Financial Action Task Force 

Groupe d'action financière 

 

 

 

 

 

TRADE BASED MONEY LAUNDERING 

 

 

 

23 JUNE 2006 
© 2006 FATF/OECD 

All rights reserved. No reproduction or translation of this 

publication may be made without prior written permission. 

Applications for such permission should be made to: 

FATF Secretariat, 2 rue André-Pascal, 75775 Paris Cedex 16, France 

Fax: +33 1 44 30 61 37 or Contact@fatf-gafi.org

Typologies_TBML_200606.doc 
Table of Contents 

Executive Summary .......................................................................................................................... i 

1. Introduction.................................................................................................................................. 1 

2. The International Trade System .................................................................................................. 2 

3. Abuse of the International Trade System .................................................................................... 2 

Tax Avoidance and Evasion................................................................................................ 2 

Capital Flight ....................................................................................................................... 3 

Trade-Based Money Laundering......................................................................................... 3 

4. Basic Trade-Based Money Laundering Techniques.................................................................... 3 

Over- and Under-Invoicing of Goods and Services ............................................................. 4 

Multiple Invoicing of Goods and Services............................................................................ 5 

Over- and Under-Shipments of Goods and Services .......................................................... 6 

Falsely Described Goods and Services............................................................................... 6 

5. Complex Trade-Based Money Laundering Techniques............................................................... 7 

Black Market Peso Exchange Arrangements ...................................................................... 7 

6. Case Studies............................................................................................................................... 9 

7. Current Practices....................................................................................................................... 20 

Customs Agencies ............................................................................................................ 21 

Law Enforcement Agencies............................................................................................... 22 

Financial Intelligence Units................................................................................................ 22 

Tax Authorities .................................................................................................................. 23 

Banking Supervisors ......................................................................................................... 23 

Red Flag Indicators ........................................................................................................... 24 

8. Key Findings.............................................................................................................................. 25 

9. Issues for Consideration............................................................................................................ 26 

Annex I ........................................................................................................................................... 27 

Role of Financial Institutions in the Settlement of Trade Transactions .............................. 27 

Annex II .......................................................................................................................................... 28 

Customs Agencies (24 respondents) ................................................................................ 28 

Law Enforcement Agencies (20 respondents)................................................................... 29 

Financial Intelligence Units (21 respondents).................................................................... 30 

Banking Supervisors (23 respondents) ............................................................................. 33 

Glossary ......................................................................................................................................... 35 

Bibliography.................................................................................................................................... 36 

Executive Summary 

There are three main methods by which criminal organisations and terrorist financiers move money for the 

purpose of disguising its origins and integrating it into the formal economy. The first is through the use of the 

financial system; the second involves the physical movement of money (e.g. through the use of cash couriers); 

and the third is through the physical movement of goods through the trade system. In recent years, the Financial 

Action Task Force has focused considerable attention on the first two of these methods. By comparison, the 

scope for abuse of the international trade system has received relatively little attention. 

The international trade system is clearly subject to a wide range of risks and vulnerabilities that can be exploited 

by criminal organisations and terrorist financiers. In part, these arise from the enormous volume of trade flows, 

which obscures individual transactions; the complexities associated with the use of multiple foreign exchange 

transactions and diverse trade financing arrangements; the commingling of legitimate and illicit funds; and the 

limited resources that most customs agencies have available to detect suspicious trade transactions. 

For the purpose of this study, trade-based money laundering is defined as the process of disguising the proceeds 

of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins. In 

practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports. 

Moreover, trade-based money laundering techniques vary in complexity and are frequently used in combination 

with other money laundering techniques to further obscure the money trail. 

This study provides a number of case studies that illustrate how the international trade system has been exploited 

by criminal organisations. It also has made use of a detailed questionnaire to gather information on the current 

practices of more than thirty countries. This information focuses on the ability of various government agencies to 

identify suspicious activities related to trade transactions, to share this information with domestic and foreign 

partner agencies, and to act on this information. 

The study concludes that trade-based money laundering represents an important channel of criminal activity and, 

given the growth of world trade, an increasingly important money laundering and terrorist financing vulnerability. 

Moreover, as the standards applied to other money laundering techniques become increasingly effective, the use 

of trade-based money laundering can be expected to become increasingly attractive. 

Looking ahead there are a number of practical steps that can be taken to improve the capacity of national 

authorities to address the threat of trade-based money laundering. Among these are the need for a stronger 

focus on training programs to better identify trade-based money laundering techniques, the need for more 

effective information sharing among competent authorities at the national level, and greater recourse to 

memoranda of understanding and mutual assistance agreements to strengthen international cooperation. 

Trade-Based Money Laundering 

1. Introduction 

In general, there are three main methods by which criminal organisations and terrorist financiers move money for 

the purpose of disguising its origins and integrating it back into the formal economy. 

• The first involves the movement of value through the financial system using methods such as cheques and 

wire transfers; 

• The second involves the physical movement of banknotes using methods such as cash couriers and bulk 

cash smuggling; and 

• The third involves the movement of value using methods such as the false documentation and declaration of 

traded goods and services. 

Each of these methods involves the movement of enormous volumes of funds and can operate at a domestic or 

international level. The primary focus of this study is trade-based money laundering involving the international 

exchange of goods.1

Over the past few years, the Financial Action Task Force (FATF) has focussed considerable attention on the first 

two of these methods. In 2003, the FATF significantly toughened the standards that apply to the financial system 

and various non-financial intermediaries. Two years later, it extended these standards to cover the activities of 

cash couriers. To date, however, limited attention has been focussed on trade-related activities. 

Not surprisingly, research has shown that when governments take action against certain methods of money 

laundering or terrorist financing, criminal activities tend to migrate to other methods. In part, this reflects the fact 

that more aggressive policy actions and enforcement measures increase the risk of detection and therefore raise 

the economic cost of using these methods. 

This suggests that the FATF’s recent actions to revise the 40 Recommendations on money laundering and 

extend the 8 Special Recommendations on terrorist financing to cover cash couriers, as well as the ongoing 

efforts of countries to implement these stricter standards, may have the unintended effect of increasing the 

attractiveness of the international trade system for money laundering and terrorist financing activities.2 

 

This report is the product of research carried out by a project team operating under the umbrella of the FATF typologies 

initiative. The FATF project team was led by Canada with the participation of Aruba, Australia, Belgium, Brazil, China, India,

Mexico, the Netherlands, the Netherlands Antilles, South Africa, South Korea, Spain, the United Kingdom, the United States, 

the Asia Development Bank, the Asia-Pacific Group on Money Laundering, the Eastern and Southern Africa Anti-Money 

Laundering Group, the Egmont Group (represented by the Ukraine), the Gulf Cooperation Council, the World Bank, and the 

World Customs Organisation. 

1 The specific risks associated with trade-based money laundering involving the international trade of services warrant further 

study. 

2 FATF Special Recommendation IX pertains to cash couriers. 
Trade Based Money Laundering 

2

2. The International Trade System 

The international trade system is subject to a wide range of risks and vulnerabilities, which provide criminal 

organisations with the opportunity to launder the proceeds of crime and provide funding to terrorist organisations, 

with a relatively low risk of detection. The relative attractiveness of the international trade system is associated 

with: 

• The enormous volume of trade flows, which obscures individual transactions and provides abundant 

opportunity for criminal organisations to transfer value across borders; 

• The complexity associated with (often multiple) foreign exchange transactions and recourse to diverse 

financing arrangements; 

• The additional complexity that can arise from the practice of commingling illicit funds with the cash flows of 

legitimate businesses; 

• The limited recourse to verification procedures or programs to exchange customs data between countries; 

and 

• The limited resources that most customs agencies have available to detect illegal trade transactions. 

On this last point, research suggests that most customs agencies inspect less than 5 percent of all cargo 

shipments entering or leaving their jurisdictions. In addition, most custom agencies are able to direct relatively 

limited analytical resources to improved targeting and identification of suspicious trade transactions. 

In recent decades, international trade has grown significantly: global merchandise trade now exceeds US$9 

trillion a year and global trade in services accounts for a further US$2 trillion3. Much of this trade is associated 

with the financial system, as a significant amount of goods and services are financed by banks and other financial 

institutions. 

In industrial countries the growth of trade has significantly exceeded the growth of gross domestic product, while 

in developing countries it has increased even faster. In addition, virtually all economies have become more open 

to trade. This has placed increasing pressure on the limited resources that most countries, especially developing 

countries, have available to scrutinise these activities. 

3. Abuse of the International Trade System 

Researchers have documented how the international trade system can be used to move money and goods with 

limited scrutiny by government authorities. In addition to money laundering, a considerable amount of academic 

attention has focused on the related activities of tax avoidance and evasion, and capital flight. A brief review of 

the recent literature in these areas is provided below. 

