As the FCA continue to crack down and impose fines on Financial Institutions (FI’s) for inadequate Anti-Money Laundering (AML) controls into 2023, modern day slavery is one of the growing methods to facilitate money laundering here in the UK. It is estimated to cost the UK economy £33 billion per year, with the human cost being immeasurable. Since the UK became the first country to pass antimodern day slavery legislation in 2015, it has set a standard which it has struggled to live up to and the Financial Services play an important role in the detection and prevention of this activity.
We have seen a push towards assessing modern day slavery as an additional factor in a broader financial crime risk framework. FI’s now must adhere to mandatory reporting of the steps they taken to ensure modern day slavery is not facilitated in their organisation or supply chains. However, these reporting requirements do not fully resonate with the reality of MDS techniques whereby rogue landlords, informal domestic cleaning services and cash intensive businesses take advantage of their opaque and “off the grid” presence to facilitate MDS.
This piece we will explore some of ways traditional transaction monitoring techniques can be leveraged to help in the detection of modern day slavery behaviours and why it is important not to omit these factors.
1. What are the known challenges within transaction monitoring?
Trends within the Financial Services industry for transaction monitoring are increasingly focused on leveraging customer data collected at on-boarding to inform rule design. This in turn has seen a shift towards a customer-focused, holistic approach to suspicious activity detection and investigation. However, firms are still impacted by legacy system issues and varying levels of data quality and governance processes that could impact control performance and effectiveness.
Defining modern day slavery
One of the challenges of automated detection of modern day slavery lies in its very definition. The Metropolitan Police define it as “the illegal exploitation of people for personal or commercial gain. It covers a wide range of abuse and exploitation including sexual exploitation, domestic servitude, forced labour, criminal exploitation and organ harvesting”. Many of these acts are internationally criminalised, however, automated solutions require a backlog of evidential cases to help identify patterns of behaviour which would indicate modern day slavery doesn’t exist or is not adequately captured and/or retained by many FIs.
Modern day slavery red flags
It can be said that “traditional” transaction monitoring scenarios only scratch the surface of detection via transactional activity analysis. Where they fall short is in their propensity to focus on cross-border activity and usual patterns of behaviour which usually signify large-scale, corporate money laundering operations. Although this may cover some aspects, the domestic, underground, and small-scale operations modern day slavery can likely go undetected by existing deployments.
2. What role can transaction monitoring play?
Within the UK and EU regulatory regimes, transaction monitoring (in conjunction with “real time” and other supplementary name/transaction screening controls) has encouraged firms to shift their attitudes to what constitutes an AML control. Industry players have become more proactive in detecting trends and changing behaviours due to the impacts of global events such as COVID-19 which indicated that many of the underlying drivers of modern slavery have worsened, such as poverty, inequality, and unemployment (Policy & Evidence Centre, 2021).
So, what types of modern day slavery scenarios could be covered by transaction monitoring to help firms keep on top of such transient landscapes?
Increasingly, FIs are leveraging non-transactional data sources to inform transaction monitoring scenario rule design. This can be seen in multi-locational and delivery channel activity monitoring whereby customers transfer funds via cash deposit and withdraw and spend the funds elsewhere. Understandably with this in mind, transaction monitoring is neither the start nor the end in the battle against modern day slavery, however, there are some typologies that more readily lend themselves to detection within a transaction monitoring control. These include (but are not limited to):
- Initial account funding monitoring: A greater level of scrutiny can be applied to new relationships and ensuring the patterns of account behaviour correspond to the original business or personal account opening purposes, referring to unknown payees/originators and flow through of funds which don’t correspond with expected values or volumes.
- In-life transaction monitoring: Monitoring of regular receipts of funds in other people’s names with similar value or volumes in conjunction with PAYE references to personal accounts could indicate salary collection and labour exploitation and can easily be applied within the remit of traditional automated detection solutions.
- Emerging modern day slavery typologies: Monitoring of online cross-border transactions at unsociable hours to countries at a higher risk of child labour and sexual exploitation in small or frequent amounts could be an indicator of child exploitation. Other emerging typologies include monitoring of multiple joint account openings under one name and multiple 3rd parties, which could indicate money collection from exploited individuals.
3. What happens next?
We have seen a step-change where organisations now dedicate a large proportion of their risk assessment to these new and emerging modern day slavery risks. These assessments are very detailed and rely on constant feedback from operational teams, Financial Investigation Unit horizon scanning and awareness of new industry guidance to ensure continued relevance and updates to their corresponding compliance monitoring controls. This mimics a similar approach to the way in which fraud has been tackled; by drilling down on very specific behaviours and typologies and adapting the control quickly to evolving and seasonal threats.
Firms are increasingly using complementary controls in know your customer/customer due diligence (KYC/CDD) and on-going customer monitoring to enhance anti-modern day slavery controls. The key to maintaining accurate customer data is to ensure that financial crime compliance monitoring systems, investigations and outcomes are clearly communicated between the different functions to create a single client picture of activity. This will help identify what suspicion means to then inform risk assessment exercises and definitions of red flags for transaction monitoring which are tailored to firm’s risk appetites and are proactive to identifying changes to industry trends.
The risk and challenges associated with modern day slavery risk are growing and now are at the forefront of organisations compliance agenda. We have supported organisations navigate this challenge and incorporate risk mitigants through the transaction monitoring control that will help identify the behaviour. We’ve become acutely aware of the modus operandi that criminals are using and how this is evolving. There is much more work to be done but if you would like to know more about the technology solutions that are making a difference in this fight and how to incorporate modern day slavery into your controls, please contact us for more information.