The Financial Action Task Force (FATF) is a 40-member body that sets international standards to ensure national authorities and certain types of private sector firms can effectively pursue illicit funds derived from criminal activities.  It defines trade-based money laundering (TBML) as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins”.

The value of the FATF definition is that it focuses on the simple premise at the core of TBML: criminals exploit the global trade system in order to launder the proceeds of their crimes. The tactics they use include falsifying trade documents and misrepresenting trade-related financial transactions to integrate criminal proceeds into the legitimate financial system. Furthermore, many suspect financial transactions also involve collusion between importers and exporters, and, as there is no single way of laundering money, the methodology used by criminals can be as straightforward or as complex as they wish.

Typologies highlighted by the FATF include but are not limited to:

• Over-invoicing – where the goods are described correctly on the Customs documentation, but their value is overstated.
• Under-invoicing – where the goods are described correctly on the Customs documentation, but their value is understated.
• Multiple invoicing – where more than one invoice is issued for the same shipment of goods, thus resulting in overpayments being made.
• Mis-declarations – where the type of goods is incorrectly stated on the shipping paperwork.
• Fictitious trading – where the invoices and shipping documentation are created, but the goods do not actually exist, and no import or export activity happens.

Governments’ capacity to control trade operations is limited. It is estimated that less than 5% of shipments globally undergo compliance intervention,[1] allowing for trade-based money laundering to hide in plain sight. Moreover, compared to other methods of laundering, TBML is not always well understood by customs and law enforcement agencies.

To tackle this threat effectively, a data and intelligence approach is critical to develop confidence and competence in detecting TBML, versus other customs offences.. However, this is no easy task.

TBML shares many similarities with other offences that exploit the trade system, such as customs fraud or the evasion of trade sanctions. It is entirely possible for TBML and these other types of fraud to be present at the same time, making it difficult to identify a TBML scheme. For example, illicit funds can be used to purchase a product or service from a company that charges VAT and subsequently disappears without forwarding the VAT to the national tax authorities. Such a scheme is called VAT supply chain fraud but can also be known as missing trader intra-community fraud (MTIC) or VAT carousel fraud.

Moreover, there are no limits to the types of commodities that can be used for the purposes of TBML. From computer parts to vegetables, machinery to shoes, criminals will exploit any commodity in their TBML schemes, as it is not the value of the goods themselves that is important; rather, it is the abuse of trade transactions, regardless of whether the goods even exist, to facilitate the movement of illicit funds.

One feature to look out for is the use of shell and shelf companies to launder the proceeds of illegal activity. Indeed, several successfully prosecuted HMRC investigations into transactions involving such companies, where it was known or suspected that TBML was taking place, have highlighted the widespread abuse of these corporate structures.

What is the difference between a shell company and a shelf company? A shell company is an entity without active business operations or significant assets; it exists primarily on paper and can be used to obscure the true ownership of funds or to facilitate illicit financial flows. A shelf company is a dormant entity but can have a detailed trading history that can be quickly enabled to mask its lack of genuine trade activity. Both appear legitimate on the surface but may be used entirely for the purpose of moving illicit funds.

Indicators that may help identify such structures include:

• trading premises are not fit for purpose for the intended trade;
• beneficial ownership is not only disguised but ownership structures are routed through jurisdictions that are reluctant to support investigations into suspicious activity;
• there is a high volume of trade coupled with long periods of dormancy;
• shipments are routed through several jurisdictions, which makes no commercial sense; and
• documentation to support trade transactions is missing or of low quality.

As the UK’s tax and customs authority, His Majesty’s Revenue and Customs (HMRC) has law enforcement capabilities, including a broad suite of powers that enable it to investigate criminal and civil offences, including the launching and conduct of money laundering investigations. HMRC also has some of the most extensive asset recovery powers of any UK law enforcement agency.

HMRC has established a dedicated TBML Threats Team to develop a strategy on behalf of the UK Government with the dual aim of developing a greater understanding of TBML and driving operational activity to limit its impact. The UK’s exposure to TBML is two-fold, we are a significant importer and exporter of goods and we’re also a prominent international (financial) services centre, with an environment that facilitates domestic and international business development.

As such, the strategy focuses on four key areas: capability building, engagement, intelligence and data, and operational activity.

Domestic partners include Border Force, the National Economic Crime Centre (NECC) and Companies House – the UK’s company registrar. Together, we examine company and trade practices to help identify suspected TBML activities. Companies House is undergoing significant reform, building additional intelligence and enforcement capability, which should bear down on the exploitation of UK corporate structures, introducing greater resilience in the company formation and registration process.