Tax Avoidance and Evasion 

A number of authors, including Li and Balachandran (1996), Fisman and Wei (2001), Swenson (2001) and 

Tomohara (2004), have described the impact that differing tax rates have on the incentives of corporations to shift 

taxable income from jurisdictions with relatively high tax rates to jurisdictions with relatively low tax rates in order 

to minimise income tax payments. 

For example, this could arise in the context of a domestic parent company headquartered in a low-tax jurisdiction, 

which has a foreign affiliate operating in a high-tax jurisdiction. In such a situation, a common technique would be 

the over- or under-invoicing of imports and exports. For example, a foreign parent could use internal “transfer 

prices” to overstate the value of the goods and services that it provides to its foreign affiliate in order to shift 

 

3 See International Trade Statistics 2005, World Trade Organisation. 
Trade Based Money Laundering 

3

taxable income from the operations of the affiliate in a high-tax jurisdiction to its operations in a low-tax 

jurisdiction.4 

Similarly, the foreign affiliate might understate the value of the goods and services that it provides the domestic 

parent in order to shift taxable income from its high-tax jurisdiction to the low-tax jurisdiction of its parent. Both of 

these strategies would shift the company’s profits to the low-tax jurisdiction and in doing so, reduce its worldwide 

tax payments. Imports can also be under-invoiced to reduce the payment of import duties and exports can be 

over-invoiced to obtain larger export subsidies. For example, studies by Vincent (2004) and Goetzl (2005) have 

documented the use of under-invoicing to reduce import duties in the case of forest products. 

Capital Flight 

A number of authors, including Cuddington (1986), Gulati (1987), Lessard and Williamson (1984), Kahn (1991), 

Anthony and Hallet (1992), Wood and Moll (1994), Fatehi (1994), Baker (2005) and de Boyrie, Pak and 

Zdanowicz (2005), have shown that companies and individuals also shift money from one country to another to 

diversify risk and protect their wealth against the impact of financial or political crises. Several of these studies 

also show that a common technique used to circumvent currency restrictions is to over-invoice imports or underinvoice exports. 

For example, the International Monetary Fund (IMF) (1991), Kahn (1991), Wood and Moll (1994) and Fatehi 

(1994) examined the impact of controls imposed by South Africa in the 1970s and 1980s. They found that the 

primary method used to evade these controls was the falsification of import and export invoices. By comparing 

discrepancies between the value of exports reported by South Africa and the value of imports reported by key 

trading partners, the Kahn study concluded that at least $20 billion had been transferred out of South Africa 

through the use of the international trade system. Other studies, including Smit and Mocke (1991) and 

Rustomjee (1991), suggested outflows ranging from $12 billion to more than $50 billion. 

Trade-Based Money Laundering 

Unlike tax avoidance and capital flight, which usually involve the transfer of legitimately earned funds across 

borders, capital movements relating to money laundering – or trade-based money laundering – involve the 

proceeds of crime, which are more difficult to track. 

Trade-based money laundering has received considerably less attention in academic circles than the other 

means of transferring value. The literature has primarily focussed on alternative remittance systems and black 

market peso exchange transactions. However, a number of authors and institutions, including Baker (2005), de 

Boyrie, Pak and Zdanowicz (2005), the Department of Homeland Security, US Immigration and Customs 

Enforcement (2005), have recently examined a range of other methods used to launder money through the 

international trade system as well as the scope that jurisdictions have to identify and limit these activities. 

A number of these studies have also analyzed techniques to establish whether reported import and export prices 

reflect fair market values. One of the methods currently being explored involves the use of statistical techniques 

to detect discrepancies in the information provided on shipping documents to better identify suspicious trading 

activity. 

4. Basic Trade-Based Money Laundering Techniques 

For the purpose of this study, trade-based money laundering is defined as the process of disguising the proceeds 

of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin. In 

practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports. 

 

4 In the case of transfer pricing, the reference to over- and under-invoicing relates to the legitimate allocation of income 

between related parties, rather than customs fraud. 
Trade Based Money Laundering 

4

In many cases, this can also involve abuse of the financial system through fraudulent transactions involving a 

range of money transmission instruments, such as wire transfers. The basic techniques of trade-based money 

laundering include: 

• over- and under-invoicing of goods and services; 

• multiple invoicing of goods and services; 

• over- and under-shipments of goods and services; and 

• falsely described goods and services. 

All of these techniques are not necessarily in use in every country. 

Over- and Under-Invoicing of Goods and Services 

Money laundering through the over- and under-invoicing of goods and services, which is one of the oldest 

methods of fraudulently transferring value across borders, remains a common practice today. The key element of 

this technique is the misrepresentation of the price of the good or service in order to transfer additional value 

between the importer and exporter. 

By invoicing the good or service at a price below the “fair market” price, the exporter is able to transfer value to 

the importer, as the payment for the good or service will be lower than the value that the importer receives when it 

is sold on the open market. 

Alternatively, by invoicing the good or service at a price above the fair market price, the exporter is able to receive 

value from the importer, as the payment for the good or service is higher than the value that the importer will 

receive when it is sold on the open market. 

Over- and Under-Invoicing of Goods – An Example 

Company A (a foreign exporter) ships 1 million widgets worth $2 each, but invoices Company B (a colluding domestic 

importer) for 1 million widgets at a price of only $1 each. Company B pays Company A for the goods by sending a wire 

transfer for $1 million. Company B then sells the widgets on the open market for $2 million and deposits the extra $1 

million (the difference between the invoiced price and the “fair market” value) into a bank account to be disbursed 

according to Company A’s instructions. 

Alternatively, Company C (a domestic exporter) ships 1 million widgets worth $2 each, but invoices Company D (a 

colluding foreign importer) for 1 million widgets at a price of $3 each. Company D pays Company C for the goods by 

sending a wire transfer for $3 million. Company C then pays $2 million to its suppliers and deposits the remaining 

$1 million (the difference between the invoiced price and the “fair market” price) into a bank account to be disbursed 

according to Company D’s instructions.

Company B Company A

Home country Foreign country

Exporter ships 1 million widgets @ $2 each

Importer remits payment for 1 million widgets @ $1 each

$1 million is moved from exporter to importer
Trade Based Money Laundering 

5

Several points are worth noting. First, neither of the above transactions would be undertaken unless the exporter 

and importer had agreed to collude. For example, if Company A were to ship widgets worth $2 each, but invoice 

them for $1 each, it would lose $1 million a shipment. Such a situation would not make sense unless the exporter 

and importer were colluding in a fraudulent transaction. 

Second, there is no reason that Company A and Company B could not be controlled by the same organisation. 

In turn, there is nothing that precludes a parent company from setting up a foreign affiliate in a jurisdiction with 

less rigorous money laundering controls and selling widgets to the affiliate at a “fair market” price. In such a 

situation, the parent company could send its foreign affiliate a legitimate commercial invoice (e.g. an invoice of 

$2 million for 1 million widgets) and the affiliate could then resell (and “re-invoice”) these goods at a significantly 

higher or lower price to a final purchaser. In this way, the company could shift the location of its over- or underinvoicing to a foreign jurisdiction where such trading discrepancies might have less risk of being detected. 

Third, the over- and under-invoicing of exports and imports can have significant tax implications. An exporter who 

over-invoices the value of the goods that he ships may be able to significantly increase the value of the export tax 

credit (or valued-added tax (VAT) rebate) that he receives. Similarly, an importer who is under-invoiced for the 

value of the goods that he receives may be able to significantly reduce the value of the import duties (or customs 

taxes) that he pays. Both of these cases illustrate the link between trade-based money laundering and abuse of 

the tax system.5 

Research suggests that under-invoicing exports is one of the most common trade-based money laundering 

techniques used to move money. This reflects the fact that the primary focus of most customs agencies is to stop 

the importation of contraband and ensure that appropriate import duties are collected. Thus, customs agencies 

generally monitor exports less rigorously than imports.6 

It is also worth noting that the more complex the good being traded, the greater the difficulty that customs 

agencies will have in identifying over- and under-invoicing and correctly assessing duties or taxes. In part, this is 

because many customs agencies do not have access to data and resources to establish the “fair market” price of 

many goods. In addition, most customs agencies do not share trade data with other countries and therefore see 

only one side of the transaction. As such, their ability to identify incorrectly priced goods is often limited to those 

that are widely traded (and whose prices are widely quoted) in international markets.7

Multiple Invoicing of Goods and Services 

Another technique used to launder funds involves issuing more than one invoice for the same international trade 

transaction. By invoicing the same good or service more than once, a money launderer or terrorist financier is 

able to justify multiple payments for the same shipment of goods or delivery of services. Employing a number of 

different financial institutions to make these additional payments can further increase the level of complexity 

surrounding such transactions. 

