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Top 5 Signs Indicating Trade-Based Money Laundering

05 June, 2024

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Money laundering is not a new term to be added in today’s world of corporate fraud. However, fraudsters keep developing new tactics to do illegal financial movements. Criminal entities and terrorist merchants typically use three main methods to disguise the origins of their money and integrate it into the formal economy. These methods include utilizing the financial system, physically transporting money with cash couriers, and moving goods through international trade, also known as trade-based money laundering. 

Although the Financial Action Task Force (FATF) has focused significant attention on the first two methods, the potential abuse of the global trade system has not been scrutinized as closely. This blog will explore the lesser-known vulnerabilities in the international trade system that can be exploited for financial crimes.

What is Trade-Based Money Laundering?

Trade-based money laundering, or TBML, refers to an approach to utilizing the international commerce system to legalize the transfer of illicit funds. Improper pricing, number, and quality reporting of both imported and exported commodities are examples of TBML activities.

In order to conceal the real source of money and provide the impression that they are genuine, it involves manipulating commercial transactions, such as payment. TBML can present itself in a number of ways, including the excessive or under-invoicing of products, the misclassification of items to evade customs charges, and the use of fictitious shipment papers. By doing this, the criminal may transfer the money they make from their illicit operations into the official financial system, which makes it a challenge for authorities to track down the source of the cash.

Challenges of Trade-Based Money Laundering


Top 5 Trade-Based Money Laundering Red Flags

  • Over or Under Invoicing of Goods and Services

One of the most common signs of trade-based money laundering is the over or under-invoicing of goods and services. This involves intentionally misstating the value of goods on invoices to transfer value between parties without a corresponding movement of funds. 

Over-invoicing occurs when the invoice value is higher than the actual value of the goods or services provided. The buyer pays the inflated amount, and the excess value is transferred to the seller. This technique is often used to move money out of a country under the guise of legitimate trade. For instance, a company exports goods worth $100,000 but invoices the buyer $150,000. The buyer pays the inflated amount, allowing the seller to transfer $50,000 illicitly.

When there is over-invoicing, the products or services are actually worth more than what is shown on the invoice. The buyer receives goods worth more than what is paid, effectively transferring value to the buyer without creating a financial trail. For example, a company imports goods worth $200,000 but is invoiced for only $150,000. The company pays the lower amount, receiving an extra $50,000 worth of goods without a corresponding financial transaction.

  • Multiple Invoices for the Same Shipment

Issuing multiple invoices for the same shipment is another red flag for trade-based money laundering. This practice involves creating several invoices with varying details for a single shipment, complicating tracking the actual value and quantity of goods. Multiple invoices may show different values, quantities, or recipient details, making it difficult to determine the true nature of the transaction.

This discrepancy of invoices obscures the movement of illicit funds. Another common tactic is the layering of transactions. By using multiple invoices, criminals can layer transactions to create a complex paper trail that is hard to follow. This layering can help businesses and their owners disguise the origins of the money and make detection more difficult for authorities. For instance, a company ships goods to an intermediary in a third country, which then re-exports the goods to the final destination, each time accompanied by different invoices. This creates a convoluted trail that obscures the true nature of the transaction.

  • Misrepresentation of Quantity or Quality of Goods

Misrepresenting the quantity or quality of goods is a common technique used in trade-based money laundering to manipulate the perceived value of a transaction.

Quantity Misrepresentation: This involves declaring incorrect quantities in shipping documents to match the declared value with the laundered amount. For instance, an exporter might declare a shipment of 1,000 units when only 800 units are actually shipped.

Quality Misrepresentation: Declaring goods as high-quality or premium when they are of lower quality or even worthless can facilitate the movement of value. This technique exploits the difficulty in verifying the actual quality of goods in transit.

  • Complex or Unusual Payment Structures

Unusual or complex payment structures that lack commercial logic are indicative of trade-based money laundering. These arrangements often involve payments to third parties, inconsistent payment terms, or convoluted payment routes that obscure the true nature of the financial flows.

Payments made to entities not involved in the trade transaction can signal trade-based money laundering. These third parties may be shell companies or entities controlled by the launderers, used to funnel illicit funds. For instance, a buyer in Country A purchases goods from a seller in Country B but makes the payment to a third-party entity in Country C, which has no apparent connection to the transaction. This complex payment route raises suspicions about the legitimacy of the transaction.

In addition, unusual payment terms, such as substantial upfront payments, extended credit periods, or frequent amendments to payment terms, can indicate attempts to disguise the flow of illicit funds.

  • Unusual Shipping Routes and Practices

Using indirect or illogical shipping routes and practices is another indicator of trade-based money laundering. These methods complicate tracking goods and funds, making it easier to disguise illicit activities. Shipping goods through multiple countries without clear commercial justification can signal attempts to obfuscate the origin and destination of the goods and funds.

Changing transport methods multiple times during transit, such as switching from sea to air to land transport, can complicate the tracking of the shipment and signal illicit activities. Inconsistent or unusual shipping practices, such as frequent changes in the declared value, quantity, or type of goods, also indicate attempts to disguise trade-based money laundering activities.

International Regulations to Combat Trade-Based Money Laundering

An appropriate international regulatory framework can assist businesses and individuals in taking preventive measures to prevent trade-based money laundering. Global regulatory bodies, for instance, the Financial Action Task Force (FATF), have already published a best practices paper on TBML and terrorist financing in an effort to increase public awareness of this problem and strengthen government agencies’ capacity to gather and use trade data efficiently for the sole purpose of identifying and looking into cases of laundering of funds and terrorist funding involving trade across borders.

Furthermore, a multinational bank group called the Wolfsberg Group attempts to provide guidelines and procedures for managing the risks associated with money laundering. Their Wolfsberg Trade Finance Principles offer insightful information on industry standard procedures for TBML mitigation in the international trade finance sector.

How The KYB Helps

It is now more crucial than ever to take actionable measures against illicit financial activities, whether corruption or trade-based money laundering. However, the complexity of trade transactions, lack of data and relevant information, and difficulty in tracking trade-based activities are some of the most prominent challenges most businesses face. And that’s where The KYB comes in. Being the world’s largest Know Your Business solution, we have access to databases of 300M+ companies globally. Not only that, but our regulated solution involves extensive business transaction monitoring, risk scoring, and enhanced due diligence procedures to dig deeper into the complex trading structure of businesses.

It’s your turn to ensure business compliance and make the corporate world more financially transparent. Contact our experts at The KYB today and determine how we will hope you stay empowered!

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