Trade-Based Money Laundering

Why Trade-Based Money Laundering Matters

Trade-Based Money Laundering (TBML) is one of the three primary methods criminals use to move illicit value across borders, alongside the use of the formal financial system and the physical movement of cash. The Financial Action Task Force (FATF) and the Egmont Group have repeatedly identified TBML as one of the most under-detected and least understood forms of money laundering. Because global trade involves enormous volumes, complex documentation, multiple jurisdictions, and many intermediaries, it provides an ideal cover for disguising criminal proceeds and moving value with relatively low risk of detection.

For CAMS candidates, TBML is important for several reasons:
• It is a recurring exam topic within the Financial Crime Risks and Methods domain.
• Financial institutions that provide trade finance (letters of credit, documentary collections, guarantees) are directly exposed to TBML risk.
• Even institutions that do not offer trade finance are exposed through open account trade, where payments pass through ordinary correspondent banking and wire channels.
• Regulators, including FATF, the Wolfsberg Group, the Bankers Association for Finance and Trade (BAFT), and the International Chamber of Commerce (ICC), have issued dedicated guidance that AML professionals are expected to understand.

What Is Trade-Based Money Laundering?

FATF defines TBML as "the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins." In simpler terms, criminals use the import and export of goods and services, and the associated documentation and payments, to move money across borders, obscure its criminal source, and integrate it into the legitimate economy.

A key distinction to remember: TBML is about moving value, not necessarily moving money. The goods themselves, or the manipulation of their declared value, carry the illicit wealth. This is why TBML can occur even when the underlying trade is partially genuine and when funds flow through regulated banks.

TBML should also be distinguished from related concepts:
• Trade finance fraud aims to deceive a bank or counterparty for profit; TBML aims to launder existing criminal proceeds.
• Customs fraud and tax evasion may use the same techniques (such as under-invoicing) but with the goal of evading duties rather than laundering money. In practice these often overlap.
• Sanctions evasion and proliferation financing frequently use trade channels to move controlled goods or pay for them covertly, and the red flags are very similar.

How Trade-Based Money Laundering Works: The Core Techniques

The CAMS exam expects you to recognise the main TBML methods and understand the direction in which value moves in each case. The primary techniques are:

1. Over-invoicing of goods or services
The exporter invoices the importer for an amount higher than the true market value of the goods. The importer pays the inflated price, thereby transferring extra value to the exporter. Value moves from the importer to the exporter. This is a common way to move money out of a country or to justify large incoming payments as legitimate export revenue.

2. Under-invoicing of goods or services
The exporter invoices for an amount lower than the true market value. The importer receives goods worth more than they paid and can sell them at full value, keeping the difference. Value moves from the exporter to the importer. This is also used to evade customs duties and capital controls.

3. Multiple invoicing
The same shipment is invoiced more than once, often through different financial institutions, so that multiple payments are made for a single consignment. Launderers exploit the fact that no single bank sees the complete picture. If challenged, they may claim payment terms were amended or that the duplicates were a clerical error.

4. Over-shipment or under-shipment (short shipping)
The quantity of goods actually shipped differs from the quantity documented and paid for. In over-shipment, more goods are sent than invoiced, transferring value to the importer. In under-shipment, fewer goods (or none at all) are sent, transferring value to the exporter.

5. Phantom shipments
An extreme form of under-shipment where no goods are shipped at all. All documentation is fabricated, and the payment is simply a disguised transfer of funds. Shell companies on both sides of the transaction are typical.

6. Falsely described goods or services
The documentation misrepresents the quality, grade, or type of goods, for example describing low-grade commodities as premium products to justify a higher price. Services are particularly vulnerable because consulting, marketing, or software services have no physical shipment to verify and their value is highly subjective.

7. Black Market Peso Exchange (BMPE)
A classic case study frequently referenced in CAMS materials. Drug traffickers in the United States sell US dollar cash proceeds at a discount to a peso broker. The broker uses those dollars to pay US exporters on behalf of Latin American importers who want to buy US goods. The importers then pay the broker in local currency (pesos), which is delivered to the cartel. The cartel has converted dollars to pesos without ever moving cash across the border, and legitimate-looking trade payments have replaced criminal cash. Key point: the goods are real and the exporter may be entirely unaware they are receiving criminal proceeds.

