Fraud Risks in Project, Trade, and Commodity Finance

Financial institutions filed more than 17,000 suspicious activity reports on suspected trade-based money laundering (TBML) from January 2004 to May 2009, covering over 276 billion dollars in transactions, according to a 2010 advisory from FinCEN.

In addition, a 2020 U.S. Government Accountability Office (GAO) report analyzing FinCEN data using a different methodology found that financial institutions filed 7,044 TBML-related SARs from 2014 to 2018, including 1,673 in 2018. GAO noted that these TBML-related SARs were a small portion of the 9.6 million total SARs FinCEN received over that same 2014–2018 period.

For scale, FinCEN’s Year in Review for FY 2023 reported an approximate total of 4.6 million SAR filings in that fiscal year, underscoring both the volume of suspicious activity reporting and the challenges of consistently tagging and detecting TBML across institutions.

These filings are consistent with patterns in which large, document-heavy deals in infrastructure, construction and commodities give criminals room to disguise value transfers as trade flows, rather than as conventional wire movements.

TBML, as described by the Financial Action Task Force (FATF) and FinCEN, involves moving illicit value through trade transactions by manipulating documents, prices or routing instead of physically moving illicit cash. Many of the TBML risk indicators also signal broader fraud and corruption risks in project and trade finance.

Trade-data “mirror” analysis also suggests a large surface area for pricing and invoice manipulation in cross-border commerce.

A 2026 Global Financial Integrity review of Western Hemisphere trade data estimated cumulative trade value gaps of roughly 3.64 trillion dollars from 2013 to 2022, with especially large gaps measured in Mexico (about 1.27 trillion dollars) and Brazil (about 873 billion dollars). These trade-gap estimates are broader than confirmed TBML, but they help quantify the vulnerability TBML exploits: value shifting through documents, pricing, and routing.

Key Fraud Patterns in Infrastructure Finance

FinCEN SARs tied to TBML from 2004–2009 exceeded 276 billion dollars in reported activity; GAO later found 7,044 TBML-tagged SARs from 2014–2018.
Shell entities and opaque concessions can hide phantom projects behind complex ownership and weak documentation.
Collusive bidding and contract changes divert value during procurement while leaving paperwork apparently compliant.
Counterfeit letters of credit and duplicate warehouse receipts can create large, opaque trade-finance exposures.
Layered verification of assets, control and cashflows at each stage reduces exposure to infrastructure finance scams.

Pre-Financing: Shell Projects and Phantom Production

Early funding rounds often depend on the credibility of the project narrative. Criminals can register shell companies in jurisdictions with weak AML controls, use mass-registration addresses, or maintain almost no online footprint.

This aligns with structural risk indicators set out in FATF’s TBML risk-indicator report.

A newly formed entity that suddenly presents multi-million-dollar orders or shows unexplained periods of dormancy fits the trade-activity indicators that FATF highlights. In many compliance programs, this should trigger enhanced checks on beneficial ownership, concession rights and permits.

Because mineral and energy concessions can be opaque, financiers need to verify titles directly with the issuing authority. They should cross-check maps and license identifiers, and compare them with independent public records where available, instead of relying only on scanned contracts supplied by promoters.

Site visits, independent engineering reviews, and direct confirmation with regulators help convert narrative claims about reserves, throughput or offtake demand into verifiable data before initial disbursements.

Contracting and Procurement: Systematic Value Diversion

Once a project budget is approved, fraud risk often shifts from fictional assets to real contracts on distorted terms. Guidance from the World Bank’s Integrity Vice Presidency in its procurement red-flags brochure highlights collusive bidding signals.

These signals include unusually similar unit prices, shared formatting or identical errors across competing bids.

The same brochure notes patterns in which losing bidders reappear as subcontractors or where winner rotation emerges across related tenders. Both can indicate a collusive ring that pre-assigns winners while keeping the process superficially competitive.

Contract amendments require equal scrutiny. The World Bank material describes how significant increases in quantities, unit costs or contract values without matching scope changes can signal overpricing.

Repeated unplanned extensions can also signal efforts to fund bribes or to recover costs from earlier kickbacks.

Financiers can reduce exposure by requiring access to competitive-tender data. They should monitor the number and size of change orders against original estimates, and reserve rights to review subcontractor structures and ledgers when red flags arise.

