Financial Institutions Face High Expectations to Detect and Report Invisible Victims. of Human Trafficking and Smuggling

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1 Financial Institutions Face High Expectations to Detect and Report Invisible Victims of Human Trafficking and Smuggling Sponsored by:

2 Financial institutions may differ in how they have addressed the convergence of financial crimes and money laundering but most fraud and AML professionals have accepted the premise that profit driven criminal activity and money laundering are inseparable. Two particularly detestable criminal industries, Human Trafficking (HT), which involves forced servitude and the degrading use of human beings as a commodity, and Human Smuggling (HS), which centers on rustling people across borders illegally, produce significant illicit proceeds that inevitably move through the financial system. These criminal enterprises present distinct challenges and outsized reputational and regulatory risks to financial institutions if not detected and reported under their BSA regimens. These crimes and criminal actors have attracted the full attention of bank regulators and law enforcement task forces across the country that focus on attacking the HT/HS industry s illegitimate proceeds as the linchpin of their enforcement strategies. As this issue gathers critical mass, it is only a matter of time before a financial institution finds themselves in the crosshairs after a major HT takedown and is subjected to criminal prosecution and regulatory enforcement action. Victims of these crimes are ruthlessly extorted, exploited, and often forced to engage in criminal activity. Adolescent girls as young as 13 are forced into sexual slavery generating tainted profits for their handlers or pimps and madams. A more appropriate title is sexual predator. Because of this forced criminality, victims and their relatives view themselves as perpetrators. This mindset combined with a preexisting mistrust of law enforcement results in very few reports to law enforcement. This dynamic has created a dearth of intelligence and reliable data causing law enforcement and regulators to increasingly look to banks, money service businesses and casinos to assist in identifying the movement of the illicit proceeds that accompany these activities. The inherent cruelty of these crimes and the victimization of children have triggered universal concern and rare global consensus on the need for international efforts to share intelligence and attack the criminal enterprises that are often behind these insidious industries. The United Nations (UN) estimates that these crimes involve the ruthless exploitation of 27 million victims and generate over 32 billion in dirty money, much of which will move through the financial system. The 2014 report from the International Labor Organization (ILO) Profits and Poverty: The Economics of Forced Labor is even more alarming, estimating that the illegal profits made from the use of forced labor in the private economy worldwide amount to a staggering $150.2 billion per year. According to the ILO, two thirds of the profits, amounting to an estimated $99 billion per year, are generated by commercial sexual exploitation exacted by fraud or force, which often involves underage girls. The UN describes HT as the third most lucrative organized crime activity behind trafficking in drugs and counterfeit goods. Unfortunately the brutish Mexican drug trafficking cartels now dominate the HT/HS trade along the southwest border as a way to supplement their income flow as pressure on 1 : Financial Institutions Face High Expectations to Detect and Report

