What is Trade-Based Money Laundering (TBML)?

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 is Trade-Based Money Laundering?

Trade-based money laundering (TBML) is a method used by criminals to launder the proceeds of crime through the international trade system. It involves the manipulation of trade transactions, such as invoicing, to disguise the true source of funds and make them appear legitimate. TBML can take various forms, such as over-invoicing or under-invoicing goods, misclassifying goods to avoid customs duties, and using false shipping documents. By doing so, the criminal is able to move the proceeds of their illegal activities into the legitimate financial system, making it difficult for law enforcement agencies to trace the origin of the funds. 

TBML is a significant threat to the global financial system, as it can be used to finance a range of illegal activities, such as drug trafficking, arms smuggling, human trafficking, and terrorism. It is also challenging to detect, as it often involves complex and sophisticated methods that can be difficult to uncover. Governments, financial institutions, and other relevant organizations have taken steps to combat TBML. This includes increasing transparency in international trade, strengthening anti-money laundering regulations, and improving cross-border trade cooperation among law enforcement agencies.

In conclusion, TBML is a serious problem that poses a significant threat to the global financial system. It is important for governments, financial institutions, and other organizations to take proactive measures to detect and prevent TBML to ensure the integrity of the international trade system.

How Does Trade-Based Money Laundering Work?

The primary techniques used in TBML are as follows:

  • Over-invoicing: In this method, the seller issues an invoice that overstates the value of the goods being exported. This results in a payment from the buyer that is higher than the actual value of the goods, effectively transferring excess funds to the seller.
  • Under-invoicing: Conversely, the seller might issue an invoice that understates the value of the goods. As a result, goods of higher value are shipped than what is paid for, benefiting the buyer by transferring additional value their way.
  • Multiple-invoicing: Here, the seller issues several invoices for the same shipment of goods, leading to multiple payments for a single transaction. This allows the seller to illicitly transfer more funds from the buyer.
  • Discrepancies in Shipment Quantities: This involves either shipping more or fewer goods than what was agreed upon. Shipping more goods than stated transfers additional value to the buyer, while shipping less benefits the seller by retaining a portion of the goods' value.
  • Misrepresentation of quality: The quality or type of goods shipped is falsely documented to appear more valuable than they are, leading to a higher payment to the seller and thus transferring undue value.

What Are The Financial Crime Risks in Trade Finance?

To effectively detect and prevent TBML, it is important to understand the risk indicators associated with this type of crime.

Some of the most common TBML risk indicators include:

  • Price discrepancy: A significant difference between the price of goods on the invoice and the market price for similar goods.
  • Volume discrepancy: A significant difference between the volume of goods on the invoice and the actual volume of goods being shipped.
  • Quality discrepancy: A mismatch between the quality of goods being shipped and the quality described on the invoice or other documentation.
  • Structural complexity: The use of complex or convoluted trade structures, such as the use of multiple intermediaries, shell companies, or other entities that make it difficult to trace the flow of funds.
  • Trade-based techniques: The use of techniques such as over-invoicing, under-invoicing, multiple invoicing, over- or under-shipment, and misrepresentation of quality, which are common methods used in TBML.
  • Lack of economic rationale: Transactions that lack an economic rationale, such as the trade of goods between countries with no prior trade relationship or the trade of goods that are not in demand in the destination country.
  • Political or economic instability: Transactions that involve countries or regions that are politically or economically unstable, as these can be used to conceal the proceeds of crime.
  • Suspicious financial behavior: Transactions that involve parties that have a history of suspicious financial behavior, such as money laundering, sanctions violations, or other financial crimes.
  • Licensing Requirements: It can be challenging for firms to determine when an import or export license is required for a trade transaction. This lack of clarity can increase the risk of TBML. In order to effectively address AML risks, it is recommended that companies seek the advice of specialists to gain an understanding of the kinds of products that require licensing in both their own jurisdiction and in foreign countries. This due diligence can help firms ensure that they are conducting transactions in compliance with local regulations and reducing the risk of involvement in TBML. Firms should also be aware of any changes to licensing requirements and regulations and regularly update their internal procedures and processes to stay informed and minimize their risk exposure.