Production and Trade Finance: Documentary Manipulation

During production and shipment, letters of credit, invoice financing and receivables discounting depend on document integrity. In a 2008 notice, the International Chamber of Commerce’s Financial Investigation Bureau warned that counterfeit letters of credit often contain incorrect or misused banking terms.

According to the ICC, these documents may also contain spelling or grammar errors, and wording that can amount to a veiled attempt to extort funds.

Trade finance guidance from the Export-Import Bank of the United States points to discrepancy waivers, reassignment of proceeds and reimbursement requests in letters of credit as red flags. This is especially true when combined with vague or inconsistent shipment documentation.

Related trade-documentary evasion patterns also appear in more recent U.S. BSA reporting. In a 2023 Financial Trend Analysis, FinCEN identified 333 BSA reports referencing joint alerts on suspected evasion of Russia-related export controls, covering almost one billion dollars in suspicious activity. While not limited to TBML, the analysis highlights how intermediary routing, transshipment jurisdictions, and document-heavy trade flows can be used to obscure end-users and the true purpose of transactions.

FinCEN’s TBML advisory lists third-party payments made by apparently unrelated intermediaries as indicators. Significant discrepancies between invoices, bills of lading and other supporting documents also suggest a trade transaction may be used to disguise value transfers rather than support normal commerce.

Bills of lading, invoices and insurance certificates should match on quantities, values, routing and commodity descriptions. Repeated mismatches, vague product descriptions or frequent amendments appear among the document and commodity risk indicators in FinCEN and FATF TBML guidance.

Automated document-matching tools can surface some of these inconsistencies. However, lenders also rely on manual controls such as direct calls to carriers, independent inspection reports and periodic sampling of high-value shipments.

These steps confirm that goods, routes and delivery dates exist as described.

Collateral and Exit: Duplicate Pledging and Phantom Assets

Collateral fraud risk is highest where lenders depend on warehouse receipts and inventory reports without independent custody checks. In the Qingdao metals case, a court statement cited by Reuters said Dezheng Resources raised about 12.3 billion yuan using fake warehouse receipts and certificates for aluminum, alumina and copper.

The company secured additional loans, letters of credit and bank acceptance bills from 13 banks by repeatedly pledging the same cargoes.

The episode showed that warehouse receipts alone did not prove that the pledged metal existed in the stated quantities. They also failed to prove that lenders had clear priority liens, and subsequent reviews reportedly revealed gaps between paper claims and physical stock.

FATF’s TBML risk indicators include over-invoicing, under-invoicing and multiple invoicing. These techniques can all be applied at the repayment or exit stage to shift profits, move capital across borders or disguise final beneficiaries of trade flows.

Repeated inspections, use of bar-coded or tamper-evident seals, and real-time inventory reporting by independent collateral managers are stronger safeguards. These measures provide more security than single certificates or one-off inspections when securing loans against commodities.

Layered Verification and Control

An effective control framework in infrastructure and commodity finance follows three proofs: existence, control and cashflow. Existence requires verified assets, permits and counterparties, supported by independent sources rather than only by documents supplied by the promoter.

Control focuses on who ultimately owns and can pledge the assets, sign contracts and operate bank accounts. The Extractive Industries Transparency Initiative explains that beneficial ownership transparency for extractive companies, required in its standard from 2020, is intended to make the real owners of license holders visible.

This transparency reduces the scope for anonymous companies to obtain or transfer rights.

Cashflow verification tests whether stated buyers exist, have the capacity to pay and actually do pay as described. Independent confirmation of offtake agreements, review of bank statements where feasible and use of escrowed settlements help to prevent circular payment structures that disguise the true direction of funds.

On the structuring side, staged disbursements tied to third-party milestones turn documentary checks into enforceable controls. Independent engineer certifications of progress, and escrow arrangements controlled by regulated institutions, further help control the pace and purpose of funding.

For procurement-heavy projects, incorporating integrity checks aligned with World Bank procurement red flags at the design stage makes it more practical to spot unusual bidding patterns. This allows for the identification of overpricing or repeated contract changes before most funds have been disbursed.

Global infrastructure and commodities finance will continue to attract complex fraud strategies. However, lenders, traders and compliance teams can limit exposure by requiring clear evidence at each stage of the deal.

FinCEN’s SAR analysis on TBML and the Qingdao metals case together show that when verification lapses, exposures can reach into the billions. Conversely, robust, layered controls make it harder for scams to advance beyond early planning.