FinCEN human trafficking guidance could present challenges for institutions


Recently released guidance by the US Treasury’s Financial Crimes Enforcement Network (FinCEN) gives financial institutions greater clarity on customers and transactions that could be aiding human traffickers and smugglers, but some aspects could prove difficult to implement and may bring unwanted regulatory attention.

The 10-page document by the US financial intelligence unit released this month centers on an area of financial crime taking greater precedence for federal and local investigators, and gaining greater visibility for institutions who are eager to avoid being linked to trafficking operations.

The guidance is “helpful because there has always been a bit of confusion about what is human trafficking and human smuggling, and this advisory helps make those distinctions,” said Robert Rowe, vice president and senior counsel for the American Bankers Association, an industry group.

Banks such as JPMorgan, Wells Fargo and Bank of America have been devising typologies and devoting additional investigative resources to uncover ties to human traffickers and smugglers as early as 2010, even before red flags were released in reports by the Paris-based Financial Action Task Force (FATF) in 2011 and early 2012, according to compliance officers at these institutions. The FATF sets global anti-money laundering (AML) standards.

These efforts have not been limited to the banking sector. Last year, Western Union announced a partnership with the US Department of Homeland Security to provide human trafficking training and awareness programs to agents in the money transmitter’s global network. Recently, some technology providers like NICE Actimize and SAS have also started incorporating human trafficking detection rules in their monitoring solutions.

Public-private coordination on human trafficking was lauded by the US State Department in its 2014 Trafficking in Persons Report. The report noted a cooperative effort by FinCEN, state regulators and eight financial institutions to more readily identify transactions indicative of human trafficking, such as suspicious cross-border transfers coupled with other indicia like international wires and quickly opening and closing accounts.

Despite the industry response, the statistics for human trafficking crimes are sobering. More than 20 million people annually are subjected to forced labor, generating nearly $150 billion in profits, $100 million of that tied to the illicit sex trade, according to International Labor Organization estimates.

In its latest guidance, FinCEN defines human trafficking as recruiting and transporting individuals for labor or sex using force, fraud or coercion. In addition, FinCEN defines human smuggling as bringing, harboring, encouraging or conspiring with foreigners to illegally bring foreigners into the United States.

As with other financial crimes, the agency believes banks have the potential to ferret out ties to human trafficking groups through analyzing aberrant customer transactions. However, the guidance also stresses close attention to customer behavior and their interactions with front line staff, through observing how customers act at the counter, who is with them, and if there are any discrepancies in their actions or documents, such as checks with clearly different handwriting.

Guidance may boost value of SARs for investigators

The guidance has the potential to aid law enforcement investigators by enabling institutions to provide more accurate and complete suspicious activity reports (SARs) on transactions and account activity that could be tied to trafficking. FinCEN states in the guidance that compliance officers should put specific terms in the narrative of the SAR to make them easier to find, either “Advisory Human Smuggling,” or “Advisory Human Trafficking.”

Institutions broadly “care a lot about this and are trying” to cut down on traffickers and smugglers using their branches to keep criminal networks going, said John Walsh, chief executive officer of Charlotte, N.C.-based SightSpan, a global risk consultancy firm.

What is challenging, however, is that the activity may also be tied to other crimes or be routine business practices, he said, adding that it takes both correctly-tuned systems, savvy AML analysts and adequately-trained frontline personnel to effectively update processes and implement the guidance.

Institutions must also be cognizant of emerging risks due to events such as natural disasters or regional conflicts that cause mass migrations of people, Walsh noted. This will open channels for smugglers and traffickers to separate children from families or take advantage of lost or orphaned children, he said.

The guidance spells out nearly 30 red flags for both crimes, and makes distinctions between what financial sector entities – banks and credits unions, money transmitters and prepaid card providers or casinos – would be most at risk.

In addition, in the case of human trafficking, it pairs those interactions with the corresponding stage: recruitment or abduction, transportation and exploitation. The first stage typically occurs when traffickers obtain victims through deception or force, such as kidnappings and false marriages, and can occur more frequently with countries suffering economic downturns, war or natural disasters.

Victims can be moved by land, sea and air and, when they arrive in the new country, are used to make profits for the criminal group through forced labor in an array of businesses. Some sectors mentioned in the guidance include massage parlors, restaurants, farms, construction companies, nail salons and housekeeping work.

Newly generated criminal proceeds from the labor of trafficked individuals then must be deposited into financial institutions, wired to other domestic or international firms, or spent on related goods and services.

Front line staff are essential to detect trafficking

The information gleaned from the report “gives banks a training piece for frontline personnel, customer service representatives and tellers, who are the ones most likely to pick up on something,” Rowe said. “Unless they are trained to look for these red flags, they may not be in the best position to make a decision.”

Even so, institutions worry that regulators may turn the guidance “into a set of requirements or expectations,” he said. “Then it becomes an obligation which adds to the overall compliance burden and undermines the premise.”

To more effectively uncover possible instances of human trafficking and smuggling, FinCEN stated financial institutions “may consider reviewing transactions at the relationship level rather than at the account level.”

The tactic would allow the institution to “analyze customer’s transactions across multiple accounts instead of reviewing transactions that are conducted solely through one account.” As well, observations by front line personnel and others at the branch and floor level “can lead to the identification of anomalous activity that could alert a financial institution to initiate a review of a customer’s transactions.”

In the case of human smuggling, banks and money remitters should be wary of customers sending multiple wire transfers below the $3,000 customer transaction report (CTR) threshold, sent from multiple locations in the United States to a common beneficiary, either in a U.S. or Mexican city along the Southwest Border, which spans the U.S.-Mexico land border.

The red flags also include multiple wire transfers going from various U.S. branches to those same regions on the same day or consecutive days and customers, either as originators or beneficiaries, moving funds between either side of the Southwest border and countries with high migrant populations, including Mexico, Guatemala and Honduras.

Institutions should also be mindful when there are large deposits of bulk cash in border branches and then immediate wires to high migrant population countries or transactions involving these regions with similar or repeating pieces of information, such as common amounts, addresses and phone numbers, with no apparent familial relation between the entities.

In operationalizing guidance, compliance pitfalls appear

In terms of human trafficking, banks and money transmitters have a host of potential compliance pitfalls, particularly around businesses and how they pay their employees.

For instance, banks may consider examining their relationships with operations that appear to pay their employees very little compared to the revenues generated or that appear to deposit payroll checks back into the company account.

Odd company transactions that do not seem to fit the business profile of the company, such as high payments for lodging, vehicles or food, are also red flags.

The guidance also suggests that institutions should be more scrupulous of transactions made by individuals escorted by a third party, and regularly sending what would appear to be their salary to other countries. As in human smuggling, banks should look for common signers or repeating account information that cuts across several businesses and customers, the agency said.

Some institutions, however, should have the capacity to tweak automated transaction systems to heighten scrutiny on the businesses outlined in the guidance, according to a compliance officer at a large domestic bank. “We can do that,” said the person, adding, though, that the option might not be available for smaller institutions with less sophisticated systems or could be too cumbersome if monitoring is still done manually.