Q3 2024 Regulatory Roundup: Mid-Year Compliance Developments
October 17, 2024Advanced Typologies: Trade-Based Money Laundering
Trade-based money laundering (TBML) is one of the most complex and prevalent forms of money laundering, accounting for an estimated $800 billion annually. This newsletter explores detection strategies for financial institutions.
📦 How TBML Works
TBML exploits legitimate trade to move value across borders while obscuring the criminal origin of funds. Common techniques include:
Over and Under-Invoicing
- Over-invoicing imports: Inflating the value of goods to transfer excess funds abroad
- Under-invoicing exports: Reducing declared value to bypass capital controls
- Price manipulation enables value transfer without moving cash
Phantom Shipments
- Invoices and payments for goods that are never shipped
- Documentation created to appear legitimate
- Often involves complicit parties on both ends
Multiple Invoicing
- Same goods invoiced multiple times to different parties
- Enables multiple payments for a single shipment
- Complex to detect without shipping documentation
🔍 Detection Red Flags
Transaction Analysis
| Red Flag | What to Look For |
|---|---|
| Price anomalies | Prices significantly above or below market rates for declared goods |
| Misdescription | High-value goods described as low-value commodities |
| Geographic inconsistencies | Trade routes that don’t make commercial sense |
| Document discrepancies | Inconsistencies between invoices, bills of lading, and letters of credit |
| Third-party payments | Payments made by or to parties unrelated to the transaction |
Customer Behavior Indicators
- Sudden changes in trading patterns or volumes
- New trading relationships in high-risk jurisdictions
- Reluctance to provide documentation supporting transactions
- Complex corporate structures obscuring beneficial ownership
- Cash-intensive businesses engaging in trade finance
🛠️ Enhanced Controls
Due Diligence Enhancements
- Verify counterparties in trade transactions independently
- Research commodity pricing through reliable databases
- Understand the customer’s trade business model thoroughly
- Analyze historical trade patterns for consistency
Transaction Monitoring Rules
- Flag transactions with pricing deviations exceeding thresholds
- Alert on trade with high-risk countries or free trade zones
- Monitor for mismatches between payment and shipping parties
- Track changes in trade corridor or commodity patterns
Documentation Review
- Cross-reference invoices with shipping documentation
- Verify weight, quantity, and value consistency across documents
- Check for suspicious patterns in letters of credit amendments
📚 Resources
- FATF: Trade-Based Money Laundering Report (2020)
- FinCEN: Advisory on Trade-Based Money Laundering (FIN-2020-A007)
- Wolfsberg Group: Trade Finance Principles
Strengthening your trade finance controls? Contact us for a risk assessment.