The human toll: International money laundering, part 1 of 2

International money laundering plays a major role in the financing of numerous illicit activities that threaten domestic and global financial systems. Human trafficking, one such illicit activity, is becoming ever more profitable and prevalent. In fact, it has become the third-largest source of income for organized crime groups after drugs and arms trafficking.

When we think of the average life of a 12-year old girl, rape and forced prostitution aren't what come to mind. But for many girls, that describes the devastating reality they're forced into because of the growing prevalence and profitability of human trafficking.

According to the Oct. 22, 2008, Al Jazeera article, "Child sex trade soars in Cambodia," reporters going undercover found girls as young as 14 forced to work as prostitutes in Cambodia. "Al Jazeera filmed secretly at several brothels, and in each case found much the same thing — rooms full of young women in their early 20s, as well as teenagers.

"For my virginity they gave me $200," said Ya Da, a 16-year-old former prostitute, according to Al Jazeera.

Ya Da's case is indicative of more than 12 million trafficked persons in the world who are subject to forced prostitution or labor.

To traffickers, people like Ya Da are nothing more than dollar signs. Each year, profits from human trafficking total approximately US$39 billion. This astronomical amount of illicit funds is then laundered into the worldwide financial system, adding the global economy to the long and growing list of human-trafficking victims.

MODERN-DAY SLAVERY

Human trafficking is a multibillion-dollar form of modern-day slavery. According to the International Labor Organization (ILO), at least 2.45 million persons are currently exploited as victims of human trafficking. Recent estimates by the ILO place its value at US$39 billion each year. However, because billion-dollar profit margins can't legally enter financial institutions unreported, human traffickers resort to money-laundering schemes. The most common trends involve wire remittance, money transfers, cash couriers, the structuring of transactions and the use of false identification documents.

For the first time ever, the U.S. Department of State ranked the U.S. in 2010 as susceptible to human trafficking. It's important that U.S. policymakers understand the mechanisms by which illicit proceeds of human trafficking make their way into U.S. financial institutions.

Part 1 of this article focuses 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 institutions in the global governance of anti-money laundering and human trafficking, specifically the Financial Action Task Force (FATF), the 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 in the July/August issue will focus on: 1) U.S. participation in the international institutions listed above 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 PROBLEMS

Money laundering
As the figure at right illustrates, money laundering typically occurs in three stages: placement, layering and integration. (Also see "The Money Laundering Process," 1.1501-1.1502, in the U.S. edition of the 2012 "Fraud Examiners Manual.") Money launderers look to offshore financial centers or bank secrecy jurisdictions where they have low risks of detection but financial systems that are stable enough to guarantee them secure access to their funds.

Because of the clandestine nature of the crime, no one knows the exact amount of laundered money circulating in the international monetary system. In 1996, the International Monetary Fund estimated the aggregate size of global money laundering to be approximately 2 percent to 5 percent of the world's gross domestic product, which by 1996 statistics would equal somewhere between US$590 billion and US$1.5 trillion.

The FATF lists the macroeconomic consequences to include: "inexplicable changes in money demand, prudential risks to bank soundness, contamination effects on legal financial transactions, and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers." Moreover, money laundering permits the underlying criminal activities, such as human trafficking, to expand, which places the social welfare of a nation or state at risk.

FOLLOW THE MONEY

Tracing the origins of laundered money can be a difficult task, but it can tell fraud examiners a lot about the original crimes. Each stage of the process (placement, layering and integration) provides clues about where the illicit funds might have originated. For example, the FATF claims that the underlying criminal activity may be concentrated geographically according to which stage the laundered funds have reached; as such, money laundering can be a Catch-22 for criminals. It's often the connections made through financial transaction records that allow law enforcement to locate hidden assets and establish the identity of the criminals and the criminal entity responsible for them.

Regional trends in money-laundering habits may also aid law enforcement in detecting money-laundering schemes. For example, human traffickers in the Americas rely more heavily on the use of casinos, import/export companies, cash-intensive businesses, money service businesses, wire transfers and online payments to launder illicit funds.

However, other trends in the global financial system over the past few decades have made the detection of illicit funds more difficult. UNODC has identified the following trends as complicating the detection of money laundering: the increased prevalence of the U.S. dollar in black market financial transactions, so criminals can avoid large currency conversions; financial deregulation; advances in technology that allow money to be transferred globally at unprecedented speeds; and the proliferation of financial secrecy havens.

Since 9/11, numerous countries have strengthened their anti-money laundering (AML) efforts and regulations to counter terrorist financing and to aid law enforcement with the challenges in detecting laundered criminal gains. However, its continued prevalence shows nations may not have gone far enough.

