Understanding Trade-Based Money Laundering

International trade is the backbone of the global economy. It enables countries to overcome limitations in natural or financial resources by accessing goods they cannot produce themselves. In doing so, international trade promotes economic growth and cooperation among nations. With globalisation and the proliferation of the free market economy, international trade reached $32 trillion in 2022. The scale of international trade is truly unimaginable. In May 2024 alone, 15.94 million TEUs (twenty-foot equivalent units of shipping containers) were delivered by sea, breaking the previous record of 15.72 million TEUs set in May 2021. Clearly, the vast scale of these operations, involving countless transactions and intricate supply chains, makes international trade vulnerable to illegal activities as well.

^{Source: Statista}

One of the illegal activities for which criminals use international trade to clean their dirty money is trade-based money laundering (TBML). The Financial Action Task Force (FATF), an intergovernmental body, in its 2006 study, defined trade-based money laundering 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 this blog, we will delve into understanding how trade-based money laundering works and the techniques used in such crimes. We will also look at the enormity of trade-based money laundering and the UAE’s endeavour to combat the crime.

International trade can be quite complicated and involves several intermediaries, such as brokers, freight forwarders, customs agents, and financial institutions, each playing their part in facilitating trade activities. A typical trade structure has been cited below:

^{Source: UAEFIU Report on TBML, 2024}

Trade-based money laundering exploits international trade to transfer value across countries. It is important to highlight that trade-based money laundering differs from other trade-related predicate crimes because its aim is “not the movement of goods, but the movement of money, which the trade transactions facilitate,” as described in the FATF/Egmont Trade-based Money Laundering: Trends and Developments, published in December 2020.

To understand how trade-based money laundering works, let’s imagine Company A wants to launder $500,000 it has earned through criminal activity. It approaches Company B, a company that sells computers in another country, and they collude to launder the money.

Company A makes an order to buy 1,000 computers from Company B.

Each computer actually costs $500, so the total cost should be $500,000.

However, instead of charging the correct price, Company B overcharges and sends an invoice to Company A for $1 million, with each computer costing $1,000. Company A pays the $1 million, even though the real value of the computers is only $500,000.

The extra $500,000 on the invoice isn’t for the computers; it’s dirty money that Company A is moving out of its country under the guise of a legitimate trade transaction. Once the money reaches Company B, it can be funnelled back to Company A or its associates through various channels, making the funds appear clean and legally obtained.

This is a classic example of trade-based money laundering through over-invoicing, a technique of misinvoicing, by which the value, volume, or type of goods is deliberately falsified in international trade. According to Global Financial Integrity, misinvoicing is the largest component of illicit financial outflows. Also, with “less than two percent of all shipping containers searched each year to verify the veracity of customs invoices,” as cited by The Global Financial Integrity report titled Trade-Related Illicit Financial Flows in 135 Developing Countries: 2008-2017, published in March 2020, international trade provides significant opportunities for criminals to engage in trade-based money laundering due to minimal regulatory oversight.

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The following four basic techniques of trade-based money laundering, outlined in FATF’s 2006 study, remain relevant and are part of trade misinvoicing methods still used today, as cited in the FATF/Egmont’s 2020 report:

a) Over- and Under-Invoicing

b) Multiple Invoicing

c) Over- and Under-Shipments

d) Falsely Described Goods and Services

Although new technology has introduced new methods of trade-based money laundering, FATF/Egmont’s 2020 report highlights the continued reliance on the technique called Black Market Peso Exchange (BMPE). BMPE was originally developed in Colombia by drug traffickers and other criminals to move money between countries without physically transferring funds across borders, using informal currency exchange arrangements. Here’s how a typical BMPE, as cited in the FATF’s 2006 report, involving a Colombian drug cartel and a peso broker works:

1. A Colombian drug cartel smuggles drugs into the U.S. and sells them for U.S. dollars.
2. The cartel sells these dollars to a peso broker in the U.S. at a lower rate in exchange for Colombian pesos.
3. The peso broker pays the cartel Colombian pesos from his bank account in Colombia, and the cartel is no longer involved.
4. The broker then deposits the U.S. dollars into American banks in small amounts to avoid being noticed.
5. The broker looks for a Colombian importer that needs U.S. dollars to buy goods from the U.S.
6. The broker pays the U.S. exporter on behalf of the Colombian importer.
7. The US company sends the goods to Colombia, where the importer sells them for pesos and pays back the broker, refilling his supply of pesos in his Colombian bank account.

