Trade-based money laundering (TBML) has long been one of the most elusive and dangerous threats to the global financial system. Through the manipulation of international trade transactions, criminals can easily hide the proceeds of illegal activities, making TBML a pervasive issue worldwide. Despite years of efforts, detecting and preventing TBML has remained a significant challenge.

In response to this growing problem, the Asian Development Bank (ADB) has launched a groundbreaking pilot initiative in partnership with the United Nations Office on Drugs and Crime (UNODC) and financial intelligence units (FIUs) from five Asian countries. This pilot, which ran from January 2022 to June 2023, has set the stage for a new approach to detecting and preventing TBML. By focusing on improving suspicious transaction reports (STRs) through the use of new data elements, enhanced training, and stronger collaboration, the pilot has already shown promising results and paved the way for future global-scale efforts in the fight against TBML.

Strengthening Suspicious Transaction Reports (STRs) to Fight TBML

The pilot’s methodology revolved around enhancing the STR framework, which is used by financial institutions and regulatory bodies to report suspicious financial transactions. Traditionally, STRs have focused on payment transactions, often overlooking critical details that could help identify TBML. However, TBML is inherently linked to trade activities, and so a more robust STR system was needed.

One of the key innovations of this ADB pilot was the introduction of additional trade-related data elements into STRs. These included indicators specific to TBML, such as goods descriptions, pricing, shipping information, and party identification. This made it easier for authorities to identify suspicious patterns and flag potentially illicit transactions.

The pilot utilized the UNODC’s goAML software, a widely used reporting and analysis tool that integrates STR data from over 70 jurisdictions. This software provided a streamlined and efficient system for collecting and analyzing data, and it is positioned to be scaled globally. By leveraging this tool, the initiative demonstrated how enhancing the reporting framework could significantly improve TBML detection.

Participating Countries: A Diverse Range of Economies

The five countries involved in the pilot—Bangladesh, Mongolia, Nepal, Pakistan, and Sri Lanka—each represent a unique slice of the global economy. With varying levels of financial sector development and trade activity, these countries were ideal candidates for testing the effectiveness of the new STR framework.

Bangladesh, for example, saw a remarkable 148% increase in TBML-related STRs filed by banks during the pilot. This growth was attributed to the identification of high-risk goods, such as capital machinery, leather products, and IT equipment, which are frequently used in TBML schemes. Notably, trade routes connecting Bangladesh with countries like Singapore, the UAE, and the United States were flagged for potential TBML activities.

Mongolia also reported impressive results, with the introduction of the goAML system in late 2022 contributing to a significant rise in TBML-related STRs. Before the pilot, Mongolia had only three TBML-related STRs over the course of two years. However, between September 2022 and April 2024, Mongolia recorded 28 such reports.

Nepal’s experience was even more dramatic: prior to the pilot, Nepal had no formal reporting system for TBML. However, by 2023, Nepal had filed 14 TBML-related STRs, signaling the success of the pilot in creating a framework for detecting illicit trade activities.

Perhaps the most striking results came from Pakistan, where the monthly volume of TBML-related STRs increased by an astounding 398%. Items such as solar panels, textiles, and industrial equipment were commonly linked to suspicious trade, revealing how the country’s financial institutions were now more attuned to TBML risks.

Sri Lanka’s participation in the pilot highlighted the importance of considering local economic conditions. The country’s experience was initially hampered by its ongoing economic crisis in 2022. However, after gaining access to the enhanced data fields in early 2024, Sri Lanka reported a 156% increase in TBML-related STR filings, underscoring the value of the new system despite economic challenges.

Valuable Insights and Findings

The ADB pilot did not just improve the reporting process—it also provided valuable insights into the nature of TBML and common techniques used by criminals to launder money. For example, Mongolia identified several red flags during the pilot, including discrepancies between contract and invoice data, incomplete documentation, and suspicious intermediaries involved in complex trade arrangements. One of the most common methods used by criminals to evade taxes and customs duties was “under invoicing,” where the value of goods is intentionally misreported to reduce their taxable value.

These findings have provided participating countries with a more comprehensive understanding of TBML techniques and how to recognize potential red flags. In many cases, the concept of TBML was entirely new to some of the countries involved, but the pilot’s data-driven approach has helped them build the capacity to manage these risks more effectively.

Additionally, the pilot’s enhanced STR framework allowed stakeholders to focus their resources on sectors and trade routes with higher incidences of TBML. This “know your sector” (KYS) approach, advocated by experts, has proven to be an effective way to prioritize areas of concern and direct efforts where they are most needed.

Building Capacity Through Training and Collaboration

The success of the ADB pilot was not just a result of improved data collection and reporting—it was also driven by comprehensive training and capacity-building initiatives. More than 700 individuals participated in specialized training on TBML, including bankers, FIU staff, customs officials, and law enforcement agents. This training program covered topics such as identifying TBML red flags, understanding trade-finance principles, and developing best practices for preventing money laundering.

The pilot’s collaborative nature was another critical factor in its success. Workshops and training sessions brought together stakeholders from various sectors—banking, customs, and law enforcement—to work together and align their strategies. This cross-sector cooperation is essential for combating TBML, as it is often a cross-border crime that requires the collaboration of various institutions to detect and prevent.

The pilot’s success demonstrated the power of collaboration, data, and training in the fight against TBML. By providing stakeholders with the tools and knowledge they need to effectively identify and investigate illicit trade transactions, the pilot has paved the way for more coordinated global efforts in the fight against money laundering.

Conclusion: A Blueprint for Global Action Against TBML

The ADB pilot has made significant strides in improving the detection and prevention of trade-based money laundering. By introducing new data elements into STRs, enhancing training programs, and fostering collaboration between key stakeholders, the initiative has demonstrated that data-driven approaches and international cooperation are essential for addressing this complex issue.

Looking ahead, there are several key areas that will require further attention. These include improving the quality of trade-related data, expanding training programs, and enhancing collaboration between public and private sectors. Additionally, new technologies and innovative solutions will be crucial for tackling persistent challenges such as mispricing and under invoicing.

The success of this pilot provides a promising path forward for the global fight against TBML. With continued efforts to improve data collection, strengthen collaboration, and build the capacity of stakeholders, countries can better detect and prevent TBML, ultimately creating more transparent and secure trade systems.

Related Links

• UNODC on Trade-Based Money Laundering
• Asian Development Bank: Trade-Based Money Laundering Initiative
• Global Money Laundering Watch
• Financial Intelligence Units in Asia
• goAML Software and Anti-Money Laundering Tools

Other FinCrime Central Links About Trade-Based Money Laundering

• Finextra & Eastnets unveil new data on the global state of trade-based financial crime
• Strengthening Maritime Compliance Against Money Laundering and Sanction Evasion

Source: International Banker