In addition, even if a case of multiple payments relating to the same shipment of goods or delivery of services is 

detected, there are a number of legitimate explanations for such situations including the amendment of payment 

terms, corrections to previous payment instructions or the payment of late fees. Unlike over- and under-invoicing, 

it should be noted that there is no need for the exporter or importer to misrepresent the price of the good or 

service on the commercial invoice.8

 

5 For the purposes of this paper, cases of over- or under-invoicing primarily designed to gain a tax advantage are considered 

customs fraud rather than trade-based money laundering. 

6 For the same reasons, non-dutiable goods may also be subject to less rigorous scrutiny. 

7 High-value goods, such as works of art, which have limited markets and highly “speculative” values present significant 

valuation difficulties. 

8 If prices are correctly reported to customs agencies, detection of criminal activity is more difficult and may depend on 

intelligence-led operations. 
Trade Based Money Laundering 

6

Over- and Under-Shipments of Goods and Services 

In addition to manipulating export and import prices, a money launderer can overstate or understate the quantity 

of goods being shipped or services being provided. In the extreme, an exporter may not ship any goods at all, 

but simply collude with an importer to ensure that all shipping and customs documents associated with this socalled “phantom shipment” are routinely processed. Banks and other financial institutions may unknowingly be 

involved in the provision of trade financing for these phantom shipments. 

Falsely Described Goods and Services 

In addition to manipulating export and import prices, a money launderer can misrepresent the quality or type of a 

good or service. For example, an exporter may ship a relatively inexpensive good and falsely invoice it as a more 

expensive item or an entirely different item. This creates a discrepancy between what appears on the shipping 

and customs documents and what is actually shipped. The use of false descriptions can also be used in the 

trade in services, such as financial advice, consulting services and market research. In practice, the fair market 

value of these services can present additional valuation difficulties. 

Over- and Under-Shipment of Goods – An Example 

Company E (a domestic exporter) sells 1 million widgets to Company F (a colluding foreign importer) at a price of 

$2 each, but ships 1.5 million widgets. Company F pays Company E for the goods by sending a wire transfer for 

$2 million. Company F then sells the widgets on the open market for $3 million and deposits the extra $1 million 

(the difference between the invoiced quantity and the actual quantity) into a bank account to be disbursed 

according to Company E’s instructions. 

Alternatively, Company G (a foreign exporter) sells 1 million widgets to Company H (a colluding domestic 

importer) at a price of $2 each, but only ships 500,000 widgets. Company H pays Company G for the goods by 

sending a wire transfer for $2 million. Company G then pays $1 million to its suppliers and deposits the 

remaining $1 million (the difference between the invoiced quantity and the actual quantity) into a bank account to 

be disbursed according to Company H’s instructions.

Company E 

Company F 

Home country Foreign country 

Importer remits payment for 1 million widgets @ $2 each

Exporter ships 1.5 million widgets @ $2 each

$1 million is moved from exporter to importer 
Trade Based Money Laundering 

7

Falsely Described Goods – An Example 

Company I (a domestic exporter) ships 1 million gold widgets worth $3 each to Company J (a colluding 

foreign importer), but invoices Company J for 1 million silver widgets worth $2 each. Company J pays 

Company I for the goods by sending a wire transfer for $2 million. Company J then sells the gold widgets on 

the open market for $3 million and deposits the extra $1 million (the difference between the invoice value and 

the actual value) into a bank account to be disbursed according to Company I’s instructions. 

Alternatively, Company K (a foreign exporter) ships 1 million bronze widgets worth $1 each to Company L (a 

colluding domestic importer), but invoices Company L for 1 million silver widgets worth $2 each. Company L 

pays Company K for the goods by sending a wire transfer of $2 million. Company K then pays $1 million to 

its suppliers and deposits the remaining $1 million (the difference between the invoiced value and the actual 

value) into a bank account to be disbursed according to Company L’s instructions. 

5. Complex Trade-Based Money Laundering Techniques 

In practice, strategies to launder money usually combine several different techniques. Often these involve abuse 

of both the financial and international trade systems. Black market peso exchange arrangements provide a 

useful illustration of how a number of different money laundering techniques can be combined into a single 

criminal operation. 

Black Market Peso Exchange Arrangements 

The mechanics of black market peso exchange arrangements became the subject of considerable study in the 

1980s when Colombia became the dominant exporter of cocaine into the United States. These illegal drug sales 

generated about $10 billion a year for the Colombian drug cartels, of which as much as $4 billion a year was 

laundered through black market peso arrangements. The mechanics of a simple black market peso arrangement 

can be set out in the following steps. 

• First, the Colombian drug cartel smuggles illegal drugs into the United States and sells them for cash; 

• Second, the drug cartel arranges to sell the US dollars at a discount to a peso broker for Colombian pesos;9 

• Third, the peso broker pays the drug cartel with pesos from his bank account in Colombia (which eliminates 

the drug cartel from any further involvement in the arrangement); 

 

9 The peso broker does need not to be located in the United States and, in fact, will usually operate out of Colombia. 

However, the peso broker will need to have a relationship with a correspondent in the United States to execute the 

transaction. 

Company I Company J 

Home country Foreign country 

Importer remits payment for 1 million SILVER widgets worth $2 each 

Exporter ships 1 million GOLD widgets worth $3 each

$1 million is moved from exporter to importer 
Trade Based Money Laundering 

8

• Fourth, the peso broker structures or “smurfs” the US currency into the US banking system to avoid reporting 

requirements and consolidates this money in his US bank account; 

• Fifth, the peso broker identifies a Colombian importer that needs US dollars to purchase goods from a US 

exporter10; 

• Sixth, the peso broker arranges to pay the US exporter (on behalf of the Colombian importer) from his US 

bank account; 

• Seventh, the US exporter ships the goods to Colombia11; and 

• Finally, the Colombian importer sells the goods (often high-value items such as personal computers, 

consumer electronics and household appliances) for pesos and repays the peso broker. This replenishes 

the peso broker’s supply of pesos. 

These transactions combine a number of different illegal activities, such as drug smuggling, money laundering 

through the financial system and trade-based money laundering.12 In addition, there is no reason why the drug 

cartel cannot act as its own peso broker or import business. In fact, many drug cartels appear to have 

internalised these functions. 

Mechanics of a Black Market Peso Exchange Arrangement 

Unlike the basic trade-based money laundering techniques discussed above, there is also no need for the 

importer and exporter to collude in a fraudulent transaction for the black market peso exchange arrangement to 

work. Instead, the prices and quantities of the goods can be correctly reported to customs agencies and value 

can still be transferred across borders.13 Although the term “black market peso exchange” refers to a money 

 

10 The peso broker generally offers an exchange rate that is significantly better than that available through a Colombian 

bank. 

11 In practice, these goods would frequently be under-invoiced to reduce import duties or smuggled into the country to avoid 

import duties. 

12 Banks and other financial institutions provide a number of arrangements for the settlement of international trade 

transactions. (For more information, see Annex 1). 

13 If prices and quantities are correctly reported to customs agencies, detection of the criminal activity is more difficult and 

may depend on intelligence-led operations. In practice, the goods associated with most black market peso exchange 

transactions are smuggled into the country to avoid duties and taxes. Drugs 

Drug cartel

US 

dollars

Pesos Pesos

Goods 

Colombian 

importer 

Peso 

broker

P
Trade Based Money Laundering 

9

laundering technique that was originally associated with Colombian narcotics trafficking, these arrangements are 

widely used in many countries to repatriate the proceeds of various types of crimes. 

6. Case Studies 

This section provides a number of case studies that illustrate the various ways that trade-based money 

laundering techniques can be used separately or in combination with other money laundering techniques to 

obscure the origins of illegal funds and complicate efforts to trace this money. 

Case Study 1 

• A Brazilian company signs a contract to export soybeans to a German company. 

• The German company prepays the Brazilian company for the shipment. 

• The Brazilian company immediately transfers the funds to a third party that is unrelated to the transaction. 

• The soybeans that were purchased by the German company are never shipped. 

Source: Information provided by Brazil. 

Commentary -- In this case, the German company transferred funds to the Brazilian company as an advance 

payment for a shipment of soybeans. Suspicions were raised when it was found that exports of soybeans were 

inconsistent with the Brazilian company’s regular business activities and the size of the reported shipment was 

inconsistent with the scale of the company’s operations. 

