Arrest of Backpage CEO may spur proactive ‘lookbacks’ at banks, more categorical de-risking
Wednesday, October 19, 2016
Posted by: Brian Monroe
By Brian Monroe
October 19, 2016
The arrest earlier this month of the top officer of online advertising website Backpage.com on pimping charges and allegations of further connections to human trafficking is likely to cause a fresh round of de-risking for similar sites, and may result in large financial institutions doing some soul searching.
Investigators stated that Backpage Chief Executive Officer (CEO) Carl Ferrer, and controlling shareholders Michael Lacey and James Larkin designed the site to be the “world’s top online brothel,” hosting ads for “escort services,” massage and other amorphous “body treatment” modalities that were just covers for the illegal sex trade, generating millions of dollars in profits.
More broadly, the arrest will likely put more pressure on institutions of all sizes to better uncover ties to sites that offer thinly-veiled illicit sex services from a range of entry points, including massage parlors, nail salons and other adult-oriented venues. This includes sites hosting advertising, the merchant side, and individuals selling skin, the advertisement buyer side.
While Backpage hosts ads for sales of a range of items and services, the arrest warrant states that the “vast majority of Backpage’s revenue is generated through prostitution-related ads in its “adult services” section.
Moreover, Backpage collects fees from users who post “escort” ads, offering sex for money using coded language and nearly nude photos. In some cases, the ads are not even discrete, and clearly state what the person will do and the various price ranges for either time or specific acts.
There will be a bevy of compliance aftershocks tied to the Backpage arrest, according to a former compliance officer at a large U.S. bank, including raising the risk of similar sites and nudging banks to review any current or past ties to such operations.
“This will only further fuel the concept around de-risking and give that fear and paranoia a new target: websites like Backpage with very unclear and vague propositions” that can be interpreted as offering any kind of “adult” services, like escorts and massage, said the person, who asked not to be named.
The California Department of Justice’s three-year investigation found that many of the ads for prostitution services involved victims of sex trafficking, including children under the age of 18.
The investigation was sparked by reports from media, law enforcement agencies, and the National Center for Missing and Exploited Children (NCMEC).
In the last five years, the organization has “reported an 800 percent increase in reports of suspected child sex trafficking, much of it the result of online child sex trafficking. Since 2012, the NCMEC has reported 2,900 instances to California law enforcement where suspected child sex trafficking occurred via Backpage.”
“Making money off the backs of innocent human beings by allowing them to be exploited for modern-day slavery is not acceptable in Texas,” Texas Attorney General Ken Paxton said in a statement, adding that his office used dozens of officers in the investigation.
Bruised big banks to do inward lookback
The arrest didn’t come as a complete surprise to some in the compliance and investigative circles, said the person.
“Backpage was already referred to as the Craiglist for the underground world,” said the former compliance officer, noting that larger banks are even more risk averse, still smarting from recent record-setting financial crime and sanctions compliance penalties that have soared into the billions of dollars.
That fear may prod these banks and others to do a “proactive lookback or KYC canvassing to see if they have any current or past links to Backpage, both on the merchant and customer side,” said the person, adding that could extend even to loans to massage or other companies that later advertised their services on Backpage.
Such a strategy is also a preemptive move to assuage examiners in the next regulatory exam, said the former compliance officer.
That’s because both regulators and investigators may triangulate the institutions with the highest “saturation” of Backpage connections, including companies offering illicit services and individuals who may be engaged in prostitution.
“The first thing a regulator is going to say is that they found that the bank has a high saturation of Backpage paying members and paying merchants doing business through the bank and its website and the second thing the regulator is going to ask is what the bank did to remediate those issues. The bank doesn’t want the answers to be ‘I didn’t know that’ and ‘nothing.’”
“Even if the lookback won’t be complete for another six months, it shows examiners you have optics into the issue and the bank has actively analyzed what it can do to address the problems that regulators found. Because if you don’t give the examiner the correct answer, they will make future examinations take longer and they will be much harder.”
Congress, private parties prying into Backpage’s backdoor
Like regulators giving extra scrutiny to banks tied to Backpage, the site has also been on the radar of other government agencies and even raised the ire of the U.S. Congress.
The Senate voted 96-0 earlier this year to hold the site in civil contempt after it failed to respond to a subpoena requiring it to hand over documents detailing how it fights sex trafficking in ads on the adult section of its website, according to Reuters.
Prior to that, other legal skirmishes included a civil lawsuit against Backpage was filed in 2012 in Washington State by three young teenagers who alleged they were raped multiple times after being advertised on the site, according to the Reuters article.
The girls, the oldest of whom was 15, sued Backpage for claims including sexual exploitation of children, alleging its posting rules were intended to instruct pimps how to post trafficking ads that evade law enforcement, according to the article.
Backpage argued its rules are meant to prevent unlawful posts and invoked the federal Communications Decency Act, asserting they are not responsible for the ads because they were third-party content. Some free speech advocates filed briefs in support of its position.
The Washington state Supreme Court disagreed, ruling last year that the lawsuit could go forward.
Earlier this year, however, a similar trafficking case involving children against Backpage in Massachusetts was dismissed by a federal appeals court, which said the free speech principles embodied in the Communications Decency Act were paramount, according to Reuters.
Even with array of classified options, sex represented quickest growth
Exploiting that niche, the site expanded on the back of the illicit sex industry.
Since 2010, Backpage expanded operations, creating sites in hundreds of cities throughout the world, including over 30 cities in California, according to authorities.
Backpage’s internal revenue reports show that from January 2013 to March 2015, “99 percent of Backpage’s worldwide income was directly attributable to the ‘adult’ section,” according to investigators.
During the 29-month period tied to the formal investigation, Backpage’s self-reporting demonstrated that gross monthly income from California rose to $2.5 million per month, with more than $51 million in revenue derived from California in that period.
But what made Ferrer an even bigger target for authorities is that he allegedly was in the midst of expanding beyond Backpage into sites that offered sexual services in a more explicit, direct manner.
The arrest warrant alleged that Ferrer “devised a way to promote Backpage by creating other prostitution-related sites that essentially serve as an escort directory comprised entirely of Backpage users,” according to the arrest documents.
Ferrer took data from Backpage users and created content for Backpage-affiliated sites like EvilEmpire.com and BigCity.com.
The investigation found that Evilempire.com “featured photos and contact information from Backpage and offered no apparent way for users to submit content directly. These schemes enabled Ferrer and his co-conspirators to expand Backpage’s share of the online sex advertising market.”
Backpage is currently still up, with, in most cases for large cities, dozens of ads for a wide array of sexual services.
“Raking in millions of dollars from the trafficking and exploitation of vulnerable victims is outrageous, despicable and illegal,” said California Attorney General Kamala Harris said in a statement.