Human trafficking is an illicit global value chain worth an estimated hundreds of billions of USD a year1. Its victims are often the poorest of the poor, seeking to improve their living conditions by accepting job offers that sound too good to be true – because they are. This usually leads to a life of mental and physical abuse, coercion and violence. In nearly all cases, the traffickers are running their activities through a bank, either to launder illicit funds or by abusing their victims to gain access to loans. Consequently, financial institutions have enormous potential to identify and prevent these activities – and much to lose if they fail to do so. In this blog, we examine the risks for financial institutions associated with human trafficking and the actions they can take to intercept such activities.
How is human trafficking a risk for financial institutions?
Human trafficking is a global problem, but certain regional hot spots, such as South Asia, do exist2. Global financial institutions rely on the due diligence of local financial institutions and branches to filter out illicit activities, but often these lack the funds and other resources to vet clients and partners as thoroughly as they should. This problem is further exacerbated by complex internal structures with no direct line of sight to regional branches.
Local financial institutions, on the other hand, are directly exposed to the illicit transactions by the traffickers. If they fail to identify fraudulent remittances, including payments for goods and services resulting from forced labor or sex trafficking, they may find themselves in breach of national and even international AML laws. The legal consequences and resulting reputational damage can be severe.
What are the challenges for financial institutions in combating human trafficking?
In the digital age, it is almost impossible to commit crimes without leaving traces in the data. Criminals excel at obscuring these traces as best they can, often by burying them in data from legitimate transactions. This data is already being collected, often for marketing purposes. So why are financial institutions struggling so much with identifying potentially illicit transactions?
One reason is that human trafficking is not a single crime. Instead, it is an illicit value chain with several criminal actors profiting from the exploitation of the same victims. It encompasses crimes like deceit, passport theft, smuggling, physical violence, money laundering, corruption and even rape and murder – all of which are investigated by a variety of different agencies, ranging from national security and intelligence organizations to non-government organizations (NGOs) and local law enforcement. Kept in separate intelligence silos without a clear sense of intent, this data is often not accessible to financial institutions in an actionable manner. This makes it difficult to obtain a complete picture of the situation.
Out of necessity, investigating terrorism and drug trafficking often take precedence over investigating human trafficking. As a consequence, the responsible law enforcement institutions and agencies sometimes gather less data on it than they could – and what data is gathered and to what extent also varies greatly by country and jurisdiction3. What’s more, they usually focus more on preventing human trafficking and protecting its potential victims and less on the financial footprint of the crime. This lack of concerted intelligence efforts and analysis means that financial institutions are left without meaningful guidance on the topic. On their own, they often lack the expertise, tools and structures to adequately identify and report activities that could be indicative of forced labor and other forms of human trafficking.
Given this lack of national and international intelligence infrastructure on the issue, as well as the lack of clear direction, it’s not surprising that financial institutions may find it difficult to leverage the gathered data for actionable results. In addition, financial institutions already process a vast number of transactions every single day. Against this background, they will naturally gravitate towards areas where the data is readily available and usable. This can lead financial institutions to the false assumption that there is no risk – when in reality they are simply unaware of the problem.
Legal and structural barriers to combating human trafficking
Even today, human trafficking is often seen as a moral or ethical concern rather than a “hard crime,” garnering less investigative attention than AML and anti-terrorism initiatives. Local law enforcement tends to lack the manpower and resources to properly address the issue. Additionally, legal frameworks often rely on a narrow definition of human trafficking, primarily focusing on sex trafficking while overlooking other, interconnected crimes such as forced labor. This is also reflected in the severity of the penalties that criminals in the modern slavery business can accrue, which are almost universally lower than the billions of dollars in fines and criminal liability associated with money laundering and terrorism financing. At the same time, data protection laws limit what information can be shared across borders and jurisdictions, further restricting access to this data and limiting the data financial institutions can utilize in the context of commercially available risk management systems.
All this works together to severely curtail the ability of financial institutions to act against human trafficking. Perhaps most deleterious is that it fosters an attitude of seeing human trafficking and its associated crimes as an ethical or moral matter instead of a crime that can have severe legal repercussions for financial institutions.
