AN ARTICLE ON TRADE BASED MONEY LAUNDERING (TBML)

July 6, 2026July 6, 2026 admin 0 Comments compliance, Financial crime, Money Laundering, Risk management, TBML, Trade Finance

International trade is defined as the purchase and sale of goods and services by companies in different countries. During trading process various consumer goods, raw materials, food, and machinery etc are bought & sold in the international marketplace. International trade is an important factor which give rise of the global economy.

At present globally the total trade value is expected to exceed $35 trillion in 2025, marking a record-breaking year. Global trade is highly susceptible to money laundering because criminals can disguise illicit funds by manipulating trade transactions, such as mispricing goods, falsifying invoices, or using complex supply chains in order to move and legitimize money across borders. The reasons for vulnerability of international trade for money laundering are as mentioned below:

a. Global scale & complexity, with trillions of dollars in goods moving worldwide, monitoring every transaction is difficult. This creates opportunities for illicit actors to hide suspicious flow of money.

b. Multiple jurisdictions, trade often involves several countries with varying regulatory standards, making enforcement inconsistent and leaving gaps for exploitation.

c. High volume of transactions makes it easy for money launderers to blend illegal activities with legitimate trade. This reduces the likelihood of detecting the money being laundered.

Despite, the vulnerabilities of trade for money laundering, world economies have become more intertwined through globalization.

Before we delve into the complexity & consequences of trade-based money laundering, let us have a conceptual understanding about the procedural dynamics of money laundering.

Money laundering

Money laundering (ML) is a sophisticated, multi-step operation driven by the need to legitimize assets, or “dirty money,” acquired through unlawful means such as drug trafficking, fraud, tax evasion, corruption, or organized crime. This financial crime, “Money Laundering” remains a cause of concern because of periodical incidents like Panama Papers leaks, Swiss Leaks etc.

Initially the idea of money laundering was conversion of black money to white. This conversion was merely considered as crime of tax evasion only. In the year 2000, United Nations in its convention against organised crimes, popularly known as “Palermo Convention”, money laundering was defined:

a. The conversion or transfer of property, knowing it is acquired from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who participates in the commission of the predicate offence to evade the legal consequences of his or her actions; and

b. The concealment or disguise of the true nature, source, location, disposition, movement, or ownership of rights with respect to, or ownership of the property knowing that such property is derived from a criminal offense; and

c. The acquisition, possession, or use of property, knowing at the time of its receipt that such property was derived from the proceed of a criminal offense or from participation in any one of the forms such as association with or conspiracy to commit or attempt to commit or aiding or abetting or facilitating.

Money Laundering process is completed in three different stages viz. Placement, Layering, and Integration. Understanding the three recognized stages of money laundering is crucial for law enforcement agencies, policymakers, and financial institutions.

1. Placement: This is the initial stage, where the launderer aims to introduce the illicitly gained funds into the legitimate financial system without arousing suspicion. This phase is often considered the riskiest stage of money laundering. Criminals used various tactics including:

a. Depositing large amounts of cash in small sums to avoid reporting thresholds. This methodology is known as “Smurfing” or “Structuring,”

b. Purchasing valuable assets like real estate or art, by blending the illegal money with legitimate money.

c. Using intermediaries known as “money mules” to transport funds across borders.

d. Physical movement of cash i.e., “Currency Smuggling.” In this process currency is transported to the jurisdictions which are considered to be safe haven for financial crimes.

During this process, the goal of the criminals is to obscure the connection between the illegal source of the money and the legitimate financial system.

2. Layering: It is the second stage, focused on creating intricate layers of financial transactions to complicate the audit trail and create confusion. During this phase, money launderers may transfer funds between numerous bank accounts, engage in a series of transactions, convert currencies multiple times, and employ offshore entities to further obscure the true source of the funds. The purpose of layering is to make it exceptionally challenging for investigators to trace the laundered money back to its illegal origins.

3. Integration: It is the final stage, where the laundered funds are reintroduced into the legitimate economy in a way that makes them appear entirely lawful. Once integrated, the money has been cleansed of its illicit origins and can be used or reinvested without raising suspicion.

Trade-Based Money Laundering (TBML)

TBML is the process & practice of moving illegal funds through trade transactions to make them appear legitimate. Criminals take advantage of the inherent complexity of cross-border trade to conceal the origins of their ill-gotten gains It exploits the complexity of global trade systems, where billions of transactions occur daily. The aim of money launderer is not smuggling goods but concealing and transferring value.

