Risk Indicators for Trade-Based Money Laundering

What is Trade-Based Money Laundering (TBML)?

Trade-based money laundering is the use of trade and transactions to transfer money in a way that avoids financial transparency regulations. The methods used to falsify trade documents and adjust pricing to benefit the criminal entity are often indirect. This makes TBML a preferred money laundering technique that is difficult to track. 

 It’s estimated that up to $2 trillion of the annual $20 trillion in global trade is laundered money. This type of customs fraud can be conducted anywhere in the world. However, many laundered funds are routed through jurisdictions with weak financial regulations. 

Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) initiatives have proven effective at decreasing the number of fraudulent financial transactions. However, this increased scrutiny may have funneled a certain portion of laundering activities to trading channels. 

‍

‍

Common Trade-Based Money Laundering Techniques

Below are some of the most common techniques criminals use to conduct trade-based money laundering activities. 

• Over-Invoicing and Under-Invoicing of Products and Services 

One of the most prevalent TBML techniques, over-invoicing or under-invoicing can transfer value between exporters and importers. If two parties are owned by the same corporation or agree to collaborate for economic benefit, they can adjust the price of goods or services to achieve unfair market advantages. 

In over-invoicing, the exporter sets a price above the fair market rate to receive more money from the importer. Conversely, in under-invoicing, the exporter sets a price below the fair market rate so that the importer obtains a higher value upon selling the goods or services.

• Issuing Multiple Bills for Goods and Services

Money launderers sometimes operate by issuing multiple bills for the same commercial transaction. In addition, they may conduct the transactions through different financial institutions to disguise their activities. 

There are legitimate justifications for multiple payments for the same goods or services. So, it can be challenging to detect criminal enterprises using this technique. 

• Fraudulent Quantities of Shipped Products and Services

Another common technique is changing the quantities of provided goods or services. Money launderers can conceal illegal payments and funds by inflating or deflating these numbers. In some cases, no goods are shipped at all.

• False Descriptions of Goods and Services

Descriptions of goods and services can be misconceived to falsify billing documents. Sometimes, money launderers misrepresent the quality or type of items provided. For example, fake goods may be billed as more expensive, genuine products. 

Descriptions of goods and services can be misconceived to falsify billing documents. Sometimes, money launderers misrepresent the quality or type of items provided. For example, fake goods may be billed as more expensive, genuine products. 

Types of Risk Indicators for Trade-Based Money Laundering

The Financial Action Task Force outlines four main risk indicator categories for trade-based money laundering. These are:

1. Structural Risk Indicators
2. Trade Activity Risk Indicators
3. Trade Document and Commodity Risk Indicators
4. Account and Transaction Activity Risk Indicators
   Structural Risk Indicators
5. Trade Activity Risk Indicators
6. Trade Document and Commodity Risk Indicators
7. Account and Transaction Activity Risk Indicators
   

Structural Risk Indicators

TBML indicators related to structural risk include: 

• An entity's corporate structure is unconventional, illogical, or overly complex. For example, there are shell corporations or companies registered in high-risk jurisdictions. 
• The trading entity is not registered at a commercial address. Instead, the registered address may be located in high-density apartment complexes, industrial buildings, or post office boxes.
• The company doesn’t have a legitimate online presence. There is either a lack of information about the company in general, or the online presence is vague and does not give specific details regarding the company’s operations. 
• The entity doesn’t conduct typical business activities. These include payroll transactions, taxes, operating cost transactions, etc.
• Owners of the company don’t appear to have the appropriate experience needed to run an organization. If this is the case, they may be disguising the beneficial owners.
• The entity has been involved in money laundering or been under investigation for other criminal activities in the past. 
• The company’s number of staff is inconsistent with its trading volume.
• The entity’s name may appear similar to an established company in the same industry.
• The business goes through unexplained periods of dormancy.
• The company doesn’t comply with standard business procedures, such as filing VAT returns.
• Financial records are unusual, overly complex, or exhibit exceptionally low profit margins.
• The company uses abnormal or inconvenient shipping routes.
• A recently established company makes high-volume, high-value trades. 
• Commodity purchases far exceed the entity’s financial profile.
• Complicated commercial transactions involve multiple brokers not connected through their business activities.
  

Trade Activity Risk Indicators

TBML indicators related to trade activity include: 

• The stated business doesn’t match the trading activity. For example, a clothing manufacturer is exporting precious metals.  
• An entity enters complex trade deals with multiple third parties that do not engage in the same line of business.
• A company uses shipping routes that are not considered standard for that industry.
• An entity unnecessarily uses complex financial products without justification. For example, utilizing unconventionally long lines of credit or combining multiple types of trade finance products. 
• A company’s accounts reveal an unusually low profit margin. This suggests that it conducts business outside the standard market rates within its industry.
• An entity’s purchase of commodities is funded by a sudden influx of capital from an unrelated third party.
• A new entity appears or is re-activated in a sector with a high barrier to entry. Especially if this entity quickly begins making high-value or high-volume trades.
  
