The hidden world of trade based financial crime

Trade-based financial crime (TBFC) is a global menace, with trade-based money laundering (TBML) being particularly insidious and often misunderstood. Criminals manipulate international trade transactions – through techniques like double invoicing, non-shipment of paid for goods, or over-invoicing – to funnel illicit funds into legitimate financial systems. 

The United Nations estimates that money laundering accounts for 2-5% of global GDP, equating to $800 billion to $2 trillion annually. TBML is believed to make up about a third of these activities, translating to $240 billion to $600 billion laundered through international trade every year. To put this in perspective, this amount could fund global humanitarian aid programs for at least five years.

Despite its vast scale, TBML is underreported, difficult to quantify and challenging to mitigate. The data proves this point. For example, in 2019, 1.15 million reports were submitted on money laundering; only 0.2% related to TBML despite it accounting for around 30% of all money laundering crimes.

The complexity arises from the involvement of numerous parties, extended transaction periods, esoteric documentation, and extensive unstructured data in different formats. Additionally, the need for precise vessel tracking and specialised domain knowledge further complicates detection and prevention.

Amidst increasing regulatory scrutiny, financial institutions must develop robust strategies to effectively tackle TBFC in this vastly convoluted landscape.

A Colossal and Underestimated Threat

The first step towards compliance is grasping the scale of TBFC and the likelihood of exposure. This is no easy feat due to widespread misconceptions and the potential for exploitation at every step in the trade finance process.

Imagine a company claiming to ship 1,000 high-end laptops valued at $2,000 each. In reality, the actual shipment contains only 500 laptops, or the laptops are significantly undervalued. Such discrepancies facilitate various financial crimes, including tax evasion, customs fraud, and money laundering through inflated payments from an accomplice buyer. Additionally, false invoicing can conceal profits or inflate expenses, leading to fraudulent financial statements.

Certain sectors are particularly vulnerable to these schemes. High-value, low-volume sectors like precious metals and minerals are prime targets, while low-value, high-volume sectors such as second-hand textiles are frequently exploited. Other susceptible sectors include auto parts, agricultural products, food items and portable electronics.

Financial institutions must educate themselves on these vulnerabilities to focus efforts on preventing criminal activities. 

The Global and Technical Hurdles

The second step towards compliance involves understanding the global and technical challenges associated with TBFC. These schemes often span multiple jurisdictions, complicating detection and prevention. Organised criminal groups, professional money launderers and terrorist financiers exploit these complexities, facilitating various illicit financial flows, including proceeds from drug trafficking, terrorism financing, fraud and tax or sanctions evasion.

This complexity is further compounded by a lack of understanding and cooperation among countries, authorities and the organisations that unwittingly enable these activities.

On the technical front, the primary issue is fragmented data across many stakeholders and disparate systems, hindering the collation of information. This is caused by multiple trade finance messages, documents and transactions. Additionally, timely updates on vessel tracking are often lacking. Monitoring vessel movements and ownership changes is crucial for managing compliance risks, but real-time data is seldom available. This fragmentation not only hampers the detection of illicit activities but also complicates proving compliance for financial institutions.

Technological Solutions to a Persistent Problem

The third step to compliance is adopting appropriate technology. Modern solutions can consolidate trade-based messaging and documents into a central digital hub, providing a comprehensive view of trade finance deals, enhancing monitoring and risk management.

AI plays a central role in this transformation. These systems digitise and verify trade finance documents against standards like UCP600 and ISBP, streamlining the process and reducing human error.

Further integration with real-time vessel tracking technology allows the monitoring of ships, flagging suspicious changes in ownership or unexpected stops. Continuous delta screening systems, which reduce repetitive false positives, can apply TBML detection rules to identify unusual activities.

Generative AI can play a particularly key role, acting as a meticulous auditor by cross-verifying product descriptions with market values to detect discrepancies. This is crucial since 63% of TBML cases involve misinvoicing. Identifying these discrepancies helps uncover hidden financial crimes.

These technologies also provide continuous, real-time screening and monitoring. A comprehensive dashboard alerts users to discrepancies, such as invoice issues or vessel anomalies. This proactive approach enables financial institutions to stay ahead of criminals and meet regulatory requirements.

Leading the Fight against TBFC

Financial institutions must recognise the threat of TBFC and adopt advanced technologies to combat it effectively. As global trade grows in complexity, traditional manual methods are no longer viable.

With regulators intensifying scrutiny and institutions facing increasing pressure to meet stringent standards, the time to act is now. Technologies like AI and real-time data integration enhance detection, facilitate compliance and prevent illicit activities. By gaining a thorough understanding of the problem and employing the right tools, the financial sector can better navigate TBFC complexities and foster a safer, compliant environment.