Manipulating Global Trade Systems And Emerging Threats

Trade-based money laundering (TBML) represents a sophisticated evolution of illicit financial maneuvers designed to obscure the origins of ill-gotten gains. At its core, TBML involves the manipulation of international trade transactions to disguise the movement of money across borders. This can be achieved through a variety of methods, including over-invoicing, under-invoicing, multiple invoicing of goods or services, and falsely describing goods or services in trade documentation.

Trade-based money laundering is the manipulation of trade systems for the movement of money achieved as the proceeds of crimes aiming to legitimize its illegal origin. The international trade system is being abused by criminal organizations and terrorist financiers to disguise the true source of illegal money, eg, drugs or human trafficking, arms smuggling, terrorism, and to integrate it into the formal economy.

The use of international trade systems as a method of money laundering is attractive due to, inter alia, high volume of trade transactions, the complexity of multiple foreign exchange transactions, the comingling of legitimate and illicit funds, and limited resources of agencies to detect suspicious trade transactions.

In practice trade-based money laundering is achieved, eg, through over- and / or under-invoicing of goods and services, multiple invoicing of goods and services, over- and / or under-shipment of goods and services, falsely described goods and services services, etc.The main purpose of money laundering is to take advantage of criminal activities. Money laundering is the result of almost all profitable crimes.

Overview of Trade-Based Money Laundering

TBML weakens the financial system and the overall economy, which results in the deterioration of the organization’s reputation.

Trade exploitation presents opportunities for terrorist financiers to frustrate identification and intervention by authorities and financial institutions. It can also support other illicit financial flows, including capital flight, sanctions evasion, customs violations, and tax evasion.

Other Methods of Money Laundering

Trade-based terrorist financing (TBTF)

TBTF uses the same trade processes as TBML but has a significant and fundamental difference: the proceeds moved can originate from legitimate and illegitimate sources. Terrorist groups hide their proceeds using TBML practices, like trade transactions, to covertly move value to evade detection and to make their funds appear legitimate. TBTF is the form of money laundering most difficult to detect since proceeds can originate also from legitimate sources. It is closely linked to sanctions on terrorism.

Companies should consider the synergies between their Counter-Terrorist Financing, trade and sanctions teams in order to ensure they have appropriate controls to help identify instances of TBTF and sanctions overlapping.

Service-based money laundering (SBML)

Instead of laundering money or transferring value through trade goods, SBML schemes rely on exploiting trade in services or other intangibles to disguise and justify the movement of illicit proceeds. Common service-based laundering scams include accounting, legal, marketing, and natural resource exploration fees. To detect SBML is difficult since, in comparison to TBML, it leaves no physical commodity trail, and the value of an invoice is subjective. So far this money laundering method is not well recognized.

The following services and sectors were identified as vulnerable to SBML:

• Gambling, particularly online gambling service providers;
• Software providers, including gaming and business software, such as electronic point-of-sale services;
• Financial services, including virtual asset wealth management;
• Consultancy and advisory services; and
• Trademarks and similar intangible items such as intellectual property rights.

Final Thoughts

Trade-based money laundering (TBML) represents a sophisticated method criminals and terrorist financiers employ to conceal the origins of illicit funds. By manipulating international trade systems, these actors exploit the vast volume and complexity of trade transactions, blurring the lines between legitimate and illicit capital flows. Methods like over-invoicing, under-invoicing, and false descriptions of goods are commonly used in TBML practices. Notably, trade-based terrorist financing (TBTF) adds an additional layer of complexity as it involves both legitimate and illicit funds, making detection exceedingly challenging.

Another variant, service-based money laundering (SBML), capitalizes on intangible services, leaving no physical evidence and further introducing subjectivity in valuation. Vulnerable sectors to SBML include online gambling, software provision, financial services, consultancies, and intellectual property rights. The implications of these practices are serious, undermining the integrity of financial systems, enabling other illicit activities, and eroding institutional reputations. Countermeasures must be synergized across Counter-Terrorist Financing, trade, and sanctions departments for effective detection and intervention.