Original Article

Trade based money laundering: A primer for

banking staff
Received (in revised form): 1st September 2015

Mohammed Ahmad Naheem

holds a Bachelor’s Degree, two Masters Degrees and has completed a PhD, all in the economic, banking and investment management
domains. The author is a specialist researcher and practitioner in the fields of Trade Based Money Laundering and Virtual Currencies and at
the time of composing this paper (May 2015) is working on his second doctorate level research project titled ‘Trade Based Money Laundering:
Exploring the Empirical Implications for Global Banks’ which is scheduled for publication in Winter 2015/Spring 2016.

ABSTRACT Purpose: What are the reason(s) for writing the paper and the aims of the research? – This
article provides a detailed overview of the risks associated with trade-based money laundering and
in particular the use of free trade zones. The purpose of the article is to inform the development of
risk-based assessments within the banking sector on trade-based money laundering. It offers
findings from research conducted by the author and other academic findings on areas to focus on
in risk assessment. Design/Methodology/Approach: How are the objectives achieved? Include the main
method(s) used for the research. What is the approach to the topic and what is the theoretical or subject scope of
the article? – The article uses a number of sources of secondary data, including FATF reports, the
Wolfsberg Principles and current research into TBML and the banking sector. It also uses findings
from research by the author. The subject scope is trade-based money laundering (TBML). Find-
ings: What was found in the course of the work? This will refer to analysis, discussion, or results – The main
findings from the analysis are that banks have a greater legal and regulatory responsibility towards
detecting and reporting suspicious transactions than they would have previously considered. This
includes identifying the source and purpose of fund transfers related to trade and shipping finance
and establishing the beneficial ownership of clients and the businesses in which they are working.
The article highlights the inherent risks associated with free trade zones and the need for a greater
level of awareness across all units of the bank on risk assessment from TBML crimes. Research lim-
itations/implications (if applicable): If research is reported on in the article this section must be completed and
should include suggestions for future research and any identified limitations in the research process – The article
is a viewpoint paper but is based on forthcoming research by the author and uses an extensive
literature-based research analysis. Practical implications (if applicable): What outcomes and implications
for practice, applications and consequences are identified? How will the research impact upon business or enter-
prise? What changes to practice should be made as a result of this research? What is the commercial or economic
impact? Not all papers will have practical implications – The research article has identified a number of
implications to the banking sector on addressing Anti-Money Laundering (AML) deficiencies,
especially the need to improve standards of beneficial ownership verification and CDD checks for
business clients involved in trading and shipping. It also has implications for IT development
within this sector for all agencies working on TBML crimes. Social implications (if applicable): What will
be the impact on society of this research? How will it influence public attitudes? How will it influence (corporate)

Correspondence: Mohammed Ahmad Naheem,

Seven Foundation, Zurich 8002, Switzerland
E-mail: mnaheem@sevenfoundation.ch

© 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance 1–23
www.palgrave-journals.com/jdg/
 Naheem

social responsibility or environmental issues? How could it inform public or industry policy? How might it affect the
quality of life? Not all papers will have social implications – This article has implications for the global
banking sector. It will also influence approaches to AML regulation, risk assessment and audit within
the broader financial services sector. In addition it has implications for agencies working on TBML,
including law enforcement, customs, governments and tax and revenue investigators. Originality/
Value: What is new in the article? State the value of the article and to whom – The originality of this article
is the in-depth discussion on TBML and banking risk assessment processes.
International Journal of Disclosure and Governance advance online publication, 21 January 2016;
doi:10.1057/jdg.2015.21

Keywords: trade-based money laundering; free trade zones; customer due diligence; beneficial
ownership; risk assessment; global banking sector

Abbreviations AML system and focusses on the example of

one particular type of illicit activity, which is
AML Anti-Money Laundering sometimes referred to as trade-based money
CDD Customer Due Diligence laundering, or TBML. It is a process that
FATF Financial Action Task Force disguises the actual movement of money by
FCA Financial Conduct Authority (UK using the cover of international trading transac-
Regulator) tions (FATF, 2006) and can be used by both
FIU Financial Intelligence Unit money launderers and white collar criminals as a
HBUS HSBC Bank in the US way to move money across different jurisdic-
HBMX HSBC Bank in Mexico tions. There are a number of TBML schemes
ICIJ International Consortium of Inves- that have been uncovered by law enforcement
tigative Journalists and banking intelligence units, and this article
KYC Know Your Customer examines some of these examples in more
ML Money Laundering detail.
RBA Risk Based Approach The main purpose of the article is to examine
PEP Politically Exposed Persons the implications of TBML for the banking and
SAR Suspicious Activity Report financial services sectors, which often have
TBML Trade-based Money Laundering responsibility for approving and facilitating the
UN United Nations trade finance component of such schemes. The
UNODC United Nations Office on Drugs article also explores whether TBML is an
and Crime appropriate name for such activity given the
use of trade transactions to facilitate white collar
crime as well, or whether a broader term such as
Trade Fraud would be a more accurate descrip-
INTRODUCTION tion, which could include a number of different
Money-laundering schemes are continuing to types of trade-related crimes.
grow and develop in complexity to avoid
detection within the main financial institutions;
at the same time, increasing numbers of banks GLOBAL TRADE
have been involved in legal cases due to failures The shipping industry is one of the busiest
in AML compliance and risk management global industries at present, with an estimated
(O’Brien and Dixon, 2013). This article 10 000 liner ships being loaded and unloaded
focusses on some of the issues that the modern per week across the globe. Most of these are
banking sector is facing in developing a strong liner ships that operate across fixed routes

