A review of the risks associated with Trade-Based Money Laundering

Trade-based money laundering (TBML) is a method of disguising the proceeds of illegal activities by manipulating the international trade system. It involves the movement of illicit funds through the use of trade transactions, such as over-invoicing or under-invoicing of goods and services, mislabeling of goods, and the use of shell companies or front businesses. The goal of TBML is to make the illegal funds appear legitimate by disguising them as legitimate trade transactions. This makes it difficult for law enforcement agencies to detect and trace the movement of illicit funds.

Let’s look at the ways money launderers exploit financial system through TBML:

1. Over-invoicing: This is when the value of goods or services is inflated on invoices, allowing money launderers to move large amounts of money through the trade system without detection.
2. Under-invoicing: This is the opposite of over-invoicing, where the value of goods or services is understated on invoices, allowing money launderers to move large amounts of money out of a country without detection.
3. Mis-invoicing: This is when the description of goods or services on invoices is not accurate, allowing money launderers to move money through the trade system without detection.
4. False shipping: This is when goods are shipped to a different location than the one stated on the invoice, allowing money launderers to move money through the trade system without detection.
5. Shell companies: This is when money launderers use a company that exists only on paper, with no real business operations, to move money through the trade system without detection.
6. Front businesses: This is when money launderers use a legitimate business as a front for their illegal activities, allowing them to move money through the trade system without detection.
7. Round-tripping: This is when money launderers use the same set of trade transactions to move money back and forth between countries, allowing them to move money through the trade system without detection.
8. Black Market Peso Exchange: This technique is used to move the proceeds of illegal activities from one country to another through the use of informal currency exchange networks.

Today we will focus on one of the types in detail which is “Over-Invoicing”.

As explained above, Over-invoicing is a technique used by money launderers to move large amounts of money through the trade system without detection. The basic principle behind over-invoicing is to inflate the value of goods or services on invoices, which allows the money launderer to move money through the trade system without detection.

For example, a money launderer wants to move $1 million in illicit funds out of a country. They could do this by creating a fake invoice for $1.5 million for a shipment of goods that are only worth $500,000. They would then use the $1 million in illicit funds to pay the inflated invoice, and the remaining $500,000 would be sent back to the money launderer as a "refund."

This allows the money launderer to move the $1 million out of the country without detection, as the funds are disguised as a legitimate trade transaction. The money launderer can then use the $500,000 refund to pay for the actual shipment of goods and use the remaining $500,000 for their own purposes.

The key characteristic of over-invoicing is the manipulation of the value of the goods or services on the invoice, making the trade transaction look legitimate but in reality, it is just a way to move money out of the country.

Red Flags of Over-Invoicing

Here are a few red flags that may indicate an over-invoicing money laundering techniques:

1. Large discrepancies between the value of goods and services and the amount of money being transferred.
2. Unusually high invoices for goods or services that are commonly sold at a lower price.
3. Lack of documentation or supporting information to justify the high value of goods or services on an invoice.
4. Transactions involving shell companies or front businesses.
5. Repeated transactions between the same parties that involve large discrepancies in the value of goods or services.
6. Transactions involving goods or services that are not typically used in the business operations of the involved parties.
7. Transactions involving goods or services that are not commensurate with the business operations of the involved parties.
8. Transactions involving goods or services that are not consistent with the overall volume of trade between the involved parties.
9. Transactions involving goods or services that are not consistent with the overall volume of trade in the relevant market.
10. Transactions involving goods or services that are not consistent with the overall volume of trade in the relevant market for goods or services of the same type.

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