Financial Crime World

Unmasking the Complex Web of Trade-Based Money Laundering: A Hidden Menace in Global Finance

Trade-Based Money Laundering (TBML) is an intricate and increasingly common method of Money Laundering (ML), exploiting the complexity of global trade systems, particularly in international contexts. Criminals and money launderers take advantage of the intricacies of cross-border trade and finance to conceal the illicit origins of funds. In this article, we will delve into the world of TBML, outlining its various red flags and techniques.

Understanding Trade-Based Money Laundering

TBML uses trade transactions to conceal the sources of illicit funds [1]. The schemes can involve manipulating invoices and customs documentation, setting up shell companies, and price distortion techniques such as transfer pricing or trade mispricing. Below are some of the common TBML techniques.

Invoice Manipulation

  • Over-invoicing: Inflating the price of goods or services in invoices to conceal the true volume or value of illicit funds involved
  • Under-invoicing: Omitting products, services, or the entire transaction value from invoices to hide the true volume or value of the transaction

Falsified Documents

  • Customs documents: Altering, forging, or providing inaccurate declarations to Customs authorities to facilitate smuggling or evade taxes
  • Shipping documents: Tampering with documents to conceal the actual contents, origin, or destination of the goods being transported

Shell Companies and Price Distortion Techniques

  • Transfer pricing: Manipulating the price of goods or services between related entities in the same corporate group to shift profits to lower-tax jurisdictions
  • Trade mispricing: Misrepresenting the price of goods or services to manipulate trade records, revenue, or profit expectations

The Darker Side of Global Finance: Risks and Consequences

TBML poses numerous risks and consequences to the financial system, including [2]:

  • Financing criminal and terrorist activities: TBML is used to fund organized crime, drug trafficking, and terrorism by hiding the proceeds of such illicit activities
  • Undermining confidence in the financial markets: Such fraudulent transactions can undermine investor confidence and erode trust in the financial system
  • Reputational damage: Financial institutions and regulatory authorities may face significant reputational damage if they fail to detect and prevent TBML activities

Regulatory Responses and Measures to Combat TBML

Staying informed about the latest TBML trends and techniques is crucial for financial institutions and regulatory authorities in effectively combating this hidden menace [3]. Some of the measures include:

  • Implementing stringent AML/KYC policies: Financial institutions should apply strict Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures to detect and prevent TBML
  • Due diligence: Thoroughly investigating business relationships, transactions, and partners to mitigate the risk of involvement in TBML schemes
  • Monitoring and reporting suspicious activities: Regular monitoring and reporting of suspicious trade activities to regulatory authorities can help in early detection and prevention of TBML
  • Strengthening international cooperation: Collaboration among regulatory authorities, law enforcement agencies, and financial institutions across borders can help address the global nature of TBML

References:

[1] Financial Crimes Enforcement Network (FinCEN). (2019, March). Trade-Based Money Laundering. Retrieved June 13, 2023, from https://www.fincen.gov/sites/default/files/advisory/Documents/2019-03-11_tbml_advisory.pdf

[2] Jain, N. (2019, July 30). Global Threats: Understanding Trade Based Money Laundering (TBML). Retrieved June 13, 2023, from https://www.kroll.com/en/publications/Global-Threats/Understanding-Trade-Based-Money-Laundering-TBML/79684ba3-e428-4f3f-aed6-4c897689863b

[3] United Nations Office on Drugs and Crime (UNODC). (2022, August 24). Trade-Based Money Laundering. Retrieved June 13, 2023, from https://www.unodc.org/unodc/en/frontpage/2022/August/trade-based-money-laundering.html