Foreign Exchange Manipulation in Trade

By repeatedly altering invoice values and currency exchange rates in cross-border trade transactions, criminals create a convoluted paper trail that intentionally obscures the origin and movement of illicit funds. This complexity is a deliberate layering strategy meant to invalidate straightforward audit checks and hinder investigators from tracing illicit proceeds back to their source.

Criminals exploit the structural features of trade finance instruments and derivatives to manipulate invoice values, obscure actual currency exchange rates, and embed illicit proceeds within ostensibly legitimate trade settlements.

The technique's primary vulnerability is the exploitation of multiple jurisdictions with weaker AML regimes or capital controls. Criminals route foreign exchange transactions and partial or advanced payments through these regions, creating a fragmented paper trail that undermines consistent oversight and facilitates hidden value transfers.

• Provides insights into how customers utilize specific financial products and services, including frequency, volumes, and product types.
• Reveals patterns where foreign exchange or hedging products are deployed gratuitously or at odds with a company’s stated operational needs.
• Aids in flagging customers whose FX usage deviates significantly from their usual business profile, indicating potential manipulation.

Records of currency exchange activities include spot trades, forward contracts, and swaps. By analyzing rates used, timestamps, volumes, and settlement details, investigators can detect inflated or deflated exchange rates, unusual patterns of currency conversions, or suspicious layering across multiple jurisdictions. This helps identify potential foreign exchange manipulation in trade.

• Monitors trading and usage of various financial instruments, including hedging products, derivatives, and related securities.
• Helps detect inconsistencies between normal hedging strategies and suspicious FX movements aimed at concealing illicit proceeds.
• Supports investigations into abnormal derivative positions used to legitimize unusual currency flows in trade finance contexts.

• Maintains verified customer information, business activities, beneficial ownership structures, and risk profiles.
• Enables comparison of declared business operations against actual foreign exchange transactions, identifying incongruent volumes or patterns.
• Highlights entities that appear dormant or lack physical presence but engage in high-volume FX activities, signaling potential trade-based laundering.

• Consolidates official records of an entity’s registration, ownership structure, shareholders, and directors across multiple jurisdictions.
• Facilitates the identification of shell or front companies used to obscure ultimate beneficial owners in foreign exchange transactions.
• Supports due diligence efforts by revealing frequent changes in ownership or hidden controlling interests, which may indicate trade-based FX manipulation.

Evaluate the AML environment of each jurisdiction involved in the trade and foreign exchange chain, focusing on regions known for loose regulatory oversight or prevalent invoice manipulation. Consequently, apply stricter monitoring thresholds or additional due diligence steps for higher-risk corridors where layering via currency trades is more likely.

Apply Enhanced Due Diligence (EDD) for cross-border transactions involving atypical foreign exchange conversions or invoice values. This includes verifying the beneficial owners of each involved entity, comparing invoiced prices against reliable market data or benchmarks, and confirming that any partial or advanced payments match legitimate trade activity and shipping documentation. This process helps to expose attempts to distort currency rates or disguise fund flows.

During onboarding and throughout the relationship, verify the legitimate business purpose for cross-border foreign exchange transactions, confirm the beneficial ownership of all involved entities, and document each trading partner’s typical transaction volume. Detect irregularities such as recurrent over/under-invoicing or frequent currency conversions unrelated to the customer’s stated business.

Configure automated alerts and analytical rules tailored to foreign exchange manipulation indicators, such as frequent currency conversions over short periods, repeated advanced payments without justifiable trade rationale, and cross-border fund movements to or from high-risk jurisdictions. Investigate flagged anomalies promptly to uncover concealed layering or over/under-invoicing schemes.

Provide specialized training for trade finance, compliance, and FX operations personnel on detecting under/over-invoicing, unusual hedging or derivative activity, and improper use of advanced or partial payments. Reinforce how to identify currency conversions unrelated to the customer’s core business and escalate anomalies promptly.

Assign higher risk ratings to customers whose foreign exchange activities involve complex or repeated currency conversions, advanced payment schedules, or multi-jurisdictional trades. Adjust monitoring intensity and investigation triggers based on these risk tiers, enabling prompt detection of unusual patterns in pricing or partial payments.

Utilize escrow structures for higher-risk foreign exchange transactions, especially those involving partial or advanced payments. Release funds only after verifying that invoice values, currency conversions, and shipment details are consistent. This prevents manipulated exchange rates or intentional over/under invoicing from going undetected.

Cross-check shipping data, third-party trade databases, and commodity price indexes to validate that declared invoice values and currency exchange rates align with actual market conditions. Confirm counterparty legitimacy by verifying operational presence, corporate registries, and any indicators of shell or front companies operating across multiple jurisdictions.