While BMPE originated in Latin America, the underlying principles of this trade-based money laundering technique with limited reliance on formal banking, are common in other regions as well — as has been cited in a report by the US Government Accountability Office (GAO).

The sheer size of international trade, including innumerable shipments and transactions, makes it extremely difficult for regulatory authorities to monitor trade-based money laundering effectively. It’s important to note that illegally sourced money can be mixed with proceeds from legitimate businesses, making it even harder to detect suspicious transactions. Add to this the complexities of multiple financial arrangements and the lack of standardised data in international trading, and it becomes clear the enormity of the challenge regulatory authorities face in combatting trade-based money laundering across countries.

Another challenge is the use of open account trading, where goods are shipped and delivered before payment is due, often with minimal oversight from financial institutions (FIs). The FATF/Egmont report of 2020 cited that “approximately 80% of international trade processed by FIs is open account trading,” with payments typically made 30 to 90 days after receipt of goods and services. This makes it even more challenging for FIs to oversee these trades.

As outlined in Global Financial Integrity’s 2020 report cited above, GFI conducted a value gap analysis to detect discrepancies in international trade data. They began by examining the trade data that governments submitted annually to the United Nations Comtrade database and applied filters to remove trades that didn’t match between countries. The total value gaps identified by GFI in trade among 135 developing countries and 36 advanced economies from 2008 to 2017 amounted to a whopping $8.7 trillion! The study showed the enormity of trade-based money laundering crime and highlighted the need for a concerted global effort to address the challenge.

The UAE’s deep commitment to fighting money laundering crimes, including combating trade-based money laundering, has led the UAE’s Financial Intelligence Unit (FIU) to publish reports on typologies and risks related to trade-based money laundering in 2021 and 2024. It has also developed comprehensive red flag indicators for identifying activities related to the crime.

In its 2024 Strategic Analysis Report, the UAE FIU conducted a comprehensive review of all trade-based money laundering-related Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) submitted by financial institutions and other reporting entities between January 1, 2022, and December 31, 2023. The analysis covered 853 suspicious reports, with 610 of them (524 STRs and 86 SARs) revealing clear patterns and techniques associated with trade-based money laundering.

Just as the FATF studies indicated, the UAE FIU’s investigation also found that criminals often mix various trade-based money laundering methods in a single scheme. The following major trade-based money laundering methods were identified during the analysis of the reports:

^{Source: UAEFIU Report on TBML, 2024}

The analysis also found that precious metals are the most commonly used goods in trade-based money laundering. Given the risks associated with this crime, the UAE FIU has developed a list of risk indicators to help reporting entities identify suspicious transactional patterns and activities potentially related to trade-based money laundering and assist them in combating these illicit practises more effectively. The risk indicators are based on four different categories, including risks related to

1. Account and transaction activity
2. Shipment and goods anomalies
3. Difficulty in verification and discrepancies in trade documents
4. Customer’s and Counterparty’s discrepancies

Having a thorough understanding of these risk indicators and incorporating them into the overall AML/CFT framework of Financial Institutions and DNFBPs is essential for effectively identifying and mitigating trade-based money laundering activities.

The Wolfsberg Group, an association of 12 global banks that aims to manage financial crime risks, has suggested that “greater collaboration” and “information sharing” among key stakeholders in international trade, including both public and private players, is needed to successfully combat trade-based money laundering. Private sector actors must know the risk indicators and perform comprehensive due diligence to facilitate such collaboration and prevent crimes.

External consultants with extensive experience in current typologies and methods of trade-based money laundering can help integrate targeted risk mitigation strategies into the overall AML/CFT programmes of companies, especially those operating in sectors such as precious metals, which are highly vulnerable to such crimes. They can also train employees to identify trade-based money laundering and connected predicate crimes, equipping financial institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs) with the knowledge and skills necessary to recognise and respond to suspicious trade activities early, thereby strengthening the frontline defence of a company.

AKW Consultants has been a leader in helping companies combat money laundering crimes and has assisted more than 200 UAE companies with AML compliance manuals, training programmes, and outsourced AML consulting. Our comprehensive expertise in trade-based money laundering enables your company to strengthen its AML frameworks, mitigate risks, and ensure compliance with both local and international AML/CFT regulations and standards.