Trade-Based Money Laundering Risk Indicators: FATF Red Flags

Trade is one of the oldest ways to move value across borders, and criminals use it to hide the movement of illicit money inside ordinary-looking commercial activity. In March 2021 the Financial Action Task Force (FATF) and the Egmont Group of financial intelligence units published a report of risk indicators to help banks, trade finance staff, advisers and authorities recognise possible trade-based money laundering (TBML). This guide explains how that report organises its indicators and how to use them sensibly. It supplements the FATF and Egmont report of December 2020 on TBML trends and developments, and it is background reading for our trade-based money laundering course overview.

Why trade is attractive to launderers

According to the December 2020 report, trade is vulnerable because of the diversity of tradable goods, the number of parties involved and the speed of transactions, which together make TBML hard to recognise, particularly where understanding of the technique is limited. The report says it should be brought to the attention of bodies including financial intelligence units, customs agencies, law enforcement, financial institutions, transport companies, importers and exporters, and accountants and auditors.

How the 2021 indicators are organised

The 2021 report groups its indicators under four headings: the structure of the business, trade activity, trade documents and commodities, and account and transaction activity. The list is not exhaustive. The examples below paraphrase the kinds of indicator the report describes in each group.

Structural risk indicators

These concern the trading entity itself. The report's examples include an unusually complex or illogical corporate structure, such as shell companies or companies in high-risk jurisdictions, registration at a mass or post-box address, and a very small number of staff relative to the volume of goods traded.

Trade activity risk indicators

These concern how the business operates. Examples include trade that does not fit the entity's stated line of business, such as a car dealer exporting clothing; consistently unreasonably low profit margins; purchases that exceed the entity's apparent financial capacity; and a newly formed firm suddenly doing high-value trade in a sector with high barriers to entry.

Trade document and commodity indicators

These concern paperwork and goods. Examples include inconsistencies between contracts, invoices and payment details; vague commodity descriptions; missing, counterfeit or repeatedly amended documents; and shipments routed through several jurisdictions without a commercial reason.

Account and transaction indicators

These concern how money moves. Examples include last-minute changes to payment arrangements; pay-through accounts with rapid, high-volume throughput and small end-of-day balances; payment by a party other than the consignee with no clear reason; cash deposits kept just below reporting thresholds; and funds routed in a circle back to the country they came from.

The caution that matters most

The report stresses that a single indicator does not necessarily indicate TBML, although it may justify further monitoring, and that several indicators together may warrant closer examination. Whether indicators point to TBML depends on the institution's business lines, customer interactions and resources, and some may reflect other illicit activity. The report also notes that some indicators need external data or input from authorities, so private firms cannot observe all of them.

Common misreadings

Two mistakes are easy to make. The first is treating the list as a checklist to be scored, as if reaching a certain number of ticks proves laundering. The report does not say that; it says context decides. The second is assuming that a clean set of documents means a clean transaction. Several of the indicators concern paperwork that looks consistent on its face but does not fit the customer's business, so the question is always whether the story makes commercial sense, not only whether the papers match.

Who should use the indicators

The report says the indicators are intended for public and private sector entities, including banks, money or value transfer services and designated non-financial businesses and professions. Within those organisations, they are meant for compliance, transaction monitoring, investigations, client onboarding and relationship management staff. That is a useful reminder that TBML is not only a trade finance desk issue: the earliest warning signs often appear at onboarding or in routine monitoring. Our guide to transaction monitoring and adverse media screening covers the monitoring side.

Putting the indicators to work: our suggestions

These steps are our suggestions, not recommendations taken from the report. Build the four groups into your onboarding questions, so that you ask what the customer trades, where it ships and who pays. Compare the documents you receive with each other before you rely on any one of them. Record why a combination of indicators was or was not escalated, rather than only recording the outcome. Link trade concerns to your wider customer risk assessment, including country risk; see our guide to high-risk third countries and FATF lists. If you want structured training in this area, browse our CPD courses.

What we could not confirm

We read the March 2021 report text through a copy hosted on the Bank of Russia website and a summary on the FATF site, not the FATF-hosted PDF itself, and we read only the summary page for the December 2020 report. We did not review the case studies in the December 2020 report or any later FATF material on TBML. The examples above are paraphrased and do not reproduce the complete lists. This post is general information, not legal advice.