Trade-Based Money Laundering: What It Is and How to Avoid It

trade money laundering

Trade finance involves a bank’s participation in international activities, and its management of products and financial instruments that facilitate trade between nations. The work of trade finance can pertain to lending money, issuing letters of credit, and offering export credit, among others. When a bank branches out into trade financing, it can anticipate working with a large network of people that includes importers, exporters, insurers, and mediators. It’s tough but exciting work, and it can be extremely rewarding for a bank to succeed in its endeavors overseas.

There are challenges to engaging in trade finance, however, and one of them is the risk of being implicated in trade-based money laundering (TBML) activities . This is when malicious agents disguise money laundering or other forms of financial crime by using legitimate trade as a front. This is a high-risk but high-reward kind of venture for them. And in recent years, international money laundering networks and groups affiliated with terror movements have become even more adept at this.

If your bank wants to avoid the dangers of TBML, what should it know about this phenomenon and what preventive actions should it take? Here’s a quick guide on TBML and how to prevent it with your bank’s transaction monitoring system, screening protocols, and data governance initiatives.

How Does Trade Based Money Laundering Usually Occur?

The first thing you should know is that there are several ways that criminals can instigate TBML. Some examples include:

  • The transport of illicit goods
  • Undervaluing or overvaluing products in their invoices, which has been identified by the 2015 Global Financial Integrity report as the most common form of TBML
  • Falsification of financial documents
  • Misrepresentation of financial transactions
  • Hidden collusion between buyers and sellers
  • Trade activities using shell companies or other fronts

Many TBML activities transpire on the level of opening new bank accounts. Say that a financial institution is only involved in the payment step for these transactions. That means that it may not initially have the intel or the infrastructure to implement anything more than basic AML transaction monitoring. It also means that the bank may only find out that the money is being funneled towards an illicit cause when it’s already too late.

TBML also thrives in bureaucracy, red tape, and disjointed documentation processes. Money launderers have gotten smart about the structural and human resource limits that banks often have in their screening and transaction monitoring protocols. They are masters of obscuring their true intentions, and they capitalize on delays, lack of coordination, and shallow data analytics capabilities on the part of banks. They may be able to pass off dubiously written bills of lading, or send conspicuous SWIFT MT7XX messages, because a bank isn’t equipped to detect these.

From this knowledge, it becomes clear that banks need to do the following before pursuing trade financing activities:

  1. Know the threats they’re dealing with and where these threats might appear.
  2. Know the limits of their current AML procedures and strive to improve them as banking operations expand.
  3. Bolster the software, hardware, and humanware they currently have in order to deal with escalating threats of TBML.
  4. Work in close coordination with international banking partners, as banks may not have the knowledge or capability to fend off criminals alone.

What Steps Can Your Bank Take to Prevent Trade Based Money Laundering in Your Institution?

Be Prepared to Tighten AML Procedures When Engaging in Trade Finance

Banks are actually well-disposed to be clearinghouses for monetary transactions at the international level. But if a bank wants to venture into trade financing, it must accept that it has a greater responsibility to tighten its AML procedures.

Your bank must already prepare for the risks that come with dealing with multiple parties. You must also ready yourselves for document processing activities that are even more challenging than what you do in your home country. Lastly, you should already be drafting the questions you’ll ask your international partners about the worst that you can expect.

When in doubt, you can fall back on this three-layer defense against international financial crime:

  • Resolve to strengthen your business operations.
  • Aim for effective oversight through the drafting and implementation of strong AML policies and procedures.
  • Audit for the actual effectiveness of your AML approach, and commit to fine-tuning it as you go along.

Adopt Pattern-Based Approaches for AML in Trade Financing

When it comes to any kind of AML procedure, flagging individual transactions and sorting false positives is an obsolete approach. Both in your local banking endeavors and your international ones, you should be equipping your staff to track patterns in your customers’ activities.

As your protocols and AML infrastructure get better, you’ll be able to pick up on the following situations:

  • You’ll be able to deduce patterns on the nature of goods involved in the trade, for example technology or software products classified as dual-use goods. These may have a military as well as civilian application, and may be used for less than innocent purposes.
  • With effective screening policies and transaction monitoring, you’ll be able to detect suspicious financial activities. These include cash flowing into “funnel accounts,” sudden rapid or closely coordinated transactions, or conspicuously large amounts of money being moved.
  • You’ll be able to see trends in erratic behaviors from clients, such as frequent amendments to letters of credit or strange discrepancies in bills of lading.

Do Some Prior Knowledge About the Region You’ll Be Trading In

Knowledge of the context in which you’ll be doing trade financing is key. You should already be on your toes if you’re doing trade finance in an area with a history of weak AML enforcement. You should also be extra careful when trading in close proximity to armed conflict, or in areas known to oversee trade in illicit goods.

This knowledge should be within close reach during the underwriting process for any new trade finance engagements. It should also be at the fore when your bank starts screening and monitoring subsequent transactions.

Align with Global Partners on Data Protection and Know Your Customer and Customer Due Diligence Standards

It won’t be possible for your bank to deal with TBML alone. You will definitely need the help of your global partners to outsmart criminals operating on their turf. One of the first initiatives you can take is to align with your partners on your standards for data protection, know your customer, and customer due diligence. Assess your situation for any problems you might encounter together on the level of staff, IT, or hardware.

On your end, always commit to preserving a high standard of KYC and CDD, as any leniency during trade finance activities could cost you. Don’t be remiss in conducting regular risk assessment, stay on top of your customer records, and aim to keep AML reporting protocols of a global standard.


What does it take for a bank’s AML approach to succeed both in its local and international financing activities? Both endeavors require the bank to be several steps ahead of money launderers and other perpetrators of financial crime. It’s easier said than done, especially in foreign territory where seasoned criminals have the upper hand. But being prepared to address the issue of TBML is vital to your bank’s success overseas. Invest in stronger infrastructure and AML procedures now, and protect the growth you’ll oversee from your ventures in trade financing.

Trade-Based Money Laundering: What It Is and How to Avoid It
Scroll to top