Trade-based money laundering

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Glossary · AML

Trade-based money laundering

TBMLAlso called trade-based laundering

Definition

Trade-based money laundering is the use of international trade to disguise criminal money and move value across borders. Criminals over or under invoice goods, ship more or less than declared, misdescribe products or invoice the same shipment several times. The difference between the paper value and the real value carries the illicit funds.

01 INVOICE02 BILL OF LADING03 LETTER OF CREDIT04 CUSTOMS ENTRY
Fig. 1 · Trade-based money laundering
FATF Recommendations · FATF/Egmont TBML report · FATF/Egmont TBML risk indicators
Key rulesFATF Recommendations · FATF/Egmont TBML report · FATF/Egmont TBML risk indicators
Applies toRegulated firms
RegionsGlobal
01

How it works

Banks see trade through letters of credit, documentary collections and open account payments. Trade finance teams compare invoice prices with market values, check shipping routes and vessels, and look for parties with no clear link to the goods. Open account trade is harder to check, because the bank sees only the payment, not the documents behind it.

The FATF and the Egmont Group have published joint reports on trade-based laundering methods and red flags. It is hard to detect because trade documents are complex, prices vary and data is spread across banks, shippers and customs. Supervisors expect banks with trade finance business to assess this risk and train staff on the red flags.

Step 1Assess exposureIdentify products, routes and customers with trade risk.
Step 2Check documentsCompare invoices, bills of lading and declared goods.
Step 3Test pricingCompare invoice values with market prices for the goods.
Step 4Screen partiesScreen counterparties, vessels and ports against sanctions lists.
Step 5Escalate suspicionReport unexplained anomalies through internal suspicious activity channels.
02

The rules

Global · February 2012, regularly updatedFATF RecommendationsInternational Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation

Require countries and firms to apply a risk-based approach, due diligence and suspicious transaction reporting, which cover trade transactions and trade finance.

Countries, which apply them to regulated firms through national law
Global · 2020FATF/Egmont TBML reportTrade-based Money Laundering: Trends and Developments (FATF and Egmont Group)

Describes current trade-based laundering methods and the challenges authorities and banks face in detecting them.

Governments, supervisors and private sector firms
Global · 2021FATF/Egmont TBML risk indicatorsTrade-Based Money Laundering: Risk Indicators (FATF and Egmont Group)

Lists red flags grouped by business structure, trade activity, trade documents and commodities, and account and transaction activity.

Banks, trade finance providers and other private sector firms
03

Common questions

What are common trade-based money laundering red flags?

Typical red flags include invoice prices far from market value, shipments routed through several jurisdictions without a commercial reason, goods that do not fit the customer's business and payments from third parties with no link to the trade.

Why is open account trade a particular risk?

In open account trade the buyer pays the seller directly after the goods arrive. The bank processes a payment but does not handle shipping documents. It therefore has less information to check prices, goods and routes than in documentary trade.

How is trade-based laundering linked to sanctions evasion?

The same techniques that move criminal money also hide the origin or destination of controlled goods. Misdescribed cargo, transhipment through third countries and front companies are used to evade sanctions and export controls as well as to launder funds.