Trade Diversion – At a Glance
Trade diversion is a money laundering technique used by criminals to disguise the true origin/destination of goods by rerouting, altering shipping paths, or using fake trade documents. It is an illicit practice where criminals use manipulative documents and non-commercial shipping paths to hide criminal proceeds, differing from a legitimate trade routing, which is done due to valid purposes.
Trade diversion enables trade-based money laundering (manipulation of trade transactions to launder funds), sanctions evasion (bypassing economic sanctions), and export control violations (transfer of restricted, sensitive goods). For this reason, regulators emphasise a risk-based approach to prevent misuse of cross-border trade for money laundering and terrorism financing activities.
Money launderers manipulate the price and quantity of goods through over-invoicing or under-invoicing practices while moving goods from one country to another. They exploit trade finance products such as bills of collection, letters of credit, and guarantees to divert trade.
Further, criminals misuse shell companies, intermediaries and a complex logistics chain to hide the true origin/destination of illegal funds by exploiting vulnerabilities of the global supply chain.
Moreover, trade diversion uses the correspondent banking system, which facilitates transactions between banks in different countries, enabling the movement of illicit money across borders.
The red flags and diversion patterns indicating individuals as high-risk are as follows:
Criminals use indirect, complex trade routes and falsify documents to disguise illicit funds as legitimate trade. FATF guides Regulated Entities to identify such patterns and TBML red flags in the global supply chain and trade.
Regulators expect enhanced due diligence (EDD) for high-risk transactions and customers to prevent ML/TF risks. EDD must be conducted for unusual activity, use of high-risk goods & complex ownership structures, and involvement with high-risk countries and adverse media individuals.
Regulated Entities must know their customers, the jurisdictions involved, and the goods shipped through KYC, name screening, record-keeping, and ongoing monitoring processes. Further, entities must ensure that funds flow matches legitimate trade activity to comply with AML laws and regulations.
RapidAML transaction monitoring software continuously analyses customer profiles to detect unusual trade patterns such as rapid, complex flows, structuring or high-risk countries involvement. The advanced customer risk assessment software mitigates ML/TF risks by evaluating customers and assigning risk scores based on type, product, transaction complexity, and jurisdictions involved.
RapidAML’s effective sanctions and adverse media screening software identify hidden connections and mitigate financial and reputational risks. The unified software helps compliance teams detect trade-based money laundering (TBML) risks. Moreover, the software provides alerts for unusual transactions and links them to customer profiles for further investigations and reporting.
Trade diversion in AML and sanctions compliance is an illegal practice that involves changing routes or using fake documents to obscure the origin, value or destination of illicit proceeds.
Standard transhipment is a legitimate process of moving cargo using different modes of transportation to optimise shipping routes, improve delivery time and reduce costs. Trade diversion is an illegal TBML method to launder illicit funds into legitimate trade activities.
Trade diversion is considered a TBML risk because it involves the use of false or manipulated trade transactions to obscure the origin of illicit funds and the destination of illegal products.
AML controls, such as due diligence, transaction monitoring, internal policies, staff training, SAR reporting, and the use of tools like RapidAML, help detect trade diversion activity.
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