Common Red Flags for Trade-Based Money Laundering Schemes

What Are Common Red Flags for Trade-Based Money Laundering Schemes?

International trade is built on speed, documentation, logistics, and trust between parties operating across multiple jurisdictions. However, the same structures that support legitimate trade can also be exploited to move illicit value, conceal ownership, evade sanctions, or disguise the true nature of transactions.

Trade-Based Money Laundering (“TBML”) remains one of the most challenging financial crime risks for financial institutions, auditors, corporate service providers, and businesses involved in international trade. Unlike conventional money laundering, TBML uses commercial trade activity as the mechanism through which illicit value is transferred or disguised.

The Financial Action Task Force defined TBML in 2006 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.”

One of the most important points within that definition is that the real objective is often not the movement of goods itself, but the movement of value through the trade transaction.

Over the years, international authorities have also recognised that similar trade-based structures may be used in sanctions evasion, terrorist financing, and proliferation financing schemes. While these are separate legal and regulatory risks, they often involve the same misuse of trade documentation, corporate structures, shipping arrangements, and payment flows.

During a recent training session jointly delivered by Diligex and The Access Bank Malta Ltd, one point became particularly clear: TBML detection is rarely about identifying one obvious red flag. More often, it involves recognising a combination of inconsistencies that, when viewed together, no longer make commercial sense.

Looking Beyond the Documents

Trade finance is heavily document-driven. Bills of lading, invoices, certificates of origin, contracts, customs declarations, and insurance documents form the backbone of international trade transactions.

As a result, documentary inconsistencies remain one of the most common indicators of potential TBML activity.

In practice, this may involve discrepancies between invoices and shipping documents, vague descriptions of goods, inconsistent quantities or values, or last-minute amendments to key information such as counterparties, destinations, or product classification (HS codes).

Sometimes the issue is not necessarily that a document is false, but that it avoids saying too much. Descriptions such as “equipment,” “industrial materials,” or “general goods” may appear harmless on the surface, yet they can significantly limit sanctions screening or dual-use assessments.

At the same time, the existence of complete documentation does not automatically mean the transaction itself is legitimate. One of the recurring themes in TBML investigations is that the paperwork often appears technically compliant while the underlying commercial activity does not.

Commercial Logic Still Matters

Some of the strongest TBML indicators arise when the transaction itself does not appear commercially rational.

A newly incorporated company suddenly engaging in large international trade activity may warrant additional scrutiny. The same applies where the scale of trade is disproportionate to the operational footprint of the business, or where entities operate primarily through nominee structures or registered-office-only arrangements.

Equally important is understanding whether the transaction aligns with the customer’s actual business activity. If a company historically involved in textiles suddenly begins trading industrial machinery through multiple high-risk jurisdictions, questions naturally arise regarding the commercial rationale behind the activity.

This does not mean that every unusual transaction is suspicious. International trade can be complex, and legitimate businesses may operate through sophisticated cross-border structures for entirely valid reasons. However, where opacity appears unnecessary or commercially unjustified, institutions should understand why.

Often, the simple questions become the most important:

Does the transaction make economic sense?
Does the scale of activity align with the business profile?
Why are these counterparties involved?
Do the financial flows align with the trade flows?

Pricing and Value Manipulation

Over-invoicing and under-invoicing remain among the most widely recognised TBML techniques.

Artificially inflating or reducing the declared value of goods allows value to be transferred across borders under the appearance of legitimate trade. In practice, however, pricing assessments are rarely straightforward. Commodity values fluctuate due to freight costs, market conditions, exchange rates, product quality, seasonality, and sourcing considerations.

This is why pricing discrepancies should not be assessed mechanically. A transaction priced slightly above market value does not automatically indicate illicit activity. The concern arises where the pricing structure lacks a reasonable commercial explanation or where multiple other red flags are also present.

Certain sectors also appear repeatedly in international TBML typologies because they facilitate high-volume trade and flexible pricing structures. Agricultural products, electronics, textiles, used vehicles, and industrial goods have all featured in previous investigations and enforcement actions.

Disconnects Between Trade and Financial Flows

Another recurring indicator involves situations where the payment flow does not align with the trade transaction itself.