2 © 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance Vol. 00, 0, 1–23

between countries. Liner shipping accounts for
about 60 per cent of the global trade in shipping
according to the World Shipping Council
(2015), transporting an estimated value of US$4
trillion around the globe. The World Shipping
Council reports that in 2012 there were approxi-
mately 500 services providing almost daily routes
between countries with an estimated 9000 port
calls made. An overview of the main trade
shipping routes shows that Asia–North America
is the biggest trading route with over 23 million
trade routes carried out in 2013, with Asia–
North Europe the second busiest at 13.5 million
routes (World Shipping Council, 2015).
This level and scale of shipping transactions
that are being undertaken on a daily basis
provides an ideal cover for criminal organiza-
tions seeking to move illicit goods and cash
between countries. TBML is a relatively new
phenomenon for the formal financial services
sector (Araujo, 2008), but has become increas-
ingly more prominent as a means by which to
defraud both tax and revenue departments, as
well as involving the banking sector in facilitat-
ing other types of illicit activity, including
laundering money (PWC, 2014a). This article
seeks to describe some of the facts and myths of
what TBML is and explain the challenges it
presents to the banking sector for risk assess-
ment and audit procedures.
Trade-based money laundering
(TBML)
TBML has been difficult to define across both
the industrial banking and the academic sectors,
partly because of its complexity and partly
because of the variety of ways in which TBML
can occur. It is not just money launderers who
use trading and shipping methods to hide goods
or fund transfers. Many white collar criminals
involved in tax evasion or corrupt politicians
and corporate businesses involved in capital
flight schemes also utilize many of the TBML
schemes for their own purposes. The first real
attempt at a definition was by the Financial
Action Task Force (FATF, 2006), when they
© 2016 Macmillan Publishers Ltd. 1741-3591
Trade-based money laundering
produced a guidance document in 2006 and
defined TBML activity as ‘the process of dis-
guising the proceeds of crime and moving value
through the use of trade transactions in an
attempt to legitimize their illicit origins’ (p. 5).
This definition has been criticized by some
academics (Soudijin, 2014) as being too vague
by not specifying whether the focus is on goods
and/or services and whether it is international
trade only or if it includes domestic transfers.
Also by its limited definition of ‘illicit origins’ it
does not cover terrorism funds moved in this
way or capital flight/tax evasion schemes using
the same systems. In a report published by the
Australian Institute of Criminology the follow-
ing definition is used for TBML: ‘the use of
trade to move value with the intent of obscur-
ing the true origin of funds’ (Sullivan and
Smith, 2011, p. 10). They also explicitly state
that alternative remittance systems and the
movement of cash are not covered in their
definition.
In this article the focus is on the mechanisms
behind the different schemes and methods used,
and from this information to start to consider or
establish an appropriate risk assessment frame-
work that can be used across the different
schemes. For the purposes of this article the
predicate crimes or purposes for undertaking
TBML activity could be tax evasion, money
laundering, capital flight and/or terrorist
funding.
TBML SCHEMES
Banks are often involved in shipping and trade
transactions because some form of pre-shipping
finance is needed by the client to enable them
to purchase the goods and ship them (APG,
2012). The buyer will not usually want to pay
upfront for all the goods until they can be
inspected at the destination port, and thus banks
provide the bridge between the sellers and the
buyers in the transaction. As part of the banking
process an assessment is undertaken as to the
viability of the business transactions and the risk
to the bank in agreeing to fund it. The bank
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 3
 Naheem
will request a number of documents to be
submitted by the seller before the trade finance
is approved. These may include some or all of
the following:
Commercial invoices – gives information on
the weight and description of goods
Transport document – often known as a
Bill of Lading, which provides details of
the agreed goods for carriage and details of
the shipping arrangements.
Insurance document – for the goods while
in transit
Certificate of origin – which states where
the goods were produced
Certificate of inspection – provides an
additional opinion on whether the goods
are as stated
A packing list – often used when the
consignment is divided into smaller
packages
A weight certificate – used by buyers when
goods are sold by weight; also used by
freight companies to determine the cost of
transport.
Falsification of trade documents
Most business clients know that this informa-
tion will be required by the bank, and the first
part of most TBML activity will involve crim-
inals developing schemes (Gottschalk, 2013)
that will enable them to falsify one or more of
these documents. The easiest and most
Figure 1: Example of invoice falsification reproduced from FATF (2006, p. 6) Copyright ©
FATF/OECD. All rights reserved.
4 © 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance Vol. 00, 0, 1–23
common form of falsification occurs on the
invoices (AUSTRAC, 2013) where the value
and description of the goods are often changed
depending on how money is to be moved –
from the destination country or from the
country of origin.
Example of invoice falsification
There are two main ways in which invoices are
changed and which are known as ‘over-invoi-
cing’ or ‘under-invoicing’ (FATF, 2006). The
principles are similar, but one is a mirror version
of the other depending on which way money
needs to move. The example shown in Figure 1
illustrates under-invoicing.
In this example company E under-declares
the number of widgets being shipped to com-
pany F by actually sending out 1.5 million
widgets rather than the stated invoice amount
of $1 million. Each widget is sold at $2 each,
and thus this transaction produces an extra $1
million in revenue, which is deposited in a local
bank of company F for future use by company
E. In affect, company E has moved $1 million
to the country of company F without it being
detected. This kind of transaction obviously
requires complicity on the side of both the
seller and the buyer. Similarly, company F will
also need to falsify their invoices at some point
to match the amount of widgets actually sold.
This kind of transaction is not without its
risks to the criminals. For example, the weight
of an extra 500 000 widgets could be spotted by