Restrict or require heightened approval for high-risk FX transaction types, especially when partial or advanced payments deviate substantially from normal trade practices or when hedging tools appear misaligned with legitimate business needs. Enforce the refusal of services if a customer cannot adequately justify complex multi-jurisdictional FX flows.

Implement targeted reviews of trade finance and shipping documentation by corroborating invoiced amounts with prevailing market rates and verifying consistency between purchase orders, bills of lading, and FX settlements. This helps detect inflated or understated invoice values, unusual use of hedging instruments, and partial payment structures that are inconsistent with routine trade cycles.

• Criminals establish multi-currency or offshore bank accounts to process partial or advanced payments in various currencies.
• By cycling these transactions through multiple jurisdictions, they distort exchange rates and disguise the true origin of funds under the appearance of routine foreign trade.
• The layering of funds through numerous accounts impedes traceability, making it difficult for AML systems to link payments back to illicit sources.

• Offenders use currency forwards, options, or swaps to present an appearance of legitimate hedging strategies.
• In reality, they embed atypical currency flows into these contracts, effectively layering illicit proceeds by rolling positions across multiple markets.
• Through recurring derivative trades, criminals blur the transactional chain, making it difficult for financial institutions to identify irregular cash flows tied to foreign exchange operations.

• Documentary instruments (e.g., bills of lading, shipping documents) are used to legitimize artificially altered invoice values.
• Criminals fragment payments (partial or advanced) and route them across multiple jurisdictions, masking their ultimate source.
• Regulatory gaps in different countries are exploited through false documentation and complex financing structures, hampering straightforward AML checks.

• Offenders inflate or understate invoiced amounts in cross-border transactions to hide the true value of goods or services.
• Falsified invoices enable the diversion of surplus or underdeclared amounts, which are then settled as normal trade payments.
• This tactic conceals illicit profits within legitimate trade records, frustrating financial institutions' attempts to identify suspicious activity tied to foreign exchange transactions.

• Criminals exploit trade finance instruments to inflate or understate invoice values, masking true goods or service costs in foreign exchange transactions.
• Advanced or partial payment structures, often arranged through documentary channels, fragment the payment flow and obscure the ultimate source of funds.
• False or misleading trade documentation further complicates due diligence, facilitating layering across multiple jurisdictions.

• Layers of spot trades and short-term currency swaps create the appearance of legitimate forex activity, separating funds from their illicit origins.
• Repeated high-volume trades in multiple currencies obscure transaction trails and frustrate AML monitoring systems.

• Hedging instruments and other derivatives are used to justify atypical currency movements, creating a facade of legitimate risk management.
• Complex transactions and rolling contracts mask the true origin and purpose of illicit funds, enabling layering in multiple currencies.

• Offenders manipulate or distort exchange rates during invoice settlements, obscuring the real trade value.
• Converting illicit proceeds into multiple currencies through repeated transactions makes it harder to trace the initial source of the funds.

• Criminals route funds across different countries under the guise of legitimate trade, scattering partial and advanced payments to evade detection.
• Frequent cross-border transfers mask the origin of funds and complicate compliance checks by leveraging multiple jurisdictions with weaker oversight.

• Establishing shell companies in offshore jurisdictions enables multi-jurisdiction layering of foreign exchange transactions.
• Hidden beneficial ownership structures impede traceability, making it harder for authorities to identify true owners in complex trade finance arrangements.

Trade finance institutions are exploited to finance manipulated cross-border transactions through:

• Documentary instruments that provide a legitimate appearance for over- or under-invoiced trade.
• Advanced or partial payment structures that obscure the ultimate payer and source of funds.
• Facilitating foreign exchange conversions that mask the true value of underlying transactions.

Import-export companies are used to manipulate invoice values in cross-border transactions by:

• Inflating or understating the declared prices of goods or services.
• Fragmenting payment flows through advanced or partial settlements.
• Presenting a veneer of legitimate trade to disguise illicit funds.

Professional money launderers coordinate and execute foreign exchange manipulations by:

• Over or under-invoicing cross-border transactions to disguise the real value of goods or services.
• Structuring partial or advanced payments through multiple jurisdictions.
• Employing derivatives or hedging instruments to legitimize irregular currency movements in FX markets.

Shell or front companies enable layering in foreign exchange manipulation by:

• Obscuring true beneficial ownership behind minimal or opaque operations.
• Conducting multi-jurisdictional transactions that do not reflect genuine commercial activity.
• Facilitating invoice discrepancies and partial payment flows to mask illicit proceeds.