Trade Finance Under Pressure: Why AML Compliance and Payment Screening Matter More Than Ever
- FinScan
- 2 days ago
- 4 min read
In an era marked by tariff wars, global supply chain disruptions, and shifting trade alliances, the world of trade finance is under intensifying scrutiny. For financial institutions, the challenge isn’t just navigating complex transactions—it’s preventing their misuse for financial crimes like money laundering, drug-trafficking and terrorist financing. Trade-based money laundering (TBML) is on the rise, and financial institutions must bolster their anti-money laundering (AML) compliance programs, especially when facilitating international trade and payments.
With global trade topping $25 trillion annually, according to the United Nations Conference on Trade and Development (UNCTAD), even a fraction infiltrated by illicit actors poses a serious threat. Compliance with frameworks such as those set by the Financial Action Task Force (FATF) is no longer just best practice—it’s a non-negotiable shield against legal, financial, and reputational fallout.
Trade finance and the expanding risk landscape
Trade finance is complex. It encompasses instruments like letters of credit, bills of exchange, and open account financing to enable cross-border commerce. But that same complexity—and the involvement of multiple counterparties across different jurisdictions—makes it ripe for financial crime.
Tariff hikes and trade restrictions often push businesses to reroute supply chains or find less transparent trade partners. This creates fertile ground for TBML, where illicit funds are disguised as legitimate trade transactions through techniques like:
Over or under-invoicing of goods
Misrepresentation of goods and services
Shell companies and false documentation
According to the FATF, TBML is “one of the most sophisticated methods of laundering criminal proceeds.” Its stealth lies in appearing legitimate, making it difficult to detect without strong compliance frameworks.
The role of AML compliance and screening in trade payments
Financial institutions must scrutinize trade finance payments using multiple layers of AML controls—well beyond basic transaction processing. Key components include:
1. Payment screening
Every element of a payment—names, goods description, routing instructions – including intermediary banks and countries involved—must be screened in real time. Dual-use goods or high-risk trade corridors should trigger enhanced scrutiny. In addition, banks must compare customer and beneficiary data against global watchlists (e.g., OFAC, UN, EU) to detect links to sanctioned entities, politically exposed persons (PEPs), or known bad actors.
2. Customer due diligence (CDD)
Know Your Customer (KYC) checks are critical, especially when working with exporters, importers, or intermediaries in countries affected by tariffs or sanctions. Enhanced due diligence (EDD) is warranted for high-risk clients or transactions.
3. Ongoing monitoring
While trade finance often operates in a “one-and-done” environment—where each transaction is independently assessed and settled—changes over time can reveal emerging risks. Continuous monitoring should focus on shifts to trade routes, counterparties, suppliers, or sourcing patterns, which may indicate elevated risk profiles, attempts to circumvent sanctions or tariffs, or the use of front companies. Institutions must be able to detect and analyze these shifts across seemingly isolated transactions, even if they don’t fit traditional continuous monitoring models.
How tariff wars exacerbate AML risks
Tariff wars complicate compliance. They drive businesses to seek alternative suppliers, routes, countries, or partners—potentially at the expense of transparency. Some specific challenges include:
New or unvetted counterparties entering the supply chain
Emerging risks from new jurisdictions with weak AML oversight
Spikes in false documentation or front companies created to bypass tariff costs
These dynamics raise red flags that must be accounted for in AML programs and screening systems. Even if a transaction passes initial scrutiny, inconsistencies in trade documents or routing behavior may indicate deeper issues.
Regulatory expectations and real-world consequences
AML frameworks are anchored by FATF recommendations, which require risk-based CDD and EDD, comprehensive name and payment screening, suspicious activity reporting (SAR), and governance and training for applicable personnel.
Regulators around the world—from FinCEN in the US to the European Banking Authority—expect trade finance operations to comply with these obligations. Failure to do so can result in multi-million-dollar fines, loss of banking licenses, and damaged reputations.
Recent enforcement actions underscore these risks. Cases of banks facilitating payments tied to sanctioned entities or misrepresented trade goods continue to make headlines, highlighting the real-world stakes of inadequate compliance.
Strengthening defenses: practical strategies for AML-resilient trade payments
Financial institutions can better protect themselves with a few key strategies, such as:
Risk mapping: Evaluate exposure by geography, trade partners, and product types. High-risk areas like trans-shipment hubs or controlled goods require more attention.
Configurable payment screening: Adopt solutions that parse and screen every field in a payment message (SWIFT, Fedwire, SEPA, etc.) and flag anomalies like mismatched goods and destination inconsistencies.
Integrated sanctions management: Screen against up-to-date sanctions and restricted party lists. Dual-use goods or sensitive sectors (e.g., defense, semiconductors) should receive added focus.
Training and awareness: Ensure front-line and compliance staff understand TBML typologies and how to escalate concerns.
Cross-border collaboration: Participate in public-private partnerships and information-sharing forums to detect emerging TBML patterns and align best practices.
Building resilience in a fractured world
As global trade becomes more politicized and less predictable, financial institutions must evolve their AML and compliance capabilities to keep pace. Trade finance is a critical engine of global commerce, but it’s also a high-risk channel for financial crime.
Tariff wars have only heightened those risks. By investing in intelligent screening, stronger due diligence, and continuous collaboration, financial institutions can protect themselves—and the financial system at large—from abuse.