Unveiling the hidden threat of trade-based financial crime

by Will Anderson*

A large shipping vessel departs a Southeast Asian port, laden with electronics ostensibly worth $2 million. However, unknown to customs officials, the goods are deliberately undervalued, with the actual market value exceeding $10 million.

This classic example of under-invoicing, a hallmark of trade-based financial crime, allows criminals to siphon off $8 million in illicit funds through legitimate trade channels, masking their trail in plain sight. By the time the vessel reaches Europe, the fraudulent deal is complete and the money has already vanished into overseas accounts.

Trade-based financial crime is one of the most pernicious and underreported threats facing today’s global economy. With an estimated annual impact of $1.6 trillion – rivalling the gross domestic product of major economies such as Australia – it erodes financial systems, fuels illicit activities and stifles economic development.

Yet, despite its enormous cost, it continues to operate in the shadows, exploiting the very systems designed to facilitate global trade.

The growing complexity of trade-based financial crime

Eastnets’ recent report, Broken Inside, Broken Outside: The Global Fight Against Trade-Based Financial Crime, lays bare the scope of this threat. According to the report, financial institutions face significant challenges in combating trade-based financial crime, primarily due to internal fragmentation, regulatory complexity and lagging technology adoption.

Trade-based financial crime thrives on the complexity of global trade, where traditional methods of oversight fall short. Criminal networks exploit gaps between jurisdictions, fragmented financial systems and evolving regulations, making it nearly impossible for financial institutions to keep pace. The result? A growing threat to global financial stability.

Internal fragmentation is a key weakness

One of the most significant barriers to combating trade-based financial crime is the internal fragmentation within financial institutions. According to the Broken Inside, Broken Outside report, 42% of institutions cite disconnected systems and siloed data as major obstacles in their fight against trade-based financial crime. In Europe, where regulatory demands are particularly stringent, this figure rises to 59%.

Trade-based financial crime risk management is often spread across three to four departments, including compliance, fraud prevention and trade finance. These fragmented efforts create blind spots, allowing criminals to exploit unnoticed gaps in oversight. Institutions must adopt more collaborative platforms, enabling real-time data sharing and cross-functional innovation.

Much like the DevOps movement revolutionized software development, breaking down these internal silos will be key to addressing trade-based financial crime more effectively.

Regulatory complexity: A moving target

Externally, the challenge of navigating ever-evolving regulations further compounds the problem. According to the report, 65% of institutions struggle with the complexity of regulatory compliance, particularly in North America and Europe.

The fast-changing nature of global trade regulations diverts resources from proactive risk management, leaving institutions vulnerable to increasingly sophisticated financial crime techniques.

However, regulatory challenges also present an opportunity for financial institutions to demonstrate leadership. By leveraging AI-powered technology, institutions can automate compliance processes, ensuring they not only meet regulatory requirements but also position themselves as pioneers in financial security.

Embracing AI and automation

The importance of technology in combating trade-based financial crime cannot be overstated. The Broken Inside, Broken Outside report reveals that 87% of institutions recognize the value of AI in detecting trade-based financial crime. Yet, many have been slow to integrate these technologies fully.

Fragmented internal systems and a lack of coordination have hampered the widespread adoption of AI and automation, exposing institutions to financial crime.

AI can sift through vast amounts of trade data in real time, uncovering patterns that human analysts might miss. More importantly, AI can go beyond mere detection, helping institutions optimize their trade processes, improve efficiency and enhance overall performance.

By adopting AI and automation, financial institutions can shift from a reactive to a proactive stance, identifying risks before they escalate.

Turning challenges into opportunities

Addressing trade-based financial crime requires a mindset shift within financial institutions – one that embraces innovation and lateral thinking. Conventional approaches have proven inadequate in the face of this evolving threat. Instead, institutions should harness creative strategies that combine technology, collaboration and agility.

Institutions that break down internal barriers harness the power of AI and view regulation as a strategic advantage will protect themselves from financial crime and set the pace for the rest of the industry.

Combatting trade-based financial crime presents an opportunity to innovate, enhance resilience and drive efficiency, turning a global challenge into a competitive advantage.

The threat of trade-based financial crime is growing but it is not insurmountable. Financial institutions must act swiftly and strategically, leveraging technology, improving collaboration and thinking creatively to stay ahead of sophisticated criminal networks. The time to act is now.

Download the full Broken Inside, Broken Outside report to learn how your institution can combat trade-based financial crime and transform compliance into a strategic advantage.

*Chief Marketing Officer, Eastnets
**first published in: Weforum.org