With the rise of online fraud and criminal activities, several innovations have emerged that are quite successful in ruining the malicious intent of hackers and cybercriminals. However, this has motivated cybercriminals to resort to more sophisticated and complex methods that are hard to detect.

And one such sophisticated or complex method that is becoming quite popular among criminals is trade-based money laundering or TBML. This article discusses what TBML is, how it works and how TBML could be prevented by adopting the basic principles of AML.

What is Trade-Based Money Laundering (TBML)?

According to the FATF, TBML is the process of illegally moving funds using cross-border trade activities/transactions to legitimize the illicit/illegal origin. But why is this method of fraud/money laundering so complex?

Well, trade-based money laundering involves trade activities that happen across borders, i.e., internationally. And at the international level, multiple parties from multiple countries practicing multiple jurisdictions are involved, which makes customer due diligence processes, and KYC and AML checks hard.

Also, at international levels, trades often touch crazy volume and value. For instance, there can be millions of transactions worth millions of dollars each, every day. And when there are so many crazy transactions being processed, it’s quite hard to point out which ones are for laundering money.

How Does Trade-Based Money Laundering Work?

Here are several ways in which TBML works:

  • Under-Invoicing: In this case, the exporter sends a deflated invoice and ships the goods of greater value to the importer.
  • Over-Invoicing: In this case, the exporter sends an inflated invoice to the importer. It simply means the invoice has a huge amount on it, while the products shipped are of pretty low value.
  • Under or Over Shipment: In this case, the exporter, either ships more quantity of goods than agreed, thereby transferring more value to the exporter, or ships less quantity of goods than agreed, taking in more money as payment from the importer. 
  • Multiple-Invoicing: In this case, the exporter sends out multiple invoices for the same shipment over and over again. This way, a high value is transferred to the importer.
  • Quality Misinterpretation: In this case, the quality of goods shipped is different (lower) from the one agreed on in the official documentation. This way, the exporter gets more value transferred to their account.

How to Combat Trade-Based Money Laundering?

While TBML could be prevented by adopting basic principles of AML and KYC, trade-based money laundering frauds hide in plain sight among legitimate transactions and involves multiple jurisdictions, making it insanely complex to detect and deal with.

However, Financial Action Task Force (FATF), in 2021, released a list of TBML risk indicators that apply to private and public sectors. Businesses can consider these indicators to detect TBML fraud effectively. Also, FATF released a list of TBML red flags for financial institutions to keep an eye on while dealing with cross-border transactions. Here are some of them:

  • Substantial discrepancies between the description of goods on official documents and the invoices generated.
  • Shipments are routed through unconnected subsidiaries or multiple countries without a solid reason.
  • Shipments much smaller or larger than the usual volume of goods managed by a particular exporter or importer.
  • Movement of goods to and from countries with a high risk of money laundering and related activities.
  • A huge number of shipments are being paid for in cash.
  • Shipments are being paid for by 3rd parties with no direct link to the transaction.
  • Payment methods are not relevant to the level of risk a transaction carries.

In case businesses or financial institutions notice any of the above red flags, they must investigate the transaction and the parties involved. This way, they can minimize the risk of money laundering.

How can HyperVerge Help?

While it can be tough to combat Trade-Based Money Laundering frauds, businesses can reduce the risk substantially by taking precautions immediately. And that’s where HyperVerge comes in.

HyperVerge offers a digital end-to-end identity verification service provider using which businesses can accurately perform KYCs for all their customers. Our platform makes use of AI and performs all the necessary checks to ensure the person is exactly who they claim to be. This way, businesses can ward off any suspicious entities right from the start.

TBL could be prevented by adopting the basic principles of AML. Therefore, businesses must also follow all the AML principles/regulations and look for the aforementioned red flags to point out any suspicious transactions and reduce the risk of TBML to a minimum.

FAQs

What is an example of trade-based money laundering?

While there are several examples of trade-based money laundering, some common techniques include commodity over- or under-valuation, false reporting on invoices, customs & tax violations, etc.

What is the meaning of trade-based money laundering?

In its simplest terms, trade-based money laundering, or TBML, is the process of disguising the funds generated from illicit or criminal activities and moving those funds using trade transactions in an attempt to make them legitimate.

Why is it hard to detect trade-based money laundering?

One of the biggest reasons why it’s close to impossible to detect trade-based money laundering is because TBML is a non-documentary trade. It simply means banks get access to limited information about the transaction. Also, such transactions involve multiple countries and jurisdictions, which makes it even harder to detect these transactions.