Updated Indicators: Laundering of proceeds from human trafficking for sexual exploitation

Reference: FINTRAC-2021-OA001
July 2021

Updated Indicators: Laundering of proceeds from human trafficking for sexual exploitation (PDF version, 671 KB)

Purpose

This Operational Alert updates FINTRAC's 2016 Operational Alert "Indicators: The laundering of illicit proceeds from human trafficking for sexual exploitation" with additional indicators in support of Project Protect to assist reporting entities in recognizing financial transactions suspected of being related to the laundering of proceeds associated to human trafficking for sexual exploitation. Through financial transaction reports, FINTRAC is able to facilitate the detection, prevention and deterrence of all stages of money laundering (placement, layering and integration) and the financing of terrorist activities by providing actionable financial intelligence disclosures to law enforcement and national security agencies.

Background

Human trafficking is often confused with human smuggling, although these crimes can overlap. Human smuggling involves individuals who voluntarily consent to be illegally moved across an international border by other individuals for an agreed-upon fee. Human smuggling always involves an international border, is consensual, and the relationship between the smuggler and smuggled person usually ends once the smuggled person arrives at their destination country. Conversely, human trafficking can occur both within a country's own borders and through international movement, is not consensual (the trafficked person does not consent to being exploited), does not end upon crossing a border, and involves forcing or coercing the trafficked person to provide their services (typically through sexual exploitation or forced labour). In some cases, a smuggled person can become a victim of human trafficking when they arrive at their destination.

Project Protect

is a public-private partnership initiative led by the Bank of Montreal, supported by Canadian law enforcement agencies and FINTRAC. First launched in 2016, Project Protect targets human trafficking for sexual exploitation by focusing on the money laundering aspect of the crime. The objective of the project is to improve the collective understanding of the crime, and to improve the detection of the laundering of proceeds from human trafficking for sexual exploitation.

Human trafficking for sexual exploitation is reported to be more prevalent than forced labour. Canada is a source, transit and destination country for men, women and children trafficked for the purposes of sexual exploitation. Traffickers exploit their victims primarily for financial gain. The money laundering indicators in this Operational Alert apply equally to victims trafficked in Canada regardless of their origin.

What is human trafficking?

"Human trafficking, also referred to as trafficking in persons, involves recruiting, transporting, transferring, receiving, holding, concealing,  harbouring, or exercising control, direction or influence over that person, for the purpose of exploitation, generally for sexual exploitation or forced labour."

Research suggests that human trafficking for sexual exploitation, like drugs and weapons trafficking, is just another commodity in a range of criminal activities perpetrated mostly by organized crime groups who often collaborate with each other to maximize illicit financial gain. Sexual exploitation is a high-value business for criminals because, unlike a drug that can only be sold once, a human being can be sold repeatedly over an extended period of time. This type of crime is also attractive to criminals because the risk of losing business due to detection and successful prosecution is kept low through coercion of their victims in combination with the use of well-known money laundering methods. As a result, the perpetration of this crime is reinforced because criminals are able to benefit from the illicit proceeds. The International Labour Organisation (ILO) estimates that global proceeds from human trafficking amount to USD 150 billion per year with USD 99 billion sourced specifically from forced sexual exploitation. 

In Canada, the number of police-reported incidents of human trafficking has been on an upward trend since 2011 with the highest number to date reported in 2019.Footnote 1 Yet, most cases of human trafficking are not reported to police due to the reluctance or inability of victims and witnesses to come forward. Footnote 2 The Covid-19 pandemic has not curtailed human trafficking in Canada and has caused many individuals to be more vulnerable to this crime.

A recent studyFootnote 3 by the Canadian Centre to End Human Trafficking (CCEHT) found that exploitation through escort services distantly followed by illicit massage businesses were the most common forms of human trafficking for sexual exploitation in Canada. Further, the CCEHT identified several human trafficking corridors in Canada connecting commercial sex markets within and across Canadian provinces.

