Identifying TBML: 8 Trade-Based Money Laundering Red Flags

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Trade-based money laundering (TBML) is a growing concern for governments, financial institutions, and businesses worldwide as criminals exploit international trade to move illicit funds across borders. 

 

In this article, we’ll look at eight common red flags that may indicate trade-based money laundering and discuss how your business can reduce anti-money laundering (AML) compliance risks and costs.

 

 

 

What is Trade-Based Money Laundering?

Criminals use trade-based money laundering to disguise the proceeds of crime and move value via trade transactions that attempt to legitimize their illicit origins. This process typically involves exploiting the international trade system to transfer value while obscuring the true sources of wealth. By manipulating various aspects of trade transactions, such as pricing, quantity, and documentation, criminals can effectively launder money and integrate it into the legitimate economy.

 

For additional information, view our webinar on trade-based money laundering.

 

 

 

Trade-Based Money Laundering Red Flags

To detect and prevent TBML, it is crucial to identify potential red flags associated with illicit activity. By recognizing these warning signs, businesses can take appropriate measures to reduce anti-money laundering compliance risks. Let’s look at eight common red flags that may indicate TBML.

 

 

1. Invoicing and Shipping Discrepancies

Discrepancies between goods that are shipped and the declared value, quantity, or description on the invoices could indicate attempts to manipulate trade transactions for money laundering purposes. These inconsistencies may arise from forged or altered documents or collusion between the parties involved in a transaction.

 

 

2. Over or Under-Valuation of Goods

Deliberate misrepresentation of the value of goods helps criminals transfer money across borders without attracting attention. Overvaluing imports or undervaluing exports enables the transfer of excess funds to foreign suppliers or the receipt of extra funds from foreign buyers, effectively laundering money through seemingly legitimate trade transactions. 

 

 

3. Multiple Unusual Transactions With the Same Counterparty

Repeated transactions that deviate from normal patterns or involve unusual terms and conditions with the same counterparty may suggest TBML activity. Criminals often collaborate with trusted associates to launder money, and these unusual transactions can serve as a means to move illicit funds. 

 

 

4. High-Risk Countries or Entities

High-risk jurisdictions may have weak AML regulations or known connections to financial crimes, making them attractive money laundering destinations for criminals. Businesses should be cautious when dealing with counterparties in such jurisdictions and should conduct enhanced due diligence to mitigate potential risks.

 

 

5. Complex Transactions Involving Multiple Intermediaries

Criminals often use convoluted transaction structures involving numerous intermediaries, including shell companies and transit accounts, to obfuscate money’s true origins. These complex transactions, which may see funds crossing borders multiple times, make it difficult for financial institutions and regulators to trace the movement of funds and identify potential money laundering activities.

 

 

6. Transactions With Unusual Payment Methods

Criminals seeking to avoid scrutiny often resort to unconventional or non-standard payment methods in their trade transactions. These methods, which can include third-party payments, cash transactions, or cryptocurrencies, make tracing the origin and movement of funds more challenging.

 

 

7. Inconsistent Documentation or Paperwork

Inconsistent or incomplete documentation, such as discrepancies in trade, financial, or shipping documents, can be a sign of TBML. Launderers often forge or alter documents. By thoroughly reviewing documentation for inconsistencies and ensuring that all paperwork is complete and accurate, money services businesses can detect potential TBML activities and take appropriate action.

 

 

8. Multiple Transactions Beneath Threshold Limits

Threshold limits are predefined monetary amounts set by regulatory authorities, above which financial institutions must report transactions to relevant agencies. For example, money services businesses must file a Currency Transaction Report (CTR) with the Financial Crimes Enforcement Network (FinCEN) for cash transactions exceeding $10,000 daily by or on behalf of one person.

 

Criminals often attempt to circumvent these reporting requirements by conducting multiple transactions beneath the threshold limits. By keeping transactions below these limits, they aim to avoid triggering alerts or attracting attention. This tactic, known as “structuring” or “smurfing,” is one of the three stages of money laundering and involves breaking down large transactions into smaller amounts to make them appear less suspicious.

 

 

 

How to Mitigate TBML Risks

In the U.S., money services businesses are required to effectively monitor and report money laundering red flags by regulations that include the Bank Secrecy Act, the USA PATRIOT Act, and the Money Laundering Control Act. Among other requirements, companies must implement the following processes:

 

  • Know Your Customer (KYC): Establish and maintain a customer identification program (CIP) to verify the identity of individuals or entities opening accounts.
  • Customer Due Diligence (CDD): Perform risk-based customer due diligence to understand the nature of the customer’s business, the purpose of their accounts, and the expected transaction patterns. Enhanced Due Diligence (EDD) may be required for high-risk customers.
  • Transaction Monitoring: Establish systems and controls to monitor customer transactions for unusual or suspicious activities.
  • Suspicious Activity Reporting (SAR): If a financial institution suspects that a transaction or pattern of transactions may involve money laundering, terrorist financing, or other illegal activities, it is required to file a SAR with FinCEN.

 

These processes are costly and time-consuming to maintain, and there is often a risk of non-compliance due to process errors, poor training, and difficulty keeping up with large numbers of customers and transactions. 

 

Alessa provides a range of software solutions that help businesses implement and automate AML compliance processes, including:

 

 

Speak to an AML compliance expert or book a free demonstration to learn more about how we can help your business reduce AML compliance costs and risks.

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