German company prepays for the shipment of soybeans

The Brazilian company does not ship the soybeans

Brazilian company transfers the funds to a 

company unrelated to the transaction 
Trade Based Money Laundering 

10

Case Study 2 

• A criminal organisation exports a relatively small shipment of scrap metal, but falsely reports the shipment as 

weighing several hundred tons. 

• Commercial invoices, bills of lading and other shipping documents are prepared to support the fraudulent 

transaction. 

• When the cargo is loaded on board the ship, a Canadian customs officer notices that the hull of the ship is 

still well above the water line. This is inconsistent with the reported weight of the shipment of scrap metal. 

• The cargo is examined and the discrepancy between the reported and actual weight of the shipment is 

detected. 

• It is assumed that the inflated value of the invoice would have been used to transfer criminal funds to 

Canada. 

Source: Information provided by Canada. 

Commentary -- In this case, the criminal organisation appears to have intended to over-invoice a colluding 

foreign importer by misrepresenting the quantity of goods. Using the international trade system, the criminal 

organisation would then have been able to transfer illegal funds back into the country using the trade transaction 

to justify payment through the financial system. 

Partial shipment of goods is exported and sold abroad

Payment for full shipment remitted to exporting company

Value is remitted to the 

export company 
Trade Based Money Laundering 

11

Case Study 3 

• An alternative remittance system (ARS) operator (e.g. a “hawaladar”) in the United States wants to transfer 

funds to his Pakistani counterpart to settle an outstanding account. 

• The US operator colludes with a Pakistani exporter, who agrees to significantly over-invoice a US importer 

for the purchase of surgical goods. 

• The US operator transfers funds to the US importer to cover the extra cost related to the over-invoicing. 

• The Pakistani exporter uses the over-invoiced amount to settle the US operator’s outstanding account with 

his Pakistani counterpart. 

• The Pakistani exporter additionally benefits from a 20 percent VAT rebate on the higher prices of the 

exported goods. 

Source: Information provided by the United States. 

Commentary -- In this case, rather than simply wiring the funds to his Pakistani counterpart, the US operator 

convinces a Pakistani exporter to over-invoice a colluding US importer. Using the international trade system, the 

US operator was then able to transfer the funds to settle his account using the trade transaction to justify payment 

through the financial system. 

Exporter ships surgical goods to the US

plus payment for outstanding ARS account

Importer remits payment for surgical goods

US 

hawaladar 

operator 

Pakistani 

hawaladar 

operator 

Outstanding ARS account 

is settled

Surgical 

goods 

importer 

Surgical 

goods 

exporter 

Payment 

to settle 

account 
Trade Based Money Laundering 

12

Case Study 4 

• An alternative remittance system operator in the United States wants to transfer funds to his Bangladeshi 

counterpart to settle an outstanding account. 

• The US operator deposits US dollars into his bank account and then wires the money to the corporate 

account of a large communications company to purchase telephone calling cards. 

• The personal identification numbers (PINs) of these calling cards are sent to Bangladesh and sold for cash. 

• The cash is given to the Bangladeshi counterpart to settle the US operator’s outstanding account. 

Source: FATF Money Laundering and Terrorist Financing Typologies for 2004-2005. 

Commentary -- In this case, rather than simply wiring the funds to his Bangladeshi counterpart, the US operator 

chose to minimise the risk of detection through use of the international trade system. Interestingly, the operator’s 

scheme does not depend on fraudulently reporting the price or quantity of the goods in order to transfer the funds 

required to settle the outstanding account. In addition, the calling cards are not actually exported. All that is 

required is the cross-border transfer of the PINs (i.e. the sale of an “intangible” good). 

Bangladeshi 

hawaladar 

operator 

US 

hawaladar 

operator 

US bank US 

communications 

company 

Dollars 

deposited 

into US bank 

account 

Dollars wired 

for purchase 

of telephone 

calling cards 

Calling card PINs are sent to 

Bangladesh 

PINs are sold 

for cash 

Bangladeshi 

intermediary 
Trade Based Money Laundering 

13

Case Study 5 

• A Colombian cartel smuggles illegal drugs into the United States and sells them for cash. 

• The cartel uses the cash to buy scrap gold in the United States, which is melted down and recast as gold 

bars. 

• At the same time, the cartel ships lead bars from Uruguay to the United States, which are invoiced as bars of 

gold. 

• When the shipment arrives, the lead bars are destroyed and the recast gold bars are substituted. 

• With authentic documentation, the gold bars are sold on the open market. The money is wired back to 

Uruguay and then eventually to Panama. 

Source: Jeffrey Robinson, The Laundrymen (1995). Used by permission of the author. 

Commentary -- Unlike black market peso exchange arrangements, rather than smurfing the US currency into the 

US banking system, the cartel chose to minimise the risk of detection through the use of a falsely described 

shipment of goods. The shipping documents associated with these falsely described South American “gold bars” 

were used to legitimise the sale of the US gold bars. The receipts from these US gold sales were then deposited 

into the US banking system. 

Cartel smuggles drugs into the US from Colombia

Cartel exports lead bars into the 

US from Uruguay 

Proceeds 

from drug 

sales used 

to purchase 

scrap gold 

Gold is 

switched with 

lead and sold 

Payment for gold bars is 

remitted to Uruguay 

Payment 

remitted from 

Uruguay through 

third countries to

Colombia
Trade Based Money Laundering 

14

Case Study 6 

• A Colombian cartel smuggles illegal drugs into the United States and sells them for cash. 

• The cash is deposited into the US banking system and then used to purchase gold bullion that the cartel 

exports from Colombia. 

• A group of cooperative jewellers in New York melts down the gold bullion and recasts them as low-value 

hardware items, such as nuts, bolts and household tools. 

• The hardware items are enamelled and exported back to Colombia where they are melted down and recast 

as gold bullion again. 

• The cartel re-exports the gold bullion to the United States where they are sold again and used to repatriate 

additional funds from drug sales to Colombia. 

Source: Information provided by the United States. 

Commentary -- Like black market peso exchange arrangements, the cartel smurfs the cash from drug sales 

into the US banking system and then uses this money to buy gold bullion that it has exported from Colombia. 

The gold is accurately reported to US Customs as “gold bullion”, but falsely described to Colombian Customs as 

“manufactured gold products” in order to claim export credits. The shipping documents presented to US 

Customs are used to legitimise the sale of the Colombian gold bullion. By disguising the gold bullion as lowvalue exports to Colombia and then re-exporting the same gold bullion back to the United States, the cartel is 

able to repatriate the proceeds of the drug sales to Colombia by repeatedly invoicing the same gold bullion.

Cartel smuggles drugs into the US from Colombia 

The “hardware” is 

exported to Colombia 

Proceeds from drug 

sales used to 

purchase gold bullion Gold is 

recast into 

“hardware”

Cartel exports gold bullion into the US from Colombia 
Trade Based Money Laundering 

15

Case Study 7 

• A Colombian drug cartel smuggles illegal drugs into the United States and sells them for cash. 

• The drug cartel arranges to sell these US dollars at a discount to a peso broker for Colombian pesos. 

• The broker “smurfs” the US dollars from the drug sales into the US banking system. 

• The broker uses these funds to pay a Canadian company to ship grain to Colombia (on behalf of a Colombian 

grain importer). The payment is in the form of a letter of credit (covering 70% of the value of the contract) and 

third party cheques and electronic fund transfers (covering 30% of the value of the contract). 

• The Colombian grain importer sells the grain in Colombia for pesos and repays the broker for financing the 

shipment. 

Source: Information provided by Canada. 

Commentary -- This is a black market peso arrangement. Unlike the example that is used earlier in the paper, 

the peso broker smurfs the US dollars from the drug sales into the US banking system, but then uses these funds 

to purchase grain from a Canadian company for export to Colombia. In this case, the Colombian importer also 

made use of the two types of payments to try to defraud the Colombian Government of import duties by only 

declaring the 70 percent of the cost of the shipment covered by the letter of credit. Drugs 

US dollars 

Grain 

Drug cartel 

Peso 

broker 

Pesos Pesos

US banking 

system 

Canadian 

grain 

exporter 

Colombian 

grain 

importer 

P
Trade Based Money Laundering 

16

Case Study 8 

• A food product trading company is established in an offshore financial centre and conducts business with 

several African food product companies. 

• The money that the company receives for the sale of its products is immediately transferred from the 

company’s offshore account to the personal account of its manager in Belgium. In turn, the funds are then 

quickly transferred to several foreign companies. 

• The company also receives transfers from an unrelated company in the diamond business. The money 

from the diamond company is commingled with the company’s other business receipts and transferred 

through Belgium to the same foreign companies. 

Source: Information provided by Belgium 

Source: Information provided by Belgium. 

