Trade-Based Money Laundering (TBML)

What Is Trade-Based Money Laundering?

Trade-based money laundering (TBML) is the use of trade transactions to move value and to make criminal proceeds look as if they come from legitimate business. Instead of moving money directly, criminals move goods, or claim to move goods, and misrepresent the price, quantity, quality or type of those goods so that value shifts between parties under the cover of normal commerce.

International trade is an attractive channel because of its enormous volume, the number of parties involved in each shipment, the complexity of trade finance documents and the limited ability of customs authorities and banks to inspect every consignment. The FATF has described TBML as one of the main methods criminal organizations use to move value, alongside the use of the financial system and the physical movement of cash.

Why TBML Matters

• It is hard to detect. A bank processing a payment for an invoice usually sees the payment and perhaps some documents, but not the goods. Customs authorities see the goods but not the payment.
• It can move large values. A single mispriced shipment can transfer significant value, and the activity can be repeated across many shipments.
• It overlaps with other crimes. TBML is linked to customs fraud, tax evasion, sanctions evasion, export control breaches and the financing of terrorism.
• It touches many sectors. Banks offering trade finance, payment institutions processing supplier payments, freight forwarders, insurers and the importers and exporters themselves can all be exposed.

Common TBML Techniques

Over-Invoicing and Under-Invoicing

The most widely cited technique is misrepresenting the price of goods:

• Over-invoicing: the exporter invoices above the true value. The importer pays more than the goods are worth, moving extra value to the exporter.
• Under-invoicing: the exporter invoices below the true value. The importer receives goods worth more than it paid and can sell them to realize the difference.

Multiple Invoicing

The same shipment is invoiced more than once, often through different financial institutions, justifying several payments for a single delivery.

Over-Shipment and Under-Shipment

The quantity shipped differs from the quantity invoiced. Sending more goods than invoiced moves value one way; sending fewer moves it the other.

Falsely Described Goods

The quality or type of goods is misrepresented, for example cheap goods described as premium products, so that the invoice value appears justified.

Phantom Shipments

No goods are shipped at all. Documents are fabricated to support payments for a transaction that never happened.

Third-Party and Complex Payment Structures

Payments are made by or to parties unrelated to the trade, or routed through several jurisdictions and intermediaries. A well-known example of this pattern is the Black Market Peso Exchange, in which drug proceeds in one country are used to pay for goods exported to another, and the importers settle in local currency.

Red Flags

• Prices significantly out of line with market values for the goods
• Discrepancies between the invoice, the bill of lading, the packing list and the letter of credit
• Goods that do not fit the customer's business, such as an electronics trader suddenly shipping commodities
• Shipments routed through jurisdictions with no apparent commercial reason
• Payments from third parties not named in the trade documents
• Frequent amendments to letters of credit, or a sudden switch from documentary trade to open account
• Vaguely described goods, or transactions involving goods that are hard to value
• Trading partners that are shell companies or front companies, or share addresses or directors
• Involvement of dual-use goods or high-risk destinations

Controls and Best Practices

1. Know the trade: customer due diligence should capture the goods traded, typical counterparties, ports, routes and expected volumes.
2. Check documents for consistency: compare quantities, values, descriptions, parties and routes across all trade documents.
3. Benchmark prices where reliable data exists, and question transactions that deviate significantly.
4. Screen all parties: buyers, sellers, banks, shipping companies, agents, vessels and ports should be screened for sanctions and other risk.
5. Look at the vessel: check the vessel's identity, flag and ownership for sanctions links.
6. Monitor open account flows: much trade is paid on open account, where the bank sees only the payment, so transaction monitoring should cover trade-related payments.
7. Share information within legal limits with customs and law enforcement through suspicious activity reporting.

Regulatory Expectations

The FATF has published several reports on TBML, including joint work with the Egmont Group on trends and developments and on risk indicators for TBML. The Wolfsberg Group, together with industry bodies, has published trade finance principles that describe the due diligence banks are expected to apply.

In terms of legal obligations, TBML is addressed through general AML requirements rather than a single rule: customer due diligence, ongoing monitoring and suspicious activity reporting under the Bank Secrecy Act in the US, the EU AML framework including Directive (EU) 2015/849 and Regulation (EU) 2024/1624, and the UK Money Laundering Regulations 2017. Sanctions and export control laws apply in parallel and are frequently engaged in trade cases.

How on8.ai Helps

SmartSanction screens the people, companies, vessels and addresses involved in a trade transaction against more than 520 list and registry sources, by API or in batch. Its ownership and relationship graph applies the OFAC 50 Percent Rule to trading counterparties, and each match comes with the reasoning behind it.

Related Terms

• Dual-Use Goods
• Front Company
• Shell Company
• Layering
• Cross-Border Transactions
• Sanctions Evasion