8. Use of free trade zones (FTZs)
FTZs often have relaxed oversight, minimal customs inspection, simplified documentation, and limited transparency on beneficial ownership. Goods can be repackaged, relabelled, transhipped, and re-invoiced within a zone, breaking the audit trail. FATF has highlighted FTZs as a significant TBML vulnerability.

Where TBML Fits in the Laundering Cycle

TBML can support all three stages of money laundering:
• Placement: In BMPE schemes, bulk cash is effectively placed when the peso broker uses it to pay exporters.
• Layering: Complex chains of invoices, intermediaries, and shipments across multiple jurisdictions obscure the origin of funds.
• Integration: Proceeds appear as legitimate trade revenue, allowing criminals to use them freely.

Trade Finance Products and Their Vulnerabilities

Understand the basic products because exam questions may reference them:
• Letters of credit (documentary credits): The bank undertakes to pay the exporter upon presentation of compliant documents. Banks examine documents, not goods, which creates both an opportunity for detection (document review) and a limitation (banks cannot confirm what was actually shipped).
• Documentary collections: Banks act as intermediaries for documents and payments but do not guarantee payment and perform less scrutiny.
• Open account trade: The vast majority of global trade (often cited as around 80 percent) is conducted on open account, meaning goods are shipped and payment is made by ordinary wire transfer with no trade documents passing through the bank. This is the most difficult to monitor and represents the greatest TBML blind spot.

Key Red Flags of TBML

Examiners frequently test red flag recognition. Memorise these categories:

Pricing and documentation red flags
• Significant discrepancies between the invoice value and the fair market value of the goods.
• Discrepancies between the description, quantity, or weight of goods on the invoice, bill of lading, and customs declarations.
• Invoices for services that are vague or difficult to value.
• Amendments to letters of credit that change the beneficiary, payment location, or terms without clear commercial reason.
• Documents that appear forged, inconsistent, or unusually generic.

Transaction structure red flags
• Shipment routed through countries with no apparent economic connection to the transaction.
• Transhipment through multiple jurisdictions or free trade zones with no logistical rationale.
• Payment made by or to a third party unrelated to the transaction.
• Payments received from multiple unrelated parties for one shipment (a strong BMPE indicator).
• Payment to the exporter in cash or from accounts in jurisdictions unrelated to the trade.

Customer and goods red flags
• Customer's trade activity is inconsistent with its stated business, size, or history (for example, a textiles company suddenly importing heavy machinery).
• Newly formed company engaging in large or complex trade immediately.
• Goods that are high value, low volume, and hard to value, such as precious metals, gemstones, electronics, art, or scrap metal.
• Shipments of goods that are commonly used in laundering schemes or that are unusual for the stated destination (for example, snow equipment shipped to a tropical country).
• Dual-use goods or goods subject to export controls (overlap with proliferation financing).
• Reluctance by the customer to provide shipping documents or explain the commercial purpose.

Controls and Mitigation Measures

The CAMS exam tests not only recognition of risks but also appropriate responses. Effective controls include:
• Risk-based customer due diligence on trade finance clients, including understanding the nature of their business, expected trade corridors, typical goods, and counterparties.
• Document examination for consistency across invoices, bills of lading, packing lists, insurance documents, and certificates of origin.
• Price verification against market reference data where feasible, recognising the practical limitations given the vast range of goods.
• Vessel and container screening against sanctions lists and for suspicious routing, including Automatic Identification System (AIS) gaps.
• Screening of all parties: applicant, beneficiary, shipping company, ports, agents, and jurisdictions involved.
• Dual-use goods screening for export control and proliferation concerns.
• Transaction monitoring of open account payments with trade-related keywords and patterns such as round-dollar amounts, third-party payments, and high-risk corridors.
• Training of trade finance operations staff, who are often the first line of defence and the only people who see the physical documents.
• Information sharing and public-private partnerships, since no single institution sees the whole trade chain. Trade Transparency Units (TTUs), pioneered by US Immigration and Customs Enforcement, allow countries to compare import and export data to detect anomalies.
• Suspicious activity reporting when red flags cannot be resolved through reasonable inquiry.

