Trade-Based Money Laundering
The documents can be perfect and the trade still a laundering route. Over-invoicing, multiple invoicing and phantom shipments, explained.
Trade-based money laundering (TBML) moves illicit money by disguising it as payment for goods or services. FATF's 2006 study defines it as disguising the proceeds of crime and moving value through trade transactions to make their origin look legitimate. In practice that means lying about the price, quantity or quality of what is being traded.
For a trade finance officer, TBML is the risk that a perfectly compliant LC or import remittance is the vehicle. The documents can be accurate in every banking sense and still describe a transaction that makes no commercial sense. IIBF's syllabus asks for risks and scenarios through case studies, plus ethical practice in international operations.
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The Four Basic Techniques
From FATF's 2006 study. Real schemes often combine them.
Over- or under-invoicing
What happens
The invoice price is set above or below the real value, so extra value moves to the exporter or importer
Red flag at the bank desk
Unit price far from market for the same goods; related parties on both sides
Multiple invoicing
What happens
The same shipment is invoiced more than once, often through different banks, to justify several payments
Red flag at the bank desk
Same invoice or bill of lading number seen before; payments to one supplier through several banks
Over- or under-shipment
What happens
More or less is shipped than invoiced; at the extreme, nothing is shipped (a phantom shipment)
Red flag at the bank desk
Quantity inconsistent with container count or weight; no verifiable shipment
Falsely described goods
What happens
Goods are misdescribed in type or quality, so cheap goods are paid for as expensive ones
Red flag at the bank desk
Vague descriptions; goods inconsistent with the customer's business
| Technique | What happens | Red flag at the bank desk |
|---|---|---|
| Over- or under-invoicing | The invoice price is set above or below the real value, so extra value moves to the exporter or importer | Unit price far from market for the same goods; related parties on both sides |
| Multiple invoicing | The same shipment is invoiced more than once, often through different banks, to justify several payments | Same invoice or bill of lading number seen before; payments to one supplier through several banks |
| Over- or under-shipment | More or less is shipped than invoiced; at the extreme, nothing is shipped (a phantom shipment) | Quantity inconsistent with container count or weight; no verifiable shipment |
| Falsely described goods | Goods are misdescribed in type or quality, so cheap goods are paid for as expensive ones | Vague descriptions; goods inconsistent with the customer's business |
Where FATF and Egmont Say to Look
The FATF/Egmont risk indicators (March 2021) group warning signs under four headings:
- check_circleThe structure of the business: shell or newly formed firms, unclear ownership, a business that does not match its trade.
- check_circleTrade activity: goods or routes that make no commercial sense, sudden shifts in volume or product line.
- check_circleTrade documents and commodities: inconsistent descriptions, prices or quantities across invoice, transport and customs documents.
- check_circleAccount and transaction activity: payments from unrelated third parties, rapid movement of funds, cash deposits feeding trade payments.
Case: The Import Priced at Three Times Market
A Mumbai trading firm, incorporated eight months ago, asks its bank to remit USD 1.8 million against an import of "electronic components" from a supplier in a free trade zone. The director of the supplier shares a surname and address with the importer's promoter.
- 1
Check the price
The invoice works out to about three times the price of comparable components the bank has seen in other import files. That fits over-invoicing: value is moving out of India disguised as an import payment.
- 2
Check the documents against each other
The bill of entry, invoice and transport document should agree on description, quantity and value. A generic description ("electronic components, assorted") is itself a warning sign.
- 3
Check the parties
A related party abroad and a young firm with no trading history push the risk higher.
- 4
Decide and record
The bank applies enhanced due diligence and records its findings. If questioning the customer would tip it off, RBI's KYC Master Direction (para 11A) says the bank should not pursue the due diligence and should file a suspicious transaction report (STR) with FIU-IND instead.
- 5
Answer
If the explanation does not hold up, the bank files a suspicious transaction report with FIU-IND under its AML procedures. Whether to process the remittance is a separate decision under the bank's policy.
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The Bank's Obligations in India
RBI's KYC Master Direction requires risk-based customer due diligence, ongoing monitoring that transactions are consistent with the customer's business and risk profile, and reporting of suspicious transactions to FIU-IND. It also requires enhanced due diligence on business with jurisdictions named in FATF statements, and screening against sanctions lists, which has its own page in this cluster.
The ethics angle in IIBF's syllabus is practical: do not process a trade you would not be able to explain to an auditor, do not split or restructure a transaction to avoid scrutiny, and never warn a customer that a report is being considered.
How the IIBF Exam Tests This
Expect a short scenario and a question asking which technique it shows, or which feature is the red flag. The trap is confusing over-invoicing of imports (value leaves the country) with over-invoicing of exports (value enters it), and labelling a document discrepancy as TBML when the real issue is the commercial sense of the trade.
FAQs
What is trade-based money laundering?expand_more
FATF defines it as disguising the proceeds of crime and moving value through trade transactions to legitimise their origin, usually by misrepresenting the price, quantity or quality of goods or services.
What are the main techniques of trade-based money laundering?expand_more
FATF's 2006 study names four: over- and under-invoicing, multiple invoicing, over- and under-shipment, and falsely described goods and services.
How does over-invoicing of imports launder money?expand_more
The importer pays more than the goods are worth, so the excess moves abroad looking like a legitimate import payment. The overseas party, often related, holds the surplus.
What should a bank do if it suspects TBML in a trade transaction?expand_more
Apply enhanced due diligence and record its findings. If the suspicion remains, or if further questions would tip off the customer, file a suspicious transaction report with FIU-IND (RBI KYC Master Direction, para 11A).
Next steps
- Sanctions Screeningarrow_forward
- Maritime Fraudarrow_forward
- Forex compliance, KYC and AMLarrow_forward
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