An exclusive article by Fred Kahn
The growth of South–South trade—commerce between developing countries—has transformed global markets. Yet as emerging economies forge new trade corridors across Africa, Asia, Latin America, and the Middle East, these routes are increasingly exploited for trade-based money laundering (TBML). With regulators and financial institutions still playing catch-up, South–South trade routes have become a growing blind spot for AML professionals worldwide.
International focus on TBML has traditionally concentrated on trade flows between developed nations or from high-risk jurisdictions to Western financial centers. But the shifting geometry of global commerce, coupled with uneven regulatory oversight and vast differences in institutional capacities, is opening up new vulnerabilities. Criminal networks are quick to exploit these gaps, leveraging the complexity and scale of South–South trade to clean illicit funds on a massive scale.
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TBML in South–South Trade Routes: An Emerging Blind Spot
South–South trade routes are experiencing a period of rapid expansion. According to UNCTAD, trade among developing countries accounted for nearly 28% of global exports in 2023, up from just 18% at the turn of the century. This surge is fueled by growing middle classes, infrastructure investment, and shifting geopolitical alliances. Yet these same factors also attract money launderers seeking new, less scrutinized pathways to move illicit wealth.
Trade-based money laundering relies on disguising criminal proceeds as legitimate trade transactions, often by over- or under-invoicing goods, multiple invoicing, or using phantom shipments. While TBML has long been recognized as a major threat—FATF’s 2006 report called it “one of the main international money laundering typologies”—South–South trade is now drawing the attention of specialists due to three main reasons:
- Weak and uneven regulatory oversight: Many developing countries lack robust AML/CFT frameworks, or struggle with implementation. The FATF’s own mutual evaluation reports highlight major deficiencies in customs controls, trade transparency, and inter-agency cooperation across several regions.
- Complex and opaque supply chains: Trade between developing economies often involves multiple intermediaries, free trade zones, informal networks, and cash-based settlements. This complexity makes it harder to trace the true origin and destination of goods and funds.
- Limited information sharing: Cross-border AML collaboration remains inconsistent, particularly where diplomatic or political sensitivities impede information flows.
Recent cases highlight the scale of the issue. For instance, in 2022, the African Union’s report on illicit financial flows estimated that up to $50 billion is lost each year from Africa through various forms of illicit trade, with TBML a leading method. Similarly, the Asia/Pacific Group on Money Laundering (APG) identified “South–South trade corridors as emerging high-risk channels for TBML activity,” citing cases in textiles, agricultural commodities, and electronics.
As David Lewis, then Executive Secretary of the FATF, remarked at a 2021 AML summit: “Criminals adapt far faster than regulators, especially where new trade routes are opening up and oversight is weakest.”
Why Criminals Target South–South Trade
South–South trade routes present unique advantages for money launderers. The factors driving their attractiveness include:
Regulatory Asymmetry: While some emerging economies have modernized their customs systems and AML frameworks, others lag far behind. Gaps in KYC and transaction monitoring create opportunities for mis-invoicing, smuggling, and falsification of shipping documents. Free trade zones and special economic areas, which are often less stringently regulated, are particularly vulnerable.
Fragmented Enforcement: In practice, enforcement is inconsistent. Many customs authorities lack access to beneficial ownership registers or cannot cross-reference trade data with financial transactions. This fragmentation allows criminal groups to exploit the weakest link in the chain.
Rise of Informal Finance: Informal money transfer systems, such as hawala and similar networks, often intersect with formal trade flows in South–South corridors. Criminals can layer transactions using both formal and informal channels, obscuring the paper trail. In a 2023 report, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) found that informal value transfer services were “commonly used to facilitate the transfer of illicit proceeds disguised as trade.”
Political and Economic Pressures: Developing countries often prioritize trade facilitation and growth over stringent controls, especially where trade is seen as critical for economic development. AML may take a back seat, leading to under-resourced supervision.
Commodity Trade Vulnerabilities: Commodity-rich developing regions—oil, gold, timber, agricultural products—are frequent targets for TBML schemes. The World Customs Organization has repeatedly warned about gold trade from Africa and Latin America, where “ghost shipments” and false declarations are rampant.
Case Example: Gold Smuggling in West Africa
An investigation by the Global Initiative Against Transnational Organized Crime uncovered that large volumes of gold are routinely under-declared or misclassified in exports from West African countries to Asia and the Middle East. This enables organized crime groups to launder money via seemingly legitimate trade, bypassing both local and destination country controls.
The Regulatory and Enforcement Challenge
Efforts to combat TBML along South–South trade routes are complicated by several entrenched obstacles:
Lack of Harmonized Standards
Most developing economies align with FATF standards in principle, but enforcement varies widely. As of June 2024, FATF and its regional bodies (such as GAFILAT, ESAAMLG, and MENAFATF) continue to report “strategic deficiencies” in AML/CFT frameworks across key trade hubs.
