7 Key Risk Factors that Enable Trade-Based Money Laundering and How to Address Them?

Trade-based money laundering is a severe issue in the global trade arena. Criminals develop new ways of integrating illegitimate money into legal trade accounts. Businesses have to be sensitized to such risks and hence play their role in helping to curb this economic crime.

As the UN describes it, Trade-based money laundering schemes are becoming ever more sophisticated as criminals seek to exploit international trade for their criminal purposes. The agency estimates that worldwide, about $1 trillion each year is laundered through trade activities. 

Specific inherent characteristics of international trade render it vulnerable to exploitation by money launderers if not overseen. 

The article recognizes seven critical risk factors- your complex supply chains and lack of trade document scrutiny- that serve as facilitators of trade-based money laundering.

1. Complex Supply Chains

In international trade, criminals often try to capitalize on the complex network these transactions span by disguising the flow of illicit gains as payments for goods and services between intermediaries. With many supplies, subcontractors, and trade partners involved, this happens over long distances. 

Thus, it becomes hard to establish the legitimacy of trade and be able to trace either the origin or destination of funds. One big TBML telltale sign is the intricacy and opacity of today's supply chains, which means that laundered money can easily be blended into trade transactions and remain undetected.

2. Large Transaction Volumes

Those large businesses with vast volumes of transactions allow money launderers more opportunities to mingle the illegally acquired money. If the company is importing or exporting goods worth millions of dollars every day, then it is easy for criminals to engage in round-tripping hundreds of thousands without notice. 

They use the protection offered by genuine trade transactions to integrate illicit cash into global financial systems effectively. The enormous daily volumes of commerce make the task formidable.

3. Cash Intensive Businesses

The heavy reliance on cash transactions in some industries, like precious metals, luxury commodities, and standard trading, is a worldwide affair. Such cash dependency makes transactions challenging to trace and subject to abuse in TBML. 

With these issues, criminals can settle transactions for sham exports or imports, using suitcases full of dirty money and claiming the sources are legitimate cash-earning methods. Such an opaque nature in deals in cash covers the red flags of TBML, so easily accessible ill-gotten funds can quickly get soaked through a scheme of international trade.

4. Shell Companies

Some jurisdictions make it so easy to set up shell companies with minimal requirements for verification, so most criminals exploit this to set up webs of paper entities without actual operations to route money. 

A United Nations report indicated that over 60% of known TBML cases involve the use of shell companies. It is challenging, almost impossible, to verify the actual ownership and purpose of entities while conducting trade without robust KYC processes. The anonymity granted by shells obscures the TBML red flags, allowing millions in criminal proceeds to be cleaned every year through international trade transactions.

5. Know Your Customer Processes

Weak customer due diligence makes it challenging to identify the actual parties involved in a trade. Primary verification of customers' identities, locations, and sources of funds engaged in deals needs to be included, which significantly increases the risk of unknowingly being involved in TBML. Research indicates that nearly 75% of the money laundered using TBML has made its way through countries with weak KYC norms.

6. Lack of Trade Document Scrutiny

Criminals create or alter documents for import and export to transport, through borders, money acquired illegally. These documents must be rigorously matched with the trades being conducted to ensure all TBML schemes are noticed. 

According to the UN, as much as 35% of all TBML schemes take place through misrepresentation of trade documents. A lack of diligent checking of transactional records against anomalies and inaccuracies opens the door for uncontrolled TBML activity that can infect world markets.

7. Inadequate Training and Awareness

The mammoth challenge is posed when research shows that the lack of adequate TBML compliance training should affect citizens. Misconceptions linger around issues like thinking only large transactions are vulnerable or that it will not happen in their business domain. Across the globe, the FATF has identified training and awareness as a critical area of concern. 

The failure to impart regular training on compliance with TBML implies that some red flags may be missed inadvertently, undermining both the essence of preventive measures and increasing the risks exponentially. Hence, it becomes more critical that all staff directly or indirectly involved in the trade be informed and made aware of the relevant trade-based money laundering red flags implicit in money laundering and how to report suspicious evidence indicative of money seeping into the supply chain.

Bonus: The recognition of these seven principal risk factors that are subject to TBML exploitation and the closure of these gaps rapidly allow businesses to advance their compliance programs, increase their resilience to criminal abuse, and actively contribute to the mitigation of this dynamic global threat against the integrity of trade.

Learn more about how your business can better insulate itself from risks associated with trade-based money laundering. This assessment of your existing TBML controls will outline the vulnerabilities and provide you with custom recommendations based on your operations.