customs. Similarly, revenue could do an audit
to discover inventory discrepancies between
widgets produced and amount shipped or sold.
However, from the banking perspective, with-
out supporting evidence from either customs or
revenue it becomes very difficult to ascertain
whether the documents being produced and
given to the bank accurately reflect the ship-
ment details. The example shown in Figure 1
can also be repeated in reverse with the expor-
ter Company E claiming to ship 1 million
widgets but instead sending only 500 000. Pay-
ment is still received for $2 million from
Company F of which $1 million is sent to the
supplier and the remaining $1 million goes into
a bank account for Company F to access at a
later stage. In this arrangement Company F has
transferred $1 million undetected into the
country of Company E.
Schemes such as under- and over-invoicing
have begun to be noticed and have been
described in typology reports such as
AUSTRAC (2013) as well as being identified
in the FATF guidelines and red flag indicators
(FATF, 2006). One of the ways that criminals
can circumvent the trade documentation
process is through the use of free trade zones,
which enable shipments to be unloaded
and reloaded with minimal checks and with-
out having to resubmit documentation
through customs. This provides an opportunity
to move goods and change shipments without
being detected, or to change the destination
port without the banking finance unit being
aware.
Free trade zones (FTZs)
Free trade zones (FTZs) are designated areas
within jurisdictions where incentives are offered
to support development through increased
exports and foreign direct investment (FATF,
2010). The way this is achieved is through
offering benefits such as exemptions from tax
and duties, simplified administration, and less
stringent checks on goods. FTZs also enable
goods to be easily unloaded and reloaded onto
© 2016 Macmillan Publishers Ltd. 1741-3591
Trade-based money laundering
other ships, thus hiding the true destination
country of products. All of these incentives
provide an additional opportunity for criminals
to hide the source of the money and the
original source of the goods being transported
(Sullivan and Smith, 2011). In total there are an
estimated 3000 FTZs, and FATF has high-
lighted their concerns that many FTZs are also
located in major financial hubs, thus providing
criminals with easier access to the main financial
sector (FATF, 2010).
In particular, one of the highlights of the
FATF (2010) report was that the inspection of
goods by the zone authorities is carried out only
for some percentage of the cargo. This would
facilitate cases of over- and under-invoicing as
there would be little chance of any verification
checks being carried out. However, the chal-
lenge to the banking sector is that they have
little chance of having the information verified
either; thus, the use of FTZs is in itself a red flag
indicator and needs to be considered in light of
other information known about the client and
their business history.
In addition to FTZs there are a number of
similar schemes across the globe that operate
according to the same principal model of an
FTZ but without always focussing specifically
on developing export growth. Examples of
these include the following:
 Export Processing Zones (EPZ)
 Hybrid EPZ model
 Enterprise Zones
 Free Ports
 Single factory EPZ
 Special Economic Zones
 Foreign Trade Zones
 Bonded Warehouses
All of these free trade schemes highlight the
importance, to the trade finance and AML
units, of understanding the client’s proposed
shipping routes and consider why certain areas
have been used and what type of zones will be
available to facilitate criminal activity. Free zone
areas pose a significant number of challenges to
banks especially when trying to determine
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 5
 Naheem
accurate shipping information including bene-
ficial ownership and documentation on the
legal entities involved in some of the transac-
tions. In particular, FATF (2010) noted that
many zone authorities are not as stringent in
establishing new legal entities as they would be
if operating outside the zone area; as a result
they determined several weaknesses in the
system from an AML perspective because of
the following reasons:
 The zone authorities often require little or no
ownership information of the companies
setting up in the zone
 The physical presence of a company in the
zone is not always a requirement for estab-
lishment in the area
 The regulations covering the control of
FTZs are not always explicitly stated; thus, it
may not be clear whether the government or
the customs authorities have the jurisdiction
 Controls are often carried out by random
selection more than on risk assessment or
indicators
 There are no clear procedures, authority, or
documentation identified upon which to
organize and execute the examinations
 Licensing procedures and supervision of
activities in FTZs are often complicated and
bureaucratic, which can lead to insufficient
oversight
These new legal entities that have been formed
through the FTZs now have access to the
financial system in the same jurisdiction, or in
other jurisdictions, and will be considered by
most banks as legal businesses. This poses a risk
to all banks as many of these new legal entities
will be seeking to access financial services in
other countries in order to move funds across
the globe.
even if banks outside of the FTZs are
involved in the trade transactions, they
are less able to manage ML/TF risks
because of the others vulnerabilities of the
zones (opaqueness and relaxed oversight).
(FATF, 2010, p. 15)
6 © 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance Vol. 00, 0, 1–23
FTZs were introduced in order to develop and
strengthen trading within and across certain
geographic regions. The FTZs offer a number
of advantages to those in the shipping business,
such as easier access to transhipment, re-packa-
ging, warehouse storage and re-labelling of
goods. Goods entering FTZs are not usually
subject to the usual customs checks and con-
trols. However, for criminals seeking to launder
funds these same facilities also provide an ideal
haven in which to store illicit goods or change
shipment routes without informing banking
services.
Goods introduced in a FTZ can undergo
various economic operations, such as
transhipment, assembly, manufacturing,
processing, warehousing, re-packaging
and re-labelling as well as storage for
timely marketing, delivery and tranship-
ment. The tracking of shipments, espe-
cially for repackaging, is a key element in
the control of FTZs. The same shipment
may use FTZs as a base around the globe
for no other purpose than to launder
funds.(FATF, 2010, P16)
Privatization of FTZs
One of the biggest shifts in FTZ development
has been the movement towards private opera-
tors as opposed to government or state-mana-
ged zones. The rapid change in the
development of FTZs (2010) also means that
some of the AML/CTFs may not be up to date,
which is another issue that was raised as a
concern by FATF and which they state needs
to be addressed. Table 1 shows the shift towards
private zone development and the areas of the
globe most affected.
FTZs provide a number of opportunities by
which criminal organizations can exploit the lax
AML controls in order to facilitate trade fraud in
some form. One of the difficulties is that through
the establishment of legal entities and businesses,
which can then trade with each other within a
FTZ, additional layers of complexity are

Table 1: Showing the shift from public to private controlled trading zones reproduced from FATF (2010,
p. 13)
Private and public sector zones in developing and transition economies
Region
Americas
Asia and Pacific
Sub-Saharan Africa
MENA
Central/Eastern Europe and Central Asia
Total
Source: Akinci and Crittle (2008).
introduced into money-laundering or tax
evasion schemes. In particular many of these
entities cannot be checked or have the beneficial
ownership information verified.
The following case study in Figure 2 high-
lights some of the complexities that may be
present in money-laundering schemes that
operate through an FTZ, using multiple import
and export traders. The traditional model of
money laundering that involves layering the
money (Neilsen and Furneaux, 2013) through
different financial transactions is achieved here
through the trading commissions. All of these
traders could have been established within the
FTZ, meaning that beneficial ownership infor-
mation may be harder to detect.
There are a number of implications to the
banking sector from this case study, but one of
the main ones is that money that may be
released through the trade finance unit for
legitimate business shipping purposes might
halfway through the shipment be used for
criminal purposes such as smuggling, piracy of
goods or tax evasion. The more information
that the banking units can have on clients the
better understanding they will have of what
businesses they are supporting and the risks they
are exposing their bank to. However, informa-
tion gathering is only part of the solution; the
other part is understanding how to analyse the
information within a specific TBML risk assess-
ment framework.
© 2016 Macmillan Publishers Ltd. 1741-3591
Trade-based money laundering
Public zones Private zones Total
146 394 540
435 556 991
49 65 114
173 40 213
69 374 443
872 1429 2301
ANALYSING TRADE DATA FOR
LINKS TO MONEY-LAUNDERING
PURPOSES
Analysing the data produced in relation to trade
transactions is not an easy operation. There is an
inordinate amount of data relating to each
shipment entering and leaving the trade zone,
and yet according to the research conducted by
FATF (2010) many FTZs have only computer-
ized certain aspects of their work, and even
more importantly this information is not linked
to the custom’s database. This provides a num-
ber of challenges for the investigation or mon-
itoring of potential TBML shipments, both
within the zones and also by third-party orga-
nizations such as the banking sector. All of these
authorities and personnel responsible for this
work need to have access to a systematic
method for analysing the data. Otherwise
investigations become ‘manual, tedious, time-
consuming, and resource-intensive’, which
often results in ‘their high false positive rate
(FPR) and inefficiency with voluminous data
sets’ (Gao and Ye, 2007, p. 171).
The difficulties associated with producing
volumes of unsorted data have already been
noted as one of the side effects of increased
reporting regulation (Takáts, 2007). The pressure
on banks to file a suspicious report rather than be
caught not having done so has resulted in a large
increase in data, which as Takáts (2007) noted
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 7
 Naheem

Figure 2: Example provided by FATF (2010, p. 25) of Carousel Fraud using various companies
registered in free trade zones Copyright © FATF/OECD. All rights reserved.

tends to result in less efficiency and less useful needs to be handed over to the financial intelli-
material being produced. A balance is needed gence unit. Inevitably, in order to process the
whereby the banking sector can analyse the large quantities of data, some form of automated
initial data before discerning which information search system is required.

