International money laundering, part 2 of 2

International money laundering has become a key tool in facilitating the growing prevalence of human trafficking. The author outlines how the U.S. has entered the fray and the challenges facing it and the international community.

The National Human Trafficking Resource Center (NHTRC) received an anonymous call from a young woman, offering information about a suspicious massage parlor. She reported that six Thai nationals, all around 18 years old, were forced to live and engage in prostitution at a commercial-front brothel in a strip mall. She said that an older woman named Thip lured the teenagers with promises of legitimate jobs. After they started working, Thip threatened to have them deported and kill their families in Thailand if they tried to quit. The caller provided the phone number for the massage parlor, but because she was afraid that someone might find out she had called, she opted not to provide additional information.The NHTRC reported the situation to a local human trafficking task force, which matched the phone number the caller provided with a number from an online advertisement for erotic massages. An undercover officer was sent inside the massage parlor and arranged to pay $80 in exchange for sex. Once the arrangement was made, police raided the establishment and found buckets of condoms, hidden security cameras and five trafficking victims, including the anonymous caller. Thip was arrested and charged with involuntary servitude, human trafficking and pandering. She ultimately pled guilty and received a lengthy prison sentence.

This actual case, from the Polaris Project (an entity that works to end human trafficking) had a relatively positive ending because law enforcement caught the perpetrator. However, it doesn't end that well for most of the thousands of people trafficked into the U.S.

Part 1 of this article in the May/June issue focused on the global impact of the relationship between international money laundering and human trafficking, including: 1) the perpetration, costs and trends of money laundering and human trafficking offenses; 2) the efforts of the Financial Action Task Force (FATF), United Nations Office on Drugs and Crime (UNODC) and Interpol, in combating these crimes and 3) its impact on the U.S. and its financial systems.

Part 2 focuses on: 1) U.S. participation in the international institutions listed previously to detect and deter these insidious crimes, and U.S. policy compliance with global money laundering and human trafficking standards, and 2) the challenges that international cooperation, lack of global awareness and low prosecution rates present for future policymakers to curtail these crimes.

The U.S. is a member of both the FATF and U.N. and is one of the 140 signatory participants of the Conference of States Parties of the United Nations Convention against Transnational Organized Crime, the global initiative to fight human trafficking. The U.S. signed the treaty on Dec. 9, 2003 and ratified it on Oct. 30, 2006.

NOT ALL IS WELL IN DELAWARE

U.S. federal laws are consistent with international standards for money laundering. In response to the 9/11 terrorist attacks, President George W. Bush signed the USA PATRIOT Act to curtail the financing of terrorist activities through money-laundering schemes. Title III of the act, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, mandates financial institutions to comply with a series of anti-laundering measures including but not limited to the implementation of anti-money laundering (AML) programs and transparent financial reporting.

However, not all U.S. state laws are consistent with the federal mandate. Delaware, for example, has lax corporate tax laws that make it a de facto tax haven. This is because Delaware corporations can be used to hold assets in the U.S. with an effective tax rate of zero, as long as the majority of directors (not shareholders) are non-U.S. persons. (Read Beat Guldimann's Sept. 7, 2010, article, "Biden's Delaware: Making Swiss Banking Look Hyper-Clean," in The Globalist.)

Furthermore, Delaware allows the registration of limited liability companies without the disclosure of their actual owners. This is where Delaware starts countering the AML standards set forth by not only the PATRIOT Act but also by the FATF. Critics argue that the U.S. needs to close these loopholes if it wishes to be taken seriously as a global leader of financial transparency.

The opportunity for individuals to register limited liability companies in Delaware without the disclosure of their actual owners eases the ability for anyone to launder illicit funds. This opportunity is enhanced by the Tax Justice Network's recent labeling of Delaware as "the most secretive financial jurisdiction in the world," based on an analysis of 60 financial jurisdictions and their levels of secrecy and cooperation with foreign tax authorities.

