by Hassan Zebdeh
Trade-based financial crime (TBFC) is one of the most insidious threats to global finance. This shadowy practice has been plaguing international trade for years, perhaps as long as modern trade itself has existed. It’s the biggest fraud most people never heard of, quietly siphoning away trillions under the radar of even the most vigilant regulators.
To explain, TBFC is when criminals use techniques like double invoicing, non-shipment of paid-for goods, or over-invoicing to funnel illicit funds into legitimate financial systems. For example, one side of a criminal enterprise might order a shipment of laptops from another abroad. The seller might invoice the buyer for twice the value of the laptops. They arrive, the inflated cost is paid, and the money enters the economy looking like a legitimate business deal.
As a result, between 2008 and 2017, the global value gap between imports and exports reached a staggering $8.7 trillion1, an amount that surpasses even the most recent U.S. federal budget2. And this threat isn’t fading. Last year alone, over $1.1 trillion in illicit funds flowed through financial systems across the Americas3, a stark reminder of the urgent need to confront this pervasive menace.
A sizeable portion of TBFC involves trade-based money laundering (TBML), which accounts for around 30% of all money laundering activities4. Despite its scale, TBML remains vastly underreported and is notoriously difficult to combat.
The challenge stems from the scattered documentation spread across countless systems and countries, while responsibilities within financial institutions are often fragmented. Different departments manage various aspects, leaving no single entity with a complete view. As a result, only 0.2% of the 1.15 million money laundering reports in 2019 mentioned TBML5.
To shift the balance in favour of financial institutions, the industry requires more than just human expertise. This is where the convergence of automation, AI, and advanced monitoring technologies could step in, creating an AI-enabled software robot – a TBML Terminator – that is more powerful than even the most skilled human. This Terminator never sleeps, never misses a detail, and is capable of processing vast amounts of complex data with unparalleled speed and precision. Arnold Schwarzenegger would be proud.
Advanced monitoring: the eyes of the TBML Terminator
At the core of this idea are advanced monitoring technologies – the eyes with an unwavering gaze. These technologies continuously watch over trade finance activities to ensure compliance and detect suspicious behaviour in real time.
Vessel tracking is a critical part of this monitoring process, given that most global trade moves by sea6. This makes maritime shipping particularly vulnerable to exploitation by those seeking to mask illicit activities. By continuously monitoring the movements and ownership of ships involved in trade finance deals, this digital sentinel could provide real-time alerts if a vessel enters a high-risk or sanctioned area. This vigilant tracking would help financial institutions remain compliant with international regulations while mitigating risks associated with maritime trade.
Another vital monitoring function would be document digitisation, which involves converting physical paper documents into digital formats. This process is crucial given the mountains of paperwork involved in international trade. Everything from bills of lading to commercial invoices must be meticulously captured to pass this information on to the other technologies that might form a TBML Terminator.
Automation: the hands of the TBML Terminator
Once the eyes have captured and converted the necessary information, the hands take over. Automation could step in to handle the vast amounts of data generated, organising and managing it with precision.
In the context of trade finance compliance, automation plays a crucial role in grouping and linking the various components of a trade finance deal. This includes consolidating data from transaction messages, such as letters of credit, payment instructions, and contract amendments, alongside documents like commercial invoices, bills of lading, and vessel tracking updates. By seamlessly integrating these elements, automation ensures that all relevant data is accurately linked and ready for further analysis.
A key part of this work involves sanctions screening, where the hands quickly check all entities against constantly updating sanctions lists. These lists can change several times a day, making manual screening almost impossible to keep up with. Automation could prevent prohibited individuals or organisations slipping through the cracks, safeguarding financial institutions against regulatory breaches and fines.
By taking over these repetitive, time-consuming tasks, automation boosts efficiency and significantly reduces the risk of human error. This allows compliance processes to be managed in real-time, with a level of accuracy that manual methods simply can’t match.
Artificial Intelligence: the brain of the TBML Terminator
While automation handles the heavy lifting, AI would act as the intelligence driving the TBML Terminator’s advanced analysis and decision-making processes. AI’s capabilities extend far beyond traditional rule-based methods, enabling financial institutions to detect and respond to TBML techniques with a level of precision and speed that manual methods can’t.
For example, AI applications like natural language processing (NLP) are used to structure unstructured documents, turning scanned PDFs into structured XML formats. This allows the system to accurately extract and analyse crucial information from trade documents, such as commercial invoices and bills of lading.
AI models also play a crucial role in identifying TBML techniques, such as overpricing, double invoicing, and the misuse of dual-use goods. By cross-verifying product descriptions with market values, a task that generative AI excels at, financial institutions can quickly identify discrepancies that may indicate illicit activities. This level of scrutiny is essential in uncovering hidden financial crimes that might otherwise go unnoticed.
Creating a cohesive system
The true power of this TBML Terminator would lie in the seamless integration of these technologies into a unified platform that offers a comprehensive view of each trade finance deal. This integration could enable continuous monitoring and screening of all relevant data, ensuring that any updates or new risks are promptly detected and managed.
This seamless communication between different components – automation, AI, and advanced monitoring – would provide financial institutions with a 360-degree view of trade finance deals. This holistic perspective is crucial for quick, informed decision-making, allowing institutions to act swiftly in response to any potential threats.
Shifting the balance
In the ongoing fight against this type of crime, the notion of a TBML Terminator, armed with the combination of automation, AI, and advanced monitoring, stands as the key ally. Together, these technologies form a powerful, unified force, reducing the manual burden on compliance teams, enhancing the accuracy of TBML detection and ensuring that financial institutions stay ahead of ever-evolving global regulations.
As the complexity of global trade continues to grow, so too does the necessity for this vigilant defender. Financial institutions that embrace the concept will be far better equipped to protect themselves from risk. Crucially, they will also contribute to a more stable global economy. By staying ahead of these illicit activities, they play a vital role in safeguarding financial systems and, ultimately, the livelihoods of people around the world.
It’s time to consider adopting a TBML Terminator approach – and the technology already exists.
The author, Hassan Zebdeh, is a Financial Crime Advisor at Eastnets.
[*2] https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/
[*3] https://elements.visualcapitalist.com/wp-content/uploads/2024/04/1711973384569.pdf
[*5] https://www.weforum.org/agenda/2021/06/trade-based-money-laundering/
[*6] https://unctad.org/topic/transport-and-trade-logistics/review-of-maritime-transport
