A few weeks ago, the South African Reserve Bank fined some banks for non-compliance with anti-money laundering measures. Some of the reasons for this fine is inadequate customer due diligence amongst others. By failing to implement robust AML measures, these banks inadvertently facilitated trade-based money laundering (TBML) activities.
In this blog post, we’ll explain what trade-based money laundering is, red flags to look out for as well as how Seamfix’s anti-money laundering suite helps financial services to guard against trade-based money laundering.
What is Trade-Based Money Laundering?
Trade-based money Laundering (TBML) is a complex financial crime in which criminals use international trade to launder illicit funds. This involves manipulating the price, quantity, or quality of imports or exports to move and conceal unclean money. TBML is a major concern to regulators because it undermines the integrity of financial institutions and affects the economic and political stability of nations.
It is therefore important for financial institutions to implement strategies like enhanced due diligence that help them detect and prevent TBML.
Why is TBML a Growing Concern Globally?
Trade-based Money Laundering has caused regulators and financial institutions significant worry for some of these reasons:
- Globalization and Complex Supply Chains
In 2023, Global trade reached US$ 24.01 trillion. In 2024, it’s forecasted to reach almost $32 trillion. As this continues to grow, criminals will have ample opportunities to exploit gaps in regulatory frameworks. They can easily spread their operations across multiple jurisdictions and take advantage of differing regulations to hide illegal activities. - Difficulties in Detection
TBML is hard to detect because it blends easily with legitimate trade. It involves transactions that appear routine on the surface, making it challenging for financial institutions to differentiate between legal and illicit activities. - Evolving Criminal Tactics
Criminal organizations are becoming more skilled at bypassing traditional Anti-Money Laundering (AML) controls. They exploit weaknesses in trade finance, such as lenient document verification processes or insufficient due diligence on trading partners. - Increased Regulatory Scrutiny and Fines
The Financial Action Task Force (FATF), a global watchdog on money laundering and terrorist financing, emphasizes the need to manage TBML risks. Banks that fail to detect or report suspicious activity face heavy fines, damage to their reputation, and stricter regulatory oversight.
Common Red Flags in Trade-Based Transactions
1. Over- or Under-Invoicing
One of the most common techniques in TBML is over- or under-invoicing. Here, the price of goods is inflated or reduced to move illicit funds across borders. The buyer, often a complicit party, pays the inflated amount, transferring excess funds that appear legitimate to the seller. Conversely, under-invoicing occurs when the value of goods is understated, allowing the buyer to pay less than the actual cost, and the balance is settled illicitly outside the transaction.
Both scenarios distort the value of trade transactions and make it difficult for financial institutions to track the true flow of money. Unusual or suspicious pricing that deviates significantly from market norms should be a key red flag, prompting further investigation.
2. Multiple Invoices for the Same Goods
Multiple invoicing is another common TBML tactic. In this method, criminals generate multiple invoices for the same goods and submit them to different financial institutions, securing payments for each invoice.
3. Discrepancies in Quality, Quantity, or Description
Another red flag is when there is a mismatch between the goods’ quality, quantity, or description and the trade documentation. Criminals often misrepresent the type, quality, or volume of goods in trade transactions to either inflate or deflate the value of the shipment.
Discrepancies between the actual product and the trade documentation (e.g., invoices, bills of lading, or packing lists) are clear indicators that something is amiss. Financial institutions should implement robust checks to ensure that the details of a shipment match the agreed-upon trade terms, and discrepancies should trigger further review.
4. Unusual Shipping Routes
Banks and other financial services providers should be wary when they detect unusual or unnecessary shipping routes. Legitimate businesses typically choose the most efficient and cost-effective routes to transport goods. But in TBML, criminals often ship goods through circuitous or unrelated routes, making the transactions more difficult to trace.
5. Complex Ownership Structures
Criminals frequently use complex ownership structures, involving multiple layers of shell companies, trusts, or offshore entities, to obscure the true ownership of goods and assets.
6. High-Risk Jurisdictions
Finally, transactions tied to high-risk jurisdictions should always raise concerns. These are countries or regions known for weak AML regulations, financial secrecy, or a lack of cooperation with international regulatory bodies. Criminals often use these jurisdictions to move illicit funds with less scrutiny.
How Seamfix Helps Financial Institutions Combat Trade-Based Money Laundering
Seamfix provides an identity verification suite that helps businesses including financial institutions to comply with anti-money laundering laws and fight fraud.
Its AML suite provides real-time checks that enhance the due diligence process, ensuring banks remain compliant while safeguarding against illicit trade practices.
- Sanctions and PEP Screening: Our Identity Verification platform built-in sanctions and Politically Exposed Persons (PEP) checks that enable financial institutions to screen all parties involved in trade transactions. This helps banks avoid engaging with high-risk individuals or organizations that could be facilitating TBML, ensuring greater compliance and reducing exposure to financial crime.
- Adverse Media Checks: Seamfix’s adverse media checks scan news reports and online sources for any negative mentions of individuals or businesses in trade transactions. If someone involved has a history of fraud, criminal activity, or other risky behavior, Seamfix alerts the bank, even if they’re not officially on any watchlists. This gives banks an extra layer of protection, allowing them to steer clear of potentially dangerous partnerships.
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