A Trade Based Financial Crime story...or drama?

A Trade Based Financial Crime story

A large shipping vessel leaves a port in Southeast Asia carrying electronics—supposedly valued at $2 million—for delivery to a partner company in Europe. The ship’s cargo manifests are meticulously prepared, but unknown to customs officials, the cargo has been intentionally misinvoiced. In reality, the goods on board are worth over $10 million, a common tactic in Trade-Based Financial Crime (TBFC).

As the ship travels through international waters, illicit actors take advantage of the lax oversight between jurisdictions. By the time the vessel reaches its destination, the undervaluation has allowed the criminals to transfer $8 million in illegal funds to overseas accounts under the guise of a legitimate trade. Once the cargo arrives in Europe, it is sold at its true market value, further masking the money trail.

This method, known as under-invoicing, is a key technique in TBFC, allowing criminals to evade taxes, avoid capital controls, and launder money. The complexity of international trade, involving multiple banks, customs agencies, and freight forwarders, makes it difficult for authorities to detect the misinvoiced cargo until it's too late, highlighting the need for enhanced global cooperation and real-time trade monitoring systems to combat these crimes effectively.

Creative strategies for tackling Trade Based Financial Crime

Trade-Based Financial Crime (TBFC) is a global threat, draining $1.6 trillion from the global economy annually, according to GFI. As the story suggests, this hidden threat thrives within the complexities of international trade, where conventional methods often fall short. Criminal networks exploit fragmented systems and evolving regulations, leaving financial institutions vulnerable—not only to financial penalties but also to a deeper erosion of trust. Addressing this issue requires a fresh approach that moves beyond traditional thinking.

Rory Sutherland, in his book Alchemy, suggests that logic alone often falls short when tackling complex problems. The most effective solutions frequently come from unconventional thinking, where creativity and lateral ideas yield breakthrough results. In addressing TBFC, financial institutions need to embrace this mindset shift, blending traditional methods with creative, interdisciplinary strategies to stay ahead of evolving criminal networks.

A key threat to global stability

TBFC still remains hidden in the shadows of global trade, making it difficult to detect using conventional methods. Current approaches, constrained by siloed systems and reactive strategies, struggle to address TBFC’s growing sophistication. This is more than a compliance issue; it challenges how institutions think about risk, trust, and security on a fundamental level.

Finextra Research and Eastnets’ latest report, Broken Inside, Broken Outside: The Global Fight Against Trade-Based Financial Crime, based on a global survey of 150 financial institutions, identifies the key challenges in combatting TBFC and offers a roadmap for overcoming them. By applying innovative strategies and rethinking how institutions approach TBFC, the report provides a path forward in addressing this critical issue.

Uncovering the challenges

The Broken Inside, Broken Outside report reveals the key challenges faced by institutions in combating TBFC:

• Internal fragmentation: 42% of institutions report that disconnected systems and siloed data hinder their fight against TBFC. In Europe, this issue is especially prevalent, with 59% of respondents highlighting these barriers.
• Regulatory complexity: 65% of institutions cite the difficulty of navigating evolving regulations as a significant challenge, particularly in North America and Europe, where compliance demands are increasing.
• Lagging technology: Despite 87% of institutions recognising AI as critical for TBFC detection, many struggle with fully integrating these technologies due to fragmented internal systems and lack of coordination.

What we can learn and do differently

1. Break down internal barriers—create new connections with technology

On average, TBFC risk management is spread across three to four departments, creating fragmented and disconnected approaches. Just as the DevOps movement transformed software development, financial institutions can use collaborative platforms to bridge gaps between compliance officers, data scientists, and trade finance experts.

Technology can facilitate real-time collaboration, fostering cross-functional innovation and enabling teams to uncover patterns and risks that siloed departments might overlook. By breaking down these barriers, institutions can develop faster, more efficient responses to TBFC threats.

2. Harness AI and automation—but think bigger

AI is a powerful tool for detecting TBFC, but its potential goes beyond just spotting risks. Institutions should leverage Generative AI to identify complex patterns such as over- and under-invoicing, while also using AI to reveal hidden efficiencies in trade processes. By adopting AI for both security and business optimisation, institutions can gain predictive insights that improve overall performance, not just compliance.

3. Turn regulation into a strategic advantage

Regulation offers an opportunity for institutions to demonstrate agility and leadership. By using AI-powered technology, institutions can respond swiftly to evolving regulations while maintaining high standards of transparency and trust. Automating processes like sanctions screening and transaction monitoring ensures efficient, proactive compliance management, positioning institutions as leaders in innovation and security.

Innovation drives success

Combatting TBFC presents institutions with an opportunity to innovate. By leveraging technology, fostering cross-functional collaboration, and applying creative strategies, financial institutions can not only protect themselves but also lead the industry in new ways. Embracing this forward-thinking mindset allows institutions to turn TBFC into an opportunity for growth, efficiency, and enhanced resilience.

The threat of TBFC requires urgent and strategic action. Financial institutions must adopt technology, improve collaboration, and innovate to outpace sophisticated criminal networks.

Download the full report, Broken Inside, Broken Outside: The Global Fight Against Trade-Based Financial Crime, to explore how your institution can combat TBFC, transform compliance into a competitive advantage.