How trade-based money laundering works and its impact on world finances

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Deya Innab, Chief Strategy and Product Officer, Eastern Networks (EastNets)


  • Trade-based money laundering and associated tax evasion is big business.
  • Financial losses from these crimes in developing countries totalled $9 trillion between 2008 and 2017.
  • Global trade complexities make tackling this type of money laundering difficult, but not impossible.

Money laundering is big business, so big, that to handle the movement of enormous sums of money, fraudsters are increasingly turning to Trade-Based Money Laundering (TBML). In developing countries, TBML and associated tax evasion contributed to almost $9 trillion in losses between 2008 and 2017. Tackling TBML is complicated by cross-jurisdiction trade, multinational companies, and globalized trade pathways.

Money laundering, used to legitimize monies from some of the most grievous crimes, is classified by the Financial Action Task Force (FATF) into three main areas:

• Use of legitimate underlying financial systems, e.g. check and wire transfers.

• The physical movement of money, e.g. cash couriers.

• The physical movement of goods through the trade system (TBML).

TBML fraudsters use certain methods to facilitate the crime:

Invoicing scams

Mispricing, also called trade misinvoicing, is a common technique used in TBML. Goods invoices are deliberately misrepresented in terms of value, type, or volume. The technique involves over or under-invoicing and can also use a system of multiple-invoicing, also known as split-invoicing.

Phantom shipments

Some TBML scams use phantom shipments – shipments of goods that don’t occur, or that don’t exist. Fake documentation is generated as if the goods will be shipped. Foreign remittances are received by the exporters as part of import/export collusion. The whole process looks legitimate, money is exchanged, but no actual goods are shipped.

Over or under-shipment

This is allegedly the most common form of transactions used to facilitate TBML across borders. The seller ships more/less than the invoiced quantity or quality of goods thereby misrepresenting the true value of goods in the documents. The effect is similar to over/under invoicing.

The trick in the mechanisms used in TBML fraud is that they look legitimate. By appearing as real-world transactions and ticking the regulatory boxes, they can more easily go under the radar. Whatever mechanism is used to move money or hide funds, the ultimate outcome is to overcome structures put in place to prevent this type of fraud. Regulations and other structures attempt to prevent this type of sophisticated and highly obfuscated activity. However, some contradictions in these attempts may be thwarting the wider handling of TBML.

What is the World Economic Forum doing about digital trade?

What is the World Economic Forum doing about digital trade?

The Fourth Industrial Revolution – driven by rapid technological change and digitalization – has already had a profound impact on global trade, economic growth and social progress. Cross-border e-commerce has generated trillions of dollars in economic activity continues to accelerate and the ability of data to move across borders underpins new business models, boosting global GDP by 10% in the last decade alone.Embracing Digital Trade

The application of emerging technologies in trade looks to increase efficiency and inclusivity in global trade by enabling more small and medium enterprises (SMEs) to repeat its benefits and by closing the economic gap between developed and developing countries.

However, digital trade barriers including outdated regulations and fragmented governance of emerging technologies could potentially hamper these gains. We are leading the charge to apply 4IR technologies to make international trade more inclusive and efficient, ranging from enabling e-commerce and digital payments to designing norms and trade policies around emerging technologies (‘TradeTech’).

Contradictions that oil the wheels of TBML

In a recent report, the Government Accountability Office (GAO) found that around 80% of international trade processed through financial institutions is performed using “open account” trade, i.e. one that is not financed by the bank. The GAO described this tactic as “one of the primary vulnerabilities of the US financial and trade systems”. The GAO goes on to describe how open account trade has inherent vulnerabilities – it uses standard anti-money laundering (AML) and sanction screening for payment processing. Suspicious Activity Reports (SARs) are required to be lodged with FinCEN as part of the process. This should, in theory, be enough to spot fraud. However, according to the GAO report, “Subject-matter experts and representatives of banks say a bank’s ability to identify indicators associated with TBML is limited for open-account transactions”. This contradiction is the pivot upon which TBML turns.

These mechanisms are recognized as weaknesses in trade processes and help drive TBML. The regulations themselves show this to be true. For example, in 2019, 1.15 million reports were submitted on money laundering; only 0.2% related to TBML – the figures do not add up, mismatching the actual figures for TBML-based fraud which currently stands at around 30% of all money laundering crimes. In terms of SARs, the lag time contradicts the ability to spot fraud on-the-fly. The recent FinCEN SAR leaks debacle demonstrates the issues with SARs.

Ill-gotten gains of TBML

The inability to spot fraud that flies under the radar of legitimate checks and measures leads to serious crimes and can ruin lives or worse. TBML laundered money leads to:

• Movement of corrupt funds: In the UK, alone, £100 billion of “dirty money” is moved each year.

• Human trafficking: At any one time there are over 40 million enslaved and 152 million in child labour around the world.

• Tax evasion: The global estimate of capital income tax evasion is around $189 billion per year – TBML may be used to help in avoiding sanction lists.

• Evasion of currency restrictions: FinCEN is aware of the use of TBML methods to evade current restrictions. FinCEN released an advisory on TBML activity involving “funnel accounts”. These are accounts where an individual or business account in one jurisdiction receives multiple cash deposits. These deposits are usually under the reporting threshold to avoid suspicion. The funds are then quickly withdrawn via a different location.

