Most money laundering hides in payments. Trade-based money laundering hides in the trade itself: in a price, a quantity, a description or a route that is wrong on purpose. Every document can look normal on its own. What gives it away is a trade that, taken as a whole, does not make sense.

The FATF described trade-based money laundering (TBML) in 2006 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". The important word is value. In smuggling, the goods are the point. In TBML, the goods are the cover, and what moves is money.

It is hard to catch. In the 2020 FATF and Egmont Group study of TBML, most of the private-sector respondents, mainly banks, called it the hardest form of money laundering to detect. There are three reasons.

Why it is hard to see

The volume is enormous. Trade worth tens of trillions of US dollars crosses borders every year, and a laundered shipment looks like any other.

Nobody holds the whole picture. The exporter's bank, the importer's bank, two customs agencies, the shipping line and the freight forwarder each see a piece. Freight forwarders often hold the richest shipment data, and they usually have no anti-money laundering duties.

Banks mostly see payments, not trades. With a letter of credit, the invoices and transport documents pass through the banks, which examine the documents but never the goods. Most trade is not paid that way. The Wolfsberg Group, the ICC and BAFT estimate that about 80% of international trade is on open account: the goods ship and the buyer pays later, by an ordinary transfer. On open account the bank often sees only a payment, two names and a short reference.

So the analyst rarely catches TBML by spotting one false document. They catch it by putting the pieces together and finding that the story does not hold.

The four basic tricks

The FATF's 2006 paper set out four techniques. Each one falsifies one thing about the trade:

  • The price. Invoicing goods below their value moves value to the importer. Invoicing them above their value moves it to the exporter. Both sides are usually in on it.
  • The number of invoices. One shipment is billed more than once, often through different banks, so one set of goods justifies several payments.
  • The quantity. More or less is shipped than is invoiced. In a phantom shipment, nothing is shipped at all.
  • The description. Cheap goods are described as expensive ones, or the type and quality are misstated. Services, such as consulting, are especially easy to misprice because there is no market price to check.

Real schemes mix these, and some need no false document at all. In the Black Market Peso Exchange, genuine goods are bought at genuine prices, and laundering happens in who pays for them.

Five questions for any trade

The FATF and Egmont Group published a set of TBML risk indicators in 2021. They are long, and no single one proves anything. In day-to-day work, they come down to five questions.

Five questions for a trade: who is trading, which route, how much, who pays, and what changed. A trade that fails the test is reviewed by a person and, if still suspicious, reported. FIVE QUESTIONS FOR A TRADE Whofits the business? Routea reason for each stop? How muchprice · quantity · goods Who paysthe buyer, or else? What changednew · sudden · late ONE ODD ANSWER IS A REASON TO LOOK CLOSER, NOT A VERDICT
The questions rebuild the trade from the pieces an institution can see.

1. Who is trading, and does it fit?

Does the trade match what the customer said it does, and at a size it could plausibly handle? A car dealer shipping clothing, a company with no staff or premises moving large volumes, or a newly registered or long-dormant firm that suddenly trades heavily in a hard-to-enter sector all deserve a second look. So does an ownership chain that is complex for no clear reason.

2. Does the route make commercial sense?

Goods normally take the cheapest sensible path. Ask whether each stop and transhipment has a commercial reason. Routing through several jurisdictions for no clear purpose is a listed indicator, and free trade zones need particular care, because goods can be repackaged and relabelled there in a way that breaks the link to where they came from.

3. Do the price, quantity and description hold up?

Compare the invoice with the customer's past trades and with reliable price data where it exists. Vague descriptions of goods, documents that disagree with one another, and documents that are amended again and again are all warning signs. Banks cannot price every product, and the Wolfsberg, ICC and BAFT principles do not expect them to. They expect banks to ask questions when a price is clearly out of line.

4. Who pays, and why them?

The payer should normally be the buyer. A payment from an unrelated third party, a late change in who is to be paid, or money that passes through an account and leaves the same day needs a documented reason. In one case reported by New Zealand's financial intelligence unit, real fruit exports were paid for by shell companies with no link to the real buyers, using invoices that described ceramic tiles.

5. What changed?

New counterparties, new goods, new routes and sudden jumps in volume matter most when set against a known history. This is why knowing the customer's normal trade at onboarding is so valuable: it is what makes change visible.

From questions to a decision

An unusual answer to one question is a reason to look closer. It is rarely enough on its own. Several unusual answers together are what turn an odd trade into a suspicious one.

When something does not fit, ask the customer for documents and an explanation as part of normal business, without suggesting a report is being considered. Write down what you checked and why you concluded what you did. If the activity is still suspicious, report it to your MLRO. You do not need to prove the crime, only to have grounds for suspicion.

The strongest detection comes from joining data that no single institution holds. In one Australian case, more than AUD 500 million of drug proceeds was partly laundered through exports of under-valued electronics. It was found by comparing Australian export declarations with the import records of the receiving countries: both sides of the same trade, side by side.

Our free course Trade-Based Money Laundering covers the techniques, the risk indicators and these cases in depth, with a knowledge check and a certificate.

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