8 © 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance Vol. 00, 0, 1–23

Software development
One of the challenges in deciding on a software
package is that the ideal type of data sorting
package has not been developed yet and/or
separate systems are used that are not linked
together, even within the same FTZ area
(FATF, 2010).
Most FTZs software systems, if they exist,
are not integrated to the Customs IT
systems, which include all ports. A paper
based system or a hybrid of paper and IT as
it is in most cases requires longer to
monitor and check against related docu-
ments (in-bound versus outbound). It is
also difficult to analyze data for trends
related to specific ports, zones, regions or
businesses.(FATF, 2010, p. 17)
In many areas trade data software is still being
developed and is in the early stages, although
systems have been developed in the United
States using the US Merchandise Trade Data
Set (Zdanowicz, 2009). Despite the ongoing
development process, there have been some
inroads into developing appropriate trade data
software and some authors have noted that there
are a number of factors that need to be included
in any AML software programme (Gao and Ye,
2007). These include the following areas of
‘techniques, customer, account, product, geo-
graphy, and time’ (Gao and Ye, 2007, p. 172),
which can all be included in a basic data mining
set. However, Gao & Ye also note that, without
adequate training, users of this type of software
will have a tendency to focus only on what they
are looking for, rather than analysing what the
data are actually presenting.
WITS project (world integrated trade
solution)
Integrated trade data programmes are slowly
being developed and different systems amalga-
mated. One such programme that has been
developed is through the World Bank (2015)
and their WITS project. This database com-
bines several trade databases including the UN
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Trade-based money laundering
COMTRADE and the UN Conference on
Trade and Development database. The system
is free to be accessed and provides information
on trade data from across the globe. Data can be
searched according to countries, products and
indicators and can be viewed in a number of
ways.
Other software that has been developed to
provide information on trade tariffs across the
globe is MACMAP, which has the aim of
supporting the development of emerging
economies. The WITS and MACMAP along
with the Temporary Trade Barriers Database,
which has a focus on anti-dumping policies and
global safeguards, and the SPRD trade services
database of the World Bank, have all been
amalgamated and are being made available to
the public through a project known as Trans-
parency in Trade in 2011 (Bridges, 2011). The
greater the level of international trade transpar-
ency the easier it is for banking and financial
services to assess the risks that trading with these
countries will pose to the bank. Turnes and
Ernst (2015) suggest that the transparency of
countries is linked to their bribery indices as
transparency and corruption are also linked.
Using data from the World Bank they depict
visually how regions of the world map in terms
of bribery and transparency in international
trade (Turnes & Ernst, 2015).
Inter-agency cooperation
Because of the size and nature of many of these
large-scale money-laundering operations detec-
tion often involves cooperation across a number
of agencies, with law enforcement as the central
hub working between customs, revenue, banks
and financial intelligence units. This can cause
difficulties for banks who are involved in one
component of the transaction and may not have
the remaining information to be sure that a
transaction they are witnessing is actually
suspicious.
There is a clear need to improve the co-
operation between competent authorities
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 9
 Naheem
at the national and international level as
well as with the private sector as it relates
to FTZs. The exchange of information is a
key element to better identify the illicit
activities (e.g. fraud schemes) using FTZs.
(FATF, 2010, p. 28)
In the United States, a model of local trade
transparency units (TTUs) has been devel-
oped (Hoffman, 2012), which was initiated
by the office of immigration and customs
enforcement (ICE). Here the use of trade data
analysis has been developed, and information
is shared as one way in which law enforce-
ment and customs officials can thwart price
alterations and changes to weights of ship-
ments (FCA, 2013). The first TTU was
established in Washington in 2004, and since
then units have been introduced in Argentina,
Brazil, Colombia, Paraguay, Mexico and
Panama.
One of the most effective ways to identify
instances and patterns of trade-based
money laundering is through the
exchange and subsequent analysis of trade
data for anomalies that would only be
apparent by examining both sides of a
trade transaction.(ICE, 2015)
ICE is hoping that the model of TTUs will
spread globally and are working with FATF to
promote this particular model (ICE, 2015). The
work focusses on the four key areas of data
interest that Zdanowicz identified, which are
Table 2: US exports at low average prices (Zdanowic, 2009, p. 860)
Product country Country
Cooking stoves Colombia
Erythromycin Iran
Nickel Alloy wire Venezuela
Herring-Bone tire France
Machine guns France
Enriched 235
Uranium Spain
Military Rifles United Kingdom
10 © 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance Vol. 00, 0, 1–23
country, customs district, product, and transac-
tion price risk characteristics. As this informa-
tion is often collected by different agencies at
different points in the trading process, there was
a strong need to share data across agencies and
increase inter-agency cooperation (FCA, 2013).
This now offers one example of an inter-agency
model to illustrate how cooperation and sharing
of trade data can benefit those working to
combat TBML transactions (Zdanowicz, 2009).
However, the TTU works with other trade
fraud crimes as well as with TBML, which
raises the question whether TBML should be
viewed as a separate crime or as just a money-
laundering technique by which to commit an
array of financial crimes. Whatever the name
it is clear that a centralized data system is
needed, rather than a series of separated units,
in order to facilitate data sharing and develop
expertize in this area. As stated by Hoffman
(2012) ‘these activities may be so related and
interconnected that it only makes sense
for one entity to target all of them together.’
(p. 337).
Pricing data
The banking sector is faced with a number of
challenges when trying to examine trade
finance applications and assess the viability of
shipping proposals (FATF, 2010). Factors such
as the large number of trading transactions and
the large volume and diversity of goods being
Average price World average price
$76.62/each $425.65/unit
$0.10/gram $1.20/gram
$2.21/kg $12.26/kg
$7.69/each $192.25/unit
$364.08/each $2022.67/unit
$15.50/kg $172.22/kg
$106.87/each $387.55/un