Commentary -- This case illustrates the level of additional complexity that can be added to the money trail by 

commingling illicit funds with the cash flows of legitimate businesses. In this case, the diamond company was 

subsequently the subject of an investigation into the trade in illegal “blood diamonds”. 

Foodstuff company 

receives wire transfers 

from other foodstuff 

companies and a 

diamond company

Funds wired to other companies

Commingled funds 

wired to personal 

account
Trade Based Money Laundering 

17

Case Study 9 

• A Norwegian company purchases goods from a German company and directs that the goods be delivered 

to a branch of the Norwegian company in the Balkans. 

• The German company sends the Norwegian company an invoice, which is settled by a wire transfer. 

• The Norwegian company then sends the Balkan company a significantly higher invoice, which includes a 

range of inflated administrative costs. 

• The Balkan company settles the invoice by paying cash into the Norwegian company’s bank account.

• It is assumed that the Balkan company is transferring the proceeds of crime to the Norwegian company.

Source: Information provided by Norway. 

Commentary -- In this case, the Norwegian company “re-invoices” the goods to significantly inflate their value. 

The Balkan company then deposits cash into the account of the Norwegian company. This “pay on account” 

transaction is done without any reference to the invoice for the shipped goods. This significantly complicates 

subsequent efforts to compare invoices and payments. The net effect is to transfer funds from the Balkan 

company to the Norwegian company with a relatively limited risk of detection.

Sends invoice 

Wires payment 

Ships 

goods 

Norwegian company sends different invoice to its affiliate in the Balkans 

Affiliate deposits cash in Norwegian company’s bank to settle account 

Norwegian 

company 

German 

company Balkan 

affiliate of 

Norwegian 

company 

Norwegian 

company’s 

bank 
Trade Based Money Laundering 

18

Case Study 10 

• A criminal group imports counterfeit goods from Asia into Belgium using a letter of credit and sells them for 

cash. 

• The group deposits the money into a Belgian bank account and arranges a subsequent letter of credit. 

• The group purchases additional counterfeit goods from Asia using the new letter of credit. 

• These additional counterfeit goods are sold and the receipts deposited in the bank and used to arrange 

additional letters of credit. 

Source: Information provided by Belgium. 

Commentary -- In this case, the criminal group was able to use the cash deposited in the bank to arrange 

letters of credit. Subsequently, it was able to make use of these letters of credit to purchase a series of 

shipments of counterfeit goods. The criminal group thought that the use of letters of credit related to trade 

transactions, rather than wire transfers, would increase the appearance of legitimacy of these transactions and 

reduce their risk of detection.

Belgian 

bank 

Proceeds of 

sale of 

counterfeit 

goods 

Criminal group purchases counterfeit 

goods with letters of credit 

Criminal group imports counterfeit goods from Asia into Belgium

Asian counterfeit 

good manufacturer 
Trade Based Money Laundering 

19

Case Study 11 

• A criminal organisation sells illegal drugs in Japan. The organisation then smuggles the cash out of the 

country and into France. 

• The money is used to purchase luxury goods in designer fashion stores, which are then exported to Japan 

and resold by a shell company. 

• Proceeds from the sales of these luxury goods are deposited into the Japanese banking system. 

Source: Jeffrey Robinson, The Laundrymen (1995). Used by permission of the author. 

Commentary – Rather than smurfing, the Japanese currency into the Japanese banking system, the criminal 

organisation chose to minimise the risk of detection by smuggling the cash out of the country and then using the 

international trade system to import luxury goods back into Japan. The proceeds from the sale of these goods 

were then deposited into the Japanese banking system. Suspicions were raised when it was discovered that 

forged documents were used to export these goods and that the organisation had never applied for a value 

added tax rebate. 

Cash from drug sales smuggled into France 

Luxury goods purchased in France are exported to Japan and sold by a shell company 

Proceeds from 

sale of clothing 

are deposited in 

a Japanese 

bank account 

Designer clothing 

store 

Japanese 

bank Shell 

Company 

Criminal 

organisation 
Trade Based Money Laundering 

20

Case Study 12 

• A Brazilian company is engaged in a range of illegal activities. 

• The cash, which is generated from these activities, is smuggled out of the country by cash couriers and 

deposited in the bank accounts of offshore companies controlled by the company. 

• Funds from these offshore accounts are transferred to offshore shell companies and used to purchase 

concentrated syrup for soft drinks from the Brazilian company at highly inflated prices. 

• The syrup was then sold by the shell companies to other legitimate companies at a significant loss.

Source: Information provided by Brazil. 

Commentary -- In this case, the proceeds of crime were transferred to a Brazilian company through the sale of 

syrup at significantly inflated prices to a number of shell companies. The earnings from these sales were 

deposited into the company’s Brazilian bank account and effectively reintegrated into the legitimate economy. 

Interestingly, unlike the shipment of scrap metal in Case Study 2, the weight and other physical characteristics 

of the shipment was unchanged, however, the process of dilution was used to reduce its value from US$40 a 

litre to US$1 a litre.

7. Current Practices 

These case studies illustrate that the international trade system is subject to a wide range of vulnerabilities that 

can be exploited by criminal organisations and terrorist financiers. To examine the capacity of national authorities 

to combat trade-based money laundering, the FATF project team has made use of a detailed questionnaire to 

survey current practices in a range of countries.14 This questionnaire focuses on the ability of various 

 

14 The 36 countries that responded to this questionnaire were Aruba, Australia, Austria, The Bahamas, Belgium, Brazil, 

Cambodia, Canada, Chinese Taipei, Fiji, France, Guatemala, Hong Kong, China, Indonesia, Italy, Japan, Kenya, Republic of 

Shell companies 

Bank accounts of 

offshore companies 

Sales are over-invoiced

Payments are wired to 

Brazilian company

Proceeds from 

criminal activity 

Money is 

transferred to 

a series of 

offshore shell 

companies 

Cash couriers smuggle 

money out of the country for 

deposit into bank accounts of 

offshore companies 
Trade Based Money Laundering 

21

government agencies to identify suspicious activities related to trade transactions, to share this information with 

domestic and foreign partner agencies, and to act on this information. In carrying out this work, particular 

attention has been focused on the practices of customs agencies, law enforcement agencies, financial 

intelligence units, tax authorities and banking supervisors. 

Customs Agencies 

About half of customs agencies indicated that they make use of red flag indicators or other forms of risk analysis 

to detect potential trade-based money laundering activities. Moreover, almost three-quarters of those performing 

such analysis believe there is significant scope to make better use of trade data to identify anomalies that could 

be associated to money laundering or terrorist financing. In turn, this analysis triggered investigations in the case 

of more than half of respondents and prosecutions in about a quarter of respondents. 

Similarly, almost all of respondents indicated that they were able to share trade-based information with law 

enforcement, financial intelligence units, tax authorities and foreign competent authorities. In the majority of 

cases, information sharing with law enforcement, financial intelligence units and tax authorities is voluntary. In 

the case of foreign competent authorities, the standard requirement for information sharing is a memorandum of 

understanding or customs mutual assistance agreement. Interestingly, less than half of respondents indicated 

that their customs agencies file suspicious activity reports with their financial intelligence units. 

Only a third of respondents indicated that they had training programs in place, while virtually all agreed on the 

need for better training and understanding of the techniques of trade-based money laundering. In addition, more 

than half thought that there was scope to better use new technologies, such as X-ray scanners, electronic 

container seals and radio-frequency identification data. As a general proposition, two-thirds of respondents 

believed that their countries face serious vulnerabilities to trade-based money laundering activities. 

 

Korea, Macau, China, Malaysia, Mauritius, Mexico, Mongolia, Montserrat, Namibia, the Netherlands, the Netherlands 

Antilles, New Zealand, Norway, Peru, Qatar, South Africa, Spain, St. Lucia, Swaziland, United Kingdom and the United 

States. A detailed summary of the responses of each country has been provided to the FATF Secretariat to facilitate future 

analytical work in this area. 

Trade Transparency Units 

Customs and law enforcement experience has shown that one of the most effective means of analyzing and 

investigating suspect trade-based activity is to have systems in place that monitor reported imports and exports 

between countries. Consistent with the FATF standards on international cooperation, a number of 

governments are now sharing import and export information in order to detect anomalies in their trade data. 

To deal with the massive amounts of data generated by such exercises, new technologies have been 

developed that standardise this information against a range of variables to establish general patterns of trade 

activity. In turn, “trade transparency units” make use of this analysis to identify suspicious trading activities that 

often merit further investigation. 

The sharing of trade data can be accomplished between cooperating customs authorities through customs 

mutual assistance agreements. The success of such arrangements underscores the importance of cooperating 

nations working together to establish bilateral mechanisms to detect trade anomalies, which may be associated 

with money laundering, terrorist financing or other financial crimes. 

