Trade-Based Money Laundering and AML/CFT Compliance
The risk
Trade-based money laundering (TBML) moves value through the misrepresentation of price, quantity or quality of goods, exploiting the gap between what a bank sees (documents) and what actually moves (cargo). Classic techniques: over-invoicing and under-invoicing, multiple invoicing of the same shipment, falsely described goods, short/over-shipment, phantom shipments, carousel (round-tripping) trade, and misuse of LCs, guarantees or free-trade zones to justify transfers. The FATF recognises TBML as a distinct typology because the laundering is embedded in a legitimate commercial flow.
The compliance framework
Pakistan's regime rests on the AML Act 2010 (as amended), SBP AML/CFT/CPF regulations and FMU reporting. Core obligations: CDD/KYC on customer and beneficial owner, EDD for high-risk relationships, ongoing monitoring, sanctions screening against UNSC and other applicable lists, record retention (at least five years), and reporting suspicious transaction/activity reports to the Financial Monitoring Unit (FMU) - not to SBP and not to the customer (no tipping-off).
Red flags examiners test
Trade inconsistent with the customer's business profile; third-party payments unrelated to the parties on the documents; frequent amendments, extensions or substitutions; high-risk or conflict-prone jurisdictions; unusual routing through free zones; prices materially above or below market; round-value or structured payments; documents that do not match the transport reality (weights, ports, vessel routes).
What the bank must not do
A bank is not required to inspect cargo, but it is required to notice and escalate inconsistency between documents, customer profile and payment behaviour. Rule of thumb: the bank's defence is documentary consistency plus escalation - the same invoice stated three different ways across the file is the signal.
Worked example
An importer of textiles repeatedly receives LCs for machinery with prices 40% above comparable benchmarks, shipped via a free zone from a jurisdiction unrelated to the manufacturer: escalate for EDD, verify beneficial ownership, and file an STR if unexplained.