Do you know how criminals launder their dirty money around the world? The leader of the FBI said, Trade finance money laundering is one of the biggest threats today. Moving money through international trade is risky if not watched closely. Money laundering through trade disguises where illegal money originates since such money is sent across countries through exporting, importing, and wire transfers. Criminals take advantage of the complexities of world trade to mix their dirty money with that of real businesses. They may lie about prices on invoices to shift money across borders without really trading those goods. This article deals with some common warning signs that financial experts and police are looking for in trade deals that can reveal potential trade money laundering.
Over-invoicing of Goods
One of the red flags in Trade base money laundering is over-invoicing goods. For example, the actual value of exported or imported goods on invoices may be misrepresented by narcotic smugglers. The smuggling may happen when they are dealing with $100,000 worth of coffee beans but shipping out goods that have a real worth of just $50,000. Overcharged $50,000 is then ‘paid’ but does not leave the country. It becomes the part of money laundering. It includes one of the good trade based money laundering examples, which is on the lookout for financial institutions.
Bonus: Recognition of Trade base money laundering allows the banks to monitor closely for legal protection. Understand the best practice for anti-money laundering on our compliance resource page.
Under-invoicing of Goods
Under-invoicing is a second indicator of abuse in international trade transactions that could indicate money laundering. Trade fraudsters underprice the goods they are trading. They will say they are shipping $50,000 in electronics, but they are shipping $100,000. They then withdraw that $50,000 from the country of destination once it has been entered as legitimate business income. The trade-based laundering method covers the criminally sourced cash as authentic trade proceeds.
Multiple Trade Transactions
The occurrence of a series of small international trade transactions in a short period is one activity that indicates that a business might engage in money laundering. With the narcotics trade in AML, several import or export operations are created to fragment large amounts of cash or obtain funds from illegal activity occurring abroad. 80% of cases reported by the Financial Action Task Force in 2023 have been due to methods applied in trade-based money laundering. Fragmentation takes place through a series of quick transactions in trade finance, and this can make the money laundering scheme by the criminals opaque.
Complex Payment Methods
The convoluted methods of payments may raise an alarm. Instead of a direct transfer between the seller and the buyer, the criminals circulate it between various companies to make a trail of where the money originally comes from. $50 billion is laundered annually through complex payment mechanisms, making the money untraceable. It allows the laundered cash to blend well with legitimate income from businesses. Finance companies have to ask themselves why roundabout payment methods are being applied.
Missing Trade Papers
Failure to provide standard papers that are required for legal international trade is another red flag. Criminals usually avoid documentation that is normally required as part of the process, which may include documents like invoices, transportation documents, origin forms, etc. There may be missing things if not all required papers are verified. Global trade fraud even surged by 20% alone in 2023. So, you have to be cautious when scrutinizing any document to avoid being caught in illicit transactions.
Unknown Companies
If you are doing business with firms that you’ve never heard of before, it can raise a red flag for you. Narcotics or other illegal trades have criminals who form shell companies just to do deals to clean dirty cash. These fake businesses have no real histories or web presence. The Financial Action Task Force (FATF) estimates that annually, there are laundered throughout the world some $2 trillion. Significant risks exist when dealing with unknown traders. Finance rules prescribe that businesses must review any trader with whom they have to do business.
Goods Don’t Match Invoices
If the item invoiced does not match what shipped out, then that is a red flag. Criminals can be prone to lying about what was being shipped, so they can enable illegal money laundering between two different countries. For instance, billing cell phones but shipping in clothes. The World Bank states that trade misinvoicing accounts for nearly $1 trillion annually, which puts it into perspective. This implies that such tricks of money laundering in the trade finance area should be highly prevented, given the disparities in paperwork and concrete goods being traded.
Frequent Overseas Wires
Many transfers to foreign firms or banks within a very short span raise great concern. Narcotics or other crimes by Crook can route the proceeds outwards through such transfer. A 2023 estimated global money laundering activities stood at around $1.6 trillion. Finance businesses have to monitor transaction patterns for any unusual flows of money as trading funds wire transferred around the world. Capturing such trade based money laundering red flags would help implement anti-money laundering policies. A better understanding supports a better review process that keeps regulatory requirements. Browse our training offerings to assist in defending against trade finance fraud risks.
