The United Nations Office on Drugs and Crime estimates that between $800 million and $2 trillion is laundered globally every year—approximately 2% to 5% of global GDP. Estimates regarding the extent to which this is facilitated through trade-based money laundering (TBML) vary, but regardless of the precise figure, even a small disruption in this flow could have a material positive impact on the countries and communities affected.

Although few criminals wake up and decide to engage in TBML specifically, it is undoubtedly a useful tool for facilitating the movement of large sums across borders, as it lends legitimacy to these flows and allows them to be commingled with genuine trade activity. Trade, by its very nature, is complex, international, and disaggregated. When you add differing national regulations, information silos among the many actors involved in these transactions—such as freight forwarders, customs brokers, and financial institutions (FIs)—and the rapid expansion of free trade zones, it's no surprise that TBML is a challenging issue to address.  

It is, therefore, perhaps somewhat expected that core TBML methodologies remain largely unchanged. It has been 18 years since the landmark 2006 FATF study on TBML, which outlined the now familiar typologies of over/under invoicing, multiple invoicing, over/under shipping, and falsely described goods and services. The continued prevalence of these typologies has been reaffirmed in the 2020 FATF—Egmont Group report on TBML trends and developments, as well as at last year’s UK global TBML summit, hosted by HMRC.

Despite continued regulatory, industry and national government focus in this area, historic controls seem to have had limited impact. Simply put, the same methods continue to be effective, so criminals have little incentive to change them.

Limits of focusing on TBML

Regulatory focus on TBML has deeply affected trade finance, but less so wider transaction monitoring controls. Arguably, there is still little formal discussion around the fact that the majority of traditional TBML risk indicators can only be implemented in FIs' trade finance departments, where underlying trade documents are available. Trade finance accounts for only about 20% of global trade, but has historically been the beneficiary of the majority of TBML controls.

This has led to a considerable level of de-risking in FIs' trade finance books due to the cost and pressure of the additional controls. Yet little pressure has been applied in terms of defining and implementing dedicated TBML typologies within standard payments monitoring, despite these payments facilitating the vast majority of open account trade.

One could argue this is not possible, given that the FIs don’t have enough information from the payments alone. However, a different approach, outlined in the 2020 FATF—Egmont report, offers a different perspective. Traditional operational analysis aims to compare financial flows with underlying trade data, but FIs do not always have access to this data. Therefore, some have adopted the "reverse" approach, where instead they focus on the entities, addresses, connections, and groups of potential shell companies.

As FIs equally lack access to trade data for the majority of the transactions they facilitate, this method is similarly applicable. Open-account TBML monitoring could rely on a set of tiered risk indicators. First, there could be indicators applicable broadly across all payments, followed by secondary documentary indicators that could be explored as part of an investigative process once FIs request the supporting trade documents.

This approach can materially expand an FI’s targeted risk coverage of TBML beyond trade finance and standard transaction monitoring while remaining proportionate and allowing for the use of technology. However, the success of such an approach will depend almost entirely on the quality and precision of this first tier of TBML indicators.  

Transform Risk Monitoring and Investigations With Context

Examine a financial crime case study through two different investigative lenses–a traditional approach versus a new contextual approach–and how they can lead to different outcomes.

See the infographic

The importance of national and international collaboration

Data and technology present significant opportunities for investigating TBML, but national and international collaboration is the only way forward. Irrespective of the scope of coverage (trade finance vs. wider payments), it is becoming clear that binary transactional checks are failing to deliver. Any hope of tackling TBML requires going beyond transactional data and exploring data enrichment across all available sources, including publicly available data and open-source intelligence. This is because no single source can provide a complete solution in isolation. 

While FIs could perhaps do more in the payments transaction monitoring space, TBML should not be seen as a problem for FIs to solve. It is a complex challenge that cannot be addressed by any single country, sector, or agency in isolation. Regulators must consider the best approaches to breaking down silos both nationally and internationally to ensure collaboration and the sharing of data and expertise.

How can Quantexa help?

Quantexa’s Decision Intelligence Platform can help in two ways:

1. Empower the "reverse" approach outlined in the 2020 FATF—Egmont report by focusing on the risk associated with entities, their connections, the presence of shell companies in corporate structures, and other entity-level indicators of risk.

2. Connect disparate, siloed data across multiple data sources, delivering a trusted and reusable data hub enriched with vital intelligence about the relationships between people, organizations, events, places, and other real-world entities.

Quantexa continues to strive to be a part of the solution to the global problem of TBML. Find out how Quantexa can help your anti-money laundering efforts here.