Definition
Trade-Based Money Laundering (TBML) is the process by which criminals disguise the proceeds of crime and move value through international trade transactions to legitimize their illicit origins. In AML terms, it specifically involves manipulating trade documents, such as invoices, bills of lading, and letters of credit, to misrepresent the price, quantity, quality, or nature of goods and services. This method leverages the complexity of global trade—billions of transactions annually across multiple jurisdictions—to integrate dirty money into the legitimate economy undetected.
TBML differs from traditional money laundering by its reliance on physical goods movement rather than purely financial transfers, making detection challenging due to disparate regulatory oversight in trade versus banking. Core techniques include over-invoicing (inflating export prices to transfer excess funds abroad) and under-invoicing (deflating import prices to repatriate value).
Purpose and Regulatory Basis
TBML serves to launder proceeds from drug trafficking, corruption, human smuggling, and terrorism financing by embedding illicit value within verifiable trade flows. It matters profoundly in AML because trade volumes exceed $25 trillion annually, dwarfing other financial channels and creating a vast “white noise” for concealment.
The Financial Action Task Force (FATF), the global AML standard-setter, drives regulatory focus through its 2006 and 2019 TBML guidance, urging risk-based approaches, enhanced due diligence (EDD), and public-private information sharing. Nationally, the USA PATRIOT Act (Section 311) designates high-risk jurisdictions and mandates correspondent banking scrutiny for TBML risks. EU AML Directives (AMLD5 and AMLD6) require trade finance firms to implement transaction monitoring and suspicious activity reporting (SARs) for TBML indicators. In the UK, the 2025 TBML Handbook by authorities reinforces FATF standards with sector-specific red flags.
When and How it Applies
TBML applies whenever trade transactions exhibit discrepancies between documented value and economic reality, often triggered in high-risk corridors like Asia-Pacific to Latin America drug routes. Real-world use cases include a multi-million-dollar letter of credit where the first beneficiary submits marked-up invoices (300% inflated) linked to shell entities, detected via mismatched documentation. Another involves shell companies trading electronics to high-risk jurisdictions, routing criminal proceeds back through unrelated domiciles.
Triggers encompass sanctions evasion, where goods are misdescribed to bypass restrictions, or phantom shipments lacking physical evidence. It manifests in correspondent banking, trade finance products like letters of credit, and supply chain finance, where intermediaries obscure fund flows.
Types or Variants
TBML variants classify by manipulation method, each with distinct AML implications.
Misrepresentation of Price
Over-invoicing exports or under-invoicing imports transfers value; e.g., $1M goods invoiced at $3M to exfiltrate $2M illicitly.
Misrepresentation of Quantity or Quality
Multiple invoicing for single shipments or “horton-doing” (high-quality declared as low) evades duties while laundering.
False Description of Goods
Classifying textiles as machinery alters HS codes, hiding true trade nature.
Phantom Shipments
Fictitious trades with forged bills of lading, no goods movement.
Shell Company Networks
Front companies in tax havens cycle funds via circular trade. Emerging variants include cryptocurrency-integrated TBML and sanctions circumvention via dual-use goods.
Procedures and Implementation
Financial institutions must integrate TBML controls into AML programs via risk assessments per FATF Recommendation 1.
- Conduct TBML risk assessments mapping high-risk commodities (e.g., electronics, precious metals), jurisdictions, and counterparties.
- Implement automated screening of trade documents against sanctions lists, PEP databases, and adverse media.
- Perform EDD on trade finance: verify invoices against market prices (e.g., via ICC pricing databases), inspect shipping documents, and sample physical goods.
- Deploy transaction monitoring systems flagging anomalies like value mismatches >20% or unusual routing.
- Train staff on red flags (e.g., third-party discounters, unrelated domiciles) and foster public-private partnerships like FATF’s Phoenix Project.
Controls include blockchain for document authenticity and AI for pattern detection in SWIFT messages.
Impact on Customers/Clients
Customers face heightened scrutiny without guilt presumption; legitimate traders may experience delays in trade finance approvals pending EDD. Rights include transparent explanations of holds, appeals via internal ombudsmen, and data protection under GDPR/CCPA equivalents. Restrictions involve account freezes for SAR filings, prohibiting high-risk trades until resolved, and potential blacklisting. Interactions require prompt document submission (e.g., proof of goods delivery), with institutions offering guidance to avoid inadvertent flags.
Duration, Review, and Resolution
TBML investigations typically span 30-90 days for initial reviews, extending to 180+ days for complex cases involving law enforcement. Review processes involve compliance teams escalating to MLROs, with periodic (quarterly) risk reassessments. Resolution occurs via transaction clearance post-EDD, enhanced monitoring (12-24 months), or SAR filing with FinCEN/NCA equivalents. Ongoing obligations mandate annual TBML attestations and dynamic controls updates.
Reporting and Compliance Duties
Institutions must file SARs/STRs for TBML suspicions within 30 days (US: FinCEN CTRs for >$10k trades), documenting rationale, red flags, and EDD. Duties include board-level AML oversight, independent audits, and record retention (5-10 years). Penalties for non-compliance reach millions: e.g., US banks fined $1B+ for TBML lapses; EU fines up to 10% global turnover under AMLD4.
| Violation Type | Example Penalty | Jurisdiction |
| SAR Filing Delay | $500K fine | USA (FinCEN) |
| Inadequate EDD | €10M+ | EU (AMLD5) |
| Systemic Failures | $1.2B settlement | Global (HSBC case) |
Related AML Terms
TBML interconnects with Customer Due Diligence (CDD), where trade counterparties require UBO verification. It overlaps Structurally Similar Transactions (SSTs) in sanctions evasion and Correspondent Banking risks under FATF Rec. 13. Links to Ultimate Beneficial Owner (UBO) disclosure combat shell misuse; integrates with KYC for ongoing monitoring. Broader ties include CFT (Countering Financing of Terrorism) via dual-use exports and CTF (Counter-Terrorist Financing).
Challenges and Best Practices
Challenges: Volume overload (trillions in trades), jurisdictional silos, document forgery, and emerging tech like DeFi. Best practices: Leverage RegTech for AI-driven anomaly detection (e.g., 95% false positive reduction); collaborate via Egmont Group for cross-border intel; standardize HS code screening. Adopt FATF’s risk-based approach, pilot blockchain pilots (e.g., IBM TradeLens), and scenario-test controls annually.
Recent Developments
As of 2026, FATF’s 2025 updates emphasize TBML in virtual assets, with new red flags for crypto-trade hybrids. EU’s AMLR (2024) mandates TBML-specific reporting; US FinCAG enforces trade data interoperability. Tech advances include AI platforms detecting 300% invoice variances real-time and WTO’s digital trade facilitation reducing opacity. Trends show TBML rise in green commodities laundering via carbon credit schemes.