Human trafficking, also often referred to as modern slavery, is the act of recruiting, transporting, transferring, harboring, or receiving of persons by means of threat, fraud or use of force or other forms of coercion for the purpose of exploitation. Human trafficking is one of the fastest-growing forms of crime in the world, and an estimated 40.3 million people were victims of modern slavery in 2016.1 Approximately 24.9 million of those victims were trapped in forced labor, and women and girls were estimated to account for 71% of modern slavery victims. The annual profits generated from modern slavery are approximately $150 billion per year. Financial institutions have been responsible for identifying and reporting modern slavery for some time, but as criminal activity continues to evolve, so should financial institutions’ strategies.
Traffickers exploit traditional banking systems to spend, transfer, and launder their illegal profits. Financial institutions have a role in the fight against modern slavery and human trafficking by identifying and preventing traffickers from laundering the proceeds of their crimes. As banks become better at identifying the proceeds of human trafficking, criminals will find new ways to make it harder for investigators to understand and trace the movement of funds. Financial institutions and law enforcement should enhance their strategies to identify and prevent the laundering of trafficking proceeds.
Recently, criminals involved in human trafficking have turned to cryptocurrency in an attempt to avoid the strict controls of traditional banking systems and exploit dark markets for sex trafficking and child pornography. For example, as discussed below, the pseudo-anonymity of cryptocurrency transactions, particularly through unregulated exchanges or peer-to-peer networks, can facilitate transactions that are unencumbered by Know Your Customer (KYC) controls. Traffickers use cryptocurrencies to purchase advertisements and by sex buyers to purchase premium memberships on review board websites. Some members of the cryptocurrency community are specifically catering to traffickers who post advertisements on Backpage and other sites.
While many crypto exchanges collect significant data from the transactions they generate and are committed to addressing AML and modern slavery concerns as a matter of urgency, certain unique characteristics of cryptocurrency make it attractive to criminals seeking to conceal their identity and cover the trail of their illegal activity. There are tools businesses can leverage to better identify and address cryptocurrency transactions involving trafficking and other financial crimes. Although cryptocurrency is known for its apparent anonymity, in fact, cryptocurrency can more accurately be described as pseudonymous. In most cases, the originating address, destination address, and amount of funds associated with a transaction are permanently and, generally, immutably recorded on the blockchain. There is, however, no personal identifying information, such as an individual’s name, birthdate, or Social Security number associated with the transaction. Despite the lack of personal identifiers, there are methods of ascertaining an address owner’s identity, including analyzing blockchain activity for patterns that may provide insight into a user’s identity, the use of blockchain-tracing tools, or leveraging data obtained by regulated cryptocurrency exchanges that collect customer data in accordance with increasing KYC and AML regulations.
Leveraging information collected by businesses engaged in cryptocurrency through the implementation of enhanced data analysis systems, and the use of artificial intelligence and new technological developments is critical to better understand the scope, geography, and victim population and, in turn, more effectively fight modern slavery. As an example of how these tools can be used to identify and prevent trafficking, in 2019, a South Korean national was arrested for operating the darknet market, Welcome to Video, the largest child sexual exploitation market by volume of content, as a result of the combined action taken by US and foreign law enforcement agencies. Welcome to Video contained more than 250,000 child exploitation videos and boasted over one million downloads of child exploitation videos by users. Welcome to Video offered these videos for sale in exchange for bitcoin. Investigators were able to follow the flow of funds on the blockchain to trace payments of bitcoin to the darknet site and identify wallets associated with the site’s administrator. The investigation led to the arrest of 337 subjects around the world.
In addition to the use of data and technology to combat financial crime, it is critical that cryptocurrency exchanges adopt anti-human trafficking policies and procedures and implement strong AML and modern slavery programs with efficient transaction monitoring and KYC and Customer Due Diligence programs to detect traffickers.
Ari Redbord, head of Legal and Government Affairs at TRM Labs, discussed actions crypto companies can take to combat use of their services for trafficking. He advised that cryptocurrency exchanges should be on the lookout for use of obfuscation techniques such as peeling chains, which are a form of structuring on the blockchain that are indicative of money laundering. If a crypto exchange identifies that a certain wallet address is transacting with darknet markets or other sites that sell child exploitation and other sexually exploitative materials, the exchange should flag that address and work closely with law enforcement. If an address is consistently engaging with an unregulated exchange that facilitates illicit activity, it is a red flag for larger regulated exchanges. Redbord stated that the power and promise of cryptocurrency is that it provides unprecedented visibility on financial flows and allows law enforcement and crypto businesses to track and trace funds used in illicit activity like human trafficking.
Seth Sattler, Bank Secrecy Act officer at DigitalMint, believes that companies operating in the cash-to-crypto space need to work together and share their best practices for detecting and preventing transactions related to human trafficking, noting the impact that a group of influential companies can have when they come together to tackle an issue affecting the industry. In addition, public/private partnerships are crucial because any information law enforcement provides regarding industry trends helps companies implement more effective controls. The Cryptocurrency Compliance Cooperative, based in Chicago, is an example of a partnership where industry experts and law enforcement work together to analyze how bitcoin ATMs are being used for human trafficking-related transactions and to determine what additional controls can be implemented to prevent and report human-trafficking activity.
In summary, next steps for those concerned about the role cryptocurrency plays in human trafficking should include information exchange, increased cooperation, focus on education, and the implementation of artificial intelligence for better data analysis and accurate detection of modern slavery-related transactions. In addition, collaboration between private and public sector is important to create industry awareness and promote better financial crime controls. As criminals attempt to exploit crypto exchanges to circumvent detection, enhanced data analytics and technology, in combination with the implementation of strong AML and anti-human trafficking programs, is crucial to ensure that crypto markets do not become a modern slavery haven.