Advanced: trade-based money laundering.

What trade-based money laundering is, and what it is not

The FATF first set out the idea in 2006. It described trade-based money laundering (TBML) 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 2008 the FATF widened the idea to include financing terrorism, and the 2020 FATF and Egmont Group report also defines trade-based terrorist financing, where the money moved may come from legitimate or illegitimate sources.

The key word is value. In TBML the goods are a cover story; what the criminals want to move is money. That is what separates it from crimes that happen through trade, such as smuggling or customs duty fraud, where the goods themselves are the point. The two often appear in the same case, and a single scheme can be both, but the investigator's question is different: not "what was smuggled?" but "where did the value go, and why?"

The 2020 report also separates out services-based money laundering: the same idea applied to services and intangible things, such as consultancy and advisory fees, software, intellectual property and trademarks, online gambling and financial services. It is harder still to detect, because no goods cross a border and so no customs import or export record exists to compare with the invoice.

Why trade? Scale, complexity and fragmented information:

• Volume. The WTO reports world merchandise exports of about US$24.4 trillion in 2024, and commercial services exports of about US$8.7 trillion. A suspicious payment is a very small needle in that haystack.
• Complexity. Trade mixes foreign exchange, credit, insurance, shipping and several jurisdictions, so legitimate and illicit money move side by side.
• Fragmented data. Each customs agency usually sees only its own side of a shipment, and the FATF's 2006 paper noted research suggesting that most inspect only a small fraction of cargo. Banks, customs, shipping firms and freight forwarders each hold part of the picture, and sharing it is limited.

How big is it? Nobody knows. The FATF and Egmont found that countries struggled to put a value on their exposure, and the Asia/Pacific Group said it could not estimate the extent of the problem. Figures such as "hundreds of billions of dollars a year" are estimates, not measurements. One concrete data point: FinCEN reported in 2010 that more than 17,000 US suspicious activity reports filed between 2004 and 2009 related to potential TBML, involving over US$276 billion. Most private-sector respondents to the 2020 FATF and Egmont study, mainly banks, called TBML the hardest form of money laundering to detect.

The techniques, from simple to complex

The FATF's 2006 paper described four basic techniques. Each one falsifies something about the trade: the price, the number of invoices, the quantity, or the description.

• Over- and under-invoicing. The invoice states a price that differs from the true value. If the goods are invoiced below their value, the importer receives more value than it pays for, so value moves to the importer. If they are invoiced above their value, the importer overpays, and value moves to the exporter. Because the price is wrong on purpose, the two sides normally act together, often because the same people control both.
• Multiple invoicing. One shipment is invoiced more than once, so that several payments can be justified, often through different banks. The price can be accurate, which makes it harder to spot. Some repeat invoices are innocent: corrected payment instructions, changed terms or late fees.
• Over- and under-shipment. The quantity shipped differs from the quantity invoiced. The extreme case is the phantom shipment, where nothing is shipped at all but the documents and payments go ahead.
• Misdescribed goods or services. Cheap goods are described as expensive ones, or the quality and type are misstated. Services such as consulting and market research are especially easy to misprice because they have no market price to check.

In practice these are combined. A scheme might send one genuine shipment to build a trading history, then raise further invoices for shipments that never happen.

The Black Market Peso Exchange (BMPE) shows how TBML can work with no false price at all. In the classic version, a drug trafficking organisation sells US dollars it earned from drug sales in the United States to a peso broker. The broker places the cash into the US financial system and uses it to pay US exporters on behalf of Colombian importers. The importers receive genuine goods and repay the broker in pesos in Colombia, and the broker pays the traffickers. The importer and exporter need not know each other's role, and the invoice can be correct. The money never crosses a border in cash; the goods do the moving. FinCEN noted reports of similar systems in Venezuela and in the area where Argentina, Brazil and Paraguay meet, and the 2020 FATF and Egmont report describes a 2020 US case built on the same pattern with consumer electronics.

The 2020 report also highlights methods that do not depend on false documents:

• Offsetting between criminal groups: one group has cash it needs to get rid of, another needs cash, and trade payments settle the balance between them.
• Infiltrating a real supply chain: criminals take a stake in a legitimate trading business and feed illicit cash through it slowly, without changing how the business trades.
• Third-party payments: an invoice is settled by someone with no clear link to the buyer.
• Professional money launderers, who run these schemes for a fee, and shell and front companies, which appear in many cases but not all.

What a bank can and cannot see

How much a bank can see depends on how the trade is paid for. From the exporter's point of view, the usual methods run from least to most risk: cash in advance, letters of credit, documentary collections, open account and consignment.

• Letters of credit and documentary collections. Trade documents such as invoices and transport documents pass through the banks, governed by International Chamber of Commerce rules (UCP 600 for documentary credits, URC 522 for collections). Banks examine the documents, not the goods, and they have no means of inspecting physical cargo. For collections, a detailed review is harder still, because there is no letter of credit setting out in advance what the documents should say.
• Open account. The goods are shipped and the buyer pays later, like an ordinary transfer. Unless the bank is providing credit, it usually sees only the payment, the names on it and a short reference. It cannot see the contract, invoice or shipment. The Wolfsberg Group, the ICC and BAFT estimate that open account makes up about 80% of international trade, and the Asia/Pacific Group described the gap it creates between the movement of goods and the movement of money.

This has a consequence: when banks tighten controls on documentary trade, launderers can simply move to open account, or to another bank.

