From High Seas To High Finance: What Banks Need To Know About Human Trafficking

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Gregory Powell
5 years ago
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T he appalling crime of human trafficking may seem a million miles away from the high rise steel and glass towers of the world s major financial centers, but as a recent case shows, the connections

1 T he appalling crime of human trafficking may seem a million miles away from the high rise steel and glass towers of the world s major financial centers, but as a recent case shows, the connections and risks, are in fact, all too close. Between 2007 and 2013, an Indonesian crew of 500 men was enslaved aboard three South Korean flagged fishing trawlers and subjected to physical violence and sexual abuse. Their passports seized, the men were forced to work long and arduous shifts way beyond internationally-sanctioned contract hours while the owners of the vessels withheld the salaries promised to them, all conditions qualifying as forced labor according to the ILO Indicators of Forced Labour report by the International Labour Organization (ILO). While the activities of the vessel operators were clearly illegal, the ships were in fact operating legally, fishing in New Zealand waters under a legitimate fishing quota issued to a long-established New Zealand fishing company. Just how this apparently bizarre sequence of events came to pass provides a sobering yet instructive lesson as to how in a globalized economy, connections to illegal activities and especially human trafficking, can in fact be much closer than they appear to be. 1

From local incident to global problem Further investigations revealed that the fishing quota had originally been granted to a New Zealand company, which in turn contracted it to a major South Korean

2 From local incident to global problem Further investigations revealed that the fishing quota had originally been granted to a New Zealand company, which in turn contracted it to a major South Korean fishing company. It was this South Korean fishing company that hired the Indonesian workers to man its three trawlers through an Indonesian crewing agency. Somewhere along the human supply chain that brought 500 poor Indonesian workers to a remote part of the South Pacific Ocean, legitimate employment turned into human trafficking, affecting every company and every one associated with it. The international nature of the fishing contract meant that payments made between the parties involved quickly entered the international banking and payments system, while product tainted by the illegal act of human trafficking just as quickly entered the global food supply chain: Payments were made from the South Korean fishing company to the Indonesian contracting agency in US dollars via the international banking system, subjecting the transactions to Know Your C u s t o m e r ( K Y C ) a n d A n t i - M o n e y Laundering (AML) laws and regulations of the banks across whose system the money passed, and also subjecting the payments to scrutiny and regulation by the clearing hubs in the US. The catch from the three trawlers was processed by one of New Zealand s ten largest seafood companies, thus entering the global food supply chain. In fact the seafood company sold the same produce to several Korean and New Zealand companies and distributors, including several of these countries biggest retailers and restaurants, significantly widening the scope of companies and individuals affected. Contracted South Korean company Payments in USD via the international banking system Sells the catch Owns 3 trawlers Contracted New Zealand company received fishing quota Indonesian recruiting agency Recruited workers Distributors and supermarkets South Korean trawlers fishing in New Zealand waters Enslaved aboard the boats 500 Indonesian workers 2

Tainting the banks As soon as the banks received and transferred the payments from the Korean fishing company, the payments, and the banks association with them, became tainted.

