Introduction
Trade-based money laundering (TBML) is widely recognised by the Financial Action Task Force as one of the three primary methods by which criminal organisations move value across borders and integrate illicit funds into the legitimate financial system, alongside cash smuggling and abuse of the formal financial system. Unlike cash smuggling, which requires the physical transportation of currency, or financial system abuse, which exploits banking and investment channels, TBML embeds the movement of value within ordinary international trade transactions, exploiting their complexity, volume, and the informational asymmetries between the parties to a commercial transaction and the regulators responsible for oversight. India’s characteristics as one of the world’s largest trading nations, with an enormous volume of import and export transactions, a significant informal economy linked to trade sectors, and historically fragmented oversight between customs, banking, and tax authorities, make TBML a structural vulnerability that its current legal and administrative framework addresses only partially.
This article examines the principal TBML mechanisms, India’s specific vulnerabilities, the legal framework under FEMA and PMLA applicable to TBML, the roles of the Central Board of Indirect Taxes and Customs and FIU-IND, the Special Economic Zone regulatory framework, and comparative approaches from the United States and other jurisdictions.
Legal Framework
The primary legal mechanism for addressing TBML in India combines several statutes. The Foreign Exchange Management Act, 1999, governs the obligations of exporters and importers in relation to foreign exchange. Section 8 of FEMA requires every exporter of goods to furnish a declaration in the prescribed form to the authorised dealer bank (typically the exporter’s bank) that the full export value of the goods will be realised and repatriated to India within the period specified by the RBI (currently nine months for most categories). Failure to realise and repatriate export proceeds constitutes a FEMA contravention. Similarly, importers are required to ensure that payment for goods imported is made in accordance with the terms approved by the authorised dealer.
The Customs Act, 1962, governs the import and export of goods and empowers customs officers to examine, inspect, and value goods at the port of entry or exit. The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, establish the basis for customs valuation, which is relevant to TBML detection: the primary basis is the transaction value (the price actually paid or payable for the goods), but customs authorities can reject the declared transaction value and substitute their own assessment where there is reason to believe the declared value is inaccurate.
The connection to PMLA arises through two principal routes. First, where the funds generated by TBML (for example, the excess value received by an exporter who has over-invoiced exports) constitute proceeds of a scheduled offence (the predicate offence may be FEMA violation, customs fraud, or a related offence), these funds are proceeds of crime subject to PMLA attachment and the broader enforcement machinery. Second, where TBML is used to move funds generated by other criminal activity (drug proceeds laundered through trade transactions), the TBML mechanism itself constitutes the “layering” stage of money laundering under Section 3 of PMLA.
The RBI’s Caution List System under FEMA, in which exporters who have failed to realise export proceeds are listed and flagged to authorised dealer banks, is one administrative mechanism for identifying potential TBML through under-invoiced exports. However, the caution list system is primarily a post-facto enforcement tool rather than a real-time detection mechanism.
Judicial Developments
Indian courts have had limited opportunity to develop a sophisticated TBML-specific jurisprudence, partly because TBML cases are investigatively complex and prosecutorial resources have been directed primarily at other forms of money laundering. The cases that have reached the courts have typically involved combined proceedings under FEMA and PMLA, with the FEMA adjudicating authority imposing monetary penalties for foreign exchange violations and the ED pursuing PMLA proceedings for the money laundering dimension.
The Gujarat High Court’s decisions in several cases involving over-invoiced imports in the pharmaceutical sector, combined with the ED’s PMLA proceedings, have established that systematic mismatch between declared import values and market values of comparable goods, combined with suspicious payment patterns (particularly payments to intermediary companies in low-tax jurisdictions), can constitute adequate material for the ED to form a reason to believe that money laundering has occurred. The Court upheld attachment orders in these cases, holding that the pattern of transactions, when viewed holistically, pointed to TBML even in the absence of direct evidence of a specific predicate offence.