Overview of FINTRAC's analysis of disclosures related to human trafficking for sexual exploitationFootnote *

FINTRAC analyzed a sample of approximately 100,000 transactions disclosed from 2018 to 2020 in FINTRAC disclosures related to human trafficking for sexual exploitation. The majority of human trafficking for sexual exploitation-related FINTRAC disclosures primarily concerned victims providing sexual services at short-stay locations (e.g., hotels). Nearly all victims in FINTRAC's sample were in this category. However, FINTRAC identified two other business models of where sexual exploitation occurred: exploitation at illicit storefront businesses offering sexual services (e.g., spas, massage parlours, private clubs), and at private residences (e.g., apartments) with some crossover between these three categories. All used advertisements of escort services to obtain clients and some traffickers operated their own escort agencies.

Overall, victims were nearly all females and 60% were under 25 years old at the time of their transactions and some were minors. Traffickers were mostly males aged between 24 and 36 years old. Female traffickers were mostly aged between 27 and 32 years old, albeit most were also victims and connected to male traffickers.

Traffickers who exploited their victims out of private residences or in illicit storefront businesses offering sexual services, however, were mostly older females (usually over 40 years old) and many operated with their spouses. Some traffickers in these categories also trafficked victims in short-stay locations and/or were associated to traffickers in those networks.

Overall, email money transfers and cash deposits were the primary transactions in human trafficking for sexual exploitation-related disclosures. Additionally, FINTRAC observed several money laundering methods in the disclosures. These included the use of online casinos, casinos, virtual currencies, prepaid credit cards, gift cards, nominees, front companies owned by traffickers or their associates, funds layered between related accounts, and investment accounts.

In addition to human trafficking, many traffickers were also involved in or suspected to be involved in other criminal activities (e.g., drug trafficking, fraud) and were members or associates of criminal groups. Many traffickers used their victims to conduct other crimes. Therefore, the money laundering methods observed were likely also used to launder proceeds generated from other criminal activities and are not necessarily specific to human trafficking.

Traffickers frequently used nominees to funnel proceeds of crime, pay for human trafficking running costs, launder funds, or conceal beneficial ownership. These nominees were often victims and family members of traffickers. Victims were used as intermediaries to funnel funds to traffickers and other victims. Some victims had roles within human trafficking rings to collect funds from other victims. Some traffickers also had access to their victims' accounts or held joint accounts with victims. The family members in FINTRAC's sample were usually traffickers' parents and spouses but also included their siblings, and adult and minor children.

Traffickers and victims often purchased virtual currencies with funds sent directly to virtual currency exchange businesses sometimes doing so immediately after receiving several email money transfers from third parties. However, several traffickers and victims also sent email money transfers to individuals who purchased virtual currencies on behalf of others. One such individual advertised their intermediary virtual currency services on escort websites.

Prepaid credit cards was another method traffickers and victims used to launder funds and to pay for human trafficking-running costs (e.g., escort ads, hotel bookings). Indeed, EUROPOL detected an increased use of prepaid credit cards among human trafficking organized crime groups for money laundering purposes.Footnote 4 FINTRAC also observed that some traffickers used prepaid credit cards as a means to provide funds to their victims. These traffickers transferred funds from their prepaid credit card to their victim's prepaid credit card.

Traffickers and victims conducted transactions at casinos. In-person casino transactions were not observed beyond early 2020, highly likely a result of government restrictions imposed on businesses in response to the Covid-19 pandemic. Additionally, FINTRAC observed a significant increase in transactions involving online casinos in 2019 and 2020 indicating that this is an upward trending money laundering method.

Front businesses were used to illicitly offer sexual services, to launder proceeds, and/or to manage the running costs associated with human trafficking. For example, illicit proceeds were used to pay the rent and utilities for residential properties where sexual services are rendered or used as safe houses. Front companies in FINTRAC's sample were diverse and included industries such as, music, spas, salons, restaurants, motels, farming, IT services, clothing, vehicle- and construction-related businesses, and transport businesses among others. Front companies co-mingled legitimate with illicit funds and/or had limited business-related transactions. They were owned by traffickers, their associates and other members of their human trafficking networks including some victims. Businesses owned by victims also transferred funds to traffickers and their businesses.