These are just a few examples of the TBML risk indicators that financial institutions, governments, and other organizations should be aware of in their efforts to detect and prevent this type of crime. It is important to remember that TBML is a constantly evolving threat and that risk indicators may change over time as criminals adapt their methods to avoid detection.

Financial Crime Risks of Trade

Trade-Based Money Laundering AML Challenges

There are several challenges that organizations face in their efforts to detect and prevent TBML, including:

  • The complexity of trade transactions: TBML often involves complex trade structures, such as the use of multiple intermediaries, shell companies, or other entities that make it difficult to trace the flow of funds.
  • Lack of data and information sharing: Many organizations need access to the data and information they need to detect and prevent TBML due to the lack of coordination and collaboration between different stakeholders, including financial institutions, governments, and law enforcement agencies.
  • Inadequate technology: Many organizations lack the technology and tools they need to detect and prevent TBML effectively and may not have the resources to invest in these technologies.
  • Weaknesses in AML regulations: Despite efforts to strengthen AML regulations, many countries still need strong or consistent regulations that fail to address the threat of TBML effectively.
  • Limited knowledge and awareness: Many organizations, particularly small and medium-sized businesses, need more knowledge and awareness of TBML and the measures they can take to prevent it.
  • Difficulty in prosecuting TBML: Proving TBML can be difficult, as it often involves complex trade structures and the use of trade-based techniques that are difficult to detect and track.

link between TBML and sanctions, and how effective AML/CFT compliance programs can mitigate TBML risks.

Trade-Basen Money Laundering Risk Indicators

The Financial Action Task Force (FATF) is an intergovernmental organization that sets standards for preventing money laundering and terrorist financing. In its efforts to prevent TBML, the FATF has identified several red flags that financial institutions should be aware of.

Here is a more detailed explanation of the FATF's TBML red flags:

  • Discrepancies between Invoices and Official Documents: Significant discrepancies between invoices and the definition of goods on official documents can indicate the presence of TBML. This can include mismatches in the quantity, quality, or value of goods, as well as inconsistencies in the routing and timing of shipments.
  • Unusual Trade Patterns: This red flag refers to transactions that deviate from normal trade patterns, such as unusual shipment routes, inconsistent product types, or large, round-number transactions.
  • Routed through Multiple Countries: Shipments that are routed through several countries or multiple unconnected subsidiaries without good reason can be a sign of TBML. This can indicate that the shipment is being used to launder money, hide the origin of funds, or evade sanctions.
  • Suspicious Payment Methods: Payment plans that are inconsistent with the level of risk offered by the transaction can indicate the presence of TBML. This can include large cash payments or payments made to shell companies or offshore accounts.
  • High-Risk Goods: Shipments of goods generally considered at high risk of involvement in money laundering, such as luxury goods, precious metals, and gems, should be carefully scrutinized for signs of TBML.
  • High-Risk Countries: It is important to closely monitor shipments of goods entering or leaving countries that are considered to have a high potential for money laundering and to look for warning signs.
  • Cash Payments: Shipments that are paid for in cash can be a sign of TBML, as cash transactions are more difficult to trace and can be used to evade AML controls.
  • Third-Party Payments: Shipments that third parties pay for with no apparent connection to the transaction can indicate the presence of TBML, as this can be a sign that the third party is acting as a front for money laundering activities.

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

How can Sanction Scanner AML Sofware help with TBML?

Sanction Scanner AML software is designed to help financial institutions and businesses detect and prevent money laundering and other financial crimes, including TBML. The software uses advanced algorithms and artificial intelligence to analyze transactions and detect patterns that may indicate TBML.

  • Real-time transaction monitoring: The software continuously monitors transactions for red flags that may indicate TBML, such as large or unusual transactions, transactions involving high-risk countries, or transactions with a known or suspected criminal organization.
  • Risk scoring: The software uses risk scoring to prioritize transactions that are more likely to involve TBML. This allows businesses to focus their resources on the transactions that pose the greatest risk.
  • Enhanced due diligence: The software can perform enhanced due diligence on customers and suppliers, including screening against sanctions lists, watchlists, and other databases. This can help businesses identify potential TBML risks before they occur.
  • Alert generation: The software can generate alerts for suspicious transactions, allowing businesses to take action to prevent TBML.

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