Banking Can't Turn A Blind Eye To The Human Trafficking-Money Laundering Connection

The COVID-19 pandemic has impacted almost everything in the world, including human trafficking. While the virus hasn't necessarily increased this activity, it has created a distraction from the pervasive problem and allowed it to flourish in new ways.

At the same time, there's a huge connection to money laundering that many financial professionals may not even be aware of. It's the methods of money laundering – often to cover up profits made from human trafficking – that have changed during the pandemic.

Human trafficking is believed to be one of the world's most lucrative crimes. In fact, in its "2020 National Strategy for Combating Terrorist and Other Illicit Financing," the U.S. Treasury Department reported that money laundering linked to human trafficking is one of the biggest illegal finance threats facing the nation. What's more, the Financial Crimes Enforcement Network (FinCEN) has found that "the global COVID-19 pandemic can exacerbate the conditions that contribute to human trafficking, as the support structures for potential victims collapse, and traffickers target those most impacted and vulnerable."

What has emerged in the past several years is a growing and vulnerable population. Along with this comes the growth of highly organized exploitation networks, a significant demand and a banking industry that is undecided as to whether the discovery of these things is actually part of their scope.

The state of human trafficking during COVID-19

There hasn't necessarily been an uptick in human trafficking during the global pandemic; however, COVID-19 has made the aforementioned vulnerable population even more so. When people become desperate due to financial hardships, they become natural targets for traffickers. A prime example is that a lot of human trafficking is taking place within the context of illegal immigration.

It's essentially a matter of modern-day, indentured servitude – individuals give money to traffickers or coyotes to get them across the border but then find themselves indebted for an indeterminate period of time. In some situations, the traffickers confiscate things like passports and identification to make it harder for the victims to escape.

The money laundering connection

Money laundering and human trafficking go hand-in-hand. Trafficking brings in $150 billion annually, according to an estimate cited by FinCEN. That makes it one of the most profitable crimes in the world. And it’s a cash game – nobody involved wants a paper trail involving credit card statements or anything remotely traceable. And that means traffickers have a boatload of cash that they need to launder!

COVID-19 has increased the amount of cash floating free, which is a problem for traffickers. Many of the traditional money laundering businesses like restaurants, stores and those leather purse stores in big cities that are constantly touting their "going out of business" sale were closed as a result of lockdowns. Without those businesses to launder their funds through, traffickers have had to think outside the box and devise new tactics.

What's happened is that some distressed companies essentially became shell companies for organized crime. These business owners struggling economically are easy prey and can too often be convinced of the potential gains of becoming a money-laundering front.

Banks' facilitation of crime

On the whole, crime has one purpose – to make money. That money needs to be processed and managed through a financial system. The banks remain at the center of that system, although the decentralization of finance will put that model under considerable pressure over the next decade.

Whether intentional or not, financial institutions around the world are acting as the intermediary between the supply and demand sides of human trafficking – and that needs to change. Pretending they are successful in stopping crime because they have checked the box from the regulator, turning a blind eye to massively profitable cash flows or just not being equipped sufficiently to find and stop an impressively elusive set of adversaries, are all causes.

A significant aspect of the problem though is the question of accountability. Where does the responsibility actually lie? Banks have plenty of things to address that are clearly their responsibility, and they are highly unlikely to volunteer for extra work. It's equally too easy for financial institutions to ignore the situation and pretend they don't have a role in preventing human trafficking. But the world needs the financial industry to think of themselves as financial stewards and do their part. And it's encouraging to see that many are beginning to see this as a moral imperative and not a regulatory or worse, analytical exercise.

How banks become heroes

To change the status quo and become a stronger force for good, banks will need to take several actions. As a start, they need to step up to the plate. It will only take a few of them to make it clear to the world community that they understand banks are the key to the integrity of the financial system. More are sure to follow their lead.

If banks are self-regulating, as many claim to do, then they can lead the charge against human trafficking. Rather than merely complying with the bare minimum set forth by regulators, they can become more proactive. Banks could and should have a truly impactful and materially important role in this fight.

And it's not just some highfalutin moral mission that this points to. It's good business. The pivot of the market to decentralized finance (DeFi), democratization of financial transaction with cash and equity apps, and a slow but steady move to cryptocurrency is an existential threat to the traditional banking system and its incumbents. But DeFi is incredibly exposed to exploitation, and in fact, is perfect for it. And here banks can stand as effective custodians of financial integrity and establish a much stronger and compelling position when looked at by government and regulatory decision-makers.

To help in the fight against human trafficking, ICE Homeland Security Investigations (HSI) has identified multiple red flags that banks can refer to when considering potentially suspicious activity. These include:

• Payments to student or employment recruitment agencies that are not licensed or registered or that have labor violations
• A customer who is always escorted by a third party when setting up an account or visiting a branch to conduct transactions
• Frequent payments to online escort services for advertising to companies of online classifieds, as well as higher-end advertising and website hosting companies
• Cash deposits in cities and/or states where the customer does not reside or (allegedly) conduct business

Simple examples but foundational, and the agency discusses other transactions that could signal human trafficking is taking place and offers this encouragement to banks and their employees: "You could be the hero behind the scenes who is helping to rescue individuals from the nightmare of human trafficking and bringing their tormentors to justice."

To be able to spot odd transaction behavior accurately, banks need to not just "know" their customer. They need to "understand" them. This is difficult to do when they are working with processes, technologies and policies that date back 20 years and that are often designed to look for crimes that were prevalent in the 1980s and 90s.

They desperately need modern approaches that will help them understand their customers with intimacy and at scale and stop financial crimes. This includes AI-based automation that identifies anomalous behavior that human inspectors would never be able to see. AI and machine learning (ML) tools enable banks to extract greater intelligence out of existing data to monitor changes over time and spot emerging patterns that signal potential problems.

AI has a bad rap at the moment, and it's deserved. Gartner is right in its estimation that 85% of AI projects will fail – this is largely due to over-promising, too large marketing budgets and too much alchemy, which has been the AI market of the last few years. But some firms have genuinely innovated. Some have truly added the transparency at scale, and the operational productivity that is so desperately needed to execute on the mission against the vileness of human trafficking.

Banks as proactive participants

The COVID-19 pandemic has enabled human trafficking to flourish in new ways, and traffickers have become equally creative as they launder their profits. Vulnerable populations have exploded and not just in third world countries. Target exploitation is growing in our own neighborhoods, on our kids' Xboxes and PS4 messaging, on social media and in the very fabric of day-to-day life. Anyone with a young child needs to take a serious pause and understand the risks they face.

Airlines, hotels, transportation companies, and most particularly, banks must become more vigilant than ever to ensure that they aren't unwittingly aiding criminals by being the passive financial intermediary. Banks can lead the fight against trafficking and its tragic consequences. This requires a commitment against financial crime and the tools to spot it. Armed with these, financial institutions will truly take their place in creating a more just and caring society.

(Simon Moss is the chief executive officer of Symphony AyasdiAI)