3 Tainting the banks As soon as the banks received and transferred the payments from the Korean fishing company, the payments, and the banks association with them, became tainted. Absent remedial action on the part of the banks, the institutions became implicated in human trafficking by association and subject to governmental and regulatory investigation and sanction. Aside from financial penalties, the brand and business reputation implications are clearly, potentially catastrophic. Unfortunately, our example is not an isolated incident and human trafficking is not only common in the fishing industry, it is prevalent in a variety of other industries, meaning financial institutions servicing these supply chains need to be equally diligent. They also need to identify the variety of risks to which they can be exposed by inadvertently funding human trafficking: 1. Industry and country In addition to fishing, food processing, food and beverage, retail, ship leasing and employment agencies are all business sectors vulnerable to a supply chain infected by human trafficking. Clearly, there are other potential high-risk sectors too (such as mining, plantations and construction) and financial institutions must be sensitive to all such sectors. As a guide, each year the US Department of State releases its Trafficking in Persons report which lists the degree of risk aversion to human trafficking by country and the degree of compliance with the Trafficking Victims Protection Act s (TVPA) standards. 2. Reputational Major international publications, including The Associated Press, The Guardian and Bloomberg have published investigative reports on human slavery within the fishing industry, which have implicated supermarkets, restaurants and food processing companies, leading to boycotts and other negative media coverage. If illicit payments have been made through international payment systems, implicating financial institutions, rightly or wrongly, becomes straightforward: banks can become an easy and high profile target. 3. Compliance Acceptance of fund transfers for transactions potentially involving human trafficking constitutes an offence under AML regulations in global financial centers. 4. Regulatory According to the UK Modern Slavery Act of 2015, any company in the UK, or any company with a business in the UK with revenues of more than GBP 36 million, must explain steps taken to ensure that slavery and human trafficking are not taking place in the business or in their supply chain. The US Tariff Act of 1930 gives Customs and Border Protection the authority to seize shipments where forced labor is suspected and to block further imports. 5. Legal In the past, consumers have filed significant classaction lawsuits against food conglomerates and retailers, alleging that their brands were the product of slave labor. For instance, in August 2015, consumers filed a class action lawsuit against Nestlé, alleging the company s Fancy Feast cat food was the product of slave labor associated with one of its Thai seafood suppliers. Nestlé later admitted to the use of forced labor in its supply chain, and, amid a public relations crisis, committed to imposing stronger regulations on its suppliers. 3

From High Seas To High Finance: What Banks Need To Know About Human Traﬃcking Tracking the traﬃckers Human traﬃcking by nature entails the exploitation of vulnerable persons, mainly from poor

4 From High Seas To High Finance: What Banks Need To Know About Human Traﬃcking Tracking the traﬃckers Human traﬃcking by nature entails the exploitation of vulnerable persons, mainly from poor countries, to gain an economic advantage, usually earned elsewhere. By definition, it entails transactions and activities across borders, often multiple countries, making illicit traﬃcking diﬃcult to detect and sometimes using highly complex and sophisticated organized crime elements. Neither does traﬃcking follow a unique pattern with regional and national variations in money laundering and traﬃcking techniques. But since in every human traﬃcking case, the ultimate goal of criminal gangs is to earn profit, banks have a front line role to play in tracking and reporting the illicit proceeds of human traﬃcking. Here are some resources and indicators banks and financial institutions can use to evaluate the human traﬃcking risk in a specific transaction or investment: 1. Understand the industry and country risk Certain industries, such as mining, plantations, construction and fishing where low-skill and high volumes of workers are required or which involve a high degree of hazardousness are particularly vulnerable to forced labor practices. Similarly, human traﬃcking often occurs in industries with complex chains of subcontracting, where labor recruitment is outsourced to agencies, often in third world or developing nations. 2. The non-profit organization Verité has produced typologies of the important primary commodities and their connections, if any, to forced or child labor in its 2016 report Strengthening Protections Against Traﬃcking in Persons in Federal and Corporate Supply Chains - Research on Risk in 43 Commodities Worldwide. 5. Ensure that your team is aware of human traﬃcking issues and can recognize and detect the red flags of human traﬃcking. In September 2014, the US Financial Crimes Enforcement Network released guidance on how to recognize potential cases of human traﬃcking. The list of red flags includes: Include keyword searches Include adverse keywords for slavery in your KYC or screening processes such as forced labor, slavery and human traﬃcking The use of funnel accounts, where cash is deposited in cities where the customer does not reside or conduct business, and is quickly withdrawn from another location. Business transactions with an employment agency that is not registered or is subject to labor law violations. Frequent outbound money transfers, with no apparent business purpose, to high-risk traﬃcking regions Transactions or indications of wealth inconsistent with the expected activity or line of business Look for correlations Human traﬃcking is often correlated with other criminal activities such as drug traﬃcking or terrorist financing, and therefore occurs in areas where there is also a high risk of bribery and corruption. 3. Train your team Use non-profit resources The U.S. Department of Labor publishes lists of products believed to be produced by forced and indentured labor or child labor. Use your due diligence partner If you suspect instances of traﬃcking, your chosen due diligence partner will be able to conduct focused inquiries and research into understanding the issues involved. 4

What is human trafficking? Human trafficking is the trade of human beings for various forms of exploitation, including forced labor and sexual exploitation as a result of coercion, deception or force.

