What Is Trade Based Money Laundering (TBML) ?

Trade-Based Money Laundering

Trade-based money laundering (TBML) definition is a process known to criminal organizations and terrorist financiers as a primary method to move money for the purpose of disguising its origins and integrating it back into the formal economy. This involves the movement of value using methods such as false documentation and declaration of traded goods and services.

What is Trade-Based Money Laundering?

Trade-Based Money Laundering (TBML) definition is the process of disguising the proceeds of crime and moving value through the use of trade transactions in order to legitimize their illicit origins. This practice can be achieved through the misrepresentation of the price, quantity, or quality of imports or exports. It makes a profit off of the complexity of trade systems, mostly used during international contexts.

The involvement of multiple parties and jurisdictions make Customer Due Diligence (CDD) processes and Anti-Money Laundering (AML) checks more taxing. Primarily, trade-based money laundering TBML involves the import and export of goods and the exploitation of a variety of cross-border trade finance instruments. However, the techniques of trade-based money laundering TBML vary in complexity and are often used along with other money laundering techniques to further obscure the money trail.

How Does Trade-Based Money Laundering Work?

The main methods of Trade-Based Money Laundering (TBML) include over- and under-invoicing of goods and services, multiple invoicing of goods and services, over- and under-shipments of goods and services, and falsely describing goods and services.

  • Over-invoicing:  One of the oldest methods and a common practice even today, where the exporter submits an inflated invoice to the importer, generating a payment that exceeds the value of the shipped goods. The key element of this technique is the misrepresentation of the price, as a greater value is transferred from the importer to the exporter. 
  • Under-invoicing: Similar to the scenario as above, where the exporter submits a deflated invoice to the importer, shipping goods with greater value and transferring that value to the importer. By invoicing the price of goods or services lower than the market price, the exporter can transfer value to the importer, as the payment will be lower than the value that the importer receives when it’s sold on the open market. 
  • Multiple-invoicing: Another technique involves issuing more than one invoice for the same international trade transaction. By invoicing more than once, a money launderer is able to justify multiple payments for the same shipment of goods or delivery of services. Thus the exporter invoices multiple times for the same shipment, shifting greater value from the importer to the exporter.
  • Over- or under-shipment: In addition to manipulating export/import prices, a money launderer can similarly overstate or understate the number of goods or services being provided. So the exporter may ship more goods to the importer to transfer greater value or fewer goods than agreed, transferring greater value to the exporter.
  • Misrepresentation of quality:  A money launderer can misrepresent the quality or type of goods or services. This leads to a discrepancy between what appears on the shipping and customs documents and what is actually shipped. Thus, goods shipped to importers may be misrepresented on official documentation as being of a higher quality — thereby transferring greater value to the exporter.

How Can Firms Combat TBML?

Firms can combat TBML by strengthening their AML/CFT controls, be it in trade finance or correspondent banking. However, due to the complexity of these sectors, many firms may struggle to adjust to their AML programs effectively. TBML is often hidden amongst legitimate trade activities or stretched across different jurisdictions and organizations, which adds to the difficulty of firms trying to detect it.

Information Sharing: To overcome the difficulties that TBML poses, firms need to look beyond their own AML provisions so they may seek coordination with other organizations, law enforcement agencies, or government authorities. To be more specific, banks or financial institutions should make sure to share their TBML discoveries and analysis. The reason because:

  • The sharing of information between institutions might make it easier to identify the global criminal infrastructure and address specific instances of TBML.
  • The law enforcement agencies are incentivized to join an information-sharing network in order to catch and stop criminal activity.
  • The government authorities use information-sharing networks to analyze TBML and align regulatory focuses better.

International Guidance: Individual firms can effectively work to prevent TBML with a broad regulatory perspective. The Financial Action Task Force (FATF) including other international authorities can issue guidance and advice to help financial institutions detect and address TBML. The FATF Trade-Based Money Laundering Best Practice guidance focuses on raising private-sector awareness for why we need trade finance AML policies and on educating banking supervisors on TBML vulnerabilities in their AML/CFT programs. The FATF project team has made use of a detailed questionnaire to survey current practices, paying particular attention to customs agencies, law enforcement agencies, financial intelligence units, tax authorities, and banking supervisors.

The FATF provides banks and financial institutions with a list of trade finance AML red flags to consider when managing cross-border transactions, which include:

    1. Heavy discrepancies between the description of the commodity and on the bill of lading and the invoice; 
    2. Heavy discrepancies between the description of the goods on the bill of lading (or invoice) and the actual goods shipped;
    3. Heavy discrepancies between the value of the commodity reported on the invoice and the commodity’s fair market value; 
    4. Inconsistent size of the shipment compared to the scale of the exporter or importer’s regular business activities; 
    5. The kind of commodity being shipped is designated as “high risk” for money laundering activities; 
    6. The kind of commodity being shipped is inconsistent with the exporter or importer’s regular business activities; 
    7. Where the shipment does not make economic sense; 
    8. The commodity being shipped to (or from) a jurisdiction is designated as “high risk” for money laundering activities; 
    9. The commodity is being transhipped through one or more jurisdictions for no apparent economic reason; 
    10. The method of payment is inconsistent with the risk characteristics of the transaction; 
    11. The transaction involves cash or other payments from third party entities that have no connection with the transaction; 
    12. The transaction has repeated use of amended or frequently extended letters of credit; 
    13. The transaction includes the use of front or shell companies. 

Trade-Based Money Laundering Examples

Trade-Based Money Laundering (TBML) examples include activities that should raise red flags:

  • The first trade-based money laundering example is, during an examination by the routine bank, a letter of credit for a high-value cross-border import is revealed to contain anomalies. With the further investigation by the bank, it is revealed that some documents with the import agents are either missing or unrecognized. Therefore the bank rejects the transaction and returns the drawing documents.
  • The second trade-based money laundering example is that the first line of a multi-million dollar letter of credit is to supply medical goods for another country’s bureau of health. However, the second and ultimate line of the credit issues invoices does not match those submitted by the first. Thus the first beneficiary is revealed to have substituted invoices marked up by 300% and is revealed to have a connection with the firm acting as the agent to the bureau of health. Therefore the bank cancels the transaction and adds them to their internal watch list.
  • The third trade-based money laundering example is that there are several shell companies, which purchase electronic goods with funds derived from criminal activities, further selling these goods to buyers with minimum due diligence in high-risk countries. After these proceeds are then directed back to the shell companies, the bank handling the transactions notices the red flags. They detect that the shell companies are registered in countries unrelated to the transactions. Finally, the bank adds all parties to its internal watch list.

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We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...