Global trade — the lifeblood of the international economy — is increasingly being exploited as a conduit for illicit financial flows. At the centre of this exploitation lies Trade-Based Money Laundering (TBML), a complex financial crime that hides fraudulent transactions amid legitimate commerce.
This hidden threat undermines financial systems, fuels criminal enterprises and impedes economic development across borders. With an estimated $1.6 trillion laundered annually, TBML is fast emerging as a pressing concern for financial institutions, law enforcement and regulators worldwide.
veil of legitimacy
Understanding TBML’s pervasiveness requires examining the structural conditions that allow it to remain concealed within legitimate global commerce. With billions of trade transactions occurring daily, the sheer volume creates an overwhelming data landscape. This enables criminals to embed fraudulent activity within regular trade flows, making detection akin to finding a needle in a haystack.
Financial institutions, which primarily monitor monetary transactions, often lack the mandate and resources to verify the physical movement or valuation of goods. Meanwhile, customs authorities are typically focused on tariff collection and contraband detection. These siloed oversight mechanisms leave critical blind spots — vulnerabilities routinely exploited by money launderers.
modus operandi
TBML is executed through many sophisticated techniques. They include:
- Over-invoicing/under-invoicing:Altering the price of goods or services to transfer excess or deficient funds. An exporter might over-invoice goods to receive more money from an importer laundering funds. Studies suggest trade misinvoicing accounts for approximately 63% of TBML cases.
- Multiple invoicing: Issuing more than one invoice for the same shipment of goods, facilitating multiple payments for a single transaction.
- Phantom shipments: Creating fictitious trade transactions for goods that are never actually shipped. This allows for transfer of funds without any underlying legitimate trade.
- Mislabelled goods: Falsely describing the type or quality of goods to conceal their true value or origin, often to bypass trade restrictions or tariffs.
- Over-shipment and under-shipment: This involves discrepancies between the quantity of goods declared and the actual quantity shipped.
- Black Market Peso Exchange: A system predominantly used in Latin America where illicit proceeds in one currency are exchanged for local currency through networks of brokers and businesses, often facilitated by trade transactions.
the impact
TBML poses serious threats to global economic and security frameworks. Its consequences extend beyond financial transactions, affecting institutions, markets and societies:
- Economic distortion: TBML undermines fair competition, distorts market pricing, erodes tax revenues and stifles legitimate economic growth.
- Funding illicit activities: Laundered funds frequently fuel criminal activities like terrorism, drug and human trafficking and corruption.
- Reputational damage: Jurisdictions and financial institutions vulnerable to TBML face reputational harm, reduced investor confidence and potential restrictions from global financial networks.
- Increased compliance costs: Combating TBML requires enhanced due diligence, monitoring and reporting, which drives up compliance costs.
challenges in detecting TBML
TBML operates across multiple sectors — including life insurance, real estate, art and shell corporations. Despite robust compliance frameworks, high-profile cases like the FinCEN Files highlight how sophisticated schemes continue to exploit systemic blind spots. Key challenges include:
- Volume and complexity:The sheer scale and intricacy of global trade make it difficult to scrutinise every transaction effectively.
- Lack of transparency: Shell companies, offshore accounts and complex corporate structures obscure the identity of beneficial owners.
- Fragmented data: Limited information-sharing between financial institutions, customs and regulatory bodies restricts holistic risk management.
- Evolving tactics: Launderers continually evolve their techniques, outpacing static detection systems.
combating TBML
Fighting TBML demands integrated, cross-sectoral solutions, including:
- Enhanced due diligence: Financial institutions must rigorously assess trade finance transactions by identifying red flags like unusual payment terms, circuitous shipping routes and documentation inconsistencies.
- Information sharing: Improved collaboration among financial intelligence units (FIUs), customs authorities, law enforcement and private entities is essential to detect cross-border suspicious patterns.
- Technological solutions: Leveraging advanced analytics, Artificial Intelligence (AI) and Machine Learning enables the analysis of vast trade datasets to detect anomalies, uncover hidden networks and flag suspicious patterns. Bill Winters has aptly noted thatmoney launderers are no longer just winning. In fact, they’re leveraging a growing arsenal of digital capabilities to fully change the game. In response, technology must be central to the solution.
- Stronger regulatory alignment:International anti-money laundering (AML) and counter-terrorist financing (CTF) regulations must be strengthened and harmonised with specific provisions targeting TBML vulnerabilities.
- Capacity building:Training for customs agents, financial institutions and trade professionals is vital to improve detection and response capabilities.
Conclusion
TBML remains an insidious and shape-shifting challenge, silently corroding global trade’s integrity and fueling illicit activities across borders. Combating it demands a proactive and integrated strategy that unites technology, policy and collaboration. Only by strengthening our collective defenses and fostering a culture of transparency can we shine a definitive light into the shadows of global trade, safeguard the global financial system and ensure legitimate commerce serves humanity’s prosperity, not its exploitation. The urgency of this fight cannot be overstated.
how can Infosys BPM help?
Navigating complex trade-based financial crime demands specialised expertise and advanced solutions. Infosys BPM offers comprehensive Financial Crime Compliance services, leveraging AI, ML and Generative AI to combat illicit flows. Our solutions enhance productivity, automate processes and optimize risk mitigation, ensuring global regulatory adherence. Partner to strengthen defenses, achieve operational efficiency and adapt swiftly to evolving threats in global trade.
