Trade-based money laundering — the document tells
Trade-based money laundering hides value in the price of real goods, which is why it survives controls built to look at payments alone. The payment leg is often entirely orthodox: a commercial transfer, with an invoice, between two trading companies. The manipulation is in the relationship between the payment and the goods — and that relationship is only visible in documents most payment firms never see.
1. The four basic manipulations
| Technique | What happens | Effect |
|---|---|---|
| Over-invoicing | The invoice exceeds the true value of the goods | Moves value to the exporter |
| Under-invoicing | The invoice understates the true value | Moves value to the importer |
| Multiple invoicing | The same shipment is invoiced and paid more than once | Justifies repeated payments for one movement of goods |
| Short or phantom shipping | Fewer goods than invoiced, or none at all | Payment with no corresponding trade |
2. Where the risk factors sit in law
Regulation (EU) 2024/1624 does not name trade-based laundering as a category, but Annex III supplies most of the factors a firm needs, and Article 34(2) supplies the duty:
- Annex III (2)(c) — payment received from unknown or unassociated third parties. Third-party payment is one of the most persistent trade-laundering signatures, because the payer of record is frequently not the counterparty on the contract.
- Annex III (1)(f) and (1)(h) — an ownership structure that is unusual or excessively complex given the nature of the business, and entities created where they have no real economic activity or apparent economic rationale.
- Annex III (2)(e) — transactions related to oil, arms, precious metals or stones, tobacco products, cultural artefacts and other items of archaeological, historical, cultural or religious importance or rare scientific value, as well as ivory and protected species.
- Article 34(2) — the duty to examine origin, destination and purpose where a transaction is complex, unusually large, in an unusual pattern, or without apparent economic or lawful purpose.
Annex III (2)(e) is worth reading as a list of commodity classes rather than as a prohibition. Their common feature is a wide or opaque price range, which is what makes mis-invoicing hard to disprove.
3. The indicators that survive scrutiny
Three families of signal are available even to a firm that never sees a bill of lading:
- Price plausibility. A unit price far outside any observable range for the commodity, or a price that does not vary across shipments in a market where it should.
- Route and structure inconsistency. Goods routed through a jurisdiction with no logistical rationale; a payment routed through a country unconnected to either counterparty; an invoice denominated inconsistently with the trade corridor.
- Counterparty mismatch. The paying entity is not the contracting entity; the stated business activity does not match the goods; a newly incorporated counterparty transacting at a scale its stated substance cannot support.
Of these, counterparty mismatch is the most tractable for a payments firm, because it can be tested against information the firm already holds — the customer’s declared business activity, captured under Article 20(1)(e), against the goods and counterparties actually appearing in payment references.
4. A worked case
Facts: a customer whose declared activity is wholesale of electrical components receives payments for shipments of “industrial machinery parts” from a counterparty in a third country. The payer of record on three of five payments is a different company again, in a third jurisdiction. Values per shipment are identical to the euro.
What the rules engage: Annex III (2)(c) is present on its face — payment from unassociated third parties. The identical values are an unusual pattern under Article 34(2), because genuine commercial shipments of parts rarely price to the euro repeatedly.
What the analyst does: tests the declared activity against the goods described, asks for the underlying commercial documentation, and treats the third-party payer as the primary question rather than a formality — because a payer who is not a party to the contract has no evident reason to be paying at all. The assessment and its outcome are recorded under Article 77(1)(b) either way.
FAQ
Can a payment firm detect this without trade documents?
Partially. Counterparty mismatch, third-party payment and price implausibility are all testable against information already held — the declared business activity and the payment references and counterparties themselves.
Which Annex III factors are most relevant?
Payment from unknown or unassociated third parties, unusual or excessively complex ownership structures, entities without real economic activity in their jurisdiction, and the listed commodity classes with wide or opaque price ranges.
Is a third-party payer always a problem?
No, but it always requires an explanation. Where the payer is not a party to the underlying contract, the reason for their involvement is the question — and it is a named higher-risk factor.
Related: Enhanced due diligence · Correspondent relationships · Structuring and smurfing