How can financial institutions combat human trafficking?
Financial institutions are facing a number of roadblocks regarding the accessibility of data and the lack of support from the legal system. But there are things they can do to actively mitigate the risk of unwittingly being exploited by human trafficking value chains.
Abandon misplaced complacency
Absence of evidence is not the same as evidence of absence. Financial institutions must abandon the sense of false security born out of a lack of accessible and actionable data. Just as with AML and anti-terrorism financing measures, combating human trafficking must be a natural part of financial institutions’ entire risk mitigation processes and frameworks. Implementing this can be initially challenging, particularly for smaller institutions with a lack of sufficient available resources. In this case, bringing external advisors on board to help with the process can be the best way forward.
Leverage existing data against human trafficking
We have spoken a lot about the data that financial institutions can’t access, but let’s not forget about the data that they can: client and business data. The risk areas for human trafficking are well known. Industries that employ large numbers of unskilled workers and countries with low governance requirements are hotspots for forced labor and human trafficking. Financial institutions that are working in those regions or with these industries, be it directly or through regional partners, can leverage their existing client data by screening it for suspicious activities that typically indicate criminal activities in the human trafficking value chain. This has the added benefit of reducing the likelihood of whole industries or regions being put under a generalized high-risk umbrella, which can in turn lead to a loss of commercial opportunities in these areas.
Bring all stakeholders on board
Human trafficking data is gathered by a number of civil and government actors, meaning it is not accessible for financial institutions in an actionable way. But financial institutions can seek cooperation with these actors to bring this data together and establish ways of sharing it that are effective and fit-for-purpose. With this type of cooperation, financial institutions can make human trafficking detection part of their regular financial crime procedures.
Large financial institutions should also seek cooperation with their regional partner institutions who are directly exposed to transactions connected to human trafficking, but lack the manpower and resources to conduct sufficient due diligence. By educating their regional correspondents on the issue, financial institutions can contribute to fighting human trafficking and making the entire value chain more secure for all actors, including their corporate partners.
Conclusion
Human trafficking is an unimaginable tragedy for the people affected by it. But it is far more than just an ethical or moral problem. Unwittingly supporting criminals engaged in human trafficking can have severe legal and reputational repercussions for financial institutions. By employing a robust risk management approach that includes human trafficking-related activities, they can prevent losses in business revenue that result from blacklisting entire geographies or industries. Instead, they can reap the economic benefits of rewarding good actors while punishing the bad ones.
Forced labor, in particular, can be very difficult to identify, because so many people in the human trafficking value chain are not even aware of their own involvement. Even financial institutions themselves are often unaware that they have become part of this value chain. Businesses using forced labor can be extremely hard to distinguish from legitimate businesses in the same sector or region. That is why financial institutions must make combating human trafficking an organic part of their proactive risk management processes. Only by doing so can they develop a comprehensive understanding of their own risk exposure and protect themselves against becoming enmeshed in criminal activities. The key to understanding lies in cooperating with other financial institutions, governments, law enforcement agencies and NGOs to provide compelling intelligence and foster unified legal standards and data accessibility.
By leveraging transactional data, financial institutions can enable real-time monitoring of activities with accurate pattern, fraud and anomaly detection, helping them to manage high-quality risk alerts and lower their false positives. Screening data from global sources can help financial institutions optimize their customer screening processes for improved due diligence.
How SEEBURGER can help Financial Institutions in their fight against human trafficking
The key to addressing the challenges associated with human trafficking lies in breaking open information silos and making valuable data both accessible and actionable. Financial institutions must create and manage channels to seamlessly share critical information between institutions, stakeholders, law enforcement and government agencies. An agile integration platform like the secure and scalable SEEBURGER BIS Platform enables financial institutions to make data accessible in real time for all stakeholders with ready-to-use connectors and mappings – for improved customer screening, heightened transactional transparency, fraud detection, and optimized investigation and reporting accuracy.
Source: https://blog.seeburger.com/the-role-of-financial-institutions-in-combating-human-trafficking/
This can lead financial institutions to the false assumption that there is no risk – when in reality they are simply unaware of the problem.