What the Wolfsberg, ICC and BAFT Trade Finance Principles expect (a risk-based approach, not a checklist):

• Know the customer's trade. At onboarding, learn the customer's main counterparties and their countries, the goods traded and the expected volumes, and compare later activity with that profile.
• Screen at each stage of a letter of credit: when it is applied for (parties, countries, goods, ports and any declared transhipment points), when documents are presented (screen again if time has passed, and check new names), and at payment.
• Ask when a price is manifestly unusual. Banks are generally not able to judge whether a unit price is right: most goods have no public price, and the contract terms are not visible. They are expected to question prices that are obviously out of line where reliable data exists, not to verify every price.
• Check the shipping, where the risk calls for it: vessel and voyage history services, the International Maritime Bureau, and sanctions screening of vessel names and shipping companies.
• Look out for dual-use goods, those with both civil and military uses, while accepting that banks lack the technical expertise to identify them reliably. Exporters, customs and export licensing authorities are better placed.

Other parties hold the missing pieces. Customs holds declarations, and the customs agency in the other country holds the other side of the same shipment. Freight forwarders and customs brokers hold detailed shipment data but usually have no AML obligations. No single institution sees the whole trade, which is why TBML is ultimately a problem of joining data together.

Reading the risk indicators, and working an alert

In 2021 the FATF and Egmont Group published TBML risk indicators in four groups. In summary:

• Structure of the business: an ownership chain that is complex for no clear reason; registration at a mass-registration address or a residence; little or no real business presence, such as no staff, payroll or tax payments; owners who look like nominees; a name that imitates a well-known company; unexplained dormant periods.
• Trade activity: trading outside the stated line of business, such as a car dealer shipping clothing; unusual shipping routes or methods; many unrelated intermediaries; persistently thin or negative margins; purchases beyond the firm's apparent means; a new or reactivated company suddenly trading at high volume in a sector that is hard to enter.
• Documents and goods: contracts, invoices and transport documents that do not agree; prices far from market or from past deals; vague descriptions of goods; documents that are missing, forged or repeatedly amended; routing through several jurisdictions with no commercial reason.
• Accounts and transactions: late changes to who is paid; payments by parties other than the buyer; pass-through accounts that end each day with little left; deposits just below reporting thresholds; round-figure payments that are unusual for the sector; money that leaves the country and comes back.

Two cautions come with the list. A single indicator is rarely enough on its own; it is a reason to look closer. And some indicators can only be seen with outside data, such as customs records or market prices, so a bank will not see all of them.

Free trade zones deserve special attention. The FATF's 2010 study, citing other research, counted about 3,000 zones in 135 countries. It found weak AML safeguards, relaxed oversight, little or no ownership information about the companies inside, poor inspection and record keeping, and weak links between zone authorities and customs. Goods can be repackaged and relabelled inside a zone, which breaks the link to where they came from, and countries without their own zones are still exposed when goods are transhipped through one.

Working a TBML alert. The skill is to rebuild the trade and see whether it makes sense:

• Who is selling what to whom, and does it fit each party's business and size?
• What is the route, and does each transhipment have a commercial reason?
• How much, and is the price, quantity and description plausible compared with the customer's history and any reliable price data?
• Who pays, and if it is a third party, what is the documented reason?
• What changed: new counterparties, new goods, new routes, sudden volume?

Ask for documents and explanations as part of normal business, without suggesting that a report is being considered. Record what you checked and why you concluded what you did. If the activity is still suspicious after review, report it to your MLRO. As in all AML work, suspicion is enough: you do not need to prove the crime or identify it.

Cases and lessons

Real cases show how the techniques look in practice. These summaries are from FATF and Egmont publications.

• A phantom shipment (FATF, 2006). A buyer in Germany paid a Brazilian company in advance for a large shipment of soybeans. The exporter passed the money on to an unrelated third party, and no soybeans were ever shipped. What drew attention was that the deal did not fit the exporter's usual business or its size.
• Under-valued electronics (Australian Border Force, in FATF and Egmont, 2020). More than AUD 500 million of drug proceeds from North America moved through Australian bank accounts from 2014. Part of it bought high-end electronics that were exported, under-valued, to South East Asia and the Middle East. The scheme was found by comparing Australian export declarations with the import records of the receiving countries: mirror trade data.
• Fake invoices for real exports (New Zealand FIU, in FATF and Egmont, 2020). New Zealand fruit exporters received about US$1.5 million over 18 months from shell companies in Eastern Europe with no link to the real buyers. The invoices the payers gave their banks described ceramic tiles and carried signatures of staff who did not exist.
• A vegetable trade as cover (Europol, in FATF and Egmont, 2020). A professional laundering network, estimated to have moved about EUR 400 million over four years, exported potatoes and onions to North Africa and told buyers to pay into accounts controlled by drug traffickers. Authorities seized EUR 4.8 million in assets and more than EUR 7 million in cash.

What the cases teach:

• Fit matters more than any single document. In each case the warning sign was a mismatch: the wrong business, the wrong payer, the wrong goods on the invoice.
• Joining data finds what one institution cannot. The electronics case was found by matching both sides of the same trade across two countries.
• Genuine goods do not mean a genuine trade. Real fruit and real vegetables were shipped; the laundering was in who paid and why.

In Kenya: the 2022 mutual evaluation of Kenya by ESAAMLG noted that proceeds of crime generated in Kenya can be moved across borders through cash smuggling, wire transfers and trade-based schemes such as mis-invoicing. It describes the port of Mombasa as the gateway to the Northern Corridor that serves landlocked countries in the Great Lakes region, and, citing other research, reports Kenya as a regional hub for the illicit gold trade, with gold consolidated and shipped onward to China, India and the UAE. Kenyan reporting duties, such as reporting suspicion to the Financial Reporting Centre within two days, are covered in the transaction monitoring course.

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