Clifford Chance

The US Financial Crimes Enforcement Network ("FinCEN") recently issued an advisory outlining several typologies indicative of human trafficking and updating its guidance for financial institutions.

In 2014, FinCEN issued its first advisory on human trafficking ("2014 Advisory") which outlined certain "red flags" of which financial institutions should be aware. Under the Bank Secrecy Act ("BSA"), financial institutions are required to report to FinCEN any transaction that the financial institution knows, suspects, or has reason to suspect involves funds derived from illegal activity, including human trafficking. FinCEN is a division of the U.S. Department of Treasury that collects and analyzes possible illicit financial activities and acts as the United States' Financial Intelligence Unit ("FIU").

Notwithstanding the guidance in the 2014 Advisory, financial institutions have continued to experience difficulty differentiating between human trafficking and other illicit activity. Financial institutions often do not have human trafficking-related training and materials and have often reported possible human trafficking transactions as other illicit activity, such as tax evasion or drug trafficking.

The October 15, 2020 FinCEN Advisory, "Supplemental Advisory on Identifying and Reporting Human Trafficking and Related Activity" ("2020 Advisory"), attempts to further educate financial institutions by detailing 20 financial and behavioural indicators of human trafficking, and four typologies often used by traffickers. FinCEN identified these typologies through a review of BSA data gathered since 2014.

• Front Companies: The 2020 Advisory explains that front companies are businesses that "combine illicit proceeds with those gained from legitimate business operations." In the context of human trafficking, the 2020 Advisory cautions that financial institutions should give particular attention to massage businesses, escort services, bars, restaurants, and cantinas. 
• Exploitative Employment Practices: The 2020 Advisory describes two employment practices commonly used by human traffickers. First, labor recruiters often mislead workers about the nature of a job and the conditions of employment, switch employment contracts surreptitiously, and/or destroy the workers' identification documents. Second, employers will charge high fees to workers, alleging they are needed to cover the costs of recruitment or job opportunities, withholding the worker's salary to collect them.
• Funnel Accounts: Human traffickers commonly use funnel accounts, i.e., an account in one geographic area will receive multiple deposits (most often cash) and the funds are then promptly withdrawn in a different geographic area.
• Alternative Payment Methods: The BSA data analyzed by FinCEN also indicated the use of non-cash, alternative forms of payment such as prepaid cards, credit cards, and mobile payment applications being accepted and used by human traffickers. The 2020 Advisory calls special attention to the use of virtual currency, including to advertise commercial sex online, and to third-party payment processors.

Regarding the additional 20 red flag indicators of human trafficking identified in the Advisory, FinCEN notes that victims of human trafficking may have contact with persons other than their traffickers only when visiting financial institutions. Thus, it is "critical that customer-facing staff are aware of behavioral indicators that may indicate human trafficking."

The 2020 Advisory also provides specific guidance to financial institutions on collecting and reporting possible human trafficking. First, the 2020 Advisory notes that FinCEN's Customer Due Diligence (CDD) Rule requires financial institutions to identify and verify the beneficial owners of legal entity customers. Second, the 2020 Advisory reiterates from the 2014 Advisory the important role, in combatting human trafficking, of information sharing between financial institutions. It emphasizes that financial institutions sharing information on suspicious transactions are protected from civil liability by Section 314(b) of the USA PATRIOT Act.

Lastly, the 2020 Advisory discusses the importance of filing Suspicious Activity Reports ("SARs") for combatting human trafficking. Under the BSA, financial institutions are required to file SARs with FinCEN for any transaction or series of transactions indicative of criminal activity. The 2020 Advisory instructs financial institutions to reference the Advisory in the SAR, where relevant, and to mark the checkbox for "human trafficking" on the SAR form, which was first instituted in 2018.

The 2020 Advisory also notes that the COVID-19 pandemic can "exacerbate" human trafficking by increasing vulnerabilities and decreasing the support systems available to potential victims. Given the new typologies identified by FinCEN and the increased risk from the global pandemic, financial institutions should consider implementing procedures to further address these developments and remain in compliance with the BSA, including by adopting anti-trafficking policies, conducting human rights due diligence, and implementing training modules for employees.