Trade-Based Money Laundering: Red Flags for Regulated Businesses

Trade-based money laundering accounts for an estimated USD 1.6 trillion annually — up to 80% of illicit financial flows in developing countries. It is one of the largest channels for moving value outside the formal financial system, and it remains one of the hardest to detect.

The mechanics are deceptively simple. Over-invoicing — exporting goods at inflated prices so the difference represents a value transfer. Under-invoicing — importing goods at reduced prices to move value in the opposite direction. Phantom shipments — invoicing for goods that are never shipped. Round-tripping — exporting and re-importing goods to generate trade documentation that legitimises the underlying fund flows. Each technique exploits the inherent opacity of international trade and the weaker scrutiny that trade transactions receive compared to pure financial transfers.

The FATF has published detailed typologies and red flag indicators. Unnecessarily complex supply chains with multiple intermediaries. Rapid growth of newly formed companies into established markets. Established companies suddenly switching to entirely unrelated business sectors. Consistent and significant cash payments for trade transactions. Unexplained third-party payments. Transactions at prices significantly above or below market rates.

These red flags are not theoretical. The FATF's June 2025 report on complex proliferation financing and sanctions evasion identified emerging tactics directly linked to trade-based laundering — including rerouting shipments through multiple jurisdictions, ship-to-ship transfers to obscure origins, opaque beneficial ownership structures, and the use of instant payments and VASPs to accelerate proceeds and reduce traceability.

For banks and financial institutions involved in trade finance, the compliance challenge is significant. Letters of credit, documentary collections, and open account trade all present opportunities for value manipulation. A bank that processes trade finance without adequate controls — without verifying that the goods exist, that the pricing is reasonable, and that the parties involved are who they claim to be — is facilitating the risk.

For regulated businesses beyond traditional banking — including payment processors, CSPs, and designated businesses — the exposure may be less direct but is no less real. Any business that processes payments, forms companies, or provides services to entities engaged in international trade should understand the TBML typologies and calibrate its monitoring accordingly.

Enhanced due diligence on trade finance customers, transaction monitoring tuned to TBML-specific red flags, and regular staff training on laundering schemes are baseline expectations. The challenge is that TBML is inherently harder to detect than cash-based laundering — it hides in plain sight, wrapped in commercial documentation that appears legitimate.

At Kybri Consulting Limited, we help regulated businesses understand and mitigate trade-based money laundering risks — from risk assessment and typology training through to transaction monitoring design and regulatory engagement.