Trade-Based Money Laundering
Exploiting Global Trade
Trade-Based Money Laundering (TBML) leverages the complexity of international trade to launder illicit funds. By manipulating trade documentation, criminals move billions across borders undetected. TBML is one of the most challenging forms of money laundering to detect, given the sheer scale and volume of global trade, which surpassed $25 trillion in 2023 according to the World Trade Organization (WTO).
With TBML cases surfacing in both developed and developing economies, authorities like the Financial Action Task Force (FATF) and the World Customs Organization (WCO) have intensified their efforts to address this evolving threat.
What is Trade-Based Money Laundering?
TBML involves disguising illegal financial transactions through legitimate trade by altering the value, type, or quantity of goods. Criminals often create complex supply chains, involving multiple jurisdictions, to evade financial scrutiny
Common Techniques in TBML
- Over-Invoicing: Inflated invoices allow excess money to be transferred to an overseas account under the guise of legitimate trade
Example: A Delhi-based importer was involved in over-invoicing goods from Hong Kong, resulting in a ₹4,800 crore ($580 million) money laundering case - Under-Invoicing: Under-declaring the value of goods enables importers to evade taxes and duties, with the remaining payments made off the books
- Multiple Invoicing: The same shipment is billed multiple times, allowing payments to be laundered through different financial institutions
- Phantom Shipments: No physical goods are shipped; fake documentation is created to justify large fund transfers
- Misclassification: Goods are deliberately misclassified to manipulate their customs duties or conceal their true nature (e.g., diamonds declared as industrial machinery)
Impact of TBML
1. Economic Damage
TBML schemes erode government revenue through customs evasion and tax fraud. For instance, India reportedly loses ₹50,000 crore ($6 billion) annually to under-invoicing and misclassification of goods
2. Distorted Trade Data
Manipulated trade figures mislead policymakers and complicate economic planning by distorting real trade and production data
3. Funding of Terrorism and Organized Crime
TBML enables criminal syndicates to fund activities such as drug trafficking, arms smuggling, and terrorism
Key Cases of TBML
1. Delhi Importers' ₹4,800 Crore Laundering Case (2023)
The Enforcement Directorate (ED) arrested two importers for forged invoices tied to under-invoiced imports from Hong Kong and China
Source: NDTV News
2. Gold Import Fraud in India (2024)
Authorities uncovered that an Indian company had under-invoiced gold imports by ₹1,200 crore ($145 million), facilitating the laundering of black money
Source: Drishti IAS
3. Abalone Smuggling Network (South Africa, 2022)
Criminals used TBML techniques to smuggle high-value abalone under the cover of legal exports, generating millions in illicit profits
Source: Business Insider Africa
Global Regulatory and Detection Measures
- Financial Action Task Force (FATF): FATF recommends cross-border cooperation and trade-based red flag indicators to detect TBML risks
- World Customs Organization (WCO): WCO works with customs authorities worldwide to strengthen supply chain transparency and detect false trade documentation
- Directorate of Revenue Intelligence (DRI) – India: DRI monitors trade transactions, focusing on high-value imports and exports for anomalies
Technologies for Detecting TBML
- Trade Analytics Platforms: Platforms use data analytics to identify irregularities such as mismatched trade values or duplicate invoices
- Blockchain-Based Supply Chain Verification: Blockchain enhances data integrity by providing a tamper-proof ledger of trade transactions
- Artificial Intelligence (AI): AI algorithms monitor trade patterns, detect suspicious activities, and automate the flagging of risky transactions
Challenges in Combating TBML
- Cross-Border Jurisdictional Gaps: Different countries have varying customs and AML regulations, making cross-border investigations difficult
- High Volume of Trade Transactions: Authorities struggle to monitor millions of global trade entries daily without advanced automation tools
- Innovation in TBML Tactics: Criminal networks continuously develop new strategies to circumvent detection, requiring regulators to stay ahead through technology
What is important to know:-
- Red Flag Indicators
- Structural Risk Indicators
- Trade Activity Risk Indicators
- Trade Documents & Commodity Risk Indicators
- Account & Transaction activity Risk Indicators
- Best Practices to counter TBML
- FEMA regulations for Trade remittances
Additional Reading & Sources
- FATF Guidance on TBML: https://www.fatf-gafi.org
- Directorate of Revenue Intelligence: https://www.dri.nic.in
- World Customs Organization (WCO): https://www.wcoomd.org
- Delhi Import Case News: https://www.ndtv.com/india-news/ed-arrests-delhi-based-importer-brothers-in-rs-4-800-crore-money-laundering-case-7118621