3 their drug operations has mounted. The intrepid non-profit group InSight Crime which focuses on organized crime in Latin America and the Caribbean states: Authorities in Mexico have uncovered a web of human trafficking alliances stretching across 17 states and involving groups from the biggest cartels down to family-run crime clans, in an illustration of the scale of the trade and the pressure on major criminal organizations to move into new businesses. To combat this scourge, the US Department of Justice has salted Bureau of Justice Assistance (BJA) grant funding to fund 42 Anti Human Trafficking Task Forces across the states. The federal Human Trafficking Center, established in 2004, has hit its stride as national intelligence analysis hub and coordinating center for law enforcement activity. The department of Homeland Security has launched HT focused initiatives such as Blue Campaign which offers much needed training to law enforcement and others to increase detection and investigation of human trafficking, and to protect victims and bring suspected traffickers to justice. Immigration and Customs Enforcement (ICE) also oversees Project STAMP, which focuses on seizing assets tied to human trafficking organizations. The agency also seeks to exchange information on trafficking methods with the private sector through its Cornerstone Program. Indeed, anyone associated with AML and financial crimes detection or investigations should be able to recite the indications of a funnel account in their sleep. Perhaps the most widely recognized Anti Human Trafficking initiative is the FBI s Innocence Lost initiative, which partners with The National Center for Missing and Exploited Children (NCMEC) to develop and support 69 dedicated Task Forces consisting of state, local and federal agencies focused exclusively on sex trafficking of children. These task forces have rescued over 3600 children from the bondage of sex trafficking, arrested 1450 pimps and madams and seized over $3.1 million in illicit proceeds generated by this sordid trade. One sobering fact is that as part of this initiative in 2011 NCMEC Analysts reviewed over 17 million images of child pornography in an attempt to identify victims. A NCMEC survey found that the average age of the boys and girls when they were first exploited was The exploitation of underage girls sets up another tragic byproduct, the double victimization of these young women: first when they are exploited by the traffickers and in later years when they are swept up by a vice squad and arrested as prostitutes by officers who have not been trained to identify the young adult women as potential victims of years of forced sexual exploitation. These various task forces, equipped with powerful statutes such as the Trafficking Victims Protection Act of 2000, RICO and money laundering statutes such as 18 USC 1956, have been busy lately. Examination of some recent federal arrests and indictments illustrate that Human Trafficking Organizations are operated like business enterprises generating significant proceeds that traverse through the 2 : Financial Institutions Face High Expectations to Detect and Report

4 financial system. In one ICE investigation codenamed Operation Dark Night, 25 defendants were indicted in the Southern District of Georgia for their roles in a massive sex trafficking ring. The leader, Joaquin Mendez-Hernandez, received a life sentence after victims described how 30 migrant workers stood in line outside shacks in sprawling farms in NC and Georgia waiting to have sex with women and girls as young as 13. In an October 2013 Houston FBI takedown, 12 victims were rescued and 14 defendants were arrested for participating in a four-year sex trafficking scheme that generated over $1.3 million in proceeds over an 18-month period. The enterprise utilized cashier s checks in amounts under the CTR trigger of $10,000 to launder their funds. Even special events such as the Super Bowl, World Cup, and political conventions have become business opportunities for sex traffickers. In a 2014 Super Bowl sting, the FBI arrested 45 pimps/predators and rescued 16 teenage girls. Financial Institutions should consider HT (Human Trafficking) and HS (Human Smuggling) as very high-risk violations in light of the accelerated pace of law enforcement activity. Speaking of criminal enterprises, the role of Russian Organized Crime in sex trafficking is well documented. The Detroit based Maksimenko/Aronov organization ran strip clubs that fronted for a prostitution business that enslaved young Eastern European immigrants by smuggling them into the country and confiscating their passports and visas. The leaders of this organization amassed over $2.5 million in profits. In this case, as in most HT and HS cases, human trafficking was listed as specified unlawful activity underlying money laundering indictment counts directed at the ringleaders. Even as domestic law enforcement agencies and regulators are working overtime, international non-government organizations (NGOs) are shining the spotlight on this opaque criminal industry. Organizations such as the Polaris Project, originally founded by two public-minded Brown University students, established the National Human Trafficking Resource Center and funds and staffs reporting hotlines, victim services, awareness campaigns and public/private partnerships. Most importantly, the organization has generated national level focus through legislative lobbying that has stimulated and supported congressional hearings on the topic resulting in key legislation. The International Rescue Committee founded in 1933 at the request of Albert Einstein has turned its attention to HT and HS. The UN, WHO, and the International Labor Organization have all provided various services, campaigns, information and focus to this criminal epidemic. In an era where FinCEN has enhanced analytical capabilities bolstered by electronic filing, there is a new capability to detect and support the filing of criminal charges against Financial Institutions (FIs) that allow their facilities to be utilized by criminal elements. This has raised the stakes for FIs. While fraud 3 : Financial Institutions Face High Expectations to Detect and Report