shipped at any one time imply that trying to
determine the feasibility of a business proposal
being presented by a client can be daunting.
Unfortunately the difficulties in capturing these
data have caused a gap to emerge with a lack of
trade data in some areas causing particular
difficulties when trying to assess interna-
tional trading patterns and money-laundering
possibilities.
The lack of trade data which can be
effectively mined by law enforcement
creates a black hole for investigations and
shipments entering and exiting FTZs
worldwide. It is significant impediment to
effectively combating TBML in FTZs.
(FATF, 2010, p. 20)
One tool that is slowly being developed is
the use of trade data comparing usual price
ranges for specific goods in the United States
using the trade database developed by
Zadanowicz (2009) and linking this to work
developed by several of the key agencies
involved in trade investigations. In his analysis
of trade data in the United States Zdanowicz
(2009) states that there are four statistical pro-
files that can be used when detecting TBML
activity. These are:
(1) country risk profiles;
(2) customs district risk profiles;
(3) product risk profiles;
(4) transaction price risk profiles.
Zdanowicz (2009) analysed bilateral trade
results between the United States and other
countries to compare trading price anomalies.
Bilateral trade results are often used in order to
check that import and export figures match
between the two countries. Other research
using bilateral trade statistics includes work
undertaken by Yalta and Demir (2010) on
Turkey, which shows that TBML schemes are
country specific, depending on which direction
the value is moving. Patterns of trade data
discrepancies for some countries are, therefore,
reported either by using over-invoicing for the
movement of funds out of a country or by using
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Trade-based money laundering
under-invoicing for movement into the coun-
try. Many examples of trade discrepancies can
be accounted for through natural currency
differences or price fluctuations. However,
some examples of large discrepancies such as
those that Zdanowicz (2009) discovered for US
exports, which appeared at below average
prices using this system, are shown in Table 2.
These trade discrepancies are notably
higher or lower than the normal trade prices,
and thus data mining software should be able to
detect such obvious anomalies. de Boyrie et al
(2007) suggested using a price matrix system
whereby:
The price of any trade item, the standard
deviation, upper- and lower-quartile
prices are determined and compared to
that of the world (or a combination of all
countries that trade with the USA). Those
items that are mispriced can be then sub-
ject to further scrutiny.(de Boyrie et al,
2007, p. 487)
However, for traders who are only modifying
prices by a small amount, these anomalies will
not be easily detected. Therefore, trade-based
money laundering through over- and under-
invoicing will continue to provide an ideal
method to move smaller amounts of money
across international jurisdictions.
Guidelines on using trade data for
TBML detection
In their updated report on TBML (2008), FATF
considered a number of ways by which the use
of computerized trade data could be used in
order to assist in TBML detection. Although
many of the examples listed below assume the
presence of software available to perform these
tasks, the reality for many banks is that these
programs have yet to be developed. The other
problem is that most of these data would need to
be analysed by other agencies outside of the
banking sector with experience in customs and
shipping. FATF identified eight major areas in
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 11
 Naheem
which AML data mining software could be used
to facilitate TBML/AML detection.
1. Comparing domestic and foreign import/
export data
2. Analysing financial information
3. Examining cargo movements
4. Examining domestic import data
5. Comparing information
6. Using statistical analytical methods
7. Comparing export information
8. Paying particular attention to trade transac-
tions that display known red flag indicators
of TBML/FT activity
The different forms of information that FATF
suggested being utilized actually cover an
extensive array of databases and shipping data.
Therefore, in order to apply the recommenda-
tions of FATF (2008) more effectively this
report suggests dividing the data into two
groups, with group one being external data
and group two being internal data, where
internal data relate to information that the
banking sector can easily access themselves and
utilize in-house and external data are that which
would be collected and analysed within exter-
nal agencies, including law enforcement and
customs. The reason for this divide is that
current research (Naheem, 2015) and other
work on data mining and AML compliance
(Gao and Ye, 2007) have found that many of
the banking AML structures are not yet able to
handle large amounts of AML-related data, nor
is the expertize available to interpret the find-
ings and apply them to a standard AML frame-
work. This report suggests that progress towards
fully implementing the FATF guidelines needs
to be stepped up and in conjunction with other
agencies working in this area.
Internal banking data
The following types of data are available at
present for the banking sector and could be
included in current risk assessment processes,
although some types of data may be largely
incomplete. This will remain the case until
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there is better organization and management of
shipping data at an international level.
1. Comparing domestic and foreign import/export
data – this would include detecting discre-
pancies in the Harmonized Tariff Schedule,
country of origin, manufacturer, importer/
exporter, ultimate consignee, broker, unit
price, commodity activity by time period,
and port of import/export.
2. Comparing information such as the origin,
description and value of the goods, parti-
culars of the consignee and consignor,
and the route of shipment with intelli-
gence information in existing databases to
detect any irregularities, targets or risk
indicators.
3. Paying particular attention to trade transactions
that display known red flag indicators of TBML/
FT activity.
 Cross-comparing known typologies of
risk, such as those identified in the FATF
Typologies Report on Trade-based
Money Laundering with trade data, infor-
mation on cross-border monetary transfers
associated with the payment of goods,
intelligence, tax and wealth information,
the kind of goods exported, and connec-
tions with organized crime or any other
illicit activity, and making the completed
analysis available to the investigative
authorities.
This type of information needs to be analysed
within the context of a risk assessment frame-
work that considers the overall business of the
client and the knowledge of previous business
ventures that the client has undertaken. The
information required within a risk framework
includes understanding patterns of behaviour
linked to money laundering, including red flags
such as trading in countries known to be high
risk, as well as trading in goods known to be
associated with money-laundering cases already
detected, and using systems such as FTZs and
unnecessary third parties. As with any business
proposal the bank is trying to determine the
commercial viability of the business. A recent