FINTRAC observed that some money laundering methods and particular types of transactions were more specific to certain business models of human trafficking for sexual exploitation over others. Some of these are highlighted below:

Trafficking out of short-stay locations

Disclosures where the sexual exploitation occurred at short-stay locations (e.g., hotels) included purchases for parking and at online casinos–which were either not observed or not significant in the other categories. Online casino purchases tended to occur in the late evening/early morning hours. Purchases of prepaid credit cards and gift cards were also more prevalent in this category in addition to purchases at short-stay locations (which would be expected). Several merchant refund transactions were observed from short-stay accommodations or vehicle rental entities with suspicions that these merchants were paid or partially paid in cash instead. Several victims also sent funds to entities offering collect calls from jail which were also unique to this category.

Further, traffickers in this category had transactions indicating a lavish lifestyle such as purchases at higher-end restaurants, higher-end clothing and accessories retailers, luxury car dealerships, jewellery retailers, entertainment venues, gyms or fitness facilities, limousine entities, cosmetic surgery entities, and spa retreats. FINTRAC did not observe these types of transactions among victims and were very few among the other categories of venues where sexual exploitation occurred.

Trafficking out of private residences

Disclosures involving traffickers who exploited their victims out of private residences (e.g., apartments) included expenses associated to multiple properties. For example, rent paid by the same party for multiple apartments in the same month or property taxes paid to multiple municipalities. Some of these traffickers operated escort agencies and had purchases associated to website hosting and online marketing in addition to purchases of advertisements for escort services. This category had the most overlap with the others. Several transactions in this category indicate that some traffickers also trafficked victims out of short-stay locations and may have also offered massage services in private residences similar to those offered in illicit storefront businesses offering sexual services.

Traffickers operating or suspected to operate illicit storefront businesses offering sexual services

Illicit storefront businesses offering sexual services included spas, massage/body rub centres and private clubs. In-person casino cash transactions were more common in these disclosures compared to the other categories. Casino transactions included cash purchases of casino chips, cash advances from player gaming accounts, and casino disbursements in cash and cheques. Also particular to these businesses was the high volume of funds they received from payment processors likely indicating this is a method in which they received payments from clients for sexual services.

Many traffickers in this category operated multiple illicit sexual services businesses, sometimes in multiple cities. They were also associated to several front companies (e.g., restaurants, vehicle-related entities) used to launder funds and often transferred funds between their business and personal accounts and those of their associates. Some of the traffickers had financial connectivity with other trafficking networks.

Some traffickers in this category and those trafficking out of private residences had transactions to and from their investment accounts or to and from online investment entities– yet some transactions did not involve investment purchases. FINTRAC suspects that traffickers used their investment/trading accounts to launder funds.

Trafficking foreign nationals

Foreign nationals who were victims of human trafficking for sexual exploitation were observed in all above business models of sexual exploitation venues but were mostly concentrated among traffickers operating illicit storefront businesses offering sexual services. Some traffickers of foreign nationals were also involved in human smuggling. Among foreign nationalities that could be identified in FINTRAC's sample, traffickers trafficked foreign nationals who originated mostly from China and South Korea but others originated from the Philippines, Thailand, Indonesia, Portugal and unspecified countries in Eastern Europe. These traffickers and their associates often had international aspects to their transactions such as transferring funds to multiple countries including some that transferred funds to themselves or to criminal associates in another country, being associated to foreign businesses also involved in human trafficking for sexual exploitation, or had online advertisements for escort services or recruitment of escorts posted in another country.

International funds transfers among these disclosures were primarily outgoing from Canada to countries such as the Philippines, Brazil, Russia, Portugal, China, Australia, Colombia, Taiwan, United States, Kazakhstan, United Arab Emirates, Hong Kong, South Korea, and Uzbekistan with reasons for transfers usually not provided. However some outgoing transfers cited reasons mostly related to family, gift, loan repayments, or tuition. Some funds transferred (totalling CAN$1.5 million) to the United States were cited as purchases of a hotel franchise – the sender of these transfers was a sex trade worker closely associated to traffickers. Indeed, a different trafficker owned motel franchises in Canada as well. Incoming funds transfers to Canada originated mostly from China but also from Hong Kong and South Korea and cited reasons such as living expenses, consulting, training, education and travel.

