The digitalisation of trade and financial services is transforming the threat posed by money laundering criminal organisations, according to a report from EU law enforcement agency Europol. 

Trade-based money laundering (TBML), where seemingly legitimate trade transactions are used to move the proceeds of crime into the formal financial system, has long posed a challenge to the industry. The amount laundered through international trade is estimated to total billions or even trillions of dollars per year. 

The technique poses a growing threat to financial institutions, Europol says in a detailed threat assessment published this week, the agency’s first such report since establishing a cross-border economic crime centre in 2020. 

“Criminal networks are increasingly involved in TBML, a method that exploits foreign trade and transit procedures to move criminal funds using false invoicing and documentation,” the report finds, drawing on data from investigations and intelligence provided by EU member-state authorities. 

“Criminals set up trading structures operating with goods and services across many sectors and jurisdictions,” it says, adding that the most common goods targeted include metals, vehicles, construction equipment and medical devices. 

Though digital tools, such as electronic document checking, have been touted as a more effective way of spotting illicit activity than relying on manual processes, the report finds criminal organisations are also using technology to change the way they launder funds. 

“The digitalisation of the economy is slowly but steadily reshaping the known money laundering process, making the various steps of the procedure much more blurred,” the report says. 

Digital transactions mean the placement phase of money laundering – where the proceeds of crime are first introduced to the legitimate financial system – is less frequent, as funds are often circulating electronically from the outset. 

That means layering – where illicit funds are moved around to conceal their origin – plays a greater role in the process, Europol says. 

The report gives the example of criminal groups operating in China, which set up contracts between parties to allow them to transfer value internationally without moving physical cash. 

Funds are “transformed into other commodities and compensation schemes”, with money laundering networks using a combination of physical trade transactions and informal systems for transferring value.  

“The magnitude of EU-China trade allows them to obfuscate the illicit money flows,” it says. 

In some cases, goods being traded are counterfeit, particularly in the case of electronic products such as mobile phones and IT accessories, with money launderers using digital channels throughout the process. 

“The digitalisation of trade and transport has shifted most of the distribution of counterfeit goods online, further distancing criminals from their commodities,” the report finds. 


Banks and authorities challenged 

A common theme in TBML is misinvoicing, where values or goods listed on trade documents differ from the actual sums or commodities being moved.  

A report published in February by Global Financial Integrity, a Washington, DC-based think tank, found that nearly two-thirds of all money laundered through trade over the last decade relied on misleading or false invoices, with metals and minerals most commonly targeted. 

However, banks’ potential exposure to TBML depends on whether transactions are carried out on an open account basis or supported by documentary trade finance facilities. 

US authorities warned in 2021 that instruments such as letters of credit are vulnerable to exploitation because banks typically assess risk based on information stated in documents, rather than on physical evidence of goods being traded. 

With open account transactions, lenders have limited oversight of trade-related documentation, and so are required to pay greater attention to possible collusion between counterparties. 

In both cases, the risk of money laundering in the trade finance sector is attracting growing interest from authorities. 

The European Banking Authority (EBA), the EU’s top banking and finance regulator, said in a risk assessment published in April that there is “perceived high, inherent [money laundering] risk associated with… correspondent banking and trade finance”, based on feedback from national authorities. 

Factoring providers for companies involved in international transactions are also “more exposed to trade-based money laundering”, the EBA added. 

But in the US, concerns are growing that authorities are failing to tackle the problem. 

An August report by the Office of Inspector General, the largest government oversight body in the US, found that US Immigrations and Customs Enforcement (ICE) “has limited ability to identify and combat commodities imported as part of trade-based money laundering schemes”. 

ICE analysts rely on manual searches of billions of import records, rather than automated technology, to spot potential discrepancies, the report found. 

Its Trade Transparency Unit also has just three full-time criminal research specialists and one section chief, relying on a “constant rotation” of temporary promotions and secondments from field offices. 

Though authorities seized more than US$350mn related to TBML investigations between 2019 and 2021, the report says that amount “is a small fraction of estimated amounts laundered”. 

ICE says it is in the process of moving to a more automated system for analysing transactions, due to be fully operational by March 2025, and has submitted a request for additional permanent staff – though adds it “could take years to fully implement” the changes required.