The Supreme Court’s general jurisprudence on the “reason to believe” standard under Section 5 of PMLA, particularly as articulated in Vijay Madanlal Chourasiya, is applicable to TBML cases: the ED officer need not have conclusive evidence of money laundering to exercise the attachment power; a reasonable belief based on material in possession is sufficient. For TBML, this is practically significant because the most valuable evidence, namely the actual import and export invoices, customs declarations, and banking records of all parties to the transaction chain, may not all be available to the ED at the time of the initial attachment decision.
The High Courts in various customs fraud cases have addressed the question of whether customs valuation disputes constitute the basis for PMLA proceedings. The general judicial position is that a mere dispute about customs valuation, without additional evidence of criminal intent or deliberate misrepresentation, does not by itself constitute a scheduled offence capable of triggering PMLA jurisdiction. The prosecution must demonstrate that the valuation difference reflects intentional fraud rather than a bona fide commercial dispute about the appropriate valuation method.
Contemporary Issues and Analysis
Over-invoicing of imports is the most common TBML mechanism used in India for transferring value abroad. In a typical over-invoicing scheme, an importer in India pays an artificially inflated price to a foreign supplier (which may be a related entity or a commercial front). The excess payment, representing the difference between the actual market value and the inflated invoice, accumulates in the foreign supplier’s bank account and is available to the beneficial owner abroad. The effect is capital flight: value has been transferred from India to a foreign jurisdiction through the mechanism of a commercial transaction. The predicate offences are contravention of FEMA’s requirement that import payments be made at market value, and potentially customs fraud where the inflated value is also used as the declared customs value to claim higher import duty drawbacks.
Under-invoicing of exports is the mirror mechanism, used to retain value abroad rather than repatriate it to India. An exporter declares a lower export price than the actual price received, receiving the declared amount through banking channels (which satisfies FEMA’s export realisation requirement for that amount) while retaining the balance in a foreign account. The Indian buyer pays the lower price; the end buyer abroad pays the market price; the exporter keeps the difference offshore. This mechanism is particularly prevalent in the gem and jewellery sector, the textile and garment sector, and the diamond polishing industry, where value per unit is difficult to assess from outside the transaction and where informal relationships between Indian exporters and foreign buyers are well-established.
Multiple invoicing involves the use of different invoice amounts for different regulatory purposes. A single shipment may be accompanied by three invoices: one at the actual transaction value, one at a lower value for customs duty minimisation, and one at a higher value for insurance or financing purposes. The documentary complexity creates verification challenges for regulators whose access to the full suite of transaction documents is limited.
Free Trade Zones and Special Economic Zones present a particular vulnerability. Transactions between entities within an SEZ and entities outside the zone are subject to customs oversight at the zone boundary, but transactions within the zone are treated as domestic transactions not subject to FEMA’s realisation requirements. This creates an opportunity for circular transactions: goods may be nominally exported from India into an SEZ (generating export benefits and potentially false export credit), re-imported into India from the SEZ (generating import duty exemptions), and the cycle repeated without any genuine trade activity.
The diamond and gemstone sector in India, particularly the Surat-based polishing industry, has been specifically identified in FATF’s guidance on TBML as a high-risk sector because of the high value per unit, the difficulty of independent valuation, the extensive use of informal credit (angadia) networks, and the international distribution of the supply chain. The ED’s investigations in the Nirav Modi and related cases touched on TBML dimensions involving diamond imports and exports through related entities.
Comparative and International Perspective
The US Financial Crimes Enforcement Network (FinCEN) has developed Geographic Targeting Orders (GTOs) as an innovative tool for addressing TBML. GTOs are administrative orders requiring specified financial institutions, real estate entities, or other businesses in designated geographic areas to collect and report enhanced information about specific transaction types. In the TBML context, FinCEN has used GTOs to require additional reporting from financial institutions in trade finance and import/export financing for specified commodities or geographic corridors. The GTO mechanism is flexible and responsive: it can be targeted to specific sectors or regions identified as TBML risks through intelligence analysis.
