On August 7, 2025, a new era in U.S. trade policy dawned as President Trump’s latest round of import tariffs took effect. Imports from 40 countries with which the United States runs a trade deficit now face a 15 percent rate, and some—Brazil, for instance—are hit with tariffs as high as 50 percent, according to The Hill. While tariffs have long dominated headlines as a lever of economic and political power, a less discussed, but equally consequential, side effect is emerging: the powerful incentive these levies create for trade-based money laundering and related financial crimes.
Trade-based money laundering, as defined by the Financial Action Task Force (FATF), disguises the proceeds of crime through trade transactions to legitimize illicit origins. It’s a mammoth problem. Some estimates peg the global total laundered through such schemes at $1.6 trillion annually, with trade mis-invoicing responsible for roughly 80 percent of illicit financial flows in developing countries. The relationship between tariffs and money laundering is direct and troubling: as tariffs rise, so does the incentive for both legitimate businesses and criminal organizations to cheat the system.
The methods used to evade tariffs read like a criminal playbook. Over- and under-invoicing is rampant, with importers misrepresenting the value of goods to reduce duty payments. The difference between actual and declared values is often settled through informal channels, making it a perfect vehicle for laundering money. Country-of-origin fraud is another favorite, where products from high-tariff countries are falsely declared as coming from lower-tariff jurisdictions, often involving forged certificates and collusion with overseas suppliers. Transshipment schemes, where goods are routed through third countries with minor repackaging to disguise their true origin, are common, especially with Chinese steel and aluminum passing through Oman, Thailand, the UAE, and Vietnam before arriving in U.S. markets. There’s also the false description trick, where high-value electronics, for example, are deliberately misclassified as low-value goods to avoid scrutiny and reduce tariff liability.
Criminal organizations, especially drug traffickers, have learned to exploit these loopholes with alarming sophistication. A notorious example came in May 2023, when a federal judge sentenced a co-owner of Woody Toys, Inc. to 14 months in custody for helping launder approximately $3 million for Mexican and Colombian drug traffickers. The scheme involved foreign toy retailers using pesos to buy discounted U.S. dollars from currency brokers, which were then used to purchase merchandise from Woody Toys, effectively washing dirty money through seemingly legitimate trade.
These schemes aren’t limited to the United States. Around the world, the banking sector is grappling with an increasingly fractured regulatory landscape. As reported by AINVEST, emerging markets in 2025 are more fragmented than ever, with regulatory frameworks diverging due to geopolitical tensions and domestic policy priorities. The Philippines, for example, recently streamlined investment guidelines for insurers, allowing more exposure to structured products and supranational debt. Brazil, meanwhile, has doubled down on standardized sustainability accounting, while Portugal has aligned with the latest FATF outcomes, imposing stricter anti-money laundering (AML) and counter-terrorism financing (CFT) rules on high-risk jurisdictions.
This patchwork of rules complicates cross-border operations for multinational banks and investors. In Indonesia, the struggle to bring its massive informal financial sector—responsible for over half of GDP—into the AML fold deters institutional investors. Nigeria’s 2025 AML/CFT updates require enhanced due diligence on high-risk jurisdictions, increasing compliance costs for foreign banks and squeezing their profit margins. Divergent interpretations of new global banking standards, such as the 2025 Basel III Endgame re-proposal, have forced smaller banks in emerging markets to rely more on cross-border credit risk transfers, further entangling global and local financial systems.
For investors, these regulatory fault lines are more than just background noise—they shape returns and risk in fundamental ways. As the Global Financial Stability Reports show, banks in fragmented regulatory environments are more sensitive to geopolitical shocks, while compliance costs and uncertainty eat into profits. The advice from market analysts is clear: diversify across regulatory regimes, prioritize markets with transparent ESG and AML frameworks, and keep a close eye on geopolitical triggers such as new FATF designations of high-risk jurisdictions.
Against this backdrop, global regulators are ramping up their scrutiny of how banks handle financial crime risks. According to a recent Forvis Mazars report, the focus is shifting from mere check-the-box compliance to probing the very culture and governance of financial institutions. Regulators are digging deeper, asking hard questions: Do banks truly know their customers? Are they acting quickly and decisively on red flags? Is their governance strong enough to challenge risky business decisions in real time?
Recent investigations have gone beyond failures in transaction monitoring or late suspicious activity reports. Regulators are examining whether banks have adequately disclosed financial crime risks to investors and are scrutinizing client onboarding processes, especially in digital and wealth management sectors. There’s also heightened attention on legacy client relationships tied to cross-border fund movements and historical exposure to sanctioned regions and complex offshore structures. The underlying concern is whether red flags were missed or ignored, and whether internal concerns were buried rather than addressed.
“The challenge is significant,” David Schwartz, president and CEO of the Financial International Business Association, told The Hill. “We must safeguard the global financial system’s credibility without hampering the legitimate international commerce that drives our interconnected economy.”
In response, the U.S. Department of Justice has made tariff evasion and trade-based money laundering top priorities. In May 2025, Matthew Galeotti, head of the Justice Department’s Criminal Division, identified “trade and customs fraud, including tariff evasion” as among the “most urgent” threats facing the country. To keep pace with increasingly sophisticated criminal operations, the federal government has ramped up its use of advanced technologies, including blockchain and artificial intelligence, in its money laundering prevention strategies.
But technology alone isn’t a silver bullet. As Forvis Mazars notes, artificial intelligence can help detect complex financial crime patterns and improve monitoring efficiency, but it must be deployed with strong governance and human oversight. There’s a risk of overreliance on AI tools, which can introduce bias or blind spots if not properly managed. The future of compliance, experts argue, will depend less on static policies and more on robust governance frameworks, real-time risk management, and a culture that empowers front-line staff to escalate concerns without fear or delay.
Effectively fighting trade-based money laundering and tariff fraud will require ongoing international collaboration, adequate funding and staffing for enforcement agencies, and the deployment of advanced technology that can keep up with ever-evolving criminal tactics. The stakes are high—not just for banks and investors, but for the integrity of the global financial system itself. As the world’s regulatory landscape grows more fractured and tariffs continue to rise, the need for vigilance, adaptability, and decisive action has never been greater.
In the end, the battle lines are drawn not just at ports and borders, but within the very institutions that move money across the globe. Whether the world’s financial system can rise to meet this challenge remains to be seen—but the time for action is now.