Experience shows that trade transparency units create effective gateways for the prompt exchange of trade 

data and information between foreign counterparts. As such, they represent a new and important investigative 

tool to better combat trade-based money laundering and customs fraud.
Trade Based Money Laundering 

22

Law Enforcement Agencies 

Interestingly, two-thirds of law enforcement agencies indicated they use trade information as part of their analysis 

of money laundering and terrorist financing activities. While the bulk of this information is received from financial 

intelligence units, customs agencies and financial institutions, significant information is also made available by 

banking supervisors and tax authorities. Almost all of the respondents that made use of this information indicated 

that it had triggered investigations and two-thirds of these investigations resulted in prosecutions. 

While only a third of respondents have access to trade databases, those that do agree that there is significant 

scope for greater cooperation between customs and law enforcement agencies in this area. Half of the 

respondents make use of red flag indicators and similarly believe that there is scope for more extensive use of 

such techniques. 

Law enforcement agencies appear to have few problems sharing information with customs agencies, financial 

intelligence units and tax authorities, although this is largely done on a voluntary basis and under certain 

conditions, such as to further an ongoing criminal investigation. Most respondents indicated that information 

sharing with banking supervisors is significantly more complicated (and frequently prohibited) and that information 

sharing with foreign competent authorities generally requires that a memorandum of understanding or mutual 

legal assistance treaty is in place. Nevertheless, several respondents indicated that they are generally able to 

share information on the basis of international reciprocity. 

A third of respondents appear to have some level of expertise in the area of trade and a similar number indicated 

that they have training programs in place. Virtually all respondents agreed on the need for better training and 

awareness of the techniques of trade-based money laundering. In general, two-thirds of respondents viewed 

trade-based money laundering activities as presenting a serious risk to their country. 

Financial Intelligence Units 

Half of financial intelligence units receive suspicious activities reports triggered by concerns about trade-related 

activities. However, in most countries, the number of such reports is relatively low (e.g. often less than 25 a 

year). In addition to financial institutions, these reports are received from customs and law enforcement agencies 

and, to a lesser extent, tax authorities and banking supervisors. About a third of financial intelligence units use 

trade information as part of their ongoing analysis of money laundering and terrorist financing activities and this 

information frequently contributes to investigations and prosecutions. 

Financial intelligence units indicated that they make extensive use of red flag indicators. In addition, the majority 

of respondents believe that there is considerable scope to make better use of such indicators and other analytical 

techniques to promote a more risk-based approach to detecting trade-based money laundering activities. This 

being the case, it is interesting that only a quarter of financial intelligence units reported that they make use of 

trade databanks as part of their analysis. 

Not surprisingly, financial intelligence units are able to share information with law enforcement agencies, customs 

agencies, tax authorities and banking supervisors. However, some respondents cautioned that strict commercial 

confidentiality continues to apply to this information, which limits its use to intelligence purposes. Others indicated 

that the sharing of trade information is often limited to cases of ongoing criminal investigation. Respondents 

confirmed that domestic financial intelligence units are able to share information with foreign financial intelligence 

units, but this generally requires a memorandum of understanding or international reciprocity. 

About half of the respondents have trade specialists on their staff, but only a quarter provide training to improve 

their analysts’ understanding of trade-based money laundering techniques. Respondents were virtually 

unanimous that financial intelligence units would benefit from better training and awareness of the techniques of 

trade-based money laundering activities. In general, two-thirds of respondents believe that their countries are 

seriously vulnerable to abuse of the trade system for criminal purposes. 
Trade Based Money Laundering 

23

Tax Authorities 

Two-thirds of tax authorities indicate that they receive information from customs and law enforcement agencies 

and financial intelligence units, which directly relates to trade-based money laundering. However, these 

respondents appear to make limited use of this information in pursuing investigations or prosecutions. This said, 

a third of tax authorities indicated that they perform analysis that is useful in identifying trade-based money 

laundering and routinely file suspicious activity reports with their financial intelligence units. 

While half of tax authorities have the power to conduct investigations, only a third have a mandate that permits 

them to examine trade-based money laundering activities. Moreover, if a suspicion of money laundering arises in 

the course of an audit, only half of the respondents indicated that they are required to report it to competent 

authorities. Most tax authorities are able to voluntarily share information with customs agencies, law enforcement 

agencies and financing intelligence units under certain conditions, such as to further an ongoing investigation. 

Most respondents indicated that sharing information with banking supervisors is significantly more complicated 

(and frequently prohibited), but that trade-related information from tax audits can be shared with their foreign 

counterparts if appropriate memoranda of understanding or mutual legal assistance treaties are in place. 

Few tax authorities have trade specialists on their staffs or training programs to improve the understanding of 

trade-based money laundering. Nevertheless, tax authorities unanimously agreed on the need for better training 

and awareness of trade-based money laundering techniques. In general, two-thirds of respondents considered 

their countries to be vulnerable to the use of trade transactions for criminal purposes. 

Banking Supervisors 

In most countries, banking supervisors have limited involvement in trade-based money laundering activities. 

However, a third of respondents indicated that they frequently receive information related to suspicious tradebased activities from their financial institutions. Moreover, a third of respondents indicated that they undertake 

analysis that can be used to identify trade-based money laundering and routinely report suspicious activities to 

their financial intelligence units. Just under half of respondents use red flag indicators and other analytical 

techniques to identify high-risk commodities, companies or countries and most see significant scope to make 

better use of such techniques. A third of respondents have used this information to trigger investigations, but in 

only 10 percent of these cases has it led to prosecutions. 

Banking supervisors appear to have considerable scope to voluntarily share trade-related information with 

customs agencies, law enforcement agencies, financial intelligence units and tax authorities. In addition, the 

majority of banking supervisors indicated that they could share trade information with foreign competent 

authorities with certain restrictions. Not surprisingly, few banking authorities have expertise on the techniques of 

trade-based money laundering and most have little or no training programs in this area. In general, about half of 

respondents considered their countries to be vulnerable to the use of trade transactions for criminal purposes. 
Trade Based Money Laundering 

24

Red Flag Indicators 

Trade-Based Money Laundering “Red Flag” Indicators 

The respondents to the FATF project team’s questionnaire reported a number of red flag indicators that are 

routinely used to identify trade-based money laundering activities. These include situations in which: 

• Significant discrepancies appear between the description of the commodity on the bill of lading and the 

invoice; 

• Significant discrepancies appear between the description of the goods on the bill of lading (or invoice) 

and the actual goods shipped; 

• Significant discrepancies appear between the value of the commodity reported on the invoice and the 

commodity’s fair market value; 

• The size of the shipment appears inconsistent with the scale of the exporter or importer’s regular 

business activities; 

• The type of commodity being shipped is designated as “high risk” for money laundering activities; * 

• The type of commodity being shipped appears inconsistent with the exporter or importer’s regular 

business activities; 

• The shipment does not make economic sense; ** 

• The commodity is shipped to (or from) a jurisdiction designated as “high risk” for money laundering 

activities; 

• The commodity is transhipped through one or more jurisdictions for no apparent economic reason; 

• The method of payment appears inconsistent with the risk characteristics of the transaction; *** 

• The transaction involves the receipt of cash (or other payments) from third party entities that have no 

apparent connection with the transaction; 

• The transaction involves the use of repeatedly amended or frequently extended letters of credit; and 

• The transaction involves the use of front (or shell) companies. 

Customs agencies make use of more targeted information that relates to specific exporting, importing or 

shipping companies. In addition, red flag indicators that are used to detect other methods of money 

laundering could be useful in identifying potential trade-based money laundering cases. 

* For example, high-value, low-volume goods (e.g. consumer electronics), which have high turnover rates 

and present valuation difficulties. 

** For example, the use of a forty-foot container to transport a small amount of relatively low-value goods. 

** For example, the use of an advance payment for a shipment from a new supplier in a high-risk country. 
Trade Based Money Laundering 

25

8. Key Findings 

The research work carried out for this project has led to the following key findings with respect to trade-based 

money laundering: 

• Trade-based money laundering is an important channel of criminal activity and, given the growth in world 

trade, it represents an increasingly important money laundering and terrorist financing vulnerability. 

• Trade-based money laundering practices vary in complexity. The most basic schemes are fraudulent trade 

practices (e.g. under- or over-invoicing of receipts). However, more complicated schemes integrate these 

fraudulent practices into a web of complex transactions, which also involve the movement of value through 

the financial system (e.g. cheques or wire transfers) and/or the physical movement of banknotes (e.g. cash 

couriers). The use of these complex transactions further obscures the money trail and complicates 

detection. 