The TBML Threats Team also works with domestic police and prosecution partners to monitor investigations that might feature TBML, providing advice and guidance in support of the overarching investigation strategy. The Team plays a key role in developing these relationships and establishing ongoing dialogue with strategic partners through multi-agency meetings. This helps keep TBML at the forefront of multiple strands of work, which will impact both directly and indirectly the exposure of the UK’s financial system to TBML.

Unsurprisingly, the depth of our domestic cooperation is matched by a similar approach to international engagement and a Public International TBML Working Group was established in September 2022.

Our next step on that journey saw HMRC host a global TBML Summit in London in September 2023. The event was attended by more than 200 participants from various public and private sector entities, representing a total of 20 jurisdictions. This was the first event of its kind, providing a platform for discussions on capability, engagement, intelligence and data, and operational activity. It concluded with an agreed Call to Action, which invited representatives from the public and private sectors to:

1. Pursue options for cross-border public-private partnerships to resolve the issue of information fragmentation: commercial trade transactions are submitted to governments as customs data, but governmental agencies do not necessarily hold the underlying transaction data. Meanwhile, financial institutions receive transaction data, but not necessarily the underlying trade data.
2. Adopt a “Know Your Sector” model to obtain insight into the industry: to assess whether a customer is compliant, you not only need to know the customer (Know Your Customer), but you also need to be familiar with the industry in which the customer operates. Is it logical that a payment in a specific sector takes place in advance? Is it logical that a customer imports certain products from country X? Or would you expect the goods flow to be reversed?
3. Increase domestic and cross-border public-sector collaborative working to learn about, implement and replicate successful disruptions.

In response to the Call to Action, HMRC launched a Multinational Public-Private Partnership Working Group in December 2024, incorporating members of the Public International Working Group, representatives of private sector entities, such as the Wolfsberg Group (an association of 12 global banks which aims to develop frameworks and guidance for the management of financial crime risks), and international organizations such as the WCO. The objective of this new working group is to share best practices and sector knowledge, and to exchange ideas and innovative ways of working collaboratively.

HMRC also supports the work of the WCO, especially Project OCTAGON which focuses on building understanding and capacity in Customs agencies to identify and disrupt money laundering activities. We are also working closely with the Australian Border Force, which is spearheading a WCO initiative – Project Lighthouse – to encourage and support wider TBML disruption in the Asia/Pacific region by connecting customs with critical stakeholders.

These forums, working groups and multilateral initiatives are not simply aimed at building a dialogue on TBML, but also exploring new ways of interpreting existing customs and trade data, and using both existing and newly developed tools to tackle suspicious behaviour. This approach seeks to achieve a clearer picture of potential suspicious activity and devise innovative ways to disrupt the threat posed by TBML.

A prime example of a new way of working was initiated by the Fiscale Inlichtingen- en Opsporingsdienst (FIOD) – the Fiscal Intelligence and Investigation Service of the Netherlands – which put TBML on the agenda of the third edition of the Global Financial Institutions Partnership Summit.

Organised in Amsterdam in November 2023, the GFIP Summit brought together representatives of the tax administrations (with some having customs responsibilities), Financial Intelligence Units and financial institutions of five countries (J5) – Australia, Canada, the Netherlands, the United Kingdom and the United States of America.

The timing could not have been better, as HMRC was keen to build on the momentum of the September Summit. On top of that, the Netherlands was a longstanding trusted partner of the UK.  So, it was an easy decision to support the Dutch initiative and develop a project that would:

1. Jointly apply the “Know Your Sector” approach to a single pre-identified sector.
2. Use customs data and information held by private sector organizations in the Netherlands and UK to identify suspicious activity and possible disruption opportunities.
3. Complementing the customs data with Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs) submitted by Financial Institutions and Designated Non-Financial Businesses and Professions (DNFBPs).
4. Liaising with the FIUs of the Netherlands and UK to interrogate available TBML intel and leverage the “Know Your Sector” approach to educate private sector stakeholders.

The pilot would serve as a blueprint that could be replicated with other customs partners or competent authorities, including other members of the J5.

The ultimate goal was to test the hypothesis that TBML indicators (for example mis-valuation, mis-description and under- and over-reporting of the volume of trade shipments) could be detected through the analysis and interrogation of customs data involving two close trading partners.

Plastic waste was selected as the focus of the pilot, as it is commonly traded between the Netherlands and UK and is confined to a handful of Harmonized System (HS) codes under heading 39.15. This contrasts starkly with other sectors, such as textiles, where goods are covered by a much larger number of HS codes, making it harder to spot anomalies.

