Trade-based money laundering and the screening of vessels and documents

What trade-based money laundering is

Trade-based money laundering (TBML) is the use of trade transactions to move value across borders and disguise its criminal origin. The Financial Action Task Force (FATF) has studied the phenomenon since its first report on the subject in 2006, followed by a paper on best practices in 2008. On 9 December 2020, together with the Egmont Group of Financial Intelligence Units, it published a report on trends and developments in TBML.¹ The report describes the classic techniques. A trader may over-invoice goods to move money to the seller or under-invoice them to move value to the buyer. It may issue several invoices for the same shipment, describe goods falsely as to quality or quantity, or invent phantom shipments for which documents exist but no goods move. The report also highlights the use of free trade zones and of high-value goods such as gold. Professional money laundering networks combine these techniques with front companies and complex supply chains. In March 2021 the FATF and the Egmont Group added a list of risk indicators. It is organized around the structure of the business, the trade activity, the trade documents and commodities, and the account and transaction activity.²

Commodities are particularly exposed to TBML for three reasons. Their prices fluctuate, which makes a manipulated price harder to detect than for standardized manufactured goods. Their quality and specification vary, so that a cargo described as one grade can be sold as another. They are traded in strings, in which several intermediaries buy and sell the same cargo, often within days and across several jurisdictions. A Lugano trader that buys steel from a mill in one country and sells it to a distributor in another sits in the middle of exactly such a chain. Its bank sees the documents and the payments, but not the goods. The Federal Council's report of 2020 noted that large trading volumes allow irregularities to be concealed through minor deviations per unit.³

Red flags for banks and traders

The red flags listed by the FATF and the Wolfsberg principles translate into concrete questions for a bank that finances a Lugano trader. Is the price consistent with the market for that commodity, quality and delivery period? Does the route make sense, or does the cargo pass through a third country without commercial reason? Are the parties in the chain related to each other, or are they newly incorporated companies with no apparent business? Does the trader deal in commodities outside its usual field? Is the payment made by or to a party other than the buyer or seller, or through an account in a third country? Is the quantity on the bill of lading consistent with the vessel's capacity and with the inspection certificates? Are the goods described in vague terms that would allow substitution?⁴

The same questions should be asked by the trader. A trading company is not itself a financial intermediary under the AMLA when it trades on its own account. Its officers and employees are nevertheless liable to prosecution for money laundering under Article 305bis of the Criminal Code if they carry out an act aimed at frustrating the identification of the origin, the tracing or the forfeiture of assets which they know or must assume to originate from a felony or an aggravated tax misdemeanour. Its bank will also terminate the relationship if the trader cannot explain unusual transactions. Under Article 102 para. 2 of the Criminal Code, the company itself is penalized for money laundering, bribery of foreign public officials and certain other offences committed within it, irrespective of the liability of any natural person, if it has failed to take all the reasonable organizational measures required to prevent such an offence. Chapter G.III treats these offences and the enforcement practice of the Office of the Attorney General.⁵ For the Lugano trader, the practical consequence is that its own know-your-counterparty procedures are part of its creditworthiness. A bank will finance a trader that screens its counterparties, documents its pricing and can explain its routes more readily than one that relies on the bank's checks.

Notes

1. FATF and Egmont Group, Trade-Based Money Laundering: Trends and Developments (Paris, 9 December 2020), https://www.fatf-gafi.org/en/publications/Methodsandtrends/Trade-based-money-laundering-trends-and-developments.html (techniques: over- and under-invoicing, multiple invoicing, phantom shipments, misdescription of goods, free trade zones, high-value goods such as gold, professional money laundering networks). ↩
2. FATF and Egmont Group, Trade-Based Money Laundering: Risk Indicators (Paris, 11 March 2021), https://www.fatf-gafi.org/en/publications/Methodsandtrends/Trade-based-money-laundering-indicators.html (also listing the earlier FATF publications of 2006 and 2008). ↩
3. Federal Council, report of 26 February 2020 (above), 15. ↩
4. Wolfsberg Group, ICC and BAFT, Trade Finance Principles (2019) (above); FATF and Egmont Group, Risk Indicators (above). The questions in the text are formulated on the basis of these red flags. ↩
5. Swiss Criminal Code of 21 December 1937 (SCC), SR 311.0, Art. 102 paras. 1 and 2 (offences under Arts. 260ter, 260quinquies, 305bis, 322ter, 322quinquies, 322septies para. 1 and 322octies) and Art. 305bis para. 1, official English translation at droit-bilingue.ch, https://www.droit-bilingue.ch/en-de/3/31/311.0-102-133.html and https://www.droit-bilingue.ch/en-de/3/31/311.0-305bis-372.html. See Chapter G.III. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of October 2026.