequently transited areas; frequent purchases for airline, train, and/or bus tickets, possibly for multiple individuals, in relatively short timelines and inconsistent with expected activity; credit card payments for purchases made after the establishments’ normal hours of business in strip clubs, massage parlors, beauty salons and modelling agencies; personal account activity inconsistent with expectations involving frequent deposits and payments through an online payment service in small amounts typically under €100; cash deposits/withdrawals between the hours of 10 p.m. and 6 a.m; frequent transactions across different cities and provinces within short timelines; continuous spending on adult websites; mobile phone numbers used match escort service advertisements; 3rd party cash deposits, inconsistent with the client’s level of wealth; holders of multiple bank accounts.
- Trafficking for the removal of organs: wire transfers to entities in high-risk jurisdictions, with names that include a variation of medical (for example, ‘Medicus’); bulk cash withdrawals and wire payments; payments between charities and medical tourism sites; credit card payments to travel agencies, airlines or hotels, particularly prior to movements of money and travel; indication of potentially ill customers moving large amounts of funds to companies or charities prior to travel; healthcare workers receiving large one-time payments that do not match with the regular account activity.
- People smuggling: foreign/migrants using the same IP or machine ID to perform transactions; immediate liquidation of money; transactions through prepaid cards in areas far from the ordinary place of residence/domicile of their holders; deposit of money in foreign currency accounts.
These are some of the risk scenarios that financial institutions can, and indeed should, incorporate in their SIRA but not solely to comply with a regulatory entity. Rather, there must be a serious commitment to fight against human trafficking to safeguard people’s dignity, abandoning the traditional idea that banks only purpose profit and rather become engaging actors in the protection of human rights.
In addition to the inclusion of a diversified portfolio of risk scenarios, it is also necessary for financial institutions to train their staff in understanding what human trafficking is and its implications, locally and internationally, and invest in capacity building to be able to recognize human trafficking in financial operations. Moreover, as criminals are continuously expanding their criminal methods and reinventing their organizations, the institution should follow weekly regulatory updates. This includes difficult humanitarian situations which are particularly appealing to criminals.
First-line defense staff should be particularly aware of additional red flags when transactions are carried out in person, such as the account holder being accompanied and not allowed to speak freely, another person holding relevant information or identification, or signs of being particularly uncomfortable around the companion as well as bruises or other signs of physical violence. There should also be monitored whether there are frequent visits from the potential trafficker and keeping an eye on non-verbal communication and physical appearance .
The role of banks and financial institutions does not end here, but rather it continues through the obligation to report suspicious or unusual transactions to the FIUs. The more complete a risk assessment, the bigger the chance to identify potential criminals involved in human trafficking and, in turn, more reports to the FIU. The unit’s approach to fight financial crime must be reinforced in line with the serious nature of human trafficking as an international crime. Thus, a holistic policy is to establish the investigation of this crime as mandatory, as well as reporting.
In other words, when the FIU receives a report of a suspicious transaction related to human trafficking, it should be mandatorily investigated and passed on to the relevant authorities for investigation and prosecution instead of remaining as mere data on a file. This would truly be in line with a forward-looking and strong approach. A relevant example is the European Public Prosecutor’s Office (EPPO) that has been extremely active in investigating crimes against the EU budget, by engaging with national authorities and taking the lead on investigations instead of passively visualizing the problem from the driver’s seat.
It is worth analyzing the creation of the Transaction Monitoring Netherlands (TMNL) whereby it would focus on the identification of unusual patterns in payments that individual banks cannot identify. Notwithstanding privacy concerns and the modifications that need to be made for such a proposal to be accepted on a national level, this would significantly enhance the identification of money laundering in relation to predicate offenses.
The present study explained the relationship between human trafficking and money laundering. Even though human trafficking is a serious crime that deeply affects people every day and everywhere, policies in place lack a far reaching scope that includes all relevant stakeholders. Banks and financial institutions are still seen as entities solely interested in profits, but their role as key players in the fight against this crime should be reinforced in order to achieve a comprehensive strategy.
Financial institutions must assess the risks to which they are exposed and put the relevant controls in place. However, the assessment of risks related to human trafficking are mostly high-level and not differential on a basis of the different modalities in which this crime can occur. The SIRA must be done comprehensively by including a wide and complete portfolio of risk scenarios addressing human trafficking in-depth, but this is just the starting point.
Regulatory entities must be stricter on financial institutions and encourage the analysis and inclusion of risk scenarios that tackle in-depth the so-called predicate offenses, instead of taking a passive and distant role as it has been doing so far. Moreover, suspicious transactions should be reported to the Financial Intelligence Units which should mandatorily investigate and transfer to law enforcement authorities to achieve prosecutions and, therefore, engage all relevant stakeholders in a serious fight against crime. Human trafficking is not only a predicate offense of money laundering, but it is also an EU crime and it is contained in the European Convention on Human Rights, which means it is of great importance to society.
Sources and references:
5. Protocol against the Smuggling of Migrants by Land, Sea and Air, supplementing the United Nation Convention against Transnational Organized Crime (UNTOC), article 3
8. Dutch Financial Supervision Act / 4th AML Directive
9. Besluit prudentiële regels Wft
10. For more information see DNB Integrity Risk Analysis: more where necessary, less where possible. https://www.dnb.nl/media/pfmbzrah/guidance-integrity-risk-analysis-english-version.pdf
11. Joint Guidelines on the characteristics of a risk‐based approach to anti‐money laundering and terrorist financing supervision, and the steps to be taken when conducting supervision on a risk‐sensitive basis (The Risk‐Based Supervision Guidelines).
12. TFEU article 83.
13. European Convention on Human Rights, article 4.
14. See a general overview in: https://businessforensics.nl/how-to-recognize-human-trafficking-in-transaction-monitoring/
15. See: Human Trafficking, Law Enforcement, and Financial Institutions: An Informative Blog Series, Part 3 of 3. https://followmoneyfightslavery.org/human-trafficking-law-enforcement-and-financial-institutions-an-informative-blog-series-victims-assistance/
16. Indicators: The laundering of illicit proceeds from human trafficking for sexual exploitation. FIU Canada. https://www.fintrac-canafe.gc.ca/intel/operation/oai-hts-eng
17. For more information see: FATF Report: Financial Flows from Human Trafficking July 2018. https://www.fatf-gafi.org/media/fatf/content/images/Human-Trafficking-2018.pdf
18. Organ trafficking: the unseen form of human trafficking. https://www.acamstoday.org/organ-trafficking-the-unseen-form-of-human-trafficking/
19. FATF Money Laundering and Terrorism Financing Risks Arising from Migrant Smuggling. https://www.fiu-nederland.nl/sites/www.fiu-nederland.nl/files/documenten/fiu-nederland_jaaroverzicht_2021_nl.pdf