Trade-Based Money Laundering
Key Highlights – Trade-Based Money Laundering
- Trade-Based Money Laundering (TBML) involves misusing international trade transactions, including trade finance and open-account trade, to disguise the origin of illicit funds and move value across borders.
- TBML involves legitimising the illicit proceeds of crime through techniques such as the use of falsified trade documents.
- Regulators expect financial institutions to implement KYC checks and monitor transactions to avoid invoice manipulation and trade-based financial crime.
- Citadel365 automates compliance processes to effectively verify customers and monitor transactions to detect and mitigate TBML risks.
What Is Trade-Based Money Laundering and Why It Matters
The FATF defines trade-based money laundering as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins.” In simple terms, criminals use the buying and selling of goods, real or fake, to move dirty money across borders.
Further, TBML includes manipulating legitimate trade transactions, often combined with other money laundering tactics to disguise the illicit origin of funds across complex layers. TBML exploits international trade and regulatory gaps to engage in money laundering and terrorist financing activities, exposing multiple jurisdictions to compliance risks.
Common Trade-Based Money Laundering Techniques
Criminals often use the following TBML techniques to move illicit funds through cross-border trade:
- Stating a higher price on the invoice (over-invoicing) or a lower price (under-invoicing) than the actual market value.
- Multiple invoicing or double/duplicate invoicing, which involves sending the same invoice multiple times for a single shipment of goods.
- Falsifying the trade documents by misrepresenting the quality, quantity or goods value.
- Use of techniques like phantom shipping or ghost shipping, where no actual trade took place, but falsified documents were used to represent trade activity between parties.
- Over- or under-shipment: shipping more or less than the invoice states, so value moves without matching paperwork.
- Black market peso exchange (BMPE): criminals sell drug cash to a broker, who uses it to pay for goods on behalf of importers, who then repay the broker in local currency.
Red Flags and Indicators of TBML Activity
Key red flags or signs that indicate trade-related money laundering activity are as follows:
- The invoice price doesn’t align with the actual standard or expected market price of the same goods or services.
- Use of unusual pathways to route goods or payments through high-risk jurisdictions may be an attempt to hide the origin, purpose or destination.
- Clients provide inconsistent or incomplete trade documents with errors or missing information.
- Involvement of counterparties such as shell companies or fronts, with unclear business purpose, may be used to hide true owners or the source of funds.
Regulatory and FATF Expectations for TBML Controls
FATF first examined trade-based money laundering (TBML) risks in its 2006 *Trade-Based Money Laundering* study. Together with the Egmont Group, it subsequently published an updated analysis of TBML trends in 2020 and a set of TBML risk indicators in 2021. These indicators help firms identify potential trade-related money laundering risks and strengthen their risk-based approach to customer due diligence, transaction monitoring and suspicious transaction reporting, in line with applicable national regulatory requirements.
Financial institutions involved in trade transactions must monitor trade finance documents and cross-border transactions. Regulators expect these entities to be vigilant to TBML typologies and red flags and implement effective control measures to prevent financial crime.
Further, financial institutions should conduct customer due diligence and identify beneficial ownership to ensure trade transparency and AML compliance.
Financial institutions should document CDD and transaction records and maintain audit trails and records so that an AML independent assessment is commissioned to test and meet regulatory requirements.
Detecting Trade-Based Money Laundering with Citadel365
Citadel365 helps financial institutions identify TBML risks by monitoring and verifying customers and transactions. The customer onboarding software automates KYC checks to ensure customers are not using fake identities or invoices to move illicit funds across borders.
Further, the risk assessment software helps assess customer risks based on factors such as trade activity, geographic exposure and business structures. The name screening software of Citadel365 scans customers, beneficial owners, counterparties, and related entities against sanctions and other watchlists to prevent transactions with illicit actors.
Moreover, the transaction monitoring software helps detect anomalies, red flags and unusual patterns in cross-border payments to avoid regulatory penalties for non-compliance. The case management software centralises compliance workflow, and effective audit trails facilitate investigations with detailed timestamped records, supporting regulatory inspections and reporting.
Strengthening Controls Against Trade-Based Financial Crime
Financial institutions must strengthen their AML controls to combat trade-based financial crime by utilising the following measures:
Customer Due Diligence: Conduct enhanced due diligence for high-risk customers who are involved in high-volume transactions, trade with high-risk jurisdictions, or use complex corporate structures.
Risk Assessment: Use of automated tools to integrate trade routes, nature of goods, and counterparties involved to analyse the risks and develop risk profiles.
Ongoing Monitoring: Perform continuous transaction monitoring to identify unusual behavioural patterns in existing customers and accordingly update their customer profile.
Governance & Reporting: Use of a centralised platform to record compliance documents, policies, procedures, and customer data for supporting regulatory inspections and avoiding penalties for non-compliance.
Trade-Based Money Laundering FAQs for AML Professionals
Trade-based money laundering (TBML) is the use of trade transactions to disguise criminal proceeds and move value across borders. Criminals misrepresent the price, quantity or quality of goods, or invent shipments altogether, so illicit money looks like ordinary payment for trade.
Trade-based money laundering techniques include over-invoicing, under-invoicing, multiple invoicing, misrepresentation of goods value and falsified shipping documents.
Regulators require firms to implement customer due diligence, identify beneficial ownership, and monitor trade finance & cross-border transactions to detect TBML risks.
Red flags such as discrepancies between invoice values and market prices, use of unusual routes, incomplete documents, and involvement of unjustified counterparties indicate trade-based money laundering activity.
Yes, technology such as Citadel365 helps identify TBML risks by automating onboarding, screening, transaction monitoring, and record-keeping, shifting from manual processes to advanced systems to improve accuracy and real-time monitoring.
TBML stands for trade-based money laundering: laundering criminal money through international trade, for example by over-invoicing, under-invoicing, multiple invoicing or phantom shipments.
Compare invoice prices with market prices, check documents for mismatches, verify every counterparty and beneficial owner, screen parties, goods and routes for sanctions, and monitor transactions for unusual routes, third-party payments and volume spikes. Use the FATF–Egmont TBML risk indicators as a checklist.