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Trade-Based Money Laundering

As anti-money laundering controls evolve, criminals find new ways to transform the financial proceeds of crime into legitimate funds. One of the most prevalent global money laundering strategies is to exploit the vulnerabilities of cross-border trade via Trade-Based Money Laundering (TBML).

What is Trade-Based Money Laundering?

Trade-Based Money Laundering takes advantage of the complexity of trade systems, most prominently in international contexts where the involvement of multiple parties and jurisdictions make AML checks and customer due diligence processes more difficult. TBML primarily involves the import and export of goods and the exploitation of a variety of cross-border trade finance instruments.

How Does Trade-Based Money Laundering Work?

The most common TBML methods include:

Over-invoicing: The exporter submits an inflated invoice to the importer, generating a payment that exceeds the value of the shipped goods. Greater value is transferred from the importer to the exporter.

Under-invoicing: The exporter submits a deflated invoice to the importer, shipping goods with greater value and transferring that value to the importer.

Multiple-invoicing: The exporter invoices multiple times for the same shipment, transferring greater value from the importer to the exporter.

Over- or under-shipment: The exporter ships more goods than previously agreed to with the importer, thereby transferring greater value to the importer. Alternatively, the exporter ships fewer goods than agreed, transferring greater value to the exporter.

Misrepresentation of quality: Goods shipped to importers are misrepresented on official documentation as being of a higher quality — thereby transferring greater value to the exporter.

How Can Firms Combat TBML?

To combat TBML, firms should seek to strengthen their AML/CFT controls in trade finance and correspondent banking. Unfortunately, the complexity of those sectors means that many firms struggle to adjust their AML programs effectively. That TBML is often hidden amongst legitimate trade activities, stretched across different jurisdictions and organizations, adds to the difficulty that firms face in detecting it.

Information Sharing: To overcome the difficulties that TBML poses, firms should look beyond their own AML provisions and seek coordination with other organizations, law enforcement agencies, and government authorities. More specifically, banks and financial institutions should, where possible, share their TBML discoveries and analyses because:

Information sharing between institutions makes it easier to identify the global criminal infrastructure and address specific instances of TBML.
Law enforcement agencies are incentivized to join an information-sharing network if it is more likely they will be able to catch and stop criminal activity.
Government authorities can use information-sharing networks to analyze TBML and better align regulatory focus.

International Guidance: The broader the regulatory perspective on TBML, the more effectively individual firms can work to prevent it. International authorities, including the Financial Action Task Force (FATF) issue guidance and advice to help financial institutions detect and address TBML. Aimed at national authorities, the FATF Trade-Based Money Laundering Best Practice guidance focuses on raising private-sector awareness of the need for trade finance AML policies and on educating banking supervisors on TBML vulnerabilities in their AML/CFT programs.

The FATF also provides banks and financial institutions with a list of trade finance AML red flags to consider when managing cross-border transactions, these include:

Significant discrepancies between invoices and the description of goods on official documents.
Shipments much larger or smaller than the usual traffic of goods handled by a particular importer or exporter.
Shipments routed through a number of countries or multiple unconnected subsidiaries without good reason.
Payments methods inconsistent with the level of risk presented by the transaction.
Shipments of goods typically considered at high risk of involvement in money laundering.
Shipments of goods into or out of countries deemed to present a high risk of money laundering.
Shipments that are paid for in cash.
Shipments that are paid for by third parties with no obvious connection to the transaction.

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