case against Credit Agricole (Croft and
Chassany, 2015) highlighted the failure of a
bank to file a suspicious transaction report. The
underlying basis of the case was the lack of
commercial viability of the transaction, and the
ruling by the judge stated that the bank should
have been in a position to assess the risk
associated with this client based on this one
aspect.
External data
Many of the areas that FATF (2010) identified
contain data that banking institutions would need
to source from an external agency first. This level
of data would be more likely used by FIUs or tax
fraud experts/law enforcement agencies. One of
the key factors of successful trade data analysis is
the volume of transactions being used, with a
greater volume of data to compare against provid-
ing a more realistic outcome.
1. Examining cargo movements through the com-
parison of import/export documentation
between two counties to verify that the data
reported to one country’s authorities match
the data reported to the other country’s
authorities.
2. Examining domestic import data with an auto-
mated technique, such as Unit Price Analy-
sis, to compare the average unit price for a
particular commodity and identify traders
who are importing commodities at a sub-
stantially higher or lower price than the
world market.
3. Using statistical analysis methods, such as linear
regression models, on trade data concerning
individual, non-aggregated imports and
exports.
4. Comparing export information with tax declara-
tions to detect discrepancies.
5. Analysing financial information collected by the
FIU to identify patterns of activity involving
the importation/exportation of currency,
deposits of currency in financial institutions,
reports of suspicious financial activities and
the identity of parties to these transactions
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The final point that FATF emphasized was the
need for taking appropriate follow-up action
when anomalies and discrepancies in trade and
financial transactions were identified. This fol-
low-up could also include seeking further
clarity or additional information before and
then deciding whether to file a suspicious
activity report (SAR).
Risk assessment in banking
The risk assessment processes used to detect
money laundering within the banking struc-
tures have changed considerably during the
time period since they were first introduced.
In 1970 when the Bank Secrecy Act was first
introduced in the United States, the focus was
on preventing bulk cash-smuggling schemes.
This included particular focus on those clients
who were making large cash deposits, which
were often made on behalf of drug cartels
seeking to launder drug money into the formal
financial services. Drug money still makes up a
large proportion of all laundered monies across
the globe (UNODC, 2011). However, other
illicit activities such as piracy, illegal arms smug-
gling and human trafficking are also significant
contributing factors in transnational organized
crime. This also matches the main crimes that
use FTZs. According to the FATF (2010)
report the top five predicate crime activities
that use FTZs for criminal purposes are:
i Smuggling (especially cigarettes and
alcohol)
ii Illicit trafficking in narcotics
iii Participation in organized criminal group
and racketeering
iv Fraud
v Counterfeiting and piracy of goods
Trade-based money laundering does not always
require a predicate offence as it can be used as a
method to move legitimate money illegally or
to avoid paying tax on legally acquired money,
as well as laundering illicit gains from corrup-
tion and other crimes. Risk-based approaches
for TBML need to consider a variety of factors,
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 13
 Naheem
including the possibility that the source of the
funds or the purpose for the funds is illegal
activity.
Risk matrices
Money-laundering risk assessment has often
used a risk matrix model, which focusses on
client behaviour and transaction activity. The
risk is calculated through a rules-based approach
with tick boxes used to determine the questions
asked and the checks made. The higher the
client appears in the risk matrix the greater the
level of risk. However, in previous research on
TBML (Naheem, 2015) it was suggested that a
broader risk matrix model that could be adapted
was needed. This model needed to be more
flexible than a rules-based approach and also
needed to be informed by AML research on the
client and the business. The move to risk-based
approaches is not new. Other authors have also
stressed the importance of a more responsive
approach (Ai et al, 2010). The FATF (2012)
report has also suggested that a more dynamic
and risk-based approach needs to be adopted
within the banking sector so that it can be
flexible enough to respond to new and emer-
ging examples of money laundering.
In work on risk-based approaches Ai (2012)
identified three areas to enhance traditional
Know Your Customer assessment. One of these
was understanding customer transactions; the
other two were knowing the customers of your
customer and knowing the business partners of
the customer. This concept of an enhanced
level of understanding of the customer and their
business was also suggested in previous research
by the author (Naheem, 2015). In the model
suggested by Naheem the two main areas of
client behaviour and transaction patterns are
used. However, in addition there are two other
areas of concern that a risk approach needs to
monitor. These additional two areas are the
geographic profile of the business and the
involvement or links to third-party organiza-
tions. These are particularly relevant in TBML
cases as money is being moved to other
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jurisdictions, and some of these jurisdictions
may be particularly prone to money-laundering
schemes. However, gathering this information
still poses a challenge.
A four-pronged approach to TBML
risk assessment
In order for risk assessment to be effective it
needs to be evidence based. To achieve this the
process requires building a profile of the client
and the business that is engaging with the
banking services. Current research suggests
(Ai et al, 2010; Ai, 2012; Naheem, 2015) that
this can only be achieved through a greater
understanding of the client and the business.
One of the ways that this can be achieved is
through mapping the client business risks
including their other business associations,
commodities being exported or imported and
the countries being used as destination and
transit points on the trading route. The four-
pronged approach suggested by Naheem (2015)
would categorize the information being col-
lected under the following four headings:
Client – Information pertaining to the client
would include observations on their interaction
with the bank, such as their willingness to
provide information about the business, as well
as their understanding of why the trading
transactions and routes have been planned that
way. Sometimes legitimate clients and busi-
nesses can be used by money launderers as a
front company for their activities, and the client
may be either a knowing or unknowing
accomplice in the illicit activity.
Transactions – Client accounts can also be
hijacked by money launderers especially if
information such as amounts of invoices are
known and countries of payment. Schemes
such as cuckoo smurfing whereby accounts are
used without the client’s knowledge can enable
money launderers to move money from one
country to another if it matches the client’s own
business transactions (AUSTRAC, 2013). Indi-
cators of this kind of transaction often show as
money coming into the client’s account from a

different source to the invoiced company, or in
a combination of different smaller amounts to
make up the invoiced total.
Many of the red flag indicators that have
been issued for TBML by FATF (2006) are
focussed on shipping documentation alerts.
These include falsified documents and a lack of
commercial viability for the business transac-
tions. However, actual financial transaction
patterns are not as well emphasized, and these
would include matching fund transfer amounts
to invoices, ensuring that the company invoiced
is the same company that pays for the goods,
and watching for structuring of funds occurring
through the client’s account. Other red flags
would also include large fund transfers that are
unaccounted for, or money transferred to
family members or to off-shore companies/
accounts.
Geographic Profile – Geographic profiling is
perhaps new within AML compliance, but
according to the Wolfsberg principles for cor-
respondent accounts (2014) there are a number
of additional risks that some countries pose to
money-laundering risk assessment.
Certain jurisdictions are internationally
recognised as having inadequate anti-
money laundering standards, insufficient
regulatory supervision, presenting greater
risk for crime, corruption, terrorist finan-
cing or pose elevated risk of evading
sanctions.(Wolfsberg Group, 2014, p. 3)
Clients that are dealing with countries at a
higher risk are exposed to more involvement
in certain criminal activities. The geographic
risk assessment still applies even if the bank that
the client is doing business with in the high-risk
country is connected to the main client’s bank.
Third-Party involvement – There is risk in
money laundering from third-party client and
business associates who may be using the client
as a front business to hide their own illicit
operations. Or the client may be doing business
with a number of companies all of which are
actually owned by the same client. One of the
ways in which this information is gathered is by
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Trade-based money laundering
clarifying the beneficial ownership information
of business clients and companies involved with
the bank’s client. Beneficial ownership is
defined in banking as ownership and control
over a specific account ‘equating to ultimate
control over funds in such account, whether
through ownership or other means’ (The
Wolfsberg Group, 2012, p. 1)
In other words, the name of the account
holder may not equate with whoever is actually
placing and withdrawing funds through that
account. Criminals sometimes use existing cli-
ents to open accounts on their behalf because
the existing client will already pass the CDD
checks. However, at present, within banking,
much of the customer due diligence verifi-
cation is on the actual account holder rather
than the beneficial owner of the account
(Davilas, 2014). These four areas are not new
in terms of risk assessment systems; however,
the indicators under each of the headings are
constantly being updated as new typologies and
cases emerge.
AML compliance across the bank
It is not entirely clear whether TBML should be
viewed as separate to other money-laundering
schemes. The only real distinction is that ship-
ping routes are used in order to move illicit
gains rather than relying purely on the financial
systems or cash-based transactions. The other
option would be to consider whether TBML is
just a technique for facilitating trade-related
fraud or crime. The main priority and focus of
this article, however, is to determine what the
implications are for detecting TBML within the
banking system.
The main additional difference between
assessing for money-laundering activity and
TBML is the broader nature of TBML activities
and the need to include trade finance units as
well as the AML compliance section within a
banking risk assessment process. There is also a
requirement that the AML compliance staff
become knowledgeable of business and ship-
ping trade processes, which will be needed by
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 15
 Naheem
those seeking to deter or detect the activity.
Within the banking sector the units that are
most likely to encounter issues of money-
laundering activity in this way are the trade
finance unit, business, front office, AML com-
pliance, and internal audit. In order to under-
stand the role of each of these units in relation
to detecting TBML activity the next section
considers each of their roles in more detail.
Front office staff
The role of the front office is often, rather
mistakenly, overlooked in AML compliance
processes. However, it is the front office staff
and anyone interacting directly with the client
who will be in a prime position to assess
suspicious behaviour linked to potential ML
activity (Mugarura, 2014). This includes the
client’s responses to questions, reluctance to
provide information, evasive behaviour and
any general suspicious behaviour. This is often
considered the first line of defence in the bank
and feeds directly into the first area of the risk
assessment model.
Trade finance/business units
The trade finance and/or business units are
often responsible for reviewing and analysing
the business plans and finance requests of the
clients, and offer the next line of defence
against money laundering. One of the key
indicators that needs to be determined is the
commercial viability of any business proposal.
A legal case in June 2015 taken against Credit
Agricole bank (Croft and Chassany, 2015) ruled
against the bank because it was felt that insuffi-
cient investigation had been undertaken and
there was no filing of a SAR by the bank,
despite the discovery of a lack of commercial
viability. The court ruled that the bank had to
assume a reasonable level of knowledge on
AML and commercial viability assessment as
part of its professional responsibility to the
clients.
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Internal audit
The role of internal audit is separate from AML
compliance, but it provides an opportunity for
the bank to review the effectiveness of its AML
systems and to assess whether appropriate levels
of resources have been allocated for the work
being undertaken. One of the weaknesses iden-
tified in the HSBC case in the United States in
2012 (Homeland Security, 2012) was failure of
the governance structure to take responsibility
to address weaknesses in their AML systems.
This included a lack of guidance from internal
audit, which is an issue that has also been raised
in a report published in 2014 by PWC (2014b).
The Financial Conduct Authority (FCA, 2013)
has also raised concerns about the lack of
awareness of TBML among internal audit staff
and identified this as a weakness in the AML
systems across the financial services sector in the
United Kingdom.
We found that some staff in compliance,
internal audit and legal functions had a
limited understanding of trade-based
money laundering risks. This meant they
were unable to oversee or challenge the
business effectively on decisions taken.
(FCA, 2013, p. 35)
Previous research by the author on TBML also
analysed responses from the global banking and
financial services sectors on TBML practice
(Naheem, 2015) and discovered similar find-
ings, including that most other departments
within the bank did not see a role for internal
audit and had not considered that they should
be involved in developing AML systems.
AML compliance
AML compliance is the unit that was tradition-
ally left with the responsibility of ensuring that
the regulatory demands placed on the bank
were met. However, cases such as HBUS in
the United States (Homeland Security, 2012)
have identified that the AML compliance unit
needs to be supported with adequate resources
and to have the proper support from