Exam Tips: Answering Questions on Trade-Based Money Laundering

Tip 1: Know the direction of value transfer. This is the most commonly tested concept. Over-invoicing moves value from the importer to the exporter. Under-invoicing moves value from the exporter to the importer. If a question describes a party paying more than goods are worth, that party is sending value out. Draw a quick mental arrow before answering.

Tip 2: Remember that banks examine documents, not goods. Many questions hinge on the limitation that a bank in a letter of credit transaction cannot verify what was physically shipped. The correct control answer usually involves document consistency checks, price reasonableness, party screening, and customer knowledge, not physical inspection.

Tip 3: Identify the BMPE pattern instantly. If a scenario involves an exporter receiving payment from multiple unrelated third parties, often in structured amounts, on behalf of a foreign importer, the answer is almost always Black Market Peso Exchange or third-party payment risk. The exporter is often an unwitting participant.

Tip 4: Watch for the "no economic rationale" theme. CAMS questions frequently describe shipping routes, intermediaries, or goods that make no commercial sense. The absence of a legitimate business purpose is the central red flag. Choose the answer that recognises this rather than one that accepts the customer's explanation at face value.

Tip 5: Distinguish TBML from fraud, tax evasion, and sanctions evasion. Read the question stem for the criminal's objective. If the goal is to disguise the proceeds of crime, it is TBML. If the goal is to deceive a bank for profit, it is fraud. If the goal is to avoid duties, it is customs fraud. If the goal is to supply a sanctioned party or acquire controlled goods, it is sanctions or proliferation financing. Recognise that the same technique can serve multiple objectives.

Tip 6: Prefer the risk-based, proportionate response. When asked what the institution should do, avoid extreme answers such as immediately closing the account or ignoring the issue. The best answer typically involves escalating to compliance, requesting supporting documentation, conducting enhanced due diligence, and filing a suspicious activity report if concerns cannot be resolved. Do not tip off the customer.

Tip 7: Remember open account trade is the biggest blind spot. If a question asks why TBML is difficult to detect, the strongest answers reference the volume and complexity of trade, the predominance of open account transactions where banks see only the payment, the involvement of multiple jurisdictions and parties, and the difficulty of verifying prices across millions of goods.

Tip 8: Associate free trade zones with reduced transparency. Any mention of FTZs in a scenario should raise your awareness of relabelling, transhipment, and weak beneficial ownership oversight.

Tip 9: Services are harder to value than goods. If a scenario involves large payments for consulting, marketing, or intellectual property with little supporting evidence, recognise the heightened TBML risk because there is no shipment to verify and pricing is subjective.

Tip 10: Learn the key guidance sources. Be familiar with FATF's 2006 TBML typologies report and its 2020 Trade-Based Money Laundering Trends and Developments report (jointly with the Egmont Group), the Wolfsberg Group, ICC and BAFT Trade Finance Principles, and the concept of Trade Transparency Units. Questions may reference these bodies when asking about industry standards.

Tip 11: Eliminate answers that rely on a single control. TBML detection requires a layered approach combining customer due diligence, document review, screening, monitoring, and staff training. Answers that present one control as sufficient are usually distractors.

Quick Revision Summary

• TBML disguises criminal proceeds by moving value through trade transactions.
• Core techniques: over- and under-invoicing, multiple invoicing, over- and under-shipment, phantom shipments, false description of goods and services.
• Classic case study: Black Market Peso Exchange, characterised by third-party payments to exporters on behalf of importers.
• Value direction: over-invoicing benefits the exporter; under-invoicing benefits the importer.
• Banks review documents, not goods; open account trade is the largest blind spot.
• Key red flags: price discrepancies, document inconsistencies, illogical routing, third-party payments, goods inconsistent with the business, free trade zones, hard-to-value goods and services.
• Controls: risk-based CDD, document and price checks, party and vessel screening, dual-use goods review, monitoring, training, information sharing, and SAR filing.

Mastering these points will prepare you to answer the majority of CAMS questions on Trade-Based Money Laundering with confidence.