Banks begin tracking Bitcoin transactions to combat human trafficking

That shift, which occurred in the summer of 2015, sent modern-day slave traders flocking to Bitcoin.

Under pressure from Illinois law enforcement, Visa and MasterCard have stopped working with online classifieds service BackPage, which has been accused of facilitating prostitution and human trafficking.

Since then, the digital currency Bitcoin has become the only payment method on Backpage. However, the decision by Visa and Mastercard appears to have backfired and may make the work of modern slave traders easier.

In December 2015, Timea Nagy, a victim of human trafficking and sexual slavery, reached out to Canadian bank executives at a conference for help.

Nagy asked financial executives present at the conference, organized by social enterprise startup Timea's Cause, to use modern methods to track financial transactions related to human trafficking.

Nagy told CoinDesk:

“In the old days, we could track traffickers who bought sex ads, but with Bitcoin, you can’t see where the money is coming from and where it’s going. So, it’s really hard for investigators to follow the money, especially in human trafficking.”

Soon, her request was responded to.

Peter Warrack, director of risk intelligence at Bank of Montreal (BMO), stepped up and accepted the challenge, and after he left the conference, he was contacted by many of his banking peers and Canadian regulator FINTRAC.

“She was basically asking for help from the audience and the banks,” Warrack told CoinDesk. “Her message was, you’re the bank, you see the money, you can help us identify the traffickers.”

The bank responded quickly

The bank's response was swift.

On January 19, 2016, Warrack and his colleague Joseph Mari from the Association of Anti-Money Laundering Specialists (ACAMS) officially launched Project Protect to combat human trafficking.

Representatives from Canada's five largest banks are participating in Project Protect: Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Scotiabank and Bank of Toronto.

Grant Thornton, another Project Protect member, released a PowerPoint presentation detailing how to identify human trafficking in different industries, including hospitality, automotive, property management, tourism and financial services.

Initially, the group of banks, consultancies and technology companies focused on developing a list of high-tech methods that traffickers use to cover their tracks, including 17 types of financial transaction patterns and 11 types of financial transactions. FINTRAC officially announced the list in December last year.

According to Mari, a senior manager at BMO, the document was sent to every reporting agency in Canada, which led to a significant increase in the incidence of financial institutions reporting this suspicious activity.

Regulators start paying attention to Bitcoin

As time goes by, one payment method has attracted special attention from regulators: digital currency.

As sex workers posted guides on how to use Bitcoin to make purchases on BackPage and elsewhere, the volume of data on such transactions began to grow dramatically, making it more difficult for regulators to analyze.

“As we started digging deeper,” Mari said, “we noticed that cryptocurrency played a big role here, and it became a sub-trend within Project Protect.”

On February 7, Project Protect hosted a conference specifically on blockchain and cryptocurrency at the Toronto chapter of ACAMS. Attendees included James Chapman, senior director of research at the Bank of Canada, Alan Cohn of the Blockchain Alliance, Joseph Weinberg of Paycase, and Jonathan Levin of Chainalysis.

Monitoring the Bitcoin Blockchain

Chainalysis, a company founded in 2015, has a mission to help fight cybercrime by monitoring the Bitcoin blockchain.

Chainalysis raised $1.6 million after signing a contract with Barclays, and now the startup has partnered with Europol to fight cybercrime.

At the Toronto event, Chainalysis CEO Jonathan Levin said:

“We can identify the difference between individual sex workers and traffickers.”

Similar to Project Protect, Chainalysis’s project also requires private companies to cooperate with law enforcement agencies to share intelligence and information.

Timea Nagy herself continued to work with law enforcement to combat human trafficking after she founded Project Protect.

Nagy founded Timea's Cause, a for-profit social enterprise, in 2014 after her earlier nonprofit failed due to funding issues. She now works side-by-side with law enforcement officials, teaching them how to identify victims of human trafficking based on her own experience.

Nagy told CoinDesk she first left her home in Hungary and traveled to Canada at age 19 to find a job as a nanny.

After being told that the nanny job was no longer available, she was forcibly taken away and forced to perform various sexual acts to please the "buyer" in exchange for an estimated $50,000.

She said:

"After three months of torture, I had thoughts of suicide, but I also wanted to escape."

The human trafficking industry has changed a lot since then. While she declined to go into detail about the many times she’s seen Bitcoin used by sex traffickers, she said she’s seen the impact firsthand. She’s since traveled across North America, working with various law enforcement officials in the Canadian and U.S. governments.

A global problem

Still, it’s difficult to track the problem of human trafficking in Canada because there is little reporting to document the horrors that trafficking victims experience.

Between 2005 and 2012, 25 cases of human trafficking were established in Canada, and the International Labour Organization (ILO) estimates that there are 20.9 million victims of human trafficking worldwide. Globally, the human trafficking industry generates an estimated $150 billion in profits.

It is reported that the British think tank Royal United Services Institute (RUSI) has commissioned Mari of the research agency BMO to examine an analytical document on the anti-money laundering regulatory challenges surrounding cryptocurrencies.

The document is expected to be published in March as part of new regulations that the European Parliament plans to implement.

Despite the international support, Mari stressed that efforts to use cryptocurrency to track human trafficking are still in their early stages.

He described the goal of Project Protect as twofold, the first being to increase compliance with suspicious transaction reporting standards.

The second is to strengthen education.

Mari concluded:

“We are grateful for any help that the international community, such as the blockchain industry, can give us in the fight against human trafficking.”