Human trafficking

 On Dec. 25, 2003, the United Nations Convention against Transnational Organized Crime established the first global, legally binding instrument with an agreed-upon definition of trafficking in persons known as the Protocol to Prevent, Suppress and Punish Trafficking in Persons. The convention created the definition to establish an element of uniformity in nations' domestic criminal human trafficking offenses to promote efficient international cooperation in the investigation and prosecution of human trafficking cases. It reads:

The recruitment, transportation, transfer, harboring or receipt of persons, by means of the threat or use of force or other forms of coercion, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person, for the purpose of exploitation. Exploitation shall include, at a minimum, the exploitation of the prostitution of others or other forms of sexual exploitation, forced labor or services, slavery or practices similar to slavery, servitude or the removal of organs.

The U.S. Department of State's "2010 Trafficking in Persons (TIP) Report" noted that in 2009, 12.3 million adults and children around the world were involved in forced labor and forced prostitution. Sexual exploitation, primarily of women and children, is the No. 1 reason for human trafficking around the world (Figure 2 at left). UNODC assessed that trafficked laborers "are most commonly used for domestic servitude, agriculture, manufacturing, janitorial services, hotel services, construction, health and elder care, hair and nail salons, and strip club dancing" (UNODC, "Global Report on Trafficking in Persons," Feb. 2009).

As Figure 3 illustrates, the globalization of the world economy has increased the legal and illegal movement of people from poorer to wealthier countries (Congressional Research Service, "Trafficking in Persons: The U.S. and International Response," Jan. 12. 2005). The U.S., for example, is a top destination country for human trafficking victims.

It's estimated that approximately 45,000 to 50,000 people, primarily women and children, are trafficked to the U.S. annually for the purposes of sexual exploitation and agriculture and domestic labor (F. Luckoo and M.Tzvetkova, "Combating Trafficking in Persons: A Directory of Organizations," The Anti-Trafficking Programme).

Trafficked individuals coming into the U.S. hail mainly from Thailand, Mexico, Philippines, Haiti, India, Guatemala and the Dominican Republic (U.S. State Department, "2010 Trafficking in Persons Report, June 2010).

The TIP Report found that "82 percent of these foreign adult victims and 56 percent of foreign child trafficking victims were labor trafficking victims." Although mainly perceived as a transnational crime, human trafficking can also be perpetrated domestically. The FATF has used the U.S. as an example of a location where human trafficking occurs within its own jurisdictions (FATF, "Money Laundering Risks Arising from Trafficking in Human Beings and Smuggling of Migrants — July 2011").

In 2000, the U.S. Congress enacted the Trafficking Victims Protection Act (TVPA), which provided the legislative framework for criminalizing human trafficking and established a tier system to rank how well countries comply with the minimum standards for the elimination of trafficking as set by the TVPA.

In 2010, the TIP Report ranked the U.S. as a Tier 1 country for human trafficking for the first time ever. According to HumanTrafficking.Org, a human rights advocacy group, "a Tier 1 ranking indicates that a state government has recognized the problem of human trafficking, has made efforts to address the issue, and meets the TVPA's minimum standards. A country with a Tier 2 rating hasn't met the standards but has made efforts to do so, while a Tier 3 rating means the country has not met the minimum standards and has not attempted to do so." Further indicating the growing prevalence of human trafficking in the U.S., the FBI classified human trafficking as a Part I Crime in the FBI's Uniform Crime Reports in 2009.

KEY INTERNATIONAL ENTITIES

FATF, UNODC and Interpol are spearheading many of the international and cooperative efforts to deter the laundering of funds directly related to human trafficking.

Financial Action Task Force

Established by the 1989 G-7 Summit in Paris, the FATF is an inter-governmental body whose primary responsibility is to develop and promote national and international AML policies. The FATF is a policy-making body that generates the necessary political will to bring about legislative and regulatory reform in money laundering and terrorist financing policies. It's comprised of 36 member countries and two regional entities: the Gulf Cooperation Council and the European Commission. In addition, there are 27 international and regional entities, such as Interpol, that are associate members or "Observers" of the FATF and participate in its work.

The FATF, in its role as a policy-making body, has taken great strides to provide the necessary guidance and expertise to help countries around the world develop and implement effective AML standards. The FATF is most known for its list of "40 Recommendations" that set out a basic, universally applicable framework of AML measures "covering the criminal justice system, the financial sector, certain non-financial businesses and professions, and mechanisms of international cooperation." The FATF initially developed these international standards in 1990 and have since amended them. 

United Nations Office on Drugs and Crime

Established in 1997 through a merger between the United Nations Drug Control Program and the Center for International Crime Prevention, UNODC is a global leader in the fight against international crime.