TBML often thrives within intricate complex supply chains, where criminals leverage multiple subsidiaries, business entities, and intermediaries, making it challenging for authorities to distinguish illicit financial flows from legitimate trade activities. The common techniques used by money launderers execute TBML are:

a. Mispricing: This is a hallmark technique involving the manipulation of prices for goods and services documented in trade documents such as bills of lading and invoices.

b. Over-invoicing and under-invoicing: These are specific mispricing techniques. Over-invoicing inflates the prices of goods or services, making the transaction appear more valuable than it is. Conversely, under-invoicing understates the prices. These discrepancies help criminals move money across borders by either overpaying or underpaying for goods to legitimize their illicit funds.

c. Phantom Shipping and Fictitious Invoices: These involve creating fake records of trade transactions. Criminals fabricate invoices and shipping documents for goods that were never shipped or never existed. These fake transactions serve to create a false paper trail and justify fund transfers, making the illicit flow of funds difficult for authorities to detect.

d. Smurfing (Structuring): Smurfing involves breaking down large transactions into smaller ones to avoid generating suspicion and bypass reporting requirements. The numerous smaller transfers appear innocuous individually but collectively add up to significant sums, helping launderers circumvent anti-money laundering monitoring systems.

e. Shell Companies: Criminals establish shell companies, which are entities existing primarily on paper, lacking genuine business operations or assets, used specifically to facilitate fraudulent trade transactions.

f. Circular Trading: This technique involves the movement of goods in a circular pattern among different entities, often part of the same criminal network. The same merchandise is repeatedly bought and sold between these entities, creating a complex web of transactions designed to confuse investigators and challenge the identification of illicit financial flows.

These methods collectively demonstrate the complexity of TBML, where criminals exploit trade transactions to ultimately legitimize funds obtained through illegal means.

Let us understand the TBML via this a hypothetical scenario, a criminal organization wants to move $1,000,000 of their ill-gotten funds from Country A to Country B.

a. Step 1: In this step criminal make a legitimate trade setup. An exporter in Country A agrees to sell 1,000 laptops to an importer in Country B. Also, please take note that true market price per laptop: $1,000, therefore, true shipment value of the consignment will be: $1,000 × 1,000 = $1,000,000

b. Step 2: This step involves about manipulation in the price of the product, in this case it is laptop. Here the criminal does over-invoicing for the products. The exporter issues an inflated invoice showing each laptop at $2,000 instead of $1,000. And thus, invoice value becomes: $2,000 × 1,000 = $2,000,000

c. Step 3: Now understand the payment flow, the importer in Country B pays $2,000,000 through the banking system. Of this, $1,000,000 is the legitimate cost of laptops. The extra $1,000,000 represents illicit funds disguised as part of the trade.

d. Step 4: As an outcome of this entire process, criminals successfully moved $1,000,000 from Country B to Country A under the cover of a legitimate trade transaction.

Also, customs see laptops shipped and invoices paid, there is nothing which looks suspicious unless they analyse the pricing anomaly.

Regulatory Framework and Global Efforts

Financial Action Task Force (FATF) plays a central role in setting international standards and guidelines to combat money laundering, including TBML through its 40 recommendations for financial institutions AML-CFT Compliance framework. Non-compliance to these recommendations can lead to sanctions and reputational damage.

Financial Institutions and Due Diligence

Another important effort was done by Basel Committee on Banking Supervision (BCBS):

1. Banks are required to conduct enhanced due diligence (Know Your Customer or KYC) to understand the nature of their customers’ trade activities and identify and report suspicious trade transactions that may indicate TBML.

2. Monitoring and Reporting: Banks employ sophisticated transaction monitoring systems that use pattern recognition and algorithms to flag high-risk or unusual trade transactions.

3. They are obligated to report suspicious transactions to relevant authorities, which helps trigger investigations into potential TBML activities.

4. Risk Assessment: Typically, banks conduct a TBML Risk Assessment annually, or more frequently if the risk profile changes, such as when entering a new sector or adding a new banking product. The results aid management in making risk-based control and business decisions and observed deficiencies should be tracked until remediated.

5. Staff Training: Banks invest in staff training to ensure employees can recognize the signs and red flags associated with TBML and are aware of their reporting obligations.

Conclusion

It is extremely critical for financial institutions to prevent criminals from misusing the financial system. Financial institutions are like blood vessels & backbone of an economy. Therefore, financial institutions must understand the risk of money laundering crime, which they are exposed by virtue of their business lines. The efforts to combat TBML is comprehensive and collaborative, involving international standards set by FATF, the crucial reporting and due diligence role of financial institutions, and government initiatives that encompass legislation, coordination, and technology. Financial institutions should be able to implement a stringent & effective AML & CTF measures. This would help them from reputational damages, financial losses and also from being a part of systemic financial crisis.