Resource Constraints
Customs and FIUs in many countries operate with limited budgets, outdated technology, and insufficient staffing. According to a 2023 UNODC assessment, less than 30% of African and South Asian customs authorities have automated risk-based systems for trade analysis. Manual document checks are still the norm, creating opportunities for fraud.
Data Silos and Lack of Interoperability
Trade data, customs information, and suspicious transaction reports are rarely integrated. This siloed approach means that anomalies in trade flows (e.g., price discrepancies, abnormal shipping routes) often go undetected.
Reluctance to Share Information
Political sensitivities, lack of trust, or fear of jeopardizing trade ties can inhibit cooperation between countries. In some cases, authorities are hesitant to share data with neighboring jurisdictions for fear of economic or diplomatic fallout.
Limited Private Sector Involvement
Trade finance providers, freight forwarders, and logistics companies are on the front lines of TBML detection. Yet many in developing regions lack awareness or training on TBML typologies, and compliance efforts often focus only on basic KYC rather than deep transaction analysis.
Notable Enforcement Actions
Despite these challenges, authorities have begun to make progress. In 2023, the Central Bank of Nigeria revoked the licenses of several Bureaux de Change found to be involved in TBML linked to trade with the Middle East. The Financial Intelligence Unit of India reported multiple cases involving shell companies channeling funds via regional trade partners. However, these actions are the exception rather than the rule, and the overall rate of successful prosecutions remains low.
Strategies to Tackle TBML Across South–South Trade
Given the scale of the threat, a more comprehensive response is urgently needed. Several strategies stand out:
Strengthen Regulatory Alignment and Mutual Evaluations
Regional AML bodies should work toward greater harmonization of standards, mutual recognition of beneficial ownership data, and regular joint evaluations. The FATF’s “best practices” guidance on beneficial ownership transparency, published in March 2023, provides a template for action.
Leverage Technology for Trade Data Analysis
Advanced analytics, AI-driven anomaly detection, and blockchain-based trade platforms can provide much-needed visibility. For example, pilot projects led by the Inter-American Development Bank are using machine learning to flag suspicious trade flows in Latin America and the Caribbean.
Enhance Capacity Building
International agencies—such as the World Bank, UNODC, and the Egmont Group—must prioritize technical assistance and funding to build customs and FIU capacity. This includes training on TBML typologies, digital trade documentation, and cross-border investigations.
Foster Public-Private Partnerships
Closer engagement between financial institutions, logistics companies, and regulators is crucial. Sharing red flag indicators and intelligence in real time can help disrupt TBML networks. Some regions are piloting joint trade finance working groups to facilitate such cooperation.
Promote Transparency in High-Risk Commodities
Improving traceability in gold, oil, and other commodities is essential. Initiatives like the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals can be adapted and adopted more widely across South–South trade corridors.
Case Example: Southeast Asian Agri-Trade
Vietnam and Indonesia, both major agricultural exporters, launched a data-sharing initiative in 2023 to identify mis-invoicing and cross-border TBML. Early results indicate a sharp rise in suspicious activity reports and several ongoing investigations.
Legal Reforms and International Cooperation
Several developing countries are updating their AML/CFT laws to close loopholes. For instance, Nigeria amended its Money Laundering (Prevention and Prohibition) Act in 2022, while Brazil passed new legislation mandating more robust KYC checks in trade finance.
“No country is immune to TBML, but emerging trade corridors are especially vulnerable if we don’t invest in enforcement and intelligence sharing,” observed John Cassara, former US Treasury Special Agent, in a 2022 panel discussion.
Conclusion: Closing the Blind Spot Before It Widens
South–South trade routes are fast becoming the new frontlines in the global fight against trade-based money laundering. The rapid growth of commerce between developing countries offers tremendous economic opportunity, but also exposes critical vulnerabilities for financial crime. Without urgent action to close regulatory gaps, harmonize standards, and strengthen both public and private sector capabilities, these trade routes will remain a lucrative blind spot for criminal organizations.
The solution requires collective effort: capacity building, cross-border collaboration, and innovative technology must all play a role. As global trade evolves, so must our approaches to AML. The window for closing these gaps is narrowing—action today will determine whether South–South trade becomes an engine of prosperity or a channel for unchecked illicit finance.
Related Links
- FATF Trade-Based Money Laundering Guidance (2023)
- UNCTAD South–South Trade Statistics
- OECD Due Diligence Guidance for Responsible Supply Chains of Minerals
- World Customs Organization – Illicit Trade Reports
- Asia/Pacific Group on Money Laundering TBML Typologies
