Every day, hundreds of thousands of products and assets are imported and exported globally. Trading operations constitute a significant portion of the country’s GDP. For this reason, the approximate trade export value of $2 trillion was recorded in the United States in 2022.
Due to the extensive coverage of these trading activities in the global GDP, imposters exploit these channels to finance their illicit activities, such as money laundering. Trade finance money laundering is an illicit measure used to exploit the trading channels for concealing unauthorized financial operations.
This blog aims to address all the issues and strategies used during trade-based money laundering and the solutions to combat their intensity.
What Exactly is Trade Finance Money Laundering?
Trade finance money laundering is a fraudulent practice that involves the movement of illicitly acquired funds through trading measures. This is a common money laundering strategy that is established through the falsification of all the pricing and quantity manipulation of trading products and assets. Trade finance money laundering is a complex strategy as it entails the manipulation of multiple jurisdictions and business entities.
This action, in turn, disrupts the overall customer due diligence and Know Your Customer operations. Trade finance money laundering is an extensive financial threat to the overall economic framework as it leads to increasing numbers of drug trafficking and terrorist financing cases.
The Strategies Used During AML Trade Finance
According to the Financial Action Task Force (FATF), trade finance money laundering is any practice through which money launderers integrate illegally acquired funds into legitimate financial institutions through ambiguous trading activities. Here are some of the most commonly used tactics that facilitate trade-based money laundering:
- The first commonly used trade finance money laundering tactic is invoice manipulation. Imposters over and under-invoice the item’s prices to conceal the official worth of the products in order to avoid tax and regulatory guidelines.
- Another known strategy is to conduct multiple invoicing of items in which the imposters reuse the existing documents to misrepresent payments in real-time.
- The third technique of trade finance money laundering includes the coordination with third-party vendors to assist in trading activities.
The Critical Indicators of Trading Money Laundering
The identification of trade finance money laundering operations requires businesses and financial institutions to look for various red flags, which are:
- Oftentimes, the misrepresentation of invoices can act as a serious indicator of trade finance money laundering as they don’t align with the shipping bill during the trading documentation process.
- Another red flag that requires consideration is the difference between the market value of various products and the value represented in the trading documents.
- Businesses must assess the volume of shipment size and the client’s business profiles to understand whether or not both operations align with each other.
Practical Instances of Trade-Based AML Finance Program
Trade-based money laundering instances are often facilitated through shell and offshore companies. The administrative bodies of the shell and offshore companies often trade assets internationally that are later sold to high-risk and sanctioned countries without due diligence approaches.
Another practical instance of trade finance money laundering is the manipulation of medical prescriptions. It has been observed that the imposters have credited million-dollar funds for medical equipment through the misrepresentation of medical documents through third-party vendors and organizations.
Significance of AML in Trade Finance – A Fraud-Preventive Measure
Trade finance money laundering is a vague and ambiguous fraudulent practice that disrupts the overall regulatory stability. For this reason, financial institutions are required to incorporate AML in finance. Finance AML practices involve updating measures optimized during enhanced due diligence reporting operations.
The automated transactional monitoring and identity screening of customers and organizations against legitimate databases, mainly sanction, PEP Screening, and watchlists. Enhanced due diligence measures, backed with automated screening solutions, allow financial institutions to track the client’s transactional patterns in order to combat over and under-invoicing of trading assets.
Technological Trends Observed in Trade AML Finance Requirement
The intensity of unauthorized financial operations conducted by money launderers calls for intensive identity screening measures that are updated and effectively aligned with the latest business trends. For this reason, businesses must integrate blockchain technology and machine learning modules in their encrypted identity detection and transaction management operations. This enhances the overall level of transparency and reliability in the anti-money laundering checks, which are necessary to overcome illicit financial operations swiftly and accurately.
Concluding Remarks
Trade finance money laundering is an emerging threat to the global financial and economic framework. These operations are carried out to disrupt the overall institutional practices through third parties and organizations that are illegally established in high-risk and sanctioned countries.
These trade-based money laundering operations involve the misrepresentation of an asset’s price and quality to avoid tax requirements. Therefore, businesses must incorporate enhanced due diligence measures during the anti-money laundering screening operations to accurately analyze the transactional and risk patterns associated with entities involved in trading operations.