governance. In the HBUS case nearly 15 000
suspicious alerts remained unfiled because of
inadequate staffing and resource issues. The lack
of priority that management gave to this issue
finally resulted in a legal case being taken against
the bank. The AML compliance unit therefore
needs to work closer with the management and
governance structures of the bank if their work
is to be recognized and given appropriate level
of support.
Anti-money-laundering compliance and
regulations rely on the banking sector to iden-
tify and subsequently report any suspicious
activity that they feel warrants further investiga-
tion, which is sent to the national financial
intelligence unit in the form of suspicious
transaction reports. Following the recommen-
dations of FATF (2012) many countries
across the globe have implemented their own
specific financial intelligence units to process
these reports. However, one of the challenges
for the banking sector and other financial
services is that within this system the very
definition of the term ‘suspicious’ is constantly
evolving.
Each new typology report such as the AUS-
TRAC report or APG (2012) or the FATF
indicators identifies new red flags of suspicious
activity for a particular money-laundering
scheme. The banks have to incorporate these
new indicators into their existing AML frame-
work so that they can be added as a suspicious
activity. In order for this to be effective this
approach makes a number of assumptions about
the banking AML frameworks, most notably
the following:
 There are currently AML frameworks in
place that are using red flag alerts and risk-
based indicators
 These frameworks are updated regularly and
are flexible enough to incorporate new
indicators
 Staff training occurs on a regular basis so that
new indicators can be explained
 The AML framework includes the audit
committee and internal audit so that they
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can update and expand the remit of the AML
audits
 There is a system in place for internal AML
audits. These can check that the new indica-
tors have been incorporated and are being
used across all units in the bank
In the absence of an appropriate AML frame-
work banks will inevitably be faced with a
number of difficulties. In the HSBC case in the
United States (Homeland Security, 2012) insuf-
ficient resources were allocated to the AML
compliance section. This resulted in a backlog
of internal suspicious alerts that were never
assessed by the AML compliance section or
passed onto the financial intelligence unit.
Eventually this resulted in an investigation by
the financial regulator.
Other difficulties that have been noted with
weak AML systems are a lack of communica-
tion with the audit committee, which was
noted in the FCA (2013) report. They noted
that if auditors within the banking system are
not up to date with different AML red flag alerts
and potential risks from money-laundering
schemes, then they are not adequately placed
to produce relevant audit reports or challenge
the systems being implemented. This is a view
that was also raised in a recent report by the
Auditing company PriceWaterhouseCoopers
who stated that ‘Regulators are looking to
internal audit as the third and final lines of
defense to detect irregularities within an orga-
nisation's BSA/AML and PFAC programs, and
to provide assurance that the first two lines of
defines are effective’ (PWC, 2014b, p. 5).
Finally some academics have highlighted the
theoretical concept of over-reporting in
response to increased regulation (Pellegrina and
Masciandaro, 2008), whereby ‘Given that the
law asks the FIs to report suspicious transactions,
the incentive to implement excessive but useless
reporting may arise, in order to avoid sanctions’
(p. 5). This theory supports the approach
favoured by FATF (2012), which is to focus on
prevention and encourage the ethos of ‘integ-
rity’ rather than relying on law enforcement
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 17
 Naheem
and strict regulation. Stricter regulation may
work initially at forcing banks to report activity,
but it does not encourage an in-depth investi-
gative risk assessment approach. The latter is
ultimately more beneficial to both clients and
banks as clients can be penalized and have their
business transactions delayed if suspicious
reports are filed against them.
In summary, the failure to develop an appro-
priate AML framework has been shown to
produce the following situations:
 More and more indicators of suspicious
activity are filed and held within AML
compliance but not communicated across
the rest of the bank
 Audits are not aware of changes in risk
assessment and do not inform governance
and management of potential risks or
resource implications
 A concern for regulation compliance means
that any suspicious activity is reported and
sent to the FIU to deal with
 FIUs become inundated with poorly under-
stood suspicious reports, which in turn
detracts from the efficiency of their own
work
Some analysts have suggested that all suspicious
repotting procedures should require a more in-
depth reporting structure to avoid simplistic
over-reporting.
… each suspicious transaction reported
should cover all related information about
the transaction, with an attached analysis
and explanation made by the reported
entity. A suspicious transaction should not
be reported simply because the transaction
is inconsistent with the descriptions of
AML regulations.(Ai, 2012, p. 206)
Although the banking sector will no doubt be
reluctant to enforce reporting at this level of
detail, it is important that an AML framework
be established and that all staff are brought up to
date with AML compliance and the many
indicators of risk. Moving forward, this needs
18 © 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance Vol. 00, 0, 1–23
to be routinely updated; however, once the
initial training has been completed the second
stage should become easier to implement and
less resource intensive.
New and emerging risks
One of the challenges in crime prevention is
that a phenomenon of ‘crime displacement’
occurs. This is a term used in criminology to
describe the means by which criminals adapt
their methods in response to crime prevention
strategies (Gurette, 2009). In financial crime
terms and for money laundering in particular,
criminal organizations will continue to exploit
those areas within the financial system that
are the weakest. Although some authors chal-
lenge the inevitability of crime displacement
(Soudijin, 2014), criminologists have stated that
as long as the motivation to change behaviour is
worthwhile crime displacement will continue
to occur (Cornish and Clarke, 1987). Crimin-
ologists term this the rational choice theory.
For criminals seeking to launder money the
ideal method is to use the weaker systems,
which are often located in the informal or
shadow financial economy, including disguising
transactions through trade and shipping routes.
These sectors are less easily regulated and harder
for law enforcement agencies to infiltrate.
Therefore, using the criminology-based ratio-
nale choice theory, systems such as alternative
remittance systems and trade disguise systems
such as TBML will continue to grow and
become the major source of threat for enforce-
ment agencies across the globe.
As the United States and other countries
worldwide tighten financial regulation and
reporting for the formal and even informal
financial sectors, the use of trade-based
money laundering and alternative remit-
tance systems will assuredly grow.(US
Dept of State, 2005)
It is important within banking risk assessment
processes that displacement theories such as this
be understood. They enable all agencies

