What is Trade Based Money Laundering (TBML)?

Trade-Based Money Laundering Definition

FATF defines the Trade-Based Money Laundering as follows:

The illicit process of disguising illicit money and moving its value through trade transactions. It is done to inject illegal cash into the legitimate financial circle and support illegal activities.

According to this definition, trade-based money laundering is not about the physical movement of goods, but the movement of cash through trade transactions. Multiple techniques and unlawful activities are involved in carrying out TBML. However, it is quite different from trade-related predicate offenses because there is no physical movement of goods involved.

Also Read: What is Suspicious Activity Reporting (SAR)?

Trade-Based Money Laundering Examples

Various techniques are used in TBML. Some of them are listed below:

1- Over Voicing and Under Voicing

It involves overpricing or underpricing the goods or services to manipulate the seller and buyer end. Over-voicing negatively impacts the buyer, whereas under-pricing impacts the seller.

2- Ghost/ Phantom Shipping

It refers to fake trades, where the buyer & seller make the documentation that indicates shipments being done and payments being received. In reality, no shipment takes place. Criminals only move cash across borders without trading any goods.

3- Multiple Invoicing

It refers to multiple invoices being issued for the same shipment of goods. Money Launderers take benefit of these invoices and make numerous payments.

4- Black Market Trade

Commonly practiced in Mexico and Colombia, it is referred to as Black Market Peso Exchange where Trade Based Money Laundering is carried out by drug traffickers.

How Does TBML Affect The Economy?

Trade-Based Money Laundering (TBML) negatively affects the economy in multiple ways such as:

1- Tax Revenue Loss

When illegal funds are laundered and trade transactions are manipulated, tax revenue is automatically decreased due to unrecorded money. Governments face deficits and tax losses due to tax evasion that occurs as a result of unrecorded laundered money used for trade.

2- Manipulation of Trade Records and Statistics

TBML involves manipulations of data in the form of over/under voicing or multiple voicing and ghost shipments. This makes it difficult for economists and policymakers to make informed decisions for a stable economy in the country.

3- Unhealthy and Unfair Competition

Criminals take unfair advantage of the market due to the influence they can create with illicit funds. TBML undercuts legitimate businesses by offering unfairly low prices as they are backed by illegal funds through laundered cash. This creates a market imbalance and legitimate businessmen cannot grow further.

4- Damaging Financial Institutions

TBML poses a serious and direct risk to the integrity and goodwill of financial institutions. Customers may lose trust in banking and financial institutions where detection of suspicious activity becomes difficult. Thus, reputational damage and penalties by regulators can damage the financial system due to TBML.

5- Supply Chain Disruption

Trade-based Money Laundering disrupts the supply chain of businesses when criminals exploit trade transactions. Typically, they divert shipments, compromise the documentation, and create fake shipments. This creates devastating effects on businesses, especially logistics and supply.

6- Inefficiency and Increased Cost

When TBML is a potential risk, the costs of Anti-Money Laundering efforts increase for businesses as well as financial institutions. Governments and regulators are also affected by the rising threat, so to mitigate it, the Compliance budget increases every coming year.

How can businesses prevent TBML?

Businesses need to understand the importance of a strong KYC and AML compliance system. For this purpose, going the extra mile in making the financial system secure is a wise thing to do. Investing in a robust KYC/AML solution will not only mitigate the overall Money Laundering and Fraud threats but also enhance the customer onboarding process, increasing customer satisfaction levels.

Businesses must stay updated on the latest regulatory requirements and latest techniques to fight financial crime. Also, they can employ the services of a KYC Technology Buying Consultancy to enhance their due diligence, ongoing monitoring, and Suspicious Activity Reporting.

Furthermore, FATF has compiled some of the best practices and measures to counter TBML which are listed below:

• Increased understanding and awareness about TBML
• Dutch Bank Initiative
• FIU’s and Designated Non-Financial Businesses Co-operation, 2019
• Collection of TBML case studies and research
• Raising knowledge and awareness in financial institutions about TBML
• Europol Financial Intelligence Public Private Partnership Initiative 2017
• Asian Development Bank’s experience with TBML
• FIU collected reports on trade finance, trade transactions, and correspondent banking
• FIU adopted an analytical approach in dealing with Trade-based money laundering

Download the full report at FATF/ Egmont Group TBML report

Bottom Line

Trade-Based Money Laundering is a crime with cascading effects on the economy. It is used by criminals to disguise their illicit funding and move cash to facilitate trade transactions and cover up the tracks of illicit activities. Legitimate businesses cannot grow to their full potential unless the threat of TBML is fully mitigated. To do so, everyone needs to embrace the importance of KYC AML systems and their timely implementation across businesses.