The Egmont Group of Financial Intelligence Units, of which FIU-IND is a member, has developed specific guidance on TBML detection through financial intelligence. The Egmont Group’s typology reports on TBML identify the key indicators (unusual payment routes involving multiple intermediary countries, significant discrepancies between declared and market values of goods, unusual payment terms or large advance payments inconsistent with the business relationship) and the analytical approaches for identifying TBML networks from financial data.
Australia’s AUSTRAC (Australian Transaction Reports and Analysis Centre) has developed a Trade Repository that integrates customs data with financial transaction data, enabling analysts to compare declared trade values with corresponding payment flows. This integration has significantly improved AUSTRAC’s ability to detect over and under-invoicing patterns. Australia’s model is frequently cited by FATF as a best practice for TBML detection through data integration.
The EU’s Anti-Money Laundering Authority (AMLA), which became operational in 2025, has indicated that TBML will be a priority focus area for its supervisory programme, including the development of integrated data analysis tools that combine customs data from EU member states’ customs administrations with financial transaction reporting from financial intelligence units.
Practical and Policy Implications
For Indian exporters and importers, particularly those operating in the high-risk sectors (gems, textiles, pharmaceuticals, commodities), TBML enforcement risk requires consideration in compliance planning. While the vast majority of trade transactions are legitimate, the complexity of trade finance structures, the use of commodity-linked financing instruments, and the international distribution of supply chains create compliance challenges. Documentation of the commercial basis for pricing, particularly for transactions with related or associated parties in foreign jurisdictions, is the primary risk mitigation strategy.
For banks providing trade finance, the obligation under RBI’s AML/CFT Master Direction to conduct transaction monitoring extends to trade finance products: documentary credits, buyer’s credit, and supplier’s credit all create financing flows that may be used in TBML schemes. Banks are expected to identify red flags (such as requests for documentary credits to jurisdictions inconsistent with the stated trade route, discrepancies between shipping documents and commercial invoices, or advance payments inconsistent with the commercial relationship) and file STRs where warranted.
Suggestions and Reforms
A joint CBIC-FIU analytical unit, with integrated access to customs declaration data, Import-Export Code information, and FIU’s STR database, would significantly enhance India’s ability to detect TBML patterns that span the customs and financial regulatory domains. The unit should be modelled on similar integrated intelligence units in Australia (AUSTRAC-Customs collaboration) and the EU (FIU cooperation with customs under AMLA supervision).
A risk-based valuation discrepancy monitoring system, using published international price references for major commodities and goods categories (such as the UN Comtrade database for typical export values by commodity and jurisdiction), should be implemented by CBIC to automatically flag import and export declarations where the declared value departs significantly from the reference range. Flagged transactions should be routed to FIU-IND for financial intelligence cross-referencing.
The FEMA export realisation monitoring system, currently managed through the Export Data Processing and Monitoring System (EDPMS) operated by the RBI, should be enhanced to include analytical tools that identify systematic over and under-invoicing patterns at the level of individual exporters and their foreign counterparties. Integration of EDPMS data with FIU’s financial intelligence would allow the identification of exporters whose realisation patterns are inconsistent with their declared export values.
SEZ transactions involving re-import of goods originally exported from India should be subject to enhanced monitoring by both the SEZ Development Commissioner and the CBIC, with a specific reporting requirement to FIU-IND for circular transactions above a threshold value.
Conclusion
Trade-based money laundering is the most operationally invisible and analytically challenging dimension of India’s money laundering threat landscape. Its invisibility derives from its embedding within the normal mechanics of international trade; its challenge from the fragmentation of oversight between customs, banking, and financial intelligence authorities. India’s legal framework, anchored in FEMA’s export realisation and import payment provisions and PMLA’s proceeds of crime and money laundering provisions, provides adequate legal authority for TBML prosecution but inadequate institutional infrastructure for TBML detection. The central reform needed is data integration: bringing together customs declaration data, banking transaction data, and financial intelligence in a single analytical environment that can detect the value movement patterns characteristic of TBML. Without this integration, enforcement will remain reactive, responding to intelligence received from foreign counterparts or emerging from the investigation of other offences rather than from proactive detection of TBML activity in India’s trade flows.
