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Trade-Based Money Laundering: Not Just for Drug Dealers Anymore

As the old U.S. Department of Justice (“DOJ”) adage goes: If you could have known, you should have known. Financial institutions need to keep this in mind as they monitor for and investigate the hard-to-detect practice of trade-based money laundering (“TBML”). TBML disguises the origin of criminal proceeds by exploiting trade transactions through methods such as under- and over-invoicing trade documents, creating phantom shipments or providing false shipping documentation.

Take the example of a global financial institution that failed to detect criminal activities involving the use of shell company networks and movements of illicit funds. The DOJ alleged that, for nearly a decade, management failed to update the company’s anti-money laundering (“AML”) compliance program to address risks repeatedly identified by internal auditors and federal regulators. Of the risks identified, the DOJ alleged, many pertained to suspicious activity by a particular customer group, and the financial institution had unwittingly allowed for the transfer of hundreds of millions of dollars in illicit funds through the institution across a network of criminal entities. The end result was payment of massive penalties by the financial institution related to conspiracy to commit money laundering and an irreversible impact on regulator and customer trust.

Understanding the Landscape

Regulators across the globe are cracking down on financial institutions that fail to identify and prevent laundering of criminal proceeds. Often, these funds are laundered by highly sophisticated criminal networks and rogue states through what appear to be “normal” commercial transactions with counterparties that appear to be legitimate and reasonable. The U.S. government’s recent designation of Mexican cartels as foreign terrorist organizations creates more risk for financial institutions as they try to keep dirty money out. Helping to launder money for “terrorists,” even unintentionally, could result in severe financial penalties and operational restrictions, in addition to reputational damage.¹

The goal of U.S. regulators and law enforcement is to stop these TBML networks. Financial institutions may come under additional scrutiny by the DOJ and the Financial Crimes Enforcement Network as part of the current administration’s broader counter-cartel initiatives. Financial institutions will have to demonstrate a robust AML compliance program that sufficiently identifies and mitigates suspicious cross-border trade activity.

Defining Characteristics of the Problem

Global proceeds from financial crime are estimated to be up to $2 trillion annually, 80% of which is thought to be TBML-related.² TBML is the hardest method of money laundering to detect due to criminals’ ability to easily mimic legitimate transactions. The rate of illicit trade has risen drastically with the evolution of finance products. For example, paper-based trade finance arrangements (e.g., bills of lading) are becoming a thing of the past due to advancements in digitization and automation. Although this transition aims to improve efficiency and lower costs, it has created new vulnerabilities for criminals to exploit, including reduced human oversight and increased connectivity, both of which may allow for illicit payments to go undetected.³

Moreover, the rise of principal-to-principal transactions for which banks do not have details on the underlying goods/shipping arrangements between counterparties has made TBML that much harder for banks to detect. In direct payment transactions, the banks often have an incomplete view of the reason for the transaction, which can challenge their ability to understand the reasonableness of the counterparty or underlying good. In addition, underlying know your customer (“KYC”) information on the client may not contain sufficient detail on the business or the purpose and nature of their counterparty network. So, while banks are privy to the payment (and some, often incomplete, KYC information), customs and border authorities manage the physical goods. These information silos are prime for exploitation.⁴ Even though advancements in artificial intelligence are beginning to help, transaction speed is often prioritized to avoid disrupting legitimate trade. The result: Hints of illicit activity can go unnoticed by traditional AML compliance investigations and processes.

Data plays a critical role in combating TBML, particularly as criminals exploit the gaps created by fragmented systems, limited visibility into underlying trade documentation and the speed of cross-border payments. Effective detection increasingly depends on the ability to integrate and analyze disparate datasets — payments, KYC files, counterparty networks, trade flows, shipping records, bills of lading and external market benchmarks — to create a fuller picture of what “normal” looks like for a given customer or transaction.

Advanced analytics, including network mapping and anomaly detection, can reveal hidden relationships, identify inconsistencies between financial and trade activity and surface red flags that are not visible through traditional rules-based monitoring. When paired with robust data governance and investigative expertise, these insights help institutions connect patterns across multiple transactions and jurisdictions, enabling earlier intervention, more accurate risk assessments and stronger evidence when reporting suspicious activity to regulators.

Preparing for Increased Scrutiny

Banks with trade finance offerings may come under increased scrutiny. It is critical now more than ever to take proactive steps to evaluate your institution’s exposure to TBML and implement swift corrective action to protect against vulnerabilities in your AML compliance program. When regulators come knocking, be prepared to answer the following questions, which may have significant, long-term impacts on your business:

How are you incorporating TBML risk analysis in your AML compliance program, taking into account industry- and country-specific vulnerabilities and norms?
What processes are in place for identifying and conducting enhanced due diligence and monitoring for those customers with an increased risk of money laundering or sanctions evasion through TBML?
Even in the absence of detailed trade finance documentation, for higher risk customers and products, are you able to demonstrate that you are taking appropriate steps to understand your customer’s customers (i.e., counterparties), the reasonableness of transactions/products given their stated businesses and consistency with market norms?
Does your investigations team know how to spot and investigate the red flags of TBML and sanctions evasion?
Do you provide global trade personnel with robust and evolving guidance on recognizing and reporting suspicious activity that is up to date with modern tactics?
Are front-line staff like relationship managers and business leads involved and incentivized to help the compliance team understand and probe business and finance documentation for commercial clients in a way that can help inform TBML risk identification?

Cartels, rogue states and terrorist organizations have been leveraging TBML tactics for years, implicating a broad swathe of financial organizations. With the current U.S. administration’s increased focus on national security and FTOs, regulators are looking to bring the gavel down heavily on financial crime, especially as it relates to counter-cartel and counter-terrorism financing. In short: All financial organizations are going to come under scrutiny. The question is not if — it’s when. Now is the time to evaluate your institution’s exposure to TBML and implement corrective action to protect against vulnerabilities in your AML/BSA compliance program.

Footnotes:

1: “FinCEN Issues Advisory and Financial Trend Analysis on Chinese Money Laundering Networks,” Financial Crimes Enforcement Network (Aug. 28, 2025).

2: “Money Laundering,” United Nations Office on Drugs and Crime.

3: Subbagari, Saikiran, “Counter Measures to Combat Money Laundering in the New Digital Age,” Association for Computing Machinery (June 20, 2024).

4: Mason, Marcy, “Buyer Beware: Bad Actors Exploit De Minimis Shipments,” U.S. Customs and Border Protection (Aug. 26, 2025).