• Trade data analysis and the international sharing of trade data are useful tools for identifying trade 

anomalies, which may lead to the investigation and prosecution of trade-based money laundering cases. 

• While customs agencies, law enforcement agencies, financial intelligence units, tax authorities and banking 

supervisors can exchange trade-related information, this is frequently restricted to certain circumstances or 

undertaken on a voluntary rather than mandatory basis. In addition, most financial intelligence units do not 

consistently receive suspicious activity reports related to trade transactions. 

• Most customs agencies, law enforcement agencies, financial intelligence units, tax authorities and banking 

supervisors appear less capable of identifying and combating trade-based money laundering than they are in 

dealing with other forms of money laundering and terrorist financing. In part, this appears to reflect their 

more limited understanding of the techniques of this form of money laundering. 

• Most customs agencies, law enforcement agencies, financial intelligence units, tax authorities and banking 

supervisors identified a pressing need for more training to ensure that their staff has sufficient knowledge to 

recognise trade-based money laundering. 

• Most customs agencies, law enforcement agencies, financial intelligence units, tax authorities and banking 

supervisors indicated serious concerns about the vulnerabilities of their countries to trade-based money 

laundering. In addition, most believe that their countries have only limited measures in place to mitigate 

trade-based money laundering activities. 
Trade Based Money Laundering 

26

9. Issues for Consideration 

Trade-based money laundering is an important money laundering technique that has received limited attention 

from policymakers. As international trade continues to grow and the standards applied to other money laundering 

techniques have become increasingly effective, the use of trade-based money laundering channels can be 

expected to become increasingly attractive. 

This study suggests that the level of understanding of trade-based money laundering appears broadly similar to 

that relating to the movement of value through the financial system a decade ago. At that time, “front line” 

workers in most financial institutions were largely unaware as to what constituted suspicious activity as well as 

what actions they should take if such activities were detected. 

This study suggests that customs agencies, law enforcement agencies, financial intelligence units, tax authorities 

and banking supervisors currently face similar challenges with respect to understanding the techniques of tradebased money laundering and detecting such activities. 

Looking ahead, there appears to be a number of practical steps that could initially be taken to improve the 

capacity of national authorities to cope with trade-based money laundering. These can be summarised as 

building better awareness, strengthening measures to identify trade-based illicit activity and improving 

international co-operation. 

Building Better Awareness 

The review of current practices of those countries responding to the FATF questionnaire showed that there was 

almost unanimous agreement on the need for a stronger focus on training programs for competent authorities 

(e.g. customs agencies, law enforcement agencies, financial intelligence units, tax authorities and banking 

supervisors) to better identify trade-based money laundering techniques. In turn, improved training could result in 

substantial increases in the number of suspicious transaction reports filed with financial intelligence units. In 

addition, such training programs could be usefully supplemented by outreach sessions to the private sector. 

Strengthening Current Measures

There are a number of actions that countries could take to better identify trade-based illicit activity. The simplest 

is to ensure that competent authorities and financial institutions have access to the case studies and red flag 

indicators in this study. In addition, most countries would benefit from more effective information sharing among 

competent authorities at the domestic level. For example, it would be useful if law enforcement agencies could 

seek information from customs agencies on specific trade transactions in advance of a full-fledged criminal 

investigation. 

Improving International Co-operation 

Countries need to work cooperatively to identify and combat trade-based money laundering. Consistent with 

FATF standards, countries could put clear and effective gateways in place to facilitate the prompt and 

constructive exchange of information. In practice, this may require broader use of memoranda of understanding 

and mutual legal assistance treaties between countries to facilitate the sharing of information related to specific 

transactions. It also means greater recourse to mutual assistance agreements between customs agencies to 

facilitate the exchange of export and import data in order to identify trade anomalies that may indicate potential 

trade-based money laundering abuses. 
Trade Based Money Laundering 

27

Annex I 

Role of Financial Institutions in the Settlement of Trade Transactions 

Financial institutions can play three roles in the settlement of international trade transactions, namely, money 

transmission, provision of finance, and lending the institution’s name to the transaction. Below is a simple 

description of these roles. 

Money transmission – is the transfer of funds between parties associated with the trade transaction. 

(e.g. a wire transfer). 

Provision of finance – is the provision of credit to support the trade transaction. In these situations, as a 

standard practice, the financial institution conducts standard credit checks against the customer. In 

addition, the financial institution may conduct a check against the underlying transaction. 

Lending the financial institution’s name to the transaction – occurs in two situations: (1) where the 

financial institution undertakes to make payment subject to certain conditions (e.g. a letter of credit), and 

(2) where the financial institution undertakes to make payment if the buyer defaults (e.g. a guarantee). 

In addition to monitoring in accordance with domestic anti-money laundering and counter-terrorist financing 

regulations, the levels of scrutiny and information available on the underlying transaction will depend upon the 

bank’s exposure to credit and reputational risk associated with the provision of finance and lending of the bank’s 

name to the transaction. For example, because an institution’s risk exposure when conducting a money 

transmission is low, it is unlikely that the institution will closely scrutinise or even see the documents supporting 

the transaction (e.g. bills of lading or invoices). 
Trade Based Money Laundering 

28

Annex II 

This annex contains a sample of the key information that was provided in the responses to the FATF Project Team’s 

questionnaire. In some cases, the respondents did not answer all questions. 

Customs Agencies (24 respondents)

Yes No

Do you perform analysis that could be used to identify, investigate, or prosecute trade-based 

money laundering? 12 12 

Do you undertake analysis of trade data to identify trade anomalies that could be related to 

money laundering or terrorist financing? 13 11 

Can you provide a list of “red-flag” indicators of potential trade-based money laundering that 

could trigger suspicions or a possible investigation? 12 12 

Do you make use of any risk models or analytical tools to identify high-risk companies, 

commodities, countries or activities? 19 5 

Is there scope to make better use of trade data analysis to identify trade anomalies that could 

justify further investigation 18 5 

Has information or analysis led to specific investigations and subsequent prosecutions? 

Investigations 14 

Prosecutions 6 

No 10 

 

Is information sharing between customs agencies and other domestic agencies mandatory or voluntary?

Law Enforcement Financial 

Intelligence Unit Tax Authority Banking Supervision 

Mandatory 10 9 6 1 

Voluntary 13 11 14 10 

Not applicable 1 0 0 8 

With which of the following domestic agencies can trade-related information be shared?

Law Enforcement Financial 

Intelligence Unit Tax Authority Banking 

Supervision 

Yes 10 6 10 2 

Yes, with restrictions 13 15 10 11 

No 1 0 0 7 

Can trade-related information be shared with foreign competent authorities? 

Yes 7 

Yes, with restrictions 16 

No 0 
Trade Based Money Laundering 

29

Yes No

Do you have training programs in place that deal with the subject of trade-based money 

laundering? 8 15 

Do you see the need for better training and awareness of the techniques of trade-based 

money laundering? 22 1 

Do you consider your country to be vulnerable to the use of trade-based money laundering for 

criminal purposes? 17 7 

Law Enforcement Agencies (20 respondents) 

From which sources does your organisation receive information related to trade-based money laundering? 

Customs Agencies 11 

Financial Intelligence Units 13 

Tax Authorities 7 

Banking Supervisors 5 

Financial Institutions 10 

Others 9 

Has this information led to investigations and subsequent prosecutions? 

Investigations 18 

Prosecutions 13 

No 2 

Yes No

Has trade information been used as part of your analysis or investigations of money 

laundering or terrorist financing? 15 5 

Do you have access to a trade information database that you can use to advance analysis or 

investigations of money laundering or terrorist financing? 7 13 

Is there scope to improve cooperation between law enforcement and customs agencies 

through the use of searchable databases relating to individual companies or transactions? 15 5 

Can you provide a list of (“red flag”) risk indicators of potential trade-based money laundering 

activity that could trigger suspicions or a possible investigation? 7 12 

Is there scope to make better use of risk indicators to promote a more risk-based approach to 

detecting trade-based money laundering activity? 8 10 

Is information sharing between law enforcement and other domestic agencies mandatory or voluntary?

Customs Agencies FIU Tax Authority Banking Supervisor 

Mandatory 6 5 5 2 

Voluntary 11 9 11 8 

Not applicable 1 1 0 8 
Trade Based Money Laundering 

30

With which of the following domestic agencies can trade-related information be shared?

Customs Agencies FIU Tax Authority Banking Supervisor 

Yes 6 6 3 0 

Yes, with restrictions 12 8 14 8 

No 0 0 0 6 

Can trade-related information be shared with foreign competent authorities? 