Reasonable grounds to suspect and how to use indicators

How reporting entities determine if they submit a suspicious transaction report to FINTRAC (for either a completed or attempted financial transaction) requires more than a "gut feel" or "hunch," although proof of money laundering is not required. Reporting entities are to consider the facts, context and money laundering indicators of a transaction. When these elements are viewed together, they create a picture that is essential to differentiate between what may be suspicious and what may be reasonable in a given scenario. Reporting entities must reach reasonable grounds to suspect that a transaction is related to the laundering or attempted laundering of proceeds of crime before they can submit a suspicious transaction report to FINTRAC.

Indicators of money laundering can be thought of as red flags indicating that something may very well be wrong. Red flags typically stem from one or more characteristics, behaviours, patterns and other contextual factors related to financial transactions that make them appear inconsistent with what is expected or considered normal. On its own, an indicator may not initially appear suspicious. However, it could lead you to question the legitimacy of a transaction, which may prompt you to assess the transaction to determine whether there are further facts, contextual elements or additional ML/TF indicators that would increase your suspicion to the point where submitting an STR to FINTRAC would be required (see FINTRAC Guidance on Suspicious Transaction Reports).

Money laundering indicators

Below are additional money laundering indicators related to human trafficking for sexual exploitation derived from FINTRAC's analysis and reflect the types and patterns of transactions, contextual factors and those that emphasize the importance of knowing your client. All indicators from FINTRAC's 2016 Operational Alert on the laundering of proceeds from human trafficking for sexual exploitation remain relevant (see Appendix). The additional indicators should be considered along with those in the 2016 Operational Alert.

These indicators should not be treated in isolation; on their own, these indicators may not be indicative of money laundering or other suspicious activity. They should be assessed by reporting entities in combination with what they know about their client and other factors surrounding the transactions to determine if there are reasonable grounds to suspect that a transaction or attempted transaction is related to the commission or attempted commission of a money laundering offence. Several indicators may reveal otherwise unknown links that, taken together, could lead to reasonable grounds to suspect that the transaction is related to the laundering of proceeds derived from human trafficking activities. It is a constellation of factors that strengthen the determination of suspicion. These indicators aim to help reporting entities in their analysis and assessment of suspicious financial transactions. 

General contextual and money laundering indicators possibly related to human trafficking for sexual exploitation

FINTRAC found that females were the majority of victims and males were the majority of traffickers in human trafficking for sexual exploitation, based on its analysis of sample transactions related to this crime. This finding is consistent with numerous external sources. With this in mind, some indicators below reference specific genders to help provide context and to potentially characterize individuals' roles within human trafficking. However, anyone can be a trafficking victim - males and other gender identities are victims of this crime too. Additionally, some females may have dual roles as traffickers and victims, or have other functions in human trafficking operations.

Contextual and money laundering indicators possibly related to human trafficking for sexual exploitation out of private residences

Contextual and money laundering indicators possibly related to human trafficking for sexual exploitation out of illicit storefront businesses offering sexual services

Contextual indicators possibly related to trafficking foreign nationals for sexual exploitation

Reporting to FINTRAC

To facilitate FINTRAC's disclosure process, please include the term #Project PROTECT or #PROTECT in Part G-Description of suspicious activity on the Suspicious Transaction Report. See also, Reporting suspicious transactions to FINTRAC.

Contact FINTRAC

Email: guidelines-lignesdirectrices@fintrac-canafe.gc.ca
Telephone: 1-866-346-8722 (toll-free)
Facsimile: 613-943-7931
Mail: FINTRAC, 24th Floor, 234 Laurier Avenue West, Ottawa ON K1P 1H7, Canada

© Her Majesty the Queen in Right of Canada, 2021.
Cat. No. FD4-13/2021E-PDF
ISBN 978-0-660-39271-4

Resources

Several external reports also described contextual and financial aspects of human trafficking. Many of FINTRAC's findings on human trafficking for sexual exploitation are also found in these other reports. For more information on human trafficking for sexual exploitation as well as associated financial intelligence, please consult the following resources:

Canada

International

Appendix

List of Indicators from FINTRAC's 2016 Operational Alert "Indicators: The laundering of illicit proceeds from human trafficking for sexual exploitation"

Types of financial transactions

Patterns of financial transactions and account activity

Contextual indicators

Know your client

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