Trade-Based Money Laundering Red Flags for Accountants

When most people picture money laundering they think of cash. Trade-based money laundering uses ordinary commercial trade instead: invoices, shipments and payments that look like business as usual. Accountants see those invoices and ledgers every day, which makes them well placed to notice when the numbers do not add up. This guide explains the main techniques and the red flags that FATF and the Egmont Group, the network of national financial intelligence units, have published. For the wider framework, see our explainer on FATF and its recommendations.

Where this guide comes from

We used two publications from FATF and the Egmont Group of Financial Intelligence Units: "Trade-Based Money Laundering: Trends and Developments" (December 2020) and its companion "Trade-Based Money Laundering: Risk Indicators" (March 2021). Page references are to those reports, and we have paraphrased rather than quoted at length. Both are several years old, so check FATF for later work. This is general information, not legal advice.

What trade-based money laundering is

The 2020 report describes it as the process of disguising the proceeds of crime and moving value through the use of trade transactions (page 11). It adds that the aim is to move money, not goods. The FATF page for the indicators report summarises the idea as criminals using legitimate trade transactions or networks to disguise and move proceeds of crime around the world.

The main techniques

The report (pages 26 and 27) describes four core methods:

• Over- and under-invoicing: misrepresenting the price of goods or services. The report says importer and exporter must be complicit for this to work.
• Multiple invoicing: reusing existing documents to justify several payments for one shipment, sometimes across several financial institutions.
• Phantom shipments: including over- and under-shipment and cases where no product moves at all.
• Misdescription: falsely describing the quality or type of a good or service to justify a transfer of value.

Why accountants should care

The 2020 report treats professional money launderers as specialists who receive criminal proceeds and move them through trade, taking a fee (pages 12 and 13). It also says jurisdictions should consider the potential exposure of accountancy service providers (page 20), and on page 32 it notes that designated non-financial businesses and professions, such as auditors or accountants, are not systematically reporting third-party settlements. The message for a practice is that being close to the paperwork carries both opportunity and responsibility. Our guide to suspicious activity reports and tipping off explains what to do when something looks wrong.

Red flags from the 2021 indicators report

The indicators report groups its list into four categories. It stresses on page 3 that a single indicator does not establish trade-based money laundering, that several together may justify a closer look, and that the list is not exhaustive. Examples, paraphrased, include:

• Structure of the business (page 4): a corporate structure that looks unusually complex and illogical; very few staff compared with the volume of goods traded; owners or senior managers who appear to be nominees hiding the real beneficial owners.
• Trade activity (page 5): trading that does not fit the stated line of business; consistently low profit margins; a newly formed or recently reactivated company doing high-volume, high-value trade.
• Documents and goods (page 6): inconsistencies between contracts, invoices and other documents; missing or counterfeit trade or customs documents; shipments routed through several jurisdictions with no commercial reason.
• Accounts and payments (page 7): very late changes to payment arrangements; payment for imports by someone other than the consignee; cash deposits consistently just below reporting thresholds.

The 2020 report adds a few more, such as a personal email address being used instead of a business one and no real trading presence for an exporter (pages 14 and 15), rapid growth of newly formed companies into existing markets, consistently large cash payments and unnecessarily complex supply chains (page 25). It warns that meeting one indicator does not mean a company is involved, so further analysis is needed to avoid false positives.

What this means for an accountancy practice

Many of these red flags appear in the normal course of work: a client whose invoices do not match its stated business, a new company with large turnover, or a director who seems to be a nominee. Our guide to KYC and customer due diligence for accountancy practices shows where such checks fit into onboarding and review.

Practical steps (our suggestions)

• Add a short trade-activity question set to your onboarding for clients who import or export, covering goods, counterparties and payment routes.
• Ask engagement teams to flag mismatches between a client's stated business and what its ledgers show.
• Record when an indicator was noticed, the explanation received and whether you were satisfied.
• Escalate clusters of indicators to your MLRO instead of judging each alone.
• Refresh team awareness regularly. Our CPD courses include financial crime content.

What we could not confirm

We read the FATF and Egmont reports of 2020 and 2021, not any later update, and we did not read the sections of the 2020 report on financial intelligence unit measures and public-private partnerships. We have not covered how UK, Irish or other supervisors apply these indicators to accountants, or any national guidance on trade-based money laundering. Check your supervisor's current guidance before setting procedures.

Frequently asked questions

Does one red flag mean a client is laundering money?

No. FATF says a single indicator does not establish trade-based money laundering, though it may justify further monitoring.

Is this only relevant to firms with import-export clients?

It is most relevant there, but the indicators on structure, nominees and cash can appear in any client file.

Who are professional money launderers?

The 2020 report describes them as specialists who receive criminal proceeds and move them through trade for a fee.

What should I do if I see several indicators together?

Record what you saw, raise it with your MLRO and follow your firm's suspicious activity reporting procedure.

Explore more guides in our AML and KYC hub.