Financial Crime Risks of Trade

Blog / Financial Crime Risks of Trade

Millions of products are bought and sold every day in the world. The vast majority of this shopping takes place online and through banks. However, commercial activities are not homogeneous; It is a combination of people, goods, documents, and coins. Trade finance is likewise a versatile operation for both exporters and importers. For this reason, the risks of trading-related financial crimes are relatively high.

What are the Financial Crime Risks of Trade?

According to the World Trade Organization data, Global Product Trade in 2015 amounted to 16 trillion USD. However, the Bank for International Settlements reported that Trade financing was around one-third of total global trade or $7 trillion in 2015.

Trade, like any other business activity, is not immune to financial crime risks. Financial crime risks of trade can take many forms, including:

  • Invoice fraud and fake documents: Criminals can falsify invoices or create fake documents to deceive companies into paying for nonexistent goods or services.
  • Money laundering and trade-based money laundering (TBML): Trade can be used as a vehicle for money laundering by disguising the proceeds of crime as legitimate trade transactions. TBML involves the use of trade transactions to transfer value across borders and obscure the origins of illicit funds.
  • Illicit trade and sources of financing: Illicit trade in counterfeit goods, drugs, weapons, and other illicit products can generate large amounts of cash that need to be laundered or otherwise integrated into the financial system. Criminals can use trade finance instruments and other legitimate financial channels to move and launder these funds.
  • Sanctions and export controls: Companies engaged in international trade must comply with sanctions and export control regulations, which can be complex and challenging to navigate. Failure to comply with these regulations can lead to significant financial and reputational damage.

Overall, the financial crime risks of trade are diverse and evolving, and companies engaged in trade must be vigilant and proactive in managing these risks to avoid financial and reputational harm.

The FATF and Egmont Group have jointly released a report on TBML risk indicators

Invoice Fraud and Fake Documents

Invoice fraud and fake documents are common types of financial crime risks in trade. Criminals can use these tactics to deceive companies into paying for nonexistent goods or services or to inflate the value of legitimate transactions to generate illicit profits.

Invoice fraud involves falsifying invoices to trick companies into paying for goods or services that were never delivered or received. Criminals may also create fake invoices for goods or services that never existed or inflate the value of legitimate invoices to generate higher profits. In some cases, criminals may impersonate legitimate suppliers or customers to gain access to sensitive financial information or to deceive companies into paying fraudulent invoices.

Fake documents are also a common tool used in financial crime in trade. Criminals may create fake shipping documents, bills of lading, or other trade documents to disguise the true origin, nature, or value of goods or services. These fake documents can be used to conceal the proceeds of crime, evade taxes or duties, or circumvent sanctions or export control regulations.

Money Laundering and Trade 

Money laundering involves the process of taking funds generated from illegal activities and making them appear legitimate by integrating them into the financial system. Trade can be used as a tool for money laundering by creating false trade transactions or by manipulating the value or nature of legitimate trade transactions. For example, criminals may overvalue goods or services in trade transactions to generate illicit profits or to move funds across borders. They may also use legitimate trade transactions to create the appearance of business activity and to provide a cover for the movement of illicit funds.

TBML is a specific form of money laundering that involves the use of trade transactions to move and launder illicit funds across borders. Criminals can use a variety of techniques in TBML, such as over or under-invoicing of goods or services, false or incomplete trade documentation, or the use of shell companies to obscure the true nature of the transactions.

The FATF and Egmont Group have jointly released a report on TBML risk indicators

Steps to Mitigate Risks: Combating Financial Crime in Trade

Combating financial crime risks in trade requires a comprehensive approach that includes strong risk management processes, effective controls, and ongoing monitoring and review. Here are some steps that companies can take to mitigate financial crime risks in trade:

  • Conduct Risk Assessments: Companies should conduct regular risk assessments to identify financial crime risks in their trade operations. This can help them to prioritize their risk management efforts and allocate resources effectively.
  • Implement Strong Controls: Companies should implement robust controls and processes to verify the authenticity and legitimacy of trade transactions. This can include conducting due diligence on suppliers and customers, monitoring trade transactions for unusual activity, and using technology such as blockchain to ensure the integrity and transparency of trade data.
  • Train Employees: Regular training and awareness programs can help employees to recognize and respond to financial crime risks in trade. This can include training on identifying suspicious activity, reporting procedures, and compliance with regulatory requirements.
  • Establish Communication and Reporting Channels: Companies should establish effective communication and reporting channels to identify and report suspicious activity. This can include establishing a dedicated compliance team or hotline or working with external partners such as banks or law enforcement agencies.
  • Conduct Ongoing Monitoring and Review: Companies should conduct ongoing monitoring and review of their trade operations to identify and respond to new or emerging financial crime risks. This can include regular internal audits, external reviews, and benchmarking against industry best practices.

Monitoring and Controls: Best Practices to Prevent Financial Crime Risks in Trade

Effective monitoring and controls are essential to preventing financial crime risks in trade. Here are some best practices that companies can follow to enhance their monitoring and control processes:

  • Conduct Regular Due Diligence: Companies should conduct regular due diligence on their suppliers and customers to verify their legitimacy and assess their risk profile. This can include screening for sanctions, politically exposed persons (PEPs), and adverse media.
  • Verify Trade Transactions: Companies should verify the authenticity and accuracy of trade transactions to prevent fraudulent activities such as invoice fraud and fake documents. This can include validating supporting documentation such as bills of lading, invoices, and contracts.
  • Implement Automated Systems: Companies should implement automated systems to monitor trade transactions and detect unusual patterns or behavior. This can include using artificial intelligence (AI) and machine learning (ML) algorithms to analyze large amounts of data and identify anomalies.
  • Establish Clear Communication Channels: Companies should establish clear communication channels for employees and external partners to report suspicious activity. This can include implementing a whistleblowing hotline or establishing a compliance team to manage and investigate reports of suspicious activity.
  • Conduct Regular Audits: Companies should conduct regular audits of their trade operations to identify gaps in their controls and processes. This can include internal audits, external reviews, and benchmarking against industry best practices.

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