The same study showed that the U.S. growth of private individual deposits by non-residents in 2007 was more robust than other popular financial jurisdictions such as the Cayman Islands, the U.K. and Luxembourg. In 2007, the total non-resident deposits in the U.S. equaled $2.6 trillion. (See Arthur Delaney's Nov. 1, 2009, article, "USA Tops International Tax Haven List, Thanks To Delaware," in The Huffington Post.)

U.S. HUMAN TRAFFICKING ENFORCEMENT

The U.S. has made significant progress in recent years to address the growing problem of human trafficking. According to UNODC, U.S. laws before 2000 were inadequate in preventing human trafficking or helping victims. Beginning on March 11, 1998, President Bill Clinton issued a directive establishing a U.S. government-wide, anti-trafficking strategy of prevention, protection and support for victims and prosecution of traffickers.

Subsequently, the Bush and Obama Administrations followed suit by implementing programs and enacting legislation to strengthen U.S. laws. One such initiative, called U.S. Project STAMP (Smugglers and Traffickers, Assets, Monies & Proceeds) targets the illicit proceeds earned by migrant smuggling/human trafficking entities.

As mentioned in part 1, the leading anti-trafficking legislation in the U.S. is the Trafficking Victims Protection Act (TVPA), which was signed into law in 2000 and subsequently reauthorized in 2003, 2005 and 2008 by the Trafficking Victims Protection Reauthorization Act (TVPRA).

The TVPA established the U.S. State Department Office to Monitor and Combat Trafficking in Persons, authorized the annual "State Department Trafficking in Persons Report," created the international tier system for ranking nations' compliance with TVPA global minimum standards for confronting trafficking and slavery and made human trafficking a federal crime. In addition, the TVPA initiated assistance programs for survivors, including visa protection for victims trafficked across international borders.

Despite these initiatives, the number of convictions compared to the number of suspected trafficking cases in the U.S. remains low. Figure 1 at left, taken from the UNODC's "Global Report on Trafficking in Persons," illustrates the number of individuals convicted under all trafficking offenses in the U.S. from FY2005-07. Despite these seemingly low figures, U.S. conviction rates are high when compared on a global scale. According to the U.S. State Department, in 2009 there were 5,606 prosecutions and 4,166 convictions for human trafficking worldwide. For offenses strictly limited to labor trafficking, there were 432 prosecutions and 335 convictions.

One contributing factor to low conviction rates in the U.S. is the inconsistent state laws. For example, West Virginia, Maine, Wyoming and Virginia don't criminalize human trafficking. Colorado, Hawaii, West Virginia, Maine, Nevada, Oregon, Pennsylvania, South Carolina, Wyoming and Virginia don't specifically include sex trafficking as a form of human trafficking.

These discrepancies can create potential havens for traffickers and contribute to overall lower prosecution rates. To increase conviction rates, the federal government may consider mandating states to enact laws criminalizing human trafficking that meet federal standards. To remain a viable leader in the global fight against human trafficking, the U.S. may need to ensure that the anti-human trafficking policies it recommends abroad are upheld domestically.

THE CHALLENGES AHEAD

The institutions of global governance working to detect and prevent human trafficking and its profits from being laundered into the global economy face numerous challenges.

International cooperation and information sharing

Because of the transnational nature of most money-laundering schemes, international law enforcement agencies and financial institutions should try to cooperate. A critical element is information sharing among jurisdictions, which aids law enforcement in investigations and provides frameworks for identifying trends and red flags.

An FATF study of jurisdictions involved in AML efforts found these common issues: time delays; ineffectiveness; special conditions attached to the information shared; and the lack of effective, mutual legal assistance.

International cooperation and information sharing is also crucial for identifying, prosecuting and deterring human trafficking cases. The FATF stresses the dearth of information about the number of persons being trafficked and smuggled, and there's even less information about the income generated by this activity and how it's laundered.