5 and other financial crimes are ubiquitous and the volume of such activity has numbed the consumer, the magnitude and atrocity of Human Trafficking stirs an emotional response from the public, motivates law enforcement/regulators and presents a huge reputational risk to any FI who overlooks indications of such activity. As this issue gathers critical mass, it is only a matter of time before a financial institution finds themselves in the crosshairs after a major HT takedown and is subjected to criminal prosecution and regulatory enforcement action. Recently, FinCEN has been anything but toothless with regard to strict enforcement of the BSA and related statutes. Under Director Jennifer Shasky Calvery, a career criminal prosecutor, clear signals have been telegraphed to the financial community that this is a special focus area. The issuance of FinCEN Advisory FIN-2014-A008 on September 11, 2014 entitled Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking - Financial Red Flags is a good example. FIs, large and small, should study and build on the red flags enumerated in this advisory. This Advisory as well as another May 2014 missive focuses heavily on detection, analysis and reporting of funnel accounts which money-laundering professionals should understand and recognize. Indeed, anyone associated with AML and financial crimes detection or investigations should be able to recite the indications of a funnel account in their sleep. There will be no reprieve for institutions that do not have robust programs in this area where it behooves FIs to go well above and beyond the basic elements of compliance. These regulatory warning flares were recently summed up in a Wall Street Journal article that bore the headline FinCEN Elevates Human Smuggling, Trafficking Compliance. As the article pointed out, when it comes to HT and HS there are increasingly higher expectations for FIs. FinCEN s recent focus on HT and HS is no accident. It coincides with the broader law enforcement emphasis at the local, state and federal levels, not to mention an international focus fueled by global outrage at the existence of a modern day slavery industry. Financial Institutions should consider HT and HS as very high-risk violations in light of the accelerated pace of law enforcement activity. Consider that during Calvery s relatively short tenure, a series of criminal prosecutions and deferred prosecution agreements have been executed against financial institutions, large and small, for failing to make the link between criminal activity and money laundering including HSBC (drug trafficking), Public Savings Bank (wire transfer fraud), Chase (Madoff Ponzi and check kiting scheme); Community One Bank (Ponzi scheme); and MoneyGram (elder fraud). State Attorney Generals are also focused on this issue. For example the Southwest Border Anti-Money Laundering Alliance is a multi state task force funded through a lawsuit filed by the Arizona Attorney General against Western Union Financial Services Inc. Under the terms of a 2010 settlement, Western Union agreed to provide $50 million to fund a task force to counter money laundering on the 4 : Financial Institutions Face High Expectations to Detect and Report

6 southwest border, a significant portion of which involves the proceeds of human trafficking and smuggling. This task force has won awards and accolades for its unique and effective approach to crime based money laundering including the ACAMS Award for Leadership to its Executive Director. For any FI that is associated with facilitating this activity, public condemnation will be swift, intense and very public. While terrorist financing is still front and center and drug trafficking led by the bloodthirsty Mexican Cartels still garners occasional sensational headlines, HT/HS are issues that spark more visceral reactions. There will be no reprieve for institutions that do not have robust programs in this area where it behooves FIs to go well above and beyond the basic elements of compliance. Stated another way, basic compliance is a beginning point: not a destination. Savvy institutions will scour the landscape for best practices and arm themselves with the latest techniques and technology. There are many examples of effective initiatives developed to enhance detection capabilities. In New York City, eight financial institutions have partnered with the Manhattan District Attorney s Office. The DA shares details of HT/HS cases and intelligence that the FIs use to refine their rules and red flags. Many FIs have acquired powerful analytics to link disparate data to identify the full scope of enterprise activity, i.e. malignant social networks. Enlightened banks have eschewed cosmetic fixes and truly converged their AML and anti-fraud programs by consolidating their people, process and technology under one organizational component. They share a common case management and detection platform; consolidated data and operate under a single executive manager. Efforts to establish an industry wide consortium approach to make criminal enterprise links across multiple FIs utilizing section 314(b) of the USA PATRIOT Act are promising but still in their infancy. The consortium strategy is in need of a champion to campaign for wider acceptance of this strategy. The combination of trafficking in human beings as a commodity, abuse of children, illicit proceeds and the image of these funds being laundered through a FI are combustible. No prosecutor will be inclined to tread softly on any malfeasance brought to his or her attention. And no financial institution will want to be the first to be prosecuted or sanctioned under these statutes. There is an old proverb to be forewarned is to be forearmed. For Financial Institutions, advance warning of a situation, especially a risky one, should prepare one to deal with it. Financial Institutions have a significant role to play in addressing the illicit industries of Human Trafficking and Human Smuggling and must make this a special focus area with enhanced training, especially for customer facing employees; partnerships with law enforcement; incorporation of and internal enhancements to FinCEN s red flags guidance; and above all, the dismantlement of any walls that exist between money laundering and fraud components. The combination of trafficking in human beings as a commodity, abuse of children, illicit proceeds and the image of these funds being laundered through a FI are combustible. No prosecutor will be inclined to tread softly on any malfeasance brought to his or her attention. And no financial institution will want to be the first to be prosecuted or sanctioned under these statutes. 5 : Financial Institutions Face High Expectations to Detect and Report