Examples include payments originating from unrelated third parties, layered settlement arrangements, or intermediary funding structures with no obvious commercial role.

These types of arrangements frequently appear in typologies involving underground banking networks and sanctions evasion structures.

Again, context remains important. Third-party payments are not automatically prohibited in every circumstance. However, where the payment structure appears unnecessarily complex or disconnected from the commercial arrangement being presented, institutions should understand the rationale behind it.

Shipping and Ownership Structures

Shipping activity and corporate ownership structures have become increasingly important within TBML and sanctions-related assessments.

Unusual routing, unexplained transshipment activity, AIS transponder gaps, ship-to-ship transfers, or vessels linked to shadow fleets may all indicate elevated risk.

One practical issue frequently overlooked is vessel identification. Vessel names may change several times throughout a ship’s operational life, whereas the IMO number remains constant. Screening based solely on vessel names may therefore fail to identify high-risk or sanctioned vessels operating under alternative identities.

Complex ownership arrangements also continue to present challenges. Shell companies, layered offshore structures, nominee shareholders, and trusts may all be used to distance the ultimate beneficial owner from the transaction or underlying asset.

The issue is often not the existence of a complex structure in itself, but whether there is sufficient transparency to identify who ultimately controls or benefits from the activity. This concern is further heightened in the context of trade-based money laundering (TBML), particularly where there is limited clarity around the end user, the involvement of dual-use goods, or the potential diversion of goods to sanctioned or high-risk jurisdictions, including proliferation-related destinations.

A Risk-Based Approach Remains Essential

Perhaps the most important point is that TBML detection cannot be reduced to a checklist exercise.

Not every unusual route is suspicious. Not every offshore structure is abusive. Not every pricing discrepancy indicates financial crime.

However, where multiple indicators converge, institutions should be prepared to apply enhanced scrutiny and escalation.

Ultimately, effective TBML controls depend on understanding the transaction as a whole: the customer, the goods, the counterparties, the shipment, the payment flow, and the commercial rationale behind the activity.

In many cases, the challenge is not the absence of documents. The challenge is determining whether the documentation genuinely reflects legitimate economic activity.

Key Takeaways

TBML uses legitimate trade structures to disguise illicit value movement.
Documentary inconsistencies remain a significant red flag.
Commercial rationale is often more important than documentation alone.
Transactions should align with the customer’s business profile and operational footprint.
Third-party payments and layered settlement structures require additional scrutiny.
Opaque ownership structures and concealed UBOs remain major risk indicators.
Shipping activity and vessel monitoring have become increasingly important in sanctions and TBML detection.
Multiple red flags combined are often more significant than a single isolated issue.

Regulatory Focus and the Expanding Scope of TBML Risk

Recent national and supervisory assessments continue to reinforce that trade-based money laundering is not a theoretical or niche concern, but a recognised and evolving risk within the financial and corporate ecosystem.

The Malta National Risk Assessment (2023) identifies TBML as a relevant risk factor within the broader financial crime landscape. TBML is also present in the context of cross-border activity, the use of corporate structures, and the interaction between different sectors within the financial system. This reflects a broader international trend where trade is increasingly recognised as a channel through which illicit value may be transferred, often cutting across traditional sectoral boundaries.

This supervisory attention is further reflected in the FIAU AML/CFT Compliance Monitoring Plan for the 2025–2026 cycle, where TBML features as an area of focus not only for credit institutions, but also for auditors, accountants, and company service providers. Importantly, the plan also highlights risks that apply across multiple sectors, such as beneficial ownership obligations with a focus on complex/opaque ownership structures and/or shell companies. This further reflects that TBML is rarely confined to a single point within a transaction chain, but instead manifests across interconnected relationships, services, and jurisdictions.

In practice, this serves as an important reminder that TBML is not solely a “banking issue”. While financial institutions play a central role in processing trade and payments, other subject persons/obliged entities form part of the same ecosystem. Auditors, accountants, and corporate service providers often act as gatekeepers at different stages of a transaction lifecycle: from company formation and structuring to financial reporting and ongoing advisory. As a result, exposure to TBML risk may arise indirectly, even where the entity is not directly involved in executing trade transactions itself.

Wait, don't go!

Name

Surname

Email