Beginner TBML Academy

0.1: Money Laundering 101 - The Definition

Money laundering is the process of concealing or disguising the origins of illegally obtained proceeds so they appear to be earned via legitimate means.

The Three Classic Stages:

• Placement: Illicit cash enters the financial system (deposits, purchases, trade transactions)
• Layering: Complex transfers obscure the money's origin (shell companies, multiple transfers, manipulated trade invoicing)
• Integration: Money re-enters the economy as apparently legitimate income. For example, criminals invest laundered funds into a restaurant chain that reports the money as normal business profits.

What makes this invisible is ambiguity. Laundering happens alongside legitimate commerce. A $2M fabric shipment that costs $500K to import is either a deal, fraud, or money laundering. Without context, it's almost impossible to tell the difference.

0.2: How We Measure Money Laundering

If laundering is $2–5 trillion annually, how do we know? Who measured it? The uncomfortable truth: our "consensus" figures are built on circular estimation and weak methodology.

Other Estimates

There is a spectacular range of global money laundering estimates over time, starting from $30 billion—which ‘pleased no one'.

• OECD 1995: $1.1 trillion (Drugs)
• UNODC 2011: $1.6 billion
• FBI: $600 billion – $1.5 trillion
• Reuter and Greenfield 2001: $45–280 billion

0.3: History - Why This Became a Thing

The modern AML framework wasn't inevitable. It emerged from specific policy choices by two countries: the U.S. and UK.

Play with this Interactive TBML Timeline

0.4: Vulnerabilities & Enablers

Some countries are more vulnerable to Money Laundering than others. Ferwerda, J. et al. (2020) estimates around $2.3 trillion laundered globally per year, and finds that the United States and United Kingdom together account for about 40% of all money laundering within the 36 OECD countries examined. Why? Button et al. (2022) define two key concepts:

The Perfect Storm (Why U.S. & UK Have High Money Laundering):

• High GDP + Ease of Trade: Legitimate commerce is voluminous; laundering blends in
• Colonial and Network Ties: UK's network of offshore tax havens (Cayman Islands, BVIs, etc.) provides profit-shifting infrastructure
• Financial Sophistication and Professional Enablers: Professional enablers (lawyers, accountants, shell company services) are abundant
• Structural Enforcement Weaknesses: Low prosecution rates and under‑resourced law enforcement and regulators relative to the scale and complexity of money flows
• Regulatory Side‑Effects: Harsh compliance expectations on banks raise the price of obfuscation (benefiting professional launderers) while frontline staff struggle to understand evolving schemes

0.5: The Risk-Based Approach (RBA)

By the 2000s, regulators realized that one-size-fits-all AML detection rules weren't working. They introduced a new Risk-Based Approach (RBA) principles. RBA is a regulatory framework that requires countries, competent authorities, and financial institutions to identify, assess, and understand their specific money laundering and terrorist financing risks, then apply controls that are proportionate to the level and nature of those risks instead of applying the same checks to everything and everyone. In practice, this means they are expected to allocate resources and impose preventive measures more intensely where the risks are higher, and more lightly where risks are demonstrably lower, with the explicit recognition that the RBA “is not a zero‑failure approach” and that some criminal abuse will still occur even when reasonable measures are taken.

In Practice: Banks still use rule-based compliance because:

• RBA requires deep understanding of customer risk (expensive, requires expertise)
• Regulators themselves follow rule-based assessment frameworks and often fine banks for non-compliance (easier to prove) rather than RBA failures (harder to prove)
• Rule-based compliance is simpler to audit and defend because rule creates predictable, documented steps

Next Step: Now that you understand the foundation, Module 1 will introduce TBML specifically—what FATF says it is, and then what the research reveals it actually is.

1.0: What FATF Says TBML Is

FATF published its first TBML report in 2006. Here's what it officially defined:

FATF's Scope (What it covers):

• Emphasis on import/export transactions where value is moved by misrepresenting the price, quantity or quality of goods
• Over‑ and under‑invoicing, over‑ and under‑shipments, misclassification of goods, phantom shipments, and similar document-based manipulation.
• Priority attention to letters of credit, collections and similar structured trade finance products, rather than open-account trade or domestic trade flows.
• Framed mainly as something done by organised criminal groups, not by “legitimate” corporates engaging in tax-driven trade abuse that uses identical techniques.
• Only vague acknowledgement that services and domestic trade can be used as TBML cover; the operational focus and typologies remain dominated by international goods trade

1.1: How FATF Got It Wrong

FATF's definition is not wrong—it's incomplete. Here's what it misses:

The Result: Banks build compliance systems for the FATF's TBML understanding and tend to miss other TBML schemes such as tax evasion via corporate structures, domestic SME abuse, open account transfers, barter trade where goods/services are exchanged for other goods/services, and many other crafty methods.

1.2: The Blind Spots

My PhD research project analyzed 27 senior banking compliance professionals. Here's what they revealed:

What Tends to be Missed:

• Profit Shifting: A UK parent company purchases goods or services from its own subsidiary in a low‑tax jurisdiction at deliberately inflated prices, so that most of the group’s profit appears in the tax haven rather than in the UK. The UK entity shows lower taxable income, while the subsidiary books high profits taxed at minimal rates, even though little real economic activity occurs there.
• Domestic SME Trading: Small businesses in the UK supply each other at suspicious prices (e.g., $2M order, $500K payment). Operates domestically; regulators don't monitor as much; invisible to FATF's "cross-border" focus.
• Open Account Transfers: Two companies move $500K between themselves on standard payment terms using only basic invoices and bank transfers, with little or no independent verification of the underlying trade. Because this is routine “everyone does it” business, the flow bypasses trade finance products and the associated documentary scrutiny, creating an easy channel to move value with minimal oversight.

Interview Finding: "If suspicious activities are found, they rarely pertain to money laundering—mostly fraud.", "Everyone hides behind open account transfers to move money around."

1.3: Why Typological Checklists Fail

Banks use checklists. "Red flag matrix" mentality: if you see X, escalate it.

Real Consequence: Banks file SARs on obvious red flags (which are often false alarms) and miss laundering that looks like a legitimate trade (In essence, ignoring what looks too good to be true).

My Research Finding: Experienced transaction monitors catch things automated systems miss—but only if they know what to look for. If the compliance culture teaches "watch for over-invoicing," they'll miss "legitimate-looking but wrongful profit shifting."

1.4: Technology That Failed to Prevent TD Bank

TD Bank is a perfect teaching case because it had everything. Let's break down what happened vs. what we can infer:

What Happened Anyway:

What We Can Infer: TD's monitoring system had architectural gaps—it wasn't designed to see all transaction types. This wasn't malicious; it was a product of FATF-centric compliance design.

The Tech Failure: Technology designed for FATF's TBML (trade finance, cross-border, document fraud) couldn't detect simple TBML (cash + small business accounts + employee corruption).