Illicit fund flows pose a significant risk to the integrity of the banking system and present persistent challenges for regulators operating under risk-based supervisory frameworks. In recent years, Bangladesh has formally moved towards implementing risk-based supervision, reflecting a broader shift away from purely compliance-driven oversight. One of the most complex manifestations of these risks is Trade-Based Money Laundering (TBML), which takes place through legitimate international trade transactions. Despite the growing effectiveness of risk-based approaches for detection, control, and oversight, TBML frameworks in many developing countries, including Bangladesh, still rely largely on compliance-based systems. Traditional compliance-driven approaches are often insufficient to identify and address TBML vulnerabilities. Risk-sensitive supervision itself is complex to implement, as it requires strong data, skilled analysis, and consistent supervisory judgment.
A recurring conceptual issue is whether TBML should be treated merely as a compliance risk for banks. The answer is yes, but only partially, and stopping there often leads to supervisory criticism. For a bank, TBML is fundamentally a financial crime, arising from the nature of its trade-related business. This risk becomes a compliance risk because banks are legally required to identify, assess, and mitigate it under applicable laws and regulations. When banks fail to do so, the consequences materialise as regulatory breaches, financial penalties, and reputational damage. In risk taxonomy terms, the root risk is money laundering. The primary risk category is compliance risk due to failure to meet regulatory obligations. Secondary spillovers may include legal risk, reputational risk, and in some cases credit or operational risk. Treating TBML as "just compliance" may help simplify internal classification for banks; however, it is hardly acceptable to regulators operating under a risk-based supervisory approach.
Risk-based supervision changes how TBML is evaluated and managed. Under this approach, supervisors are less interested in whether a bank has policies on paper and more interested in whether the bank understands its own business and risks. The central supervisory question becomes how exposed a particular bank is to TBML and whether its controls are proportionate to that exposure. This assessment begins with an evaluation of inherent TBML risk, independent of mitigating controls. Supervisors consider the size and complexity of the bank's trade finance activities, the jurisdictions involved, the nature of customers such as traders or intermediaries, the types of products offered including letters of credit, guarantees, open-account trade, and supply-chain finance, and the nature of goods traded. A bank with little or no trade activity is likely to attract limited supervisory attention, while a bank heavily engaged in cross-border trade in higher-risk corridors is examined far more closely.
After assessing inherent risk, supervisors review how effective a bank's controls are, which is often the most challenging stage for banks. Under risk-based supervision, how well controls are applied matters more than whether policies exist on paper. Supervisors look for meaningful review of trade documents, the ability to identify unusual pricing or trade patterns, proper use of trade data in AML systems, staff understanding of TBML risks, and careful investigation of alerts. Even without proven violations, weak controls raise concern because they indicate exposure to risk. Under this approach, potential weaknesses are taken seriously, not just actual failures. The supervisory response is then adjusted proportionately based on the combination of inherent risk and control effectiveness. Where TBML risk is high and controls are weak, supervisors may increase the frequency and depth of inspections. They may expand the focus on trade finance, require targeted remediation programs, or impose qualitative measures such as restrictions on certain products or trade corridors. In serious situations, supervisors may require additional capital or apply enforcement measures. These actions are typically progressive, with pressure increasing until weaknesses are addressed.
Banks often overlook that TBML is not treated the same way as general AML under risk-based supervision. Trade finance has unique features that cannot be managed through retail AML controls alone. Supervisors expect TBML risk to be assessed at the product level and supported by trade-specific controls. They also expect data-driven monitoring and clear ownership by senior management. When TBML is only briefly addressed within a general AML framework, supervisors often interpret this as a lack of genuine understanding of the bank's risk profile.
Global standard-setting bodies such as the Financial Action Task Force have repeatedly identified TBML as a major vulnerability in the financial system and have called for risk-focused supervisory responses. Supervisors increasingly emphasise the use of trade data analytics and stronger information sharing between banks and authorities as part of risk-based oversight. There is also closer cooperation among financial supervisors, customs, and tax agencies, along with thematic examinations of trade finance. These developments reinforce the principle that TBML controls must be proportionate to the nature, size, and complexity of a bank's trade activities.
Country experience shows that TBML risk varies according to economic structure and trade patterns. Countries that rely heavily on international trade often face higher TBML risk, particularly where trade processes remain manual or poorly integrated. Under risk-based supervision, authorities respond by issuing TBML-specific guidance, conducting sector-wide risk assessments, and increasing oversight of higher-risk trade finance products. In some cases, certain products are restricted until banks can demonstrate adequate controls. These approaches highlight the importance of adjusting supervisory intensity based on TBML risk rather than applying uniform rules across all banks.
Bangladesh offers a relevant example due to its heavy reliance on international trade, particularly in sectors such as garments, textiles, and commodities. The volume of imports and exports, combined with complex supply chains, has made TBML a recognised risk. Authorities have identified cases involving trade misinvoicing, over-invoicing of imports, and under-invoicing of exports, often linked not only to money laundering but also to capital flight and tax evasion. Supervisory responses have included strengthening AML/CFT regulations applicable to trade finance, issuing guidance on TBML red flags, enhancing coordination between the central bank, customs, and other agencies, and increasing scrutiny of high-risk customers and trade corridors. These measures illustrate how risk-based supervision can be adapted to national trade realities.
An emerging and increasingly logical view is that TBML should also be treated as a strategic risk rather than only an operational or compliance issue. A bank's exposure to TBML is shaped by strategic decisions such as market entry, customer targeting, product offerings, and investment in systems, data, and skilled personnel. When TBML is recognised as a strategic risk, it becomes part of enterprise-wide risk governance and attracts attention from senior management and boards. This alignment supports risk-based supervision by encouraging forward-looking risk assessments, proportionate investment in controls, clearer accountability, and more credible engagement with supervisors.
International developments and country experiences, including Bangladesh, indicate that supervisors increasingly expect trade-specific, data-driven, and strategically aligned approaches to TBML. Recognising TBML as both a compliance and strategic risk strengthens regulatory compliance and enhances long-term resilience in an increasingly complex global trade environment.
Dr. Shah Md Ahsan Habib is Professor BIBM, and Chairman, DNet.
ahsan@bibm.org.bd