On 31st January 1865 the US House of Representatives passed the 13th Amendment to the Constitution of the United States of America. Spearheaded by President Abraham Lincoln, it put an end to the most heinous blemish on the face of human history, and followed in the footsteps of such legislation as the 1833 British Slavery Abolition Act and the 1848 French second abolition act, abolishing slavery and involuntary servitude. Abolition in the USA represented the culmination of the career of one of the world’s most tenacious and revered leaders, and marked the final end to a bloody internecine conflict between North and South in the form of the US Civil War. To know that a modern reprise of slavery and human trafficking continues to blight vulnerable populations across the globe to this day, despite the practice being illegal in every country in the world, would likely have Honest Abe turning in his grave. To know that Southeast Asia and APAC more broadly represent a hotbed of such activities, a predicate money laundering offence, should leave readers in the region feeling somewhat discomfited.
The Liechtenstein Initiative for a Financial Sector Commission on Modern Slavery and Human Trafficking defines modern slavery as a “non-legal umbrella term, encompassing several forms of severe exploitation, including forced labour, forced marriage, servitude, debt bondage and human trafficking”. Human trafficking itself can be further defined as the recruitment, transfer, or obtaining of an individual through coercion, abduction, fraud, or force in order to exploit them. Exploitation can come in the form of anything from low-paid migrant workers to commercial sex work. The exploiter can be anyone, including strangers, neighbours, or even family members. In depth joint research by the International Labour Organisation and Walk Free foundation into global estimates of modern slavery indicate that over 40.3 million men, women, children experienced one or more forms of modern slavery exploitation in 2016; equivalent to one in every 185 people globally. Modern slavery is estimated to generate over $150 billion in profits every year and is on the rise. Between 2012 and 2016, global modern slavery increased by over 40%. This increase could possibly be attributed to increased awareness and as such increased reporting of the issue. Asia accounted for $50 billion of this total, due in part to its high number of victims and high profits per victim.
More than a third of the proceeds of modern slavery are generated in developed countries. The developed vs. undeveloped country split emanates as a result of the fact that slavery risks are broadly higher in poor and developing countries than in wealthier, developed countries. They are higher for marginalised and excluded groups, including women, girls, low-caste individuals, refugees, those displaced by disaster and conflict, and migrant workers. Risks are higher for low-skilled workers than skilled workers, for those with lower education levels, and the vulnerable unbanked; all prevalent factors in Asia.
Statistics compiled by Global Slavery Index (GSI) in 2016 estimate that modern slavery in Asia accounts for around 62% of the global total. The APAC region has the second highest prevalence of modern slavery in the world, with 6.1 per instances per 1000 people. GSI found that APAC had a high prevalence of forced labour (4.0 per 1000 people) and forced marriage (2.0 per 1000 people) compared with other regions. APAC also had the highest number of victims across all forms of modern slavery, accounting for 73% of victims of forced sexual exploitation, 68% of those forced to work by state authorities, 64% of those in forced labour exploitation, and 42% of all those in forced marriages. As highlighted in the above table, Southeast Asian countries feature high up on GSI’s rankings, with Cambodia in fourth place. Cambodia’s construction boom, fuelled largely by Western property firms funded by global banks, has seen a concurrent rise in the rates of debt-bonded labour in the country’s brick making industry. Myanmar sits at seventh in the rankings, Brunei Darussalam at eighth, and Laos, Thailand, and the Philippines in tenth, eleventh, and twelfth place respectively. Many will be surprised to see our own little red dot Singapore place 20th on GSI’s list.
Slavery is illegal in every country in the world, and by 2018 more than 170 countries had made firm public commitments to eradicating it, however only 122 had criminalised human trafficking in line with the UN Trafficking Protocol, and only 38 countries had criminalised forced marriage, according to GSI figures. In Singapore, the main legislation targeting modern day slavery is the Prevention of Human Trafficking Act 2014 (PHTA), which criminalises forced labour, and sex labour trafficking. In addition, it should be noted that human trafficking is a predicate crime of money laundering (a predicate offence is a crime that is a component of a more serious crime). Unlike other landmark global anti-slavery legislation such as the UK Modern Slavery Act 2015, and the Australian Modern Slavery Act (effective from 1st January 2019) however, Singapore’s PHTA does not contain a reporting requirement for corporates. Governmental and legislative pressure to report could be usefully applied in Singapore’s financial industry. The continued proliferation of modern slavery is irrevocably and inextricably correlated to the financial system and the ability to illegally launder proceeds through it. While the Financial Action Task Force (FATF) itself expressed the view that greater exposure to financial systems by both victim and perpetrator increases the opportunities for identifying money laundering as a result of modern slavery, unchecked and unbridled access, while reducing undetectable cash intensive transactions, may also facilitate rampant growth in modern slavery.
In its first secretariat briefing paper the Liechtenstein Initiative highlights the role that financial innovation played in the abolition of slavery in the UK in the 1800s. Abolition was only possible because of an arrangement in 1834 comprising what was then the largest syndicated loan in history, to the British government, to finance compensation packages; regrettably not to slaves, but rather slave owners. The loan was equivalent to a staggering 40% of Britain’s national public expenditure at the time. The last interest on this loan was only finally repaid in 2015. Although the role of the private sector in combatting modern slavery will take a different, 21st century form, its clear that FinTechs can play a major part.