Based on a legal agreement, HMRC and Dutch Customs exchanged and compared their respective data on plastic waste shipments over a two-year period. We concentrated our analysis on over-valuation compared to the market value price.

Using a broad range of in-house tools, analysts identified a disparity of several million kilogrammes in trade volumes. Findings were refined to focus on the top UK exporters and importers exhibiting the most risks. The analysis also provided information on other predicate offences in the UK, including VAT supply chain fraud, landfill tax evasion and alcohol fraud.

Throughout the project, both jurisdictions engaged with various financial institutions. Thanks to a willingness on the part of all stakeholders to test the art of the possible, we were able to interrogate financial transactions. Analysis was developed further by plotting suspicious activity indicators against open-source data to identify risk indicators such as the involvement of shell companies and develop parameters that could be replicated against other commodities.

The project was presented at the October 2024 J5 Summit in Ottawa, where it triggered the interested of the Canada Border Services Agency (CBSA). The participation of a new partner in the project will provide an opportunity to test multilateral data exchanges in 2025/26.

The original pilot demonstrated not only the value in selectively analysing Customs data, but also that, by working with FIUs and private sector partners and by leveraging open-source data analytics, it is possible to quickly and effectively build a compelling picture of suspicious activity and individuals.

The next step for HMRC is to develop specialist intelligence capability to delve more deeply into the wealth of trade and financial data we hold.. We are working on the establishment of a partnership with the United States’ Trade and Transparency Unit (TTU) programme developed by Homeland Security Investigations (HSI), a federal law enforcement agency within the US Department of Homeland Security.

Through Customs Mutual Assistance Agreements, the TTU programme enables the exchange of trade data between the US and other jurisdictions under the guiding premise that governments on both sides of trade transactions must be able to compare and analyse trade data in order to identify anomalies within those transactions.

In addition to information sharing partnerships, another critical component of participation in the TTU programme is access to the FALCON Data Analysis and Research for Trade Transparency System (DARTTS), an investigative tool that allows users to store and analyse large trade and financial datasets. HMRC is keen to exploit this and is currently working to ensure all bilateral agreements are in place to enable the use of DARTTS.

On a domestic level, with a view to building solid and effective Public Private Partnerships, HMRC supports the UK’s Joint Money Laundering Intelligence Taskforce (JMLIT). Financial institutions are important partners in JMLIT, thanks to their ability to obtain a detailed overview of their customers for the purpose of detecting and identifying suspicious activity, including money laundering, and, where appropriate, reporting any concerns to the UK’s Financial Intelligence Unit (UKFIU).

The JMLIT ensures this partnership delivers results by bringing together representatives from law enforcement, financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs). They work within dedicated “cells” – or working groups – focusing on significant financial crime risks and increasing the collective understanding of them, including TBML.

The ambition of every JMLIT cell is to produce meaningful “alerts” to be shared across all the UK entities mandated by law to submit Suspicious Activity Reports (SARs), both improving the quality of the reporting process and generating opportunities for system-led disruptions. The more actionable the SARs are, the better the response to TBML and other financial crimes will be.

TBML has a significant detrimental impact on the global economy, resulting in substantial losses to the public purse. Without a thorough knowledge of the TBML threat, progress towards identifying, disrupting and dismantling the networks behind it will be limited.

At a time of increasing shocks to the international trade system, the opportunities to commit illicit activity in plain sight are only increasing. This reinforces the critical importance of public and private sector cooperation, both within countries and especially across borders.

Systematising that cooperation is no easy task. Privacy laws – while well-intentioned – can undermine cross-border collaboration; nevertheless, some of the initiatives referred to above are demonstrating that coalitions of the willing are working hard to overcome these barriers.

However, the fight against TBML will – most likely – be an enduring effort. Wherever there is trade, there is scope for exploitation. There are some great initiatives, such as the US TTU programme, the WCO’s Project OCTAGON or HMRC’s and FIOD’s work through the Global Financial Institutions Partnership, but we do need continually to push ourselves, our partners and the system to do more.

Only by collaborating with partners through our public and private sector working groups and supporting all initiatives aimed at pooling data and intelligence can we hope to improve our understanding of the threat and our capacity to combat it.

Any public sector entities wishing to join the Public International TBML Working Group and any private sector entities working on any TBML-specific projects wishing to join the Multinational Public-Private Partnership Working Group should contact the WCO Secretariat at enforcement@wcoomd.org.

More information
tbml.threatsteam@hmrc.gov.uk

[1] https://home.treasury.gov/system/files/246/Trade-based-ML-062006.pdf