Trade-Based Money Laundering

For example, a company can export counterfeit watches, invoicing them as designer goods. In this case, the importer needs to pay for the luxury goods, enabling the exporter to take in the price difference. Another alternative scenario is that the export can falsely label luxury watches as counterfeit goods on purpose. Then, the importer needs to pay a lower price and resell the watches as luxury items, profiting from the value differences.

A phantom shipment is a fake shipment used by criminals in invoice fraud and trade-based money laundering. There aren’t any goods that are actually shipped, but criminals use this method to falsify invoices, different shipping documents, and bills of lading. This creates the appearance of a legitimate trade transaction.

Bulk cash smuggling is moving large amounts of cash across borders without declaring such a practice. In the context of trade-based transactions, this is common practice to legitimize funds and avoid scrutiny. Often, criminal organizations choose jurisdictions with weak anti-money laundering (AML) regimes to exploit loopholes and smuggle the cash without detection. 

Regulated industries, such as banks, fintech platforms, crypto companies, insurance and loan service providers, and other financial institutions, use special AML services, including transaction monitoring, to prevent trade-based on any sort of money laundering. 

Other measures, like identity verification at the onboarding stage and AML screening for PEPs and sanctions, or screening adverse media to detect negative news about the customer, potentially linking them to money laundering crimes. Banks also need to implement ongoing due diligence measures, analyze payment flows, and handle anomalies as a way to demonstrate proper AML risk management while spotting red flags. 

There are AML red flags that help compliance officers spot various inconsistencies that can lead to signs of money laundering. For example, frequent changes in partners, sudden shifts in products or overlapping trade routes that involve high-risk territories known for high money laundering rates should be treated with caution. Industry-related risks should also be considered. For example, gemstones that have high value are more prone to be used in trade-based money laundering. 

It’s not possible to remove money laundering from the picture entirely, but for financial institutions, this means implementing the right measures to prevent such crimes. 

Some key solutions that help identify and minimize money laundering include:

• Identity verification.
• Transaction monitoring.
• Training employees.
• Conducting risk assessments.
• Applying enhanced due diligence (EDD) for high-risk transactions.
• Monitoring payments and internal systems.
• Reporting suspicious activity to regulatory authorities. 

Like many forms of financial crime, trade-based money laundering harms economic stability, reduces tax revenues, and allows criminals to exploit the global financial system more easily. It disrupts legitimate trade, leaving room for imbalances and negative impacts on supply chains or markets.