An exclusive article by Fred Kahn

Trade-Based Money Laundering (TBML) remains one of the most complex and concealed forms of illicit financial flows. It leverages international trade to disguise the movement of value, taking advantage of systemic gaps, regulatory blind spots, and the sheer volume and complexity of cross-border transactions. While Know Your Customer (KYC) frameworks are a fundamental pillar of any Anti-Money Laundering (AML) regime, they alone cannot prevent or detect the intricate schemes that characterize TBML.

This article provides a detailed exploration into why robust KYC practices, while critical, are insufficient in isolation to combat TBML. Through examples, regulatory context, and technical analysis, we outline how enhanced due diligence, trade-specific scrutiny, and multi-stakeholder coordination are essential to close the gaps.

Understanding TBML and Its Mechanisms

TBML refers to the process by which illicit actors use trade transactions to move value and launder proceeds of crime. These schemes are deliberately designed to be opaque and often hide behind legitimate commercial activity. Common typologies include:

• Over and under-invoicing: Inflating or deflating the value of goods on invoices to move money illegally across borders.
• Multiple invoicing: Issuing more than one invoice for the same shipment to justify multiple payments.
• Falsely described goods: Mislabeling goods in terms of quality or quantity to disguise the transfer of value.
• Phantom shipments: Documenting shipments that never occurred to justify fund transfers.

These schemes typically involve collusion between importers and exporters, making them extremely difficult to identify without transactional and contextual scrutiny.

Why KYC Isn’t Designed for TBML

KYC procedures focus on verifying the identity of customers, understanding their source of funds, and assessing their risk level. While these checks are crucial, they are inherently customer-centric. TBML, on the other hand, is transaction-centric and often involves multiple parties, cross-border jurisdictions, and trade documentation.

A financial institution may successfully onboard a customer, validate their identity, and determine that they are a low-risk entity. However, the customer may still engage in illicit trade practices through third-party brokers, shell companies, or by colluding with counterparts abroad. KYC cannot detect this level of operational behavior without additional layers of control.

Consider a scenario where a company in Country A exports electronics to a company in Country B. The invoice states a shipment value of $5 million. KYC confirms both companies exist, are registered, and have no negative media. But unless the financial institution or customs authority has access to comparative pricing databases or real-time trade data, it cannot identify that the average shipment value for the goods in question is closer to $2 million. That $3 million discrepancy may represent laundered funds.

Case Study: TBML via Over-Invoicing in Latin America

In 2021, Colombian authorities uncovered a TBML scheme involving over-invoicing of textiles imported from Asia. Companies based in Panama exported containers of low-value clothing items, but invoices declared them as high-end fashion goods. Colombian importers paid inflated prices, which allowed illicit funds from drug trafficking to be legitimized as business expenses.

Despite robust KYC checks by Colombian and Panamanian banks, no red flags were raised until customs authorities flagged the mismatch in declared value versus actual goods. The scheme involved shell companies, fictitious addresses, and forged documents—none of which were directly detectable through traditional KYC.

This case illustrates how KYC, even when properly executed, may not prevent TBML unless paired with trade intelligence, customs cooperation, and post-transaction analysis.

The Role of Enhanced Due Diligence

To effectively combat TBML, financial institutions must adopt Enhanced Due Diligence (EDD) tailored to trade finance. This includes:

• Counterparty verification: Ensuring that the buyer and seller are legitimate, solvent, and have a trading history.
• Goods and pricing validation: Comparing invoice values against market prices using trade databases.
• Shipping route checks: Monitoring for illogical or high-risk routes (e.g., sanctioned countries, transshipment hubs with weak oversight).
• Document consistency reviews: Verifying alignment between invoices, bills of lading, certificates of origin, and insurance documents.

Banks involved in trade finance must expand their scope of AML controls to include these elements, especially when processing Letters of Credit or documentary collections.

Technology and Trade Analytics

One of the most effective tools in identifying TBML is the use of trade data analytics. By aggregating data from customs, global trade databases, and internal transaction records, financial institutions and regulators can detect anomalies.