• Evasion of import duties on luxury goods: Similar to tax evasion, but luxury goods, such as watches and cars, are often also part of over or under-invoicing scams.

Hiding in plain sight

US Customs and Border Protection (CBP) recorded that on a typical day in 2019, around 79,000 containers and $7.3 billion worth of goods entered the US through ports of entry. This massive movement of traded goods offers fraudsters enormous opportunities to hide in plain sight. TBML is successful because it uses the very structures that have been put in place to prevent fraud: documentation, customer/invoicing processes, and open trade accounts are all twisted by fraudsters to hide or obfuscate the illegitimate movement of money. When trading partners transact, they do so without bank intervention – the trade flowing outside the normal confines of the payment system. It is this divergence of systems and processes that allows fraudsters to find a chink in the financial insitutions armour. The AML process needed to tease out the complex nature of TBML requires a smarter approach.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Here’s how to achieve growth in the Middle East and North Africa

UN Security Council condemns Taliban offensive as a blow against ‘sustainable peace’

Facebook and Google to treat Europe as the 51st State of the USA

European Solidarity Corps 2021-2027: First call for proposals to support youth volunteering activities

How music can help children with autism connect

To Bing or Not to Bing? That is the question

Gender equality: an issue much talked about but less acted upon

Terrorism and migrants: the two awful nightmares for Europe and Germany in 2016

Portugal can use its economic recovery to build up resilience

Pharmaceuticals spend millions to push TTIP while consumer groups spend peanuts

The EU Parliament slams Commission on economic governance

An economist explains the pros and cons of globalization

Protecting the front line: the healthcare of health professionals

State aid: Commission approves French scheme deferring payment by airlines of certain taxes to mitigate economic impact of coronavirus outbreak

Low productivity jobs continue to drive employment growth

“Fortress Europe”, “Pegida” and its laughing stocks

New challenge: Not going through “burnout” in times of quarantine

Mental and comportamental health in the pandemic context

An Easter Special: Social protection of migrants in Europe as seen through the eyes of European youth

Pharmaceuticals conceal drug side effects with the EU’s Court blessing

European Citizens’ Initiative: Commission registers ‘Mandatory food labelling Non-Vegetarian / Vegetarian / Vegan’ initiative’

Greenery: the miracle cure for urban living

Italy should boost investment in training for the future of work

Sustainable Finance: Commission welcomes the adoption by the European Parliament of the Taxonomy Regulation

Macro-Financial Assistance: Europe’s way to control Ukraine?

Companies can help build a more inclusive world. Here’s how

Joris in Indonesia

5 steps businesses can take to protect air quality after COVID-19

5 charts that show renewable energy’s latest milestone

Devastating storms like Hurricane Florence ‘unusual this far north’: UN weather agency

Inflammation is the fuel that feeds the cancer flame. So how do we fight back?

Digital democracy: a Swiss view on digital trust

Four in five adolescents failing to exercise for even 60 minutes a day, UN health agency warns

Gaza: deadly violence continues to escalate, top UN officials work to restore calm

This is Germany’s $45 billion, 18-year plan to move away from coal

‘Time is of the essence’ for refugees on Greek islands – UN agency

Huawei answers allegations about its selling prices

Break taboo around menstruation, act to end ‘disempowering’ discrimination, say UN experts

Can the whole world live in peace?

From Russia with love: Brussels and Moscow close to an agreement on Ukraine’s gas supplies

Innovations for Content Professionals at the DCX exhibition 2018 in Berlin, in association with The European Sting

EU prolongs economic sanctions on Russia by six months

Business is a crucial partner in solving the mental health challenge

UN chief welcomes event reuniting families on the Korean Peninsula

Rule of Law: Commission launches infringement procedure to protect the independence of the Polish Supreme Court

Auditors say EU spending delivers limited value for money but the timing of their report poses questions

Ebola Outbreak in Democratic Republic Congo is ‘largely contained’: WHO

Mergers: Commission refers acquisition of newly created joint venture by Telefónica and Liberty Global to the UK competition authority

Brexit: visa-free access to the EU for UK nationals and to the UK for Europeans

Statement following the European Medicines Agency review of the COVID-19 vaccine AstraZeneca

“Decisions taken in the coming weeks will shape Europe’s experience of the internet”, Joe Mcnamee from EDRi says live from European Business Summit 2015

We must rethink and repurpose cybersecurity for the COVID-19 era

Free and secure access needed in DR Congo conflict zone to tackle Ebola – WHO

Here’s what keeps CEOs awake at night (and why it might be bad news for your next job)

President Ursula von der Leyen welcomes the first official submission of a recovery and resilience plan by Portugal

THE COMMITTEES: ‘All roads lead to the Fifth’

EU summit: step up work for recovery, and update migration and asylum system

The Bavarians threaten Berlin and Brussels with immigration crisis

EU lawmakers vote to reintroduce visas for Americans over “reciprocity principle”

EU helps tackle air pollution in Kosovo with €76.4 million

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s