Money laundering is a global phenomenon, evident in many parts of the world. Techniques have ranged from simple bulk cash movements across borders to more sophisticated techniques hidden in trade transactions. As trade between the Middle East and the rest of the world continues to grow, the threat of trade based money laundering becomes more real. Many countries in the Middle East depend on trade to grow their economies. This growth is dependent on an open, transparent and predictable process that importers and exporters can rely on to buy and sell goods to meet customer demand. According to the World Bank¹, the United Arab Emirates’ percentage of merchandise trade as a share of GDP rose from 136% in 2010 to 157% in 2013. Dubai in particular has seen the growth of gold trade from $6 billion in 2003 to $75 billion, accounting for 40% of global trade. This demonstrates the increasing reliance on trade as an engine of growth. Money laundering has the potential to disrupt this growth.

As criminals become more sophisticated in their methods of moving illicit money, they see trade as an opportunity. The principal method by which criminals launder money is through value transfer of goods traded. For example, if drug traffickers in Mexico want to launder money, they would consider entering a trade transaction by raising a letter of credit. They could set up a fictitious import company in the United States that would ‘buy’ goods from an exporter in Mexico and pay higher than normal prices. The trade documents would reflect the value of the goods being shipped. The importer would pay for the inflated goods through a bank to the seller in Mexico. This seller could also be a ‘front’ company based in Mexico. The seller in Mexico would then receive the funds through a local bank. From the bank’s perspective, the transaction would be proper, since relevant documents were used. However the value of the goods was misrepresented, resulting in transfer of money through the trade. In this example, the buyer in the United States would pay $100 per unit for a pen typically valued at $1. The seller in Mexico would mark up the invoice to $100 per pen and ship the goods. Once the seller receives payment from the buyer for $100 per pen, $99 has been transferred from the United States to Mexico due to overvaluation of the goods. There are occurrences of these trades happening globally. When reviewing the United States Department of Commerce Census Bureau trade data³, there are multiple examples of goods that are over or under-invoiced. For example, cooking stoves exported from the United States to Colombia for $77 per unit when the world average price was $425 per unit.

Why is this significant? Arguments can be made where mis-invoicing goods distorts the true value of goods in an economy causing unpredictable patterns of trade. “Bad” money may be directed to consumption or investment activities that benefit the money launderers, potentially at the expense of the region’s economic development. Banks have a role to play in minimising the impact of trade-based money laundering by reviewing the trades that financed and conducting due diligence checks on customers to determine the legitimacy of those trades. Regulators are increasingly focused on ensuring that banks identify where the goods are being shipped; what transportation is used; and whether the goods are potentially used for dual use purposes. By ensuring banks implement comprehensive Know Your Customer checks, bad actors will quickly learn that trade becomes an unattractive avenue for laundering their ill-gotten gains.


Henry Balani is currently Head of Innovation for Accuity responsible for introducing new solutions that help address client Payments, Compliance and Know Your Customer (KYC) needs. He has extensive experience working with banks and corporations, having pioneered sanction screening solutions related to Trade Finance compliance amongst other AML solutions. He was previously Managing Director with responsibility for managing Accuity’s Compliance group including the Product Management group related to all Compliance Risk solutions, and was also responsible for establishing Accuity’s Professional Services group. He has been with Accuity for more than nine years.
  • Ganesh 27 September, 2015 at 0206

    You have hit the nail on the head Henry. If we are able to tackle the menace at the root, i.e. at KYC levels.. Life for all of us would be much simpler. But given the enormous pressures to turn in higher and higher customer acquisitions, how many banks do a thorough initial and continuous due diligence??

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