Yes 3 

Yes, with restrictions 13 

No 1 

Yes No

Do you have training programs in place that deal with the subject of trade-based money 

laundering? 6 13 

Do you see the need for better training and awareness of the techniques of trade-based 

money laundering? 17 2 

Do you consider your country to be vulnerable to the use of trade transactions for criminal 

purposes? 13 6 

Financial Intelligence Units (21 respondents) 

Have you received Suspicious Activity Reports (SARs) that were triggered by suspicious trade transactions? 

Yes 12 

No 2 

Not applicable 5 

Have you received SARs that were triggered by suspicious trade transactions? 

 In the past year? In the past three years? 

0 1 1 

1 - 5 0 4 

6 - 25 6 4 

More than 25 8 5 

Not applicable 5 5 

From which sources does your organisation receive information related to trade-based money laundering? 

Customs Agencies 11 

Law Enforcement Agencies 12 

Tax Authorities 8 

Banking Supervisors 3 

Financial Institutions 17 

Others 3 

Not applicable 2 
Trade Based Money Laundering 

31

Yes No

Has trade information been used as part of your analysis or investigations of money 

laundering or terrorist financing? 11 10 

Is trade information routinely used in your analysis or investigations? 8 13 

Has this information led to investigations and subsequent prosecutions? 

Investigations 14 

Prosecutions 10 

No 5 

Yes No

In situations where trade-based money laundering is suspected, do transactions involve trade 

finance products such as letters of credit or documentary collections? 11 8 

Does your organisation collect SWIFT transactional data that is used in your analysis or 

investigations of money laundering or terrorist financing? 8 13 

Can you provide a list of (“red flag”) risk indicators of potential trade-based money laundering 

activity that could trigger suspicions or a possible investigation? 14 7 

Is there scope to make better use of risk indicators to promote a more risk-based approach to 

detecting trade-based money laundering activity? 10 6 

Do you have access to a trade information database that you can use to advance analysis or 

investigations of money laundering or terrorist financing? 6 15 

With which of the following domestic agencies can trade-related information be shared?

Customs Agencies Law Enforcement Tax Authority Banking Supervisor 

Yes 10 11 9 9 

Yes, with restrictions 8 7 7 3 

No 0 1 1 2 

Can trade-related information be shared with foreign competent authorities? 

Yes 7 

Yes, with restrictions 14 

No 0 

Yes No

Does your agency have specialists with particular expertise in the area of trade? 12 9 

Do you have training programs in place that deal with the subject of trade-based money 

laundering? 4 16 

Do you see the need for better training and awareness of the techniques of trade-based 

money laundering? 18 2 

Do you consider your country vulnerable to the use of trade transactions for criminal 

purposes? 15 4 
Trade Based Money Laundering 

32

Tax Authorities (21 respondents)

Do you receive information on suspicious activities related to trade-based money laundering? 

Yes 10 

No 11 

Do you have access to a trade information database that you can use to advance analysis or investigations of money laundering 

or terrorist financing? 

Yes 5 

No 8 

Not applicable 8 

Yes No

Do you perform analysis that could be used to identify, investigate, or prosecute trade-based 

money laundering? 7 13 

Do you file suspicious activity reports (SARs) with your financial intelligence unit relating to 

suspicious trade transactions? 7 14 

Can you provide a list of “red-flag” indicators of potential trade-based money laundering that 

could trigger suspicions or a possible investigation? 9 12 

Is there scope to make better use of risk indicators to promote a more risk-based approach to 

detecting trade-based money laundering activity? 5 10 

Do you conduct your own investigations or are you involved with other agencies in 

investigations into potential trade-based money laundering activity? 10 10 

Do you have a mandate to look for money laundering activities in the course of conducting an 

audit? 7 14 

If a suspicion of money laundering arises in the course of an audit, are you required to report 

it to a competent authority? 12 9 

Can a competent authority request tax information as part of an investigation on trade-based money laundering? 

Yes, in all cases 6 

Yes, with restrictions 14 

No 1 

Is information sharing between tax authorities and other domestic agencies mandatory or voluntary?

Customs Agencies Law Enforcement FIU Banking Supervisor 

Mandatory 7 6 10 2 

Voluntary 10 9 4 5 

Not applicable 1 3 4 11 

With which of the following domestic agencies can trade-related information be shared?

Customs Agencies Law Enforcement FIU Banking Supervisor 

Yes 9 4 8 2 

Yes, with restrictions 8 11 6 4 

No 2 3 5 10 
Trade Based Money Laundering 

33

Can trade-related information be shared with foreign competent authorities? 

Yes 2 

Yes, with restrictions 12 

No 5 

Yes No

Does your agency have specialists with particular expertise in the area of trade? 4 15 

Do you have training programs in place that deal with the subject of trade-based money 

laundering? 5 15 

Do you see the need for better training and awareness of the techniques of trade-based 

money laundering? 20 1 

Do you consider your country to be vulnerable to the use of trade-based money laundering for 

criminal purposes? 15 5 

Banking Supervisors (23 respondents) 

From which sources does your organisation receive information related to trade-based money laundering? 

Customs Agencies 2 

Law Enforcement Agencies 2 

Financial Intelligence Units 4 

Banking Supervisors 1 

Financial Institutions 7 

Others 2 

Yes No

Do you perform analysis that could be used to identify, investigate, or prosecute trade-based 

money laundering? 6 17 

Can you provide a list of (“red flag”) risk indicators of potential trade-based money laundering 

activity that could trigger suspicions or a possible investigation? 12 6 

Do you make use of any risk models or analytical tools to identify high-risk companies, 

commodities, countries or activities? 9 14 

With which of the following domestic agencies can trade-related information be shared?

Customs Agencies Law Enforcement FIU Tax Authority 

Yes 2 4 11 3 

Yes, with restrictions 10 11 3 9 

No 5 3 3 4 

Is information sharing between banking supervisor and other domestic agencies mandatory or voluntary?

Customs Agencies Law Enforcement FIU Tax Authority 

Mandatory 1 6 9 2 

Voluntary 10 8 4 9 

Not applicable 5 3 3 4 
Trade Based Money Laundering 

34

Can trade-related information be shared with foreign competent authorities? 

Yes 1 

Yes, with restrictions 12 

No 4 

Yes No

Does your agency have specialists with particular expertise in the area of trade? 3 20 

Do you have training programs in place that deal with the subject of trade-based money 

laundering? 3 18 

Do you consider your country to be vulnerable to the use of trade transactions for criminal 

purposes? 12 5 
Trade Based Money Laundering 

35

Glossary 

Alternative remittance systems (ARS) -- are operations to transfer money outside of the formal banking 

system. These include unregulated networks (e.g. underground banks) and regulated operations (e.g. money 

service businesses).*

 

Bill of lading -- is a document signed by a carrier to confirm the receipt of goods to and from the points indicated.

Capital flight -- is the rapid outflow of money from a country often in response to an economic event that disturbs 

investors and causes them to lose confidence in the country’s financial stability. 

Cash couriers -- are individuals that transport currency or bearer-negotiable instruments from one country to 

another country for the purpose of laundering the proceeds of crime or financing terrorist activities. 

Commingling -- is the process of combining the proceeds of illicit activities with the earnings of legitimate 

businesses for the purpose of disguising the source of these illicit funds and complicating the money trail. 

Front company -- is a corporate vehicle that can be used to obscure the beneficial ownership of an organisation. 

Guarantee -- is an undertaking, usually on the part of a bank, to fulfill the obligations of another party or to pay a 

specified amount of money upon presentation of specified documents indicating that the guaranteed party has 

defaulted on certain obligations. 

Hawala -- is a specific form of an alternative remittance system operation. A hawaladar is the operator or owner 

of a hawala. 

Letter of credit -- is an undertaking, usually on the part of a bank and at the request of a customer, to pay a 

named beneficiary a specified amount of money upon presentation of specified documents set out in the terms 

and conditions of the letter of credit. 

Shell Company -- is a company that is incorporated but has no significant assets or operations. 

Smurfing (or structuring) -- is a money laundering technique, which involves the splitting up of a large bank 

deposit into a number of smaller deposits to evade the suspicious activity reporting requirements of financial 

institutions. 

Trade-based money laundering -- is the process of disguising the proceeds of crime and moving value through 

the use of trade transactions in an attempt to legitimise their illicit origin. 

Trade Transparency Units -- are arrangements to promote the sharing of trade data between cooperating 

customs agencies for the purpose of detecting and analysing suspicious trading activities. 

Transfer pricing -- are pricing agreements established by mutual agreement rather than free market forces. In 

practice, these are often associated with intra-company transactions. 

 

*

 For more information, see the Financial Action Task Force’s Money Laundering and Terrorist Financing Typologies Report 

for 2004-2005. 
Trade Based Money Laundering 

36

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