Headquartered in Vienna, UNODC operates 54 field offices around the world, covering more than 150 countries. The entity's mission is to help governments cope with instability and insecurity caused by international crimes like human, drug and arms trafficking and to keep them informed on evolving crime schemes, such as cybercrime.

Under UNODC's Millennium Declaration, member nations are committed to "intensify efforts to fight transnational crime in all its dimensions, to redouble the efforts to implement the commitment to counter the world drug problem and to take concerted action against international terrorism."

In response to a mandate from the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988, UNODC created its Law Enforcement, Organized Crime and Anti-Money Laundering Unit in 1997. The General Assembly broadened the unit's mandate in 1998 to cover all serious crimes, not just drug-related offenses.

Its overarching goal is to help member nations implement AML measures and to assist them in detecting, seizing and confiscating illicit proceeds. It does this by monitoring problems related to money laundering and analyzing member nation's responses to those problems, raising public awareness about money laundering and the financing of terrorism and by coordinating initiatives carried out by the UN and other international entities.

Similarly, UNODC has a program called the Framework for Action that is specifically designed to address human trafficking issues. The Framework for Action program helps member nations meet the requirements of the United Nations Protocol to Prevent, Suppress and Punish Trafficking in Persons (also known as the United Nations Trafficking Protocol).

Interpol

Interpol is the largest international police agency in the world with 190 member countries. Interpol's official name, ICPO-INTERPOL, stands for the International Criminal Police Organization. Headquartered in Lyon, France, Interpol has offices all over the world, including one in New York City.  

The key element of Interpol's success is its facilitation of information gathering and sharing among law enforcement agencies. The following tools help create uniformity in reporting and global cooperation in tracking criminals and suspects involved in human trafficking and provide access to Interpol's crime databases (available to member nations via Interpol's secure global police communications system): the Human Smuggling and Trafficking Message, the MIND/FIND (Mobile INTERPOL Network Database and the Fixed INTERPOL Network Database) technology allowing immigration and border enforcement agencies to run checks against Interpol's database of nearly 14 million stolen and lost travel documents and the "International Contact Directory for People Smuggling Issues and the Notices and Diffusions System," which provides member countries with a way to warn each other if a known child sex offender is traveling to their territory or region.

These entities are all critical in the fight against AML schemes and human trafficking, but what about the U.S.'s role? Read about that in part 2.

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:

Operation Supersonic: trafficking for sexual exploitation

Operation Supersonic was a U.S. Immigration and Customs Enforcement Homeland Security Investigations (ICE-HSI) case that was initiated in December 2003 when the mother of a victim in the case went to the American Embassy in Mexico City, Mexico, to report that her daughter had been kidnapped. Based on information provided by the mother, ICE-HSI special agents in New York were able to locate and rescue the daughter as well as several other victims.

In the scheme, which began approximately in 1991, male members of a family romantically lured young girls from poor towns in Mexico to live in their hometown. The young girls generally stayed with the mothers of the male traffickers, who fathered children with some of the young girls.

Once the girls turned 18, the traffickers smuggled them into the U.S. and brought them to New York where they were forced to become prostitutes and live in apartments rented by the traffickers. Those who had children with the traffickers left their children in Mexico with the traffickers' mothers.

The traffickers in New York would physically abuse and threaten the victims with harming their children in Mexico if they didn't engage in prostitution. The traffickers subjected the victims to performing 25 to 30 sex acts per day, and they often forced them to have abortions.

Eight defendants were charged in a 27-count indictment, including the lead defendants' mother, who was recently extradited to the U.S. to stand trial. Six of the eight defendants have already been convicted; one defendant remains a fugitive in Mexico.

The two lead defendants in this case each were sentenced to 50 years imprisonment for sex trafficking, which is the longest sentence imposed on a human trafficker since the enactment of the U.S. Trafficking Victims Protection Act.

Approximately 25 victims were identified and rescued. The U.S. and Mexican governments closely cooperated throughout the investigation, and they also worked together to rescue the victims' children and reunite them.

Financial analysis of money transfer receipts revealed the transfer of approximately US$200,000 from 1998 to 2004, although there were indications that these transactions dated back to 1991. The money was primarily sent back to Mexico to relatives of the traffickers.

The red flag indicators associated with this case primarily surrounded the use of money services businesses to launder illicit proceeds from the prostitution in which the girls were forced to engage: the traffickers were in the U.S. illegally, had no assets in the U.S. and no gainful employment to justify their living standards. They basically lived day by day off the proceeds from the prostitution and rented apartments in New York to house themselves and the victims.

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

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