working on the issue to develop a deeper
understanding of the implications and conse-
quences of any AML actions that they take, so
that subsequent changes by criminals in their
money-laundering behaviour will also be fore-
seen and hopefully prevented. This should also
reduce the scenario of moving the problem
from one area of the bank to remain undetected
in another.
CONCLUSION
This article has provided an overview of
TBML as it affects the global banking context.
There are already several academic and empiri-
cal documents on TBML, which have
explained some of the typologies that banks
can expect to discover through TBML schemes.
However, the discussion also needs to move
beyond this to consider the issue in more depth,
and to analyse the implications for developing a
robust AML framework within the banking
sector. The model that seems to work most
effectively to combat TBML, according to
the FATF (2010), is one that is based on
prevention and establishing integrity rather than
relying on law enforcement and prosecutions.
There are a number of reasons for this, but in
general the TBML schemes are too complex
and involve too many different agencies work-
ing together to rely solely on one sector. All
agencies working in this area need to be able to
communicate together and share data and
information.
For banks in particular the multi-agency
aspect of trade means that a number of addi-
tional factors need to be considered in any risk
assessment framework for TBML. Enhanced
TBML risk assessment frameworks would be
needed because there are differences between
TBML and other forms of money-laundering
techniques. These differences include the
following:
 There are a number of different jurisdictions
involved in trade transactions and this also
includes a number of other potential financial
© 2016 Macmillan Publishers Ltd. 1741-3591
Trade-based money laundering
services, some less regulated than others for
AML compliance
 Many clients take advantage of free trade
zones in many trade transactions, and banks
need to ensure that they retain a balance
between achieving greater flexibility and
speed of shipping in these specific areas for
their client versus the AML risks that they
pose
 Finally the international dimension of ship-
ping and trade means that governments are
having to work together at a regional and
global level in order to combat criminal
AML risks within their own country. Bank-
ing risk assessment frameworks also need to
remain up to date with these different inter-
national agreements
The use of technology will become more
paramount in the future, especially as a way to
analyse the amount of data that could be
generated in TBML investigations. However,
currently there are limited software options
available, and most data systems within the ports
and customs are hybrid systems of IT and paper
work, which makes information and data shar-
ing hard to achieve. Other limiting factors for
banks can occur when trying to establish bene-
ficial ownership information for off-shore legal
entities or trading businesses created through
FTZs, where administrative and AML checks
are less stringent. Despite these challenges there
has been some progress made in certain regions,
such as the United States with their interagency
TTU. These TTUs may provide trade data sets
that can become the starting point for trade data
comparison programmes and software applica-
tions in other parts of the globe.
Risk assessment
All of the points highlighted above illustrate
that there is no quick fix solution to dealing
with trade-related money laundering across the
global banking sector. Each money-laundering
case can be very specific to a particular region or
country and can use very localized money-
International Journal of Disclosure and Governance Vol. 00, 0, 1–23 19
 Naheem
laundering processes. There is a stronger onus
on banks to develop their own localized AML
research using a combination of typology
reports and indicators of red flags from FATF
and other sources. However, banks are trying to
develop a risk-based approach to TBML while
working with guidelines that have often only
focussed on generic examples that may be too
general for the local banking process. Other
reports and academic papers are still needed to
continue expanding the knowledge base and
provide more localized examples for different
banks across the globe to use.
Risk-based approaches that can be flexible in
their response and at the same time focussed on
the key risk areas are still sought after within the
banking sector. Previous research by authors
have suggested that strengthening customer due
diligence and focussing on third parties and
geographic risks all need to inform any risk
assessment model for TBML. Criminal schemes
have developed in sophistication and have
moved beyond establishing their own accounts
where CDD checks can stop their activities.
Many organizations now use front companies
possibly established in FTZs or use established
clients within a bank to provide a legitimate
front to the money-laundering business. Client
accounts can also be hacked by criminals,
meaning that banks also have an oversight role
on behalf of their client as well as implementing
AML compliance tasks on behalf of the regu-
lator. Perhaps the biggest challenge will be the
resources required to upskill staff in AML alerts
and new money-laundering schemes. This
training needs to be implemented across all
units of the bank and for all levels of staff.
Finally the bank needs to ensure that a robust
AML framework is established across the bank,
which has the appropriate level of support at
governance and audit levels.
This article aimed to create a realistic aware-
ness of the complexity of TBML and develop
an understanding that AML compliance in this
area requires a far greater and more in-depth
understanding of trade and money laundering
and how it is abused for criminal activity. This
20 © 2016 Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and Governance Vol. 00, 0, 1–23
knowledge base also involves understanding
how trade facilitates different forms of financial
crime, such as money laundering, tax evasion
and smuggling. Detecting TBML activity
involves a number of agencies that are involved
in the tracking and monitoring of data. The
AML framework for the banking sector will
need to be a dynamic and evolving model that
can respond easily to new schemes, as they are
reported and uncovered across the globe. It is
not an easy task ahead, but the sooner it is
implemented the more effective it will become
in the future.
ACKNOWLEDGEMENTS
The author acknowledges being the recipient
of a research grant awarded by Princess Ālae as
part of Seven Foundation’s ‘2020 Banking
Vision – building banks of the future’ and he
thanks her for the continued support and
motivation both to himself and to other stu-
dents who benefit through her generosity
(www.sevenfoundation.ch). The author also
thanks Professor Muhammad Jum`ah (a leading
economist of this era based in Damascus) who
has continued to provide valuable input both
through his teaching of the science of econom-
ics and through his continued guidance.
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