All You Need To Know About Trade-Based Money Laundering Red Flags in 2024

Last Updated: 

May 9, 2024

“Financially crimes are mostly saturated with crimes done across borders and one such activity that facilitates this is Trade Based Money Laundering (TBML).”

Criminals and money launderers make use of this methodology to transfer money across borders and hide where it's coming from and going. Expect this blog to help you figure out the red flags that you must remember to identify trade-based money laundering, the techniques used by criminals, and why AML checks are so important in protecting global trade.

But before we get into exploring more about TBML red flags, it is important to know the gist of what is trade based money laundering. TBML works under the cover of genuine and proper transactions made for trade. It takes full advantage of the expanded global commerce to hide where the money is coming from and going to. The old and traditional ways of money laundering were more about hiding the source of money from financial institutions but now TBML makes use of trade relationships and has become a challenge for experts and authorities responsible for detecting it. 

Key Takeaways on Detecting Trade-Based Money Laundering

  1. Over/Under Invoicing Anomalies: Manipulating invoice values in international trade transactions is a major TBML red flag, often used to inflate funds or obscure illicit origins.
  2. Unusual Shipping Patterns: Deviations from standard shipping routes or destinations signal potential TBML activity, often involving shell companies and high-risk locations.
  3. Cash Transactions in Trade: Rare in international trade, large cash payments raise suspicion, providing anonymity for money launderers.
  4. High-Risk Jurisdictions and Entities: Transactions involving regions with lax regulations or corruption are scrutinised, necessitating thorough AML checks, especially with politically exposed persons (PEPs).
  5. Abnormal Trade Financing Structures: Complex financing schemes obscure illicit transactions, such as using multiple letters of credit or third-party guarantees without legitimate business purposes.
  6. Mismatched Goods and Documentation: Discrepancies between traded goods and accompanying documentation highlight potential TBML, as descriptions fail to align with actual quantities.
  7. Role of AML Checks: Strong AML measures, including KYC processes and collaboration with authorities, are vital in combating TBML, safeguarding financial integrity and standards.
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The Red Flags

Trade-Based Money Laundering Red Flag are as follows:

1. Over/Under Invoicing Anomalies

One of the biggest red flags of TBML is the changes done in invoice values in transactions made for international trade. What money launderers do is increase the value of goods being exported to increase the amount of funds that are transferred or decrease the value of important goods to hide the actual value of illegal funds. Such changes and irregularities in invoicing increase the suspicion of authorities and call for more investigation.

2. Unusual Shipping Patterns

One more indication that helps in recognising TBML is when irregular or unusual shipping routes or destinations are taken. Money launderers do so to make use of shell companies that help in hiding where the money is coming from and where the goods are off to. Such different patterns like changes in routes and transshipment happening from locations of high risk or shipments to known tax havens, call for further investigation.

3. Cash Transactions in Trade

While cash payments are not very common in international trade as the electronic methods are given more priority, if they happen it does raise the suspicion of regulators and authorities especially the ones with a huge value. Cash payments make it easy to keep the person's identity hidden and there is no digital mark left which makes it easy for money launderers to hide their crimes. 

4. High-Risk Jurisdictions and Entities

Money launderers take unfair advantage of locations that have relaxed regulations or have weaker enforcement of laws and systems to perform their TBML practices. Transactions that involve companies located in such locations or the ones that have lots of corruption and financial secrecy are investigated and examined more deeply. Even while working with PEP individuals or companies that have a bad reputation it is important to perform AML checks.

5. Abnormal Trade Financing Structures

In TBML plans, money launderers make use of complex trade financing methods so that they can hide the real nature of transactions, For example, the use of multiple letters of credit, trade finance instruments or getting third-party guarantees without any legal purpose of business show attempts to hide the overall movement of funds gained illegally. When any changes in practices are different from the usual ones, it must be looked into immediately.  

6. Mismatched Goods and Documentation

When the trade transactions being made are legal, there is a proper connection between the types of goods that are being traded and their documents. But in cases of TBML, there is no real connection as there are differences in the description of goods on the official documents and the actual quantity.

The Role of Anti-Money Laundering (AML) Checks

To fight and overcome TBML, it is very important to put in place strong Anti Money Laundering techniques that can help protect the overall financial system and keep up with its integrity and standards. Financial institutions as well as businesses involved in trading must make use of due diligence and perform AML checks which can help them in recognising and getting rid of illegal or unallowed financial practices. Know Your Customer (KYC) processes, monitoring systems and others are as important as it is to collaborate with authorities to fight TBML.

Final Words

By being aware of the red flags of TBML and making use of AML checks, institutions can increase their strength and defence systems against money laundering-like crimes.

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