Trade Based Money Laundering: What It Is And How To Prevent It

Trade Based Money Laundering: What It Is And How To Prevent It

Trade Based Money Laundering: What It Is And How To Prevent It

Trade based money laundering is the use of real or fake trade flows to move or hide funds. Think of it as dirty money wearing a bill of lading and an invoice. It shows up in over and under invoicing, phantom shipments, carousel structures, circuitous routing, and paperwork designed to confuse. If you run trade or you finance it, you are a target. The fix is not magic. It is discipline: clean counterparty checks, document logic that matches physics, price sanity checks, and controls that make it hard to game your process.

What Trade Based Money Laundering Looks Like In Practice

Core Manipulations
  • Over And Under Invoicing. Price is pushed far above or below fair value to move money across borders under cover of trade.
  • Multiple Invoicing. One shipment, several invoices presented to different funders to raise money multiple times.
  • Phantom Or Partly Phantom Shipments. Documents show movement, cargo does not. Or quantity is inflated.
  • Misclassification. Goods coded as harmless to avoid controls, while the real cargo is sensitive or higher value.
  • Quality Manipulation. High grade priced as low grade on paper, or the reverse, to shift value.
Deal Patterns That Should Make You Pause
  • Unusual Routing. Cargo takes a long, costly path through weak-control hubs without a clear commercial reason.
  • Odd Counterparties. New shell sellers or buyers in high-risk locations with no footprint or thin websites.
  • Cash Settlements Around Trade. Third party pays. Or refunds flow to entities that are not on the contract.
  • Strained Paper Trail. Last-minute amendments, mismatched transport dates, repeated “lost” originals, recycled photos.
  • Too-Good Terms. Deep discounts, big prepayments, or long tenors granted to weak names with no security.

Red Flags That Matter

Category Signals You Should Not Ignore
Pricing Unit price moves far off public benchmarks or recent trades without hedge or quality explanation. Frequent credit notes that reverse value after shipment.
Quantity And Quality Weights and grades do not match inspection or lab reports. Repeated short shipments. Outturn allowances abused beyond normal tolerance.
Parties Directors with no digital footprint. Chains of intermediaries that add no value. Trade agency relationships with vague scopes and big fees.
Documents Incoherent dates. Bills of lading issued before goods could be at port. Certificates with identical typos across different shipments.
Shipping Vessels that do not fit the cargo. Track gaps on automatic identification system. Frequent transshipments that add cost without reason.
Money Flow Payments split across unrelated third parties. Refunds to different jurisdictions. Early settlements that do not match contract logic.
Finance Same invoice pledged to several banks. Repeated exceptions on conditions precedent. Standby letters of credit with vague drawing conditions.

How To Prevent Trade Based Money Laundering

You stop trade based money laundering by making fraud painful and detection likely. That means knowing who you deal with, checking that the paper fits physics, and closing the gaps criminals love. Here is the stack that works in the field.

1) Counterparty Controls
  • Know Your Customer And Beneficial Ownership. Get legal docs, registries, and proof of control. Map the group and the key people.
  • Sanctions And Watchlist Screening. Screen companies, directors, vessels, and ports. Refresh before each draw, not once a year.
  • Business Purpose Check. Confirm the counterparty actually trades the goods in question and has the assets or customers to match.
2) Product And Trade Logic
  • Contract Mirrors Reality. Quantity, grade, terms, and risk transfer must align with transport and insurance.
  • Price Sanity. Benchmark against public indices, customs data, or recent trades. Tie discounts to quality or logistics, not thin excuses.
  • Dual-Use And High-Risk Goods. Pre-clear export controls. Use end-use statements that can be checked, not boilerplate.
3) Document Integrity
  • Genuine Originals Or Trusted Digital Equivalents. Use electronic bills of lading where supported. Authenticate swift messages.
  • Independent Inspections. For high-risk cargo, insist on third-party inspection or lab assays with traceable seals.
  • No Lazy Amendments. Amend terms only with written cause. Repeated last-minute changes are a red flag.
4) Money Movement And Settlement
  • Named Accounts Only. Payer and payee match the contract unless a documented assignment exists.
  • No Round-Tripping. Watch for funds moving out and back through affiliates or high-risk hubs.
  • Clear Reimbursement Paths. If a reimbursing bank or correspondent is involved, map the Society for Worldwide Interbank Financial Telecommunication messages and value dates.
5) Finance Controls By Product
  • Documentary Letters Of Credit. Draft field by field. Match Incoterms, set presentation periods, and require transport and inspection documents that prove the cargo exists.
  • Standby Letters Of Credit And Guarantees. Use precise drawing language. Tie calls to clear failures. Avoid vague “on first demand” without context.
  • Receivables And Borrowing Base Lines. Notice of assignment, controlled collection accounts, dilution reserves, and audit rights. Sample invoices every period.
6) Data And Monitoring
  • Route And Vessel Tracking. Check that vessel size, route, and timing match the cargo and the bill of lading dates.
  • Outlier Detection. Set alerts for price deviations, repeated amendments, and split payments. Review at draw, not at year end.
  • Post-Trade Checks. Compare outturn weights and assays to shipped quantities. Investigate gaps promptly.

Letter Of Credit And Standby Language That Raises The Bar

  • Require Independent Evidence Of Shipment. On containerized cargo, require an on-board bill of lading with vessel name that fits route and draft. On bulk, add draft survey or weighbridge slips where practical.
  • Tie Documents To Contract. Goods description matches grade and quality specs. No vague terms like “as per pro forma.”
  • Presentation Periods That Make Sense. Enough time for real logistics, not an open door for backdated paper.
  • Inspection Or Certificate Logic. Clear issuer names, sample seals, and assay standards. No self-issued certificates.
  • Sanctions And Export Control Clauses. Payment blocked where a sanctions breach exists, with defined process.

Quick Diagnostic: Five Questions Before You Fund

  1. Does the counterparty actually handle this product at this scale, and can you prove it beyond a glossy website
  2. Do the price, quantity, and grade line up with public data or recent trades with a clear reason for any gap
  3. Do the transport dates, route, and vessel type fit the physics of the shipment
  4. Is the money moving between the exact parties on the contract, or is a third party trying to slip in
  5. If the borrower or applicant disappeared today, do your documents, controls, and inspection rights still get you paid

Program Metrics That Keep You Honest

False Positive Rate
Alerts that lead nowhere waste time. Track and trim without blinding yourself.
Repeat Offenders
How often the same party or corridor triggers issues. Patterns beat anecdotes.
Time To Clear Red Flags
If it takes weeks to validate basics, you are under-resourced or guarding the wrong gate.

How We Help Without Wasting Your Time

  • We map the trade and the paper, then kill loopholes. If the story does not hang together, we say no.
  • We draft letters of credit and standby wording that matches the contract and transport plan.
  • We set inspection, assignment, and collection controls that block fake flows and double pledges.
  • We train your team on red flags and build short checklists that people actually use.
We are best efforts, not miracle workers. If a deal smells like paper trading or sanctions evasion, the file is closed. No exceptions.

This guide is for professional audiences. Apply local laws, sanctions, and supervisory guidance in your jurisdiction. Build controls that fit your products and risk appetite, and keep them current as counterparties, routes, and rules change.

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