Understanding Trade-Based Money Laundering techniques, Red Flags and Prevention Strategies

Trade-based Money laundering has become a serious concern for almost every government across the world. The world has globalized and it has brought many benefits to many countries, people, businesses, and a group of organizations to move their goods quickly to the other corners of the world. Though criminals find new ways of money laundering to avoid the detection process among all these tactics. Authorities consider money laundering through trade to be the most complex and challenging type of laundering to detect and prevent. The reasons are many but the major problem is the complexities and ambiguity involved in the global trade system.   This piece of writing will highlight what trade-based money laundering is, the techniques criminals use, the red flags, and the ways to combat and identify the threat.

 Understand Trade-Based Money Laundering

Criminals manipulate the global trading system and disguise the origin of illicit funds to engage in trade-based money laundering. Through this laundering scheme criminals do not use the banking channels, or cash transactions. Instead, exploit the complexity of the international trade system to move money from one country and jurisdiction to another without fear of detection. The globally known tactics that criminals use in trading involve showing over-invoicing or under-invoicing to create ambiguity and show them the real transaction against purchasing and selling the goods.

Why Does Trade-Based Money Laundering Work So Effectively?

For authorities and regulatory bodies across the world, detecting and preventing money laundering occurring through the global trading system is a real headache due to the ambiguity and complexity involved. Though the reasons are many the involvement of different parties, currencies, and regulations in the trading makes the detection process more difficult. Thus, this complexity creates loopholes that criminals always try to exploit for disguising illicit funds.  Another reason is that global transaction at a huge level makes it difficult for authorities to monitor every single deal.   

Top 5 Red Flags in Trade-Based Money Laundering

• Frequent Transfer of money to Different Foreign accounts

If you see a person transferring huge amounts in rapid transfers to different accounts of different jurisdictions, or a person is receiving a lot of money with lesser or no proper reason for money transfer.  This type of money movement from one country to another country without apparent links could be a red flag of money laundering.

• Use of offshore Businesses  

Offshore and shell companies are often established to move illicit money or evade taxation. Criminals find these companies as the source of moving their illegally obtained money from their own country to the foreign jurisdiction. If a person is purchasing assets, or investing in real estate using offshore or shell companies. Consider these activities a red flag to watch out for.

• Over and undervaluation of Goods

Showing the value of goods either over or under value to not let the regulatory bodies and authorities detect the cross border money laundering activities. The tactics help criminals to send and receive higher value of money through foreign buyers and sellers.   

• Trading in a high-risk jurisdiction

Launderers often choose countries and states that have weak AML regulations or are declared by the regulatory bodies as states prone to money laundering and other financial crimes. The weakened regulations attract criminals to move their money in such countries. So, businesses should be aware of this jurisdiction and should implement comprehensive CDD on customers who frequently send and receive money in such countries.

• Phantom Shipping

Declaring that vendors have delivered or received the goods or services, but the trading never actually happened, except for creating documents. But money still changes hands to facilitate money laundering activities.

Protect Your Business from Trade-Based Money Laundering Risks

Staying ahead of criminals and their tactics used in TBML is essential for financial institutions to detect and combat money laundering activities.  To protect your business from the risks of TBML, businesses must adopt proactive measures.

1. (KYC) Know Your Customer  

Implementing the KYC policies into their system is very helpful for businesses in verifying the identity of every customer and checking the risk associated with them. This will help to understand the source of your customer’s income, what he does, and his involvement in any criminal activities. Therefore, conducting enhanced due diligence is essential to avoid money laundering threats.

2. Real Time Transaction Monitoring

As in the global trade system, transactions are frequently made to other jurisdictions, monitoring such transactions is very effective as real-time monitoring can detect any unusual transaction pattern and alert them to red flags or suspicious.

3. Products Risk Assessment

Understating the value of any product and the risk associated with such products is essential in identifying the ambiguity about the product value and quality. Through risk assessments, trade authorities can assess the type of product, the location where it will be traded, its value, and the money being received against such products.

4. Suspicious Activity Report

Detecting the suspicious transaction isn’t the solution, it must be reported to the relevant department for further action against the suspicious activities in the global trade system. Thus, SARs are essential in reporting suspicious activities to the enforcement agencies. Businesses must implement the SARs into their system to avoid any inconvenience that might happen due to TBML. Trade-based money laundering is a continuously challenging dilemma for international trade organizations and the organizations involved in handling them. In such circumstances, businesses need to enhance their compliance efforts.