Trade-Based Money Laundering: Strategies & Solutions

Introduction

Trade-based money laundering (TBML) represents one of the most complex challenges in the financial crime landscape today. With global trade volumes reaching unprecedented levels, criminals are increasingly exploiting international trade systems to move illicit funds across borders. For financial crime professionals, understanding the intricacies of TBML is essential to effectively combat this growing threat.This blog post explores the mechanisms behind trade-based money laundering, drawing on insights from Bruce Viney, Director of Financial Crime Compliance Training at CCL Academy, a seasoned professional with nearly 40 years of experience in financial services and compliance.

What is Trade-Based Money Laundering?

Trade-based money laundering is fundamentally tied to global trade operations—the movement of goods and services across borders via ships, planes, and ground transportation. The sheer volume of these transactions makes trade an attractive vehicle for money launderers. Banks interact with trade in two primary ways:

1. Indirectly through open account trading (approximately 80% of global trade): Where buyers and sellers conduct business directly, using their bank accounts for payments.
2. Direct involvement (remaining 20%): Through financial products like letters of credit, collection services, guarantees, and credit lines.

Why TBML Presents Unique Challenges

Financial institutions face several distinct challenges when dealing with trade finance:

• Limited visibility: Banks rarely see the physical goods they finance, relying instead on documentation
• Document complexity: Trade transactions often involve numerous complex documents
• Documentation volume: A single trade can generate over 100 different documents
• Cross-border complications: Different languages, jurisdictions, and regulatory frameworks

As Bruce Viney notes, "Trade is essentially a complex business for banks... they don't see the goods that they are financing... they have limited visibility, they see the documents, and there may be a lot of documents for one trade."

Common TBML Techniques

Criminals employ various methodologies to manipulate trade for illicit purposes:

Price Manipulation

• Over and under-invoicing: Deliberately misstating the price of goods to transfer value
• Example: Selling a high-value item at a significantly reduced price to transfer value to the buyer, or inflating prices to transfer value to the seller

Quantity Manipulation

• Short and over-shipping: Misrepresenting the quantity of goods being shipped
• Phantom shipping: Creating documentation for goods that don't exist

Misrepresentation of Goods

• Quality or type misstatement: Describing goods as one thing when they are actually another
• Example: Shipping lead but declaring it as gold (detectable by weight discrepancies)

Other Schemes

• Re-invoicing: Using intermediaries to obscure the origin and destination of goods
• Circular trading: Moving the same goods repeatedly between related parties
• Multiple invoicing: Issuing multiple invoices for the same shipment

Notable TBML Case Studies

The Scrap Copper Case

A shipment of scrap copper from China to the US raised red flags because:

1. The direction of the shipment was unusual (scrap copper typically moves from the US to China)
2. The price matched high-quality copper despite being labeled as scrap

The Briefcase Weight Anomaly

Documentation showed briefcases with an implied weight of approximately 120 kilograms each—a physical impossibility that indicated concealment of additional goods or value.

Absurd Pricing Examples

• Bulldozers priced at $1.72 each
• Toilet tissue priced at $4,000 per kilogram

The Circuit Chip Company

A company selling outdated circuit chips continued to thrive financially long after the market had collapsed. Investigation revealed an elaborate circular trade scheme involving fraud and money laundering.

Detection and Prevention Strategies

Financial institutions must employ a multi-layered approach to detect and prevent TBML:

Document Analysis

• Checking for consistency across all documentation
• Verifying price reasonableness against market benchmarks
• Analyzing weights, quantities, and specifications

Risk Assessment Framework

• Customer risk: Evaluating the risk profile of all parties involved
• Document risk: Examining documentation for inconsistencies and red flags
• Transaction risk: Assessing whether the transaction makes economic sense
• Payment risk: Monitoring for unusual payment terms or methods
• Shipment risk: Evaluating shipping routes, methods, and timelines

Enhanced Due Diligence

• Identifying and verifying all parties involved, including intermediaries
• Understanding beneficial ownership structures
• Applying additional scrutiny to high-risk jurisdictions or products

Transaction Monitoring

• Implementing systems to detect unusual patterns or transactions
• Ongoing monitoring throughout the transaction lifecycle
• Re-screening against sanctions lists as transactions progress

The Human Element in TBML Detection

Despite technological advances, human expertise remains the cornerstone of effective TBML prevention. As Bruce Viney emphasizes: "In my view, it's not technology yet, it's people. And it's not just my view—regulators will support this—that to be effective in managing trade-based money laundering, trade-based financial crime risk, then you are relying heavily on having very expert people at the trade finance, the first line of defense level, and very expert people in the compliance level."

Key areas where human expertise is critical include:

• Identifying dual-use goods: Products that have both legitimate commercial applications and potential military or illegal uses
• Economic sense assessment: Determining whether a transaction makes business sense
• Pattern recognition: Drawing on experience to identify unusual trade activities
• Contextual understanding: Interpreting information within broader economic and regional contexts

Technological Solutions and Future Directions

While human expertise remains paramount, technological solutions are evolving to assist in TBML detection:

Current Technologies

• Document digitalization efforts: Converting paper documents to digital format
• Price benchmarking tools: Comparing transaction prices against market standards
• Transaction monitoring systems: Flagging unusual patterns or transactions
• Sanctions screening tools: Checking parties against global watchlists

Future Developments

• Generative AI applications: Potential to revolutionize document analysis and comparison
• Blockchain technology: Creating immutable records of trade transactions
• Digital documentation standards: Efforts like the UN Model Law on Electronic Transferable Records
• Interoperable systems: Development of technology platforms that can communicate across borders and institutions

Regulatory Landscape and Challenges

The regulatory burden for combating TBML falls heavily on financial institutions, but broader cooperation is essential:

Current Challenges

• Organized crime infiltration: Criminal organizations have infiltrated legitimate trade systems
• Document falsification services: Professional facilitators provide convincingly forged trade documents
• Regulatory disparities: Variations in regulations across jurisdictions
• Cost burden: Financial institutions face substantial compliance costs

Positive Developments

• Increased international cooperation: Growing alignment of anti-money laundering regulations globally
• Industry commitment: Financial institutions increasingly recognize their societal role in preventing financial crime
• Moving beyond compliance: A shift from box-ticking to meaningful risk management

Conclusion: The Road Ahead

Trade-based money laundering represents a significant and evolving challenge for financial crime professionals. While criminal methodologies continue to advance, so too do detection and prevention capabilities. The combination of human expertise, technological innovation, and international cooperation offers the best path forward in combating this threat.

Financial crime professionals must remain vigilant, continuously update their knowledge, and collaborate across institutions and borders to effectively address TBML. As Bruce Viney notes, "We are fighting back very hard, and I think we are getting some degree of international cooperation... I have great respect for my colleagues in this industry."

Resources for Further Learning

For professionals looking to deepen their understanding of trade-based money laundering:

• CCL Academy offers training courses, online videos, and e-learning resources on trade-based financial crime
• Focus on understanding fundamental trade finance mechanisms like letters of credit, guarantees, and standby letters of credit
• Follow trade finance and compliance experts on professional networks like LinkedIn
• Review publications from organizations like FATF (Financial Action Task Force) on TBML typologies and case studies

By developing expertise in this complex area, financial crime professionals can make significant contributions to protecting the global financial system from abuse.