Is your financial institution doing what it can and should to identify and mitigate sex trafficking money laundering risks? Are your risk assessment and transaction monitoring models up to date with emerging trafficking risks and trends? The rise of cryptocurrencies and the darknet (or dark web) have created new challenges for financial institutions in detecting and reporting money laundering related to sex trafficking. Chainalysis, the blockchain research firm, recently estimated that cryptocurrency-related illicit transaction volume went up to $20.1 billion last year. At the same time, WeProtect Global Alliance reported in their 2021 Global Threat Assessment that “more than 3,000,000 accounts are registered across the 10 most harmful child sexual abuse sites on the dark web.” Cryptocurrency and the darknet have enabled sex traffickers to connect and communicate with other criminals and customers and move money more easily and anonymously than ever before. This has made it more difficult for financial institutions to detect and prevent money laundering related to sex trafficking.
In October 2020, FinCEN published a supplemental advisory (FIN-2020-A008) to its 2014 Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking – Financial Red Flags (FIN-2014-A008), The supplemental advisory provides four additional typologies and 20 new financial and behavioral indicators of labor and sex trafficking, including the following:
A customer frequently sends or receives funds via cryptocurrency to or from darknet markets or services known to be associated with illicit activity. This may include services that host advertising content for illicit services, sell illicit content, or financial institutions that allow prepaid cards to pay for cryptocurrencies without appropriate risk mitigation controls.
As the financial industry continues to evolve, financial institutions are going to need to update their transaction monitoring models to ensure they are able to detect and report money laundering related to sex trafficking.1
Sex Trafficking Risks and Monitoring
In their BSA risk assessments, financial institutions identify the various banking products, services, customer types, and geographies that pose heightened risk for money laundering including laundering related to sex trafficking. Customers who seek anonymity, who have a history of suspicious activity, or are located in countries with weak anti-money laundering regulations are at higher risk. Services that allow for the transfer of funds between multiple accounts, such as prepaid cards, can be used to facilitate money laundering. Finally, geographies with high levels of human trafficking activity, such as certain parts of Asia and Africa, are also at higher risk.
For banks, credit unions and other institutions exposed to the above risk areas, red flags related to sex trafficking generally include large cash deposits or withdrawals, frequent transfers of funds to or from high-risk countries, and the use of shell companies or offshore accounts. Other red flags include the use of multiple accounts to move funds, the use of multiple currencies, and the use of third-party payment processors. Additionally, suspicious activity may include the use of prepaid cards, the use of multiple payment methods, and the use of multiple bank accounts. Finally, suspicious activity may also include the use of multiple identities, the use of multiple addresses, and the use of multiple phone numbers.2
Sex Trafficking in the Era of Cryptocurrency and the Darknet
In the past decade, sex trafficking has evolved significantly due to the use of cryptocurrency and the darknet. Cryptocurrency is increasingly being used to launder money due to its decentralized nature and lack of mature regulation. Criminals can use cryptocurrency to hide their identity and the source of their funds, making it difficult for law enforcement to trace the money. Criminals can also use cryptocurrency to purchase goods and services anonymously, making it difficult to track the money. Additionally, criminals can use cryptocurrency to transfer money across borders without having to go through traditional banking systems, making it even more difficult to trace the money. In Making Cryptocurrency Part of the Solution to Human Trafficking, Chainalysis reported that in 2019 they “tracked just under $930,000 worth of Bitcoin and Ethereum payments to addresses associated with CSAM3 providers. That represents a 32% increase over 2018, which in turn saw a 212% increase over 2017.”
The U.S. Government Accountability Office (GAO) issued a report in early 2022 addressing the increased use of virtual currency in sex trafficking (as well as drug trafficking and human trafficking more broadly). Based on GAO recommendations, FinCEN is currently coordinating with the IRS to evaluate new registration requirement proposals for virtual currency kiosks (also called crypto ATMs). Currently operators of the kiosks, which facilitate the conversion of cash and virtual currencies, must register with FinCEN but are not even required to identify kiosk locations.
The darknet is a part of the internet that is not indexed by search engines and is often used to facilitate the sale and purchase of illicit products and services. It is a hidden network of websites that can only be accessed using special software, such as Onion Router and the Tor browser. In its 2021 annual report, the Internet Watch Foundation (IWF), a UK based non-profit dedicated to the prevention of online child sexual abuse, “identified 931 new hidden services, up from 734 in 2020” representing an increase of 27%. The darknet has provided traffickers with a platform to advertise their services, communicate with potential customers, distribute materials including child pornography and facilitate transactions. This has made it easier for traffickers to reach a wider audience, to operate more efficiently, and to avoid detection and prosecution.
Evolving Monitoring Efforts
What is your institution doing to address sex trafficking risks? Are your risk assessment and transaction monitoring models capturing and mitigating the evolving risks in this digital age? Financial institutions are going to need to ensure that transaction monitoring models evolve to address the increasing risks of traffickers’ use of cryptocurrency and the darknet. As FinCEN has indicated, monitoring scenarios should address red flags and typologies involving cryptocurrency, such as large transfers of funds to anonymous wallets, and transactions involving the darknet. Financial institutions should explore the use of keyword lists and negative news analysis to identify digital currency and dark web transactions as well as capturing any pertinent transaction codes.
To facilitate the monitoring of these evolving money laundering red flags and typologies, financial institutions should also explore emerging data solutions that facilitate web intelligence regarding darknet marketplaces, forums and networks, as well as blockchain analysis tools which allow financial institutions to understand cryptocurrency counterparty risk, risk associated with particular exchanges, and compare current cryptocurrency activity with activity typical for the customer.