The director of the International Center of the National Institute of Justice (NIJ) of the U.S. Department of Justice (DOJ), when discussing the issue in a focus group on human trafficking hosted by the group in 2007, stressed the importance of information sharing with source countries from different geographic locations to understand the specific contexts of disparate human trafficking cases.

Also, law enforcement agencies that share policies, practices and procedures, can begin to learn the boundaries of their work and of others and areas in which they overlap. To encourage increased cooperation, the institutions of global governance should strengthen and promote the use of existing information-sharing mechanisms such as Interpol's criminal database among jurisdictions.

A number of provisions included in the U.S. TVPRA bill of 2011 (which stalled in the House and Senate last October) would strengthen international cooperation and global information sharing programs. If passed, this bill would:  

1. Authorize the Trafficking in Persons (TIP) Office to negotiate child protection compacts with designated focus countries to increase resources and political will to eradicate child trafficking. 
2. Provide resources to allow the TIP Office to respond quickly to  
3. requests for technical assistance from foreign countries. 
4. Instruct State Department regional bureaus to designate anti-trafficking specialists in U.S. embassies abroad to collect information on trafficking and communicate U.S. concerns to foreign government officials. 

LACK OF AWARENESS

Effective information campaigns can help educate the international community on the red flags of human trafficking and potentially increase the number of reported trafficking cases. According to the Polaris Project, common red flags of a victim include someone who: works excessively long and/or unusual hours; isn't allowed breaks or suffers unusual restrictions at work; avoids eye contact; exhibits fearful, anxious, depressed or submissive behavior; appears malnourished and lacking in hygiene; isn't in control of his or her identification documents (ID or passport); displays numerous inconsistencies in his or her story; and lacks a sense of time.

In a survey of U.S. state and local law enforcement personnel conducted by Caliber, an ICF International Company, for the DOJ, all respondents concurred that standard protocols should be in place so law enforcement can recognize these red flags for identifying human trafficking victims. Increasing law enforcement's human trafficking awareness would also provide them the necessary tools to evaluate areas in which they need support, assistance and information to better identify trafficking cases and respond to its victims.

In the international law enforcement community, the skill sets needed to investigate human trafficking and money-laundering cases are predominantly lacking. The FATF highlights the "importance of the cooperation between law enforcement, judicial authorities and the financial intelligence units at the national and international level" to compensate for the lack of financial awareness and training for investigators/prosecutors.

Also, the NIJ reported in a study that when authorities have succeeded in arresting traffickers, nongovernmental entities have provided helpful intelligence and have played a key role in stabilizing victims so they could cooperate with law enforcement (Read "Trafficking in Persons in the United States" by Kevin Bales and Steven Lize, submitted to the National Institute of Justice, March 2005.).

This same lack of awareness by state and local law enforcement on how to identify human trafficking victims is a significant issue in the U.S. as well. The NIJ study also found that "trafficking victims often have contact with local law enforcement authorities, but because local law enforcement agents lack sufficient training, they fail to notice the victims or take appropriate action to bring them to safety."

Moreover, according to the DOJ-funded Caliber study mentioned earlier, almost one-third of local and state law enforcement personnel interviewed didn't know if their state had a human trafficking law. This is especially problematic since local law enforcement is usually the first responder to any alerts.

To narrow the significant gap in human trafficking awareness among federal and local law enforcement agencies, policy makers should explore ways to increase training materials and resources for state and local law enforcement agencies, such as those in place at the DOJ. The DOJ's Bureau of Justice Assistance and the Office for Victims of Crime administer grants to support state and local anti-human trafficking task forces, which are tasked with identifying victims, streamlining victim services and assisting victims during criminal justice proceedings.

For FY2012 eligible state and local law enforcement applicants could receive up to $500,000 in federal grant funding for a two-year project period with a 25 percent cash or in-kind match requirement for all applicants.