We can draw striking parallels with British 19th century financial innovation in the abolition of chattel slavery with the role that financial innovation through FinTech must play in the fight against modern slavery in Asia. Not only because FinTechs such as e-payment firms and virtual banks represent today’s pioneering innovators, but also for reasons of financial inclusion. Major consumers of the FinTech revolution in Southeast Asia will be those populations of unbanked individuals in developing countries such as Cambodia and Laos. It is logical to suggest that those countries where modern slavery is prevalent are also those where financial inclusion rates are low because not having acess to the formal financial system limits formal emplpoyment opportunities. These populations are therefore those most at risk of falling victim to loan sharks and ultimately becoming victims of modern slavery as a result of debt-bonded labour. For the FinTech world to meaningfully lead the fight against modern slavery, firms must be aware of the financial crime risk faced by their enterprises, identify thematic risk typologies specific to the Southeast Asia region, and apply commensurate AML measures to their businesses.
The onboarding process can play a critical role in flagging this typology. A close inspection of the ‘selfie’ can highlight victims of abuse and those being coerced. Whilst this typology is particularly difficult to monitor as it involves multiple people, varying operating schemes and geographical locations, there are a number of ‘red flags’:
Victims' accounts - these tend to show lots of transactions from unrelated individuals in, and then the majority of funds moved out to a single point of the contact (essentially, the gang leader)
Gang leader accounts - these accounts tend to show lots of transactions to travel companies.
The funds are typically in the form of cash and therefore the methods used to launder the illegal proceeds often include cash deposits e.g. with structuring pattern.
Transactions may also appear to be related to loans or family support (usually victims will try to remit any funds to their families), which may be identified as significantly smaller cross-border transfers when compared to other migrant employees.
Alternatively, victims may send funds to criminals stating these are family remittances.
There might be multiple transactions on a criminal’s account related to accommodation, travels and the basic daily expenses of victims, appearing in transactions as details of unrelated individuals.
FATF have provided detailed guidance concerning financial crime risk typologies applicable to modern slavery. A key risk typology for Southeast Asia’s FinTechs to consider is sector and industry. Verité for example has developed a Forced Labor Commodity Atlas, which highlights commodities that are linked to human trafficking and modern slavery in global supply chains, such as cocoa, palm oil, sugar and cotton. Both palm oil (Indonesia, Malaysia, Thailand) and cotton (APAC is the largest producer of cotton in the world), are industries in relation to which FinTechs should exercise caution when considering modern slavery risk factors in the customer risk assessment. At an individual level, FATF guidance has suggested that no one indicator alone is likely to confirm money laundering from modern slavery and human trafficking. Wider contextual information may be the key to identifying both victims and perpetrators e.g. passport information, utility information (or lack of it), and non-traditional indicators such as financial data, social media activity, biometric information. Innovative means of meeting customer due diligence requirements could provide wider benefits for detection of modern slavery in this regard.
Analysis at the individual level is important in the Southeast Asian financial crime context. As mentioned above, much of the region’s FinTech growth will come as a result of financial inclusion, bringing the most poor and vulnerable into the financial system. FATF’s Financial Flows from Human Trafficking report notes that the analysis to date has uncovered patterns primarily at the level of interaction between the sector (up until now typically banks) and victims, rather than at higher levels of trafficking organizations. Examples of such interactions might be: handling, and lending migrant workers money to pay improper recruitment fees; lending funds for visa purchases to people that, upon arrival in the new country on those visas, are forced into commercial sexual exploitation; operating credit cards, debit cards, and bank accounts in the name of victims of commercial sexual exploitation that are in fact controlled by recruiters and managers; facilitating transfers from illicit massage businesses to related businesses (restaurants, grocery stores, dry cleaners), which are used to launder the proceeds of crime; and operating the conversion of virtual currencies such as Bitcoin, used in illicit commercial sex businesses, to fiat currency.
The ability of FinTechs to effectively detect and manage modern slavery risks will also require cooperation from the region’s financial regulators who must understand the bigger picture at play. Over-zealous mass AML de-risking (terminating customer accounts) under regulatory pressure may actually increase the overall level of modern slavery in the region. As the Liechtenstein Initiative paper outlines, mass de-risking may push jettisoned business into informal illicit financing arrangements. It may also hinder financial inclusion, especially where financial institutions terminate correspondent banking relationships, which allow local banks to gain access to foreign financial markets and carry out cross-border transactions. Terminating these relationships may have a particularly negative impact on migrant worker remittances, pushing them out of the formal sector into the informal, cash intensive channels, where workers may be exposed to greater risks of exploitation.
Modern slavery not only exists but is on the rise. Asia remains a hotbed of modern slavery, particularly in Southeast Asia where higher risk commodities, an established commercial sex industry, a construction and development boom, and reliance on cheap migrant labour creates a macroenvironment conducive to nefarious actors. Despite slavery being illegal in every country in the world, human trafficking remains largely un-criminalised, and international legislation is either too recent to ascertain the success of its application (for example Australia’s 2019 Modern Slavery Act), or may be too limited in scope to facilitate meaningful change at a corporate level (e.g. Singapore’s PHTA). The role of the financial sector is therefore paramount – particularly FinTech. Although bringing more of the world’s population into the traditional financial system will as FATF suggests create more opportunity to detect both perpetrators and victims of modern slavery, this holds true only when effective AML measures are applied. Modern slavery will be best detected at the individual level and Southeast Asia’s FinTechs seeking to capitalise on regional financial inclusion of the most vulnerable will lead the charge in this regard. The region’s FinTechs will require cooperation from financial regulators, and the MAS in Singapore for example must give firms adequate breathing room to assess factors such as labour conditions in their corporate customers value chains, and familiarise themselves with Southeast Asia specific individual risk typologies, rather than knee jerk de-risking, which may serve to only exacerbate the problem.