7 About the Author Chris Swecker Financial Crimes Consultant and Attorney; retired Assistant Director, FBI; and former Global Security Director, Bank of America Chris Swecker has 30 years of experience in law enforcement, national security, legal, and corporate security/risk management. Swecker served 24 years with the Federal Bureau of Investigation (FBI) before retiring as Assistant Director of the FBI s Criminal Investigative Division. He was responsible for eight FBI divisions including Cyber, Criminal, International Operations, Training, Crisis Management, Operational Technology, Criminal Justice Information and the Law Enforcement Liaison office encompassing more than half of the FBI s total resources. Swecker also served as the FBI s On Scene Commander in Iraq in 2003 where he led a team of FBI Agents conducting counter-intelligence and terrorism investigations. As head of the FBI s Criminal Division, Swecker led all FBI criminal investigations including public corruption, money laundering, organized crime/drug trafficking and financial crime matters. He was instrumental in the development of the FBI s post 9-11 strategies, leveraging criminal investigative resources to support counter terrorism/intelligence efforts. He led national task forces on corporate fraud, violent gangs, financial crimes, crimes against children, public corruption and organized crime and established the MS-13 National Gang Task Force and the National Gang Intelligence Center. Swecker has extensive experience in organized crime, money laundering and major drug trafficking investigations. As Corporate Security Director for Bank of America, Swecker led investigations; physical security; international security; employment screening and executive protection. He executed a comprehensive transformation of all aspects of the security organization, emphasizing the use of advanced analytical software, security technology and fusion of open source, government and internal information to drive strategies to prevent fraud, privacy and security events. Swecker has testified before Congressional Committees on topics such as identity theft, crimes against children, mortgage fraud, human trafficking, financial crimes, information privacy and data compromise, crimes on the Internet, drug trafficking and gangs. He has also appeared as a guest on such media programs as 60 Minutes, Good Morning America, CSPAN Washington Journal, Oprah Winfrey and North Carolina People. He is a frequent public speaker on financial crimes, money laundering and cyber crimes. About Verafin Verafin is a leader in enterprise Fraud Detection and Anti-Money Laundering (FRAML) software with a customer base of over 1100 financial institutions across North America. Its solution uses advanced behaviorbased analytics that help financial institutions stay a step ahead of numerous types of fraud as well as the BSA, USA PATRIOT Act, and FACTA compliance landscape. Verafin is the exclusive provider of fraud detection and BSA/AML software for the California Bankers Association, Florida Bankers Association, Massachusetts Bankers Association, Illinois Bankers Association, CUNA Strategic Services, and has industry endorsements in 44 states across the U.S. For more information, visit FRAML@verafin.com or call Learn more To access Verafin s ever-growing archive of webinars, white papers, success stories and other materials focusing on BSA/AML compliance and fraud detection topics relevant to financial institutions across the country, check out our Resource Center at 6 : Financial Institutions Face High Expectations to Detect and Report