For example, AI-driven tools can identify patterns such as:

• Repeated trade between two entities with unexplained price variances
• Goods shipped through high-risk jurisdictions for no clear economic reason
• Transactions inconsistent with the customer’s known business profile

Anomalies are not evidence of TBML in themselves, but they help flag transactions for further investigation.

Free Trade Zones and TBML Risk

Free Trade Zones (FTZs) present a unique risk environment. While they facilitate legitimate trade by reducing customs procedures and taxes, they are often exploited for TBML due to weak regulatory oversight. The FATF has repeatedly cited FTZs as vulnerable zones.

In many FTZs, goods can be imported, repackaged, and re-exported without detailed customs declarations. This enables schemes such as:

• Transshipment laundering, where goods are routed through multiple FTZs to obscure origin
• Invoice layering using multiple jurisdictions
• Mixing of legal and illegal goods

Financial institutions must adjust their due diligence and monitoring frameworks when dealing with clients operating in or through FTZs.

The Limitations of Trade-Based Sanctions Screening

Many banks rely on sanctions screening to identify high-risk transactions. However, TBML actors often exploit third-party intermediaries, affiliated firms, and front companies to bypass these controls.

Sanctions lists typically focus on entities and individuals, not on trade routes, shipment contents, or pricing anomalies. As such, even fully sanctioned goods may be traded under alternate descriptions or routed through jurisdictions with lax enforcement.

To mitigate this, institutions must supplement sanctions screening with geopolitical intelligence, high-risk jurisdiction indicators, and trade activity mapping.

Regulatory Framework and Global Standards

TBML is a priority for global regulators. The Financial Action Task Force (FATF) has issued detailed typology reports, red flag indicators, and best practice recommendations. In 2020, the FATF published “Trade-Based Money Laundering: Risk Indicators,” listing behavioral, transactional, and documentation-related red flags.

Moreover, the Basel AML Index includes TBML risk factors in its country risk scoring methodology. The Wolfsberg Group, an association of global banks, also emphasizes the importance of trade-specific controls in AML frameworks.

Despite these guidelines, adoption remains uneven. Some jurisdictions have embedded TBML controls into supervisory expectations, while others lag in enforcement or industry outreach.

Strengthening Public-Private Cooperation

To address TBML effectively, financial institutions must cooperate with law enforcement, customs authorities, and trade regulators. Public-private partnerships (PPPs) are increasingly promoted as a best practice.

Examples of successful PPPs include:

• The UK Joint Money Laundering Intelligence Taskforce (JMLIT), which brings together banks and law enforcement
• The US Trade Transparency Units (TTUs), which share import/export data across borders
• The Egmont Group’s focus on trade-based laundering in its FIU information-sharing initiatives

These collaborative structures allow faster intelligence sharing, feedback on suspicious transaction reports, and joint investigations.

Conclusion

KYC remains indispensable to AML compliance, but it is not enough to tackle TBML. Trade-based laundering operates in a domain that is transactionally complex, document-heavy, and globally fragmented. It exploits the blind spots between KYC, transaction monitoring, and trade documentation review.

To close these gaps, financial institutions must deploy enhanced due diligence, integrate trade data analytics, leverage public-private intelligence, and align with evolving regulatory guidance. A siloed KYC approach, no matter how well-executed, leaves too many doors open for sophisticated laundering schemes operating in global trade.

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Related Links

• FATF Trade-Based Money Laundering Guidance
• UNODC Money Laundering and Global Trade
• Basel Institute – TBML Risks in Free Trade Zones
• Wolfsberg Principles on Trade Finance
• Egmont Group Typologies on TBML

Other FinCrime Central News About Trade-Based Money Laundering (TBML)

• Complex Trade Documents: A $2 Trillion Gateway Fueling Money Laundering Risks in Trade Finance
• How Free Trade Zones Make It Easier for Trade-Based Money Laundering
• How Shipping Firms Can Safeguard Against Financial Crime Risks in 2025

Some of FinCrime Central’s articles may have been enriched or edited with the help of AI tools. It may contain unintentional errors.