LOW PROSECUTIONS

The global scale of prosecutions of human trafficking offenses is relatively low compared to the number of trafficking cases reported (Figure 2 below). UNODC's "2009 Trafficking in Persons Report" found that out of 155 countries studied, 91 stated they prosecuted at least one human trafficking case, 73 reported at least one conviction, and 47 reported making at least 10 convictions per year ("Money Laundering Risks Arising from Trafficking in Human Beings and Smuggling of Migrants," July 2011). These figures are evidence of a significant gap between the estimated number of victims and the number of criminals identified, prosecuted and convicted.

UNODC identified challenges in prevention, protection and prosecution efforts in the three following areas: "knowledge and research; capacity building and development; and monitoring and evaluation" (UNODC, "International Framework for Action"). International governing entities could help jurisdictions in these areas by: strengthening international cooperation and information sharing, increasing public awareness on the red flags of human trafficking and ensuring that law enforcement agencies have the skills to prosecute two different crimes at once. Also, these measures may help increase the number of human trafficking convictions, ultimately reducing the amount of laundered trafficking proceeds.

Law enforcement agencies at the federal, state and local levels could increase the use of anonymous tip hotlines to provide a way for people to report their suspicions but are too scared to go directly to the authorities; these tips then could be shared among all other law enforcement agencies, both domestic and international.

KEEP YOUR EYES AND EARS OPEN

The human trafficking pandemic is generating billions of dollars that are making their way into the global financial system via money laundering schemes. Money laundering undermines the stability of financial institutions, discourages foreign investment and distorts international capital flows.

Institutions of global governance such as the FATF, UNODC and Interpol have set global standards and implemented measures to help detect, prevent and prosecute these interrelated, transnational crimes.

Although U.S. federal anti-money laundering and human trafficking laws meet these global standards, it would help to close all loopholes in order for it to remain a global leader of financial transparency.

Nothing is ever as apparent as it seems, from the young ladies giving you that pedicure to the migrant farmer who picked the fruit on your plate. Always keep your eyes and ears open.

Alani Mundie, CFE, international law enforcement liaison for the ACFE, manages two of the ACFE's partnership initiatives: the ACFE Law Enforcement Partnership and the Corporate Alliance.

SIDEBAR: California smuggling: busting a sex/human trafficking ring

The deputy special agent in charge in the San Ysidro, Calif., Office of U.S. Immigration and Customs Enforcement Homeland Security Investigations (ICE-HSI) is leading a joint investigation into a commercial sex/domestic human trafficking ring based in San Diego. Multiple subjects with various degrees of documented gang affiliation have been linked to this criminal organization. Loosely affiliated pimps and gang members are recruiting and promoting the prostitution of adult and minor females.

The Internal Revenue Service – Criminal Investigations and the San Diego Police Department are assisting. ICE-HSI has conducted several undercover operations to collect evidence supporting the investigation. Three subjects acting as pimps have been arrested on state charges.

ICS-HSI has served multiple grand jury subpoenas and executed multiple electronic search warrants to exploit online information, resulting in the identification of: 

• Bank accounts.  
• Clients. 
• Illicit proceeds.  
• Methods of operations related to illegal commercial sex. 

An analysis of the financial intelligence has revealed several indicators of suspicious financial transactions and possible money laundering.

Some of the red flag indicators are: 

• Structuring deposits to avoid currency transaction reports. 
• The use of credit card processing accounts with corresponding business fronts with even-number charges credited to the accounts ranging from US$300 to US$5,000.  
• Checks written in even amounts deposited into bank accounts with "for a good time" written in the note field.  
• Leasing of high-end luxury vehicles and extravagant trips paid by electronic funds transfer from business bank accounts.  
• Credit card payments to online escort services for advertising (including small posting fees to companies such as Craigslist as well as more expensive, higher-end advertising and website hosting companies).  

Source: FATF, "Money Laundering Risks Arising from Trafficking in Human Beings and Smuggling of Migrants — July 2011" 

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