Tackling the masked menace that is trade-based money laundering

Product Strategist, Futures, BAE Systems Applied Intelligence Read time: 4 mins
Jon Draper, Product Strategist in the Futures team at BAE Systems Applied Intelligence, asks how trade-based money laundering is impacting society, and what we can do about it.
Tackling the masked menace that is trade-based money launderingThe global trade outlook is a stormy one right now. The challenges are numerous – varying in different regions across the globe.

Free ports have recently been discussed as a potential measure to address this trade tumult. But a recent EU report has raised concerns – declaring free ports a money laundering risk.

With trade-based money laundering (TBML) blossoming, our Futures team has been investigating the problem in more detail.

What is TBML?

There are three vehicles through which money laundering takes place. The simplest uses the physical movement of cash to hide illicit funds. Next comes financial services – where launderers exploit the speed and complexity of the global financial system.

More recently (and surreptitiously), trade-based money laundering is now on the rise. Here, the volume and fragmentation of the trade in goods and services is being used to create hard-to-trace transactions.

In many ways, TBML is just the same as any other type of money laundering. It essentially comprises the same three steps – placement, layering and integration.

It’s so similar, in fact, that regulation doesn’t distinguish between TBML and broader money laundering. This has lulled many into thinking that there’s nothing significantly new about TBML – that it can be treated with existing money laundering controls.

But while trade-based money laundering is similar, it varies significantly from other money laundering in key areas.

How does trade-based money laundering work?

The placement, layering and integration of TBML happens in an entirely different system – trading products or services, rather than via financial services. While financial services comprises many sub-sectors, that’s nothing compared to the fragmentation of the global trade system across a broad set of industries.

This challenge is magnified when you consider that over 80% of global trade takes place without banks involved in financing.  So, they only see the settlement of funds resulting from trades and very little (if any) details of the trade itself. To make matters worse, there’s rarely a direct match between the settlement transactions the banks see and underlying trades.

Finally, while the overwhelming majority of transactions between financial institutions are digital, trade transactions are very often paper based still.

Why is TBML so hard to tackle?

These simple differences result in far-reaching consequences for the fight against trade-based money laundering.

The transactions involved are not only spread across accounts, financial institutions and jurisdictions, but over a wide range of completely different industries, most of which are not regulated for Anti Money Laundering.

The differences between legitimate transactions and money laundering are also often only discernible when analysing overall patterns of trades. So, to detect TBML, you need broad visibility.

And, finally, the incentives for stakeholders to collaborate and tackle TBML are confusing (and therefore ineffective).

The mission to thwart TBML

As others in our industry have suggested, collaboration is crucial when attempting to takedown TBML. That sounds obvious and it’s easy to say. The trouble is, such collaboration is incredibly hard to achieve for several reasons.

Banks and other organisations face legal and regulatory constraints around the issues of data privacy and commercial confidentiality, which can make it hard for them to share information collaboratively. What’s more, the signs of TBML can be spread across organisations with wildly varying remits and incentives. This not only makes it difficult to pull the pieces of the puzzle together, but also adds to the collaboration conundrum.

The BAE Systems Futures team is currently exploring pioneering new ways to overcome these hurdles. You can read more about our progress on our Banking Insights page, where you can sign up to receive our latest report on trade-based money laundering and join our community of banking and law enforcement professionals working to defeat TBML.

Learn more; read our recent Banking Insights report, 'Finding the Achilles' Heel of Trade-based Money Laundering' now.


Jon Draper Product Strategist, Futures, BAE Systems Applied Intelligence 17 October 2019