5 What is human trafficking? Human trafficking is the trade of human beings for various forms of exploitation, including forced labor and sexual exploitation as a result of coercion, deception or force. There is no consent of trafficked victims, whose movements may be transnational or within a single country. According to the United Nations Office on Drugs and Crime (UNODC), an incident is considered human trafficking if it fulfills the elements listed in the below table in the act, means and purpose. Human trafficking is the fastest growing crime in the world, involving 21 million victims and generating USD 150 billion in profits every year, according to the ILO. Despite the efforts to control, designate and penalize human trafficking around the world, real cases seldom make the headlines of the newspapers, partly because the story that breaks out is often only the tip of the iceberg and hides a much more complex network of banks, companies and individuals that operate across national borders. Human trafficking is defined by the Financial Action Task Force as a designated category of money laundering offence. Banks are thus expected to lead by example, and take action against human trafficking leveraging their existing AML tools to detect human trafficking cases. Although much of the media coverage and programs focus on transnational organized crime groups, most human trafficking cases (68% of victims) actually happen within the legitimate business frame: it constitutes a transnational crime by legitimate businesses cutting costs. ACT MEANS PURPOSE Recruitment Transport Transfer Harbouring Receipt of persons + Threat or use of force Coercion Abduction Fraud Deception + Exploitation, including Prostitution of others Sexual exploitation Forced labour = TRAFFICKING Abuse of power or vulnerability Slavery or similar practices Giving payments of benefits Removal of organs Other types of exploitation 5

This article was co-developed with our partner Liberty Asia, a NGO that aims to eradicate human trafficking in Southeast Asia through legal advocacy, technological interventions, and strategic

6 This article was co-developed with our partner Liberty Asia, a NGO that aims to eradicate human trafficking in Southeast Asia through legal advocacy, technological interventions, and strategic collaborations with, among others, financial institutions. Further Reading ILO Indicators of Forced Labour: wcmsp5/groups/public/---ed_norm/---declaration/ documents/publication/wcms_ pdf ILO Forced labour, human trafficking and slavery facts and figures: US Department of State Trafficking In Persons Report June 2016: pdf UK Modern Slavery Act 2015 Chapter 30: ukpga_ _en.pdf US Customs and Border Protection authority on shipment seizure and import blockage: trade-community/programs-outreach/convict-importations Nestle admits forced labour in seafood supply chain : nov/24/nestle-admits-forced-labour-in-seafood-supplychain US Department of Labor List of Goods Produced by Child Labor or Forced Labor: TVPRA_Report2014.pdf Verité 2016 report Strengthening Protections Against Trafficking in Persons in Federal and Corporate Supply Chains - Research on Risk in 43 Commodities Worldwide : CommodityReports-2016% pdf US Financial Crimes Enforcement Network guidance on how to recognize potential cases of human trafficking: FIN-2014-A008.pdf The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing: moneylaunderingrisksarisingfromtraffickingofhumanbeings andsmugglingofmigrants.html About Blackpeak Blackpeak is an Asia-focused investigative research and risk advisory firm dedicated to uncovering critical risk-related information for our clients. Our team members have been managing risk consulting projects in Asia for over 20 years. We have completed over 1,000 risk advisory engagements in Asia across various industries. Blackpeak specializes in investigative due diligence, investigations and security, and business intelligence research. The firm operates in every major market in Asia Pacific and maintains full service offices in Hong Kong, Singapore, Tokyo, Shanghai, Beijing and Guangzhou. Each project is executed by our in-house team with unmatched in-country expertise, using our customized investigative methodologies. Key contacts Please do not hesitate to contact us, if you would like more information relating to how your company can help eradicate human trafficking. Hong Kong Jack Clode jclode@blackpeakgroup.com Natalie Kwan nkwan@blackpeakgroup.com Singapore Chris Leahy cleahy@blackpeakgroup.com UNODC Elements of Human Trafficking: Hong Kong Singapore Tokyo Shanghai Beijing Guangzhou 4

Ethical issues impacting on the UK seafood supply chain. Roger Plant, Ethics Consultant

Ethical issues impacting on the UK seafood supply chain Roger Plant, Ethics Consultant Background Broad methodology/approach The big picture: recent examples Nature of evidence Countries to watch Industry