  The stated business doesn’t match the trading activity. For example, a clothing manufacturer is exporting precious metals.  
• An entity enters complex trade deals with multiple third parties that do not engage in the same line of business.
• A company uses shipping routes that are not considered standard for that industry.
• An entity unnecessarily uses complex financial products without justification. For example, utilizing unconventionally long lines of credit or combining multiple types of trade finance products. 
• A company’s accounts reveal an unusually low profit margin. This suggests that it conducts business outside the standard market rates within its industry.
• An entity’s purchase of commodities is funded by a sudden influx of capital from an unrelated third party.
• A new entity appears or is re-activated in a sector with a high barrier to entry. Especially if this entity quickly begins making high-value or high-volume trades.
  

Trade Document and Commodity Risk Indicators

TBML indicators related to trading documents and commodity risk include: 

• Trade documents, bills, or contracts contain inconsistencies. For example, descriptions of items are incorrect, there are discrepancies between invoiced quantities, or the accounting numbers don’t add up.
• Trade documents do not make financial sense. For example, prices may be inconsistent with the market value, or the costs do not match the purchasing power of the entity in question.
• Contracts are vague or abnormally simplistic. Descriptions of goods or services may appear generic.
• Customs documents are falsified. They may also be missing, rejected, or duplicated old documents.
• Inconsistency between the value of the imports or exports and the company’s foreign transactions.
• Commodities are shipped via multiple jurisdictions without sufficient economic justification.
  
  Trade documents, bills, or contracts contain inconsistencies. For example, descriptions of items are incorrect, there are discrepancies between invoiced quantities, or the accounting numbers don’t add up.
• Trade documents do not make financial sense. For example, prices may be inconsistent with the market value, or the costs do not match the purchasing power of the entity in question.
• Contracts are vague or abnormally simplistic. Descriptions of goods or services may appear generic.
• Customs documents are falsified. They may also be missing, rejected, or duplicated old documents.
• Inconsistency between the value of the imports or exports and the company’s foreign transactions.
• Commodities are shipped via multiple jurisdictions without sufficient economic justification.
  

Account and Transaction Activity Risk Indicators

TBML indicators related to account and transaction activity risk include: 

• An entity makes last-minute changes to payment arrangements. For example, the entity redirects payment to another entity or requests changes to the payment amount or date.
• The company’s accounts display a high volume of transfers or values that don’t match the stated business activities.
• An entity’s account features many fast-moving transactions that pass through, leaving a minimal end-of-day balance.
• Frequent cash deposits are transferred to places without a clear relationship to the entity in question.
• Payment for received goods is paid for by parties other than the receiver. 
• Cash deposits fall below reporting thresholds. 
• Transaction activity spikes in volume, shortly followed by an idle period. 
• Payment volume and other payment behaviors are unusual in the context of the entity’s particular industry. 
• Payment routing passes through multiple countries before returning to the country of origin.
  
  An entity makes last-minute changes to payment arrangements. For example, the entity redirects payment to another entity or requests changes to the payment amount or date.
• The company’s accounts display a high volume of transfers or values that don’t match the stated business activities.
• An entity’s account features many fast-moving transactions that pass through, leaving a minimal end-of-day balance.
• Frequent cash deposits are transferred to places without a clear relationship to the entity in question.
• Payment for received goods is paid for by parties other than the receiver. 
• Cash deposits fall below reporting thresholds. 
• Transaction activity spikes in volume, shortly followed by an idle period. 
• Payment volume and other payment behaviors are unusual in the context of the entity’s particular industry. 
• Payment routing passes through multiple countries before returning to the country of origin.
  

How Can TBML Risk Indicators Be Used?

Risk indicators can be used to assist personnel in sanctions compliance and anti-money laundering enforcement. It also applies to transaction monitoring, client relationships, and other financial crime prevention units.

While the presence of a single indicator is not proof of illegal activity, it does warrant further investigation. Likewise, more intense scrutiny is required if multiple risk indicators are present.

For the public sector, investigators or compliance officers can use industry standards, customs data, and open market prices. However, in the case of private entities, this data may be more challenging to obtain. As a result, investigators may need to work with governmental authorities, law enforcement agencies, or private consultants to acquire the required information.

More information:
- "Trade Based Money Laundering Risk Indicators", Financial Action Task Force (FATF)

About sanctions.io

sanctions.io is a comprehensive Anti-Money Laundering solution with a simple to integrate API which companies can use to continuously scan their clients and business partners against the most important Sanctions & Crime Lists. Start your 7 Day FREE TRIAL right here.

Photo by Christian Lue on Unsplash