Abstract This paper develops a contract-theoretic model of trade-based money laundering (TBML) in which misinvoicing emerges as an optimal response to non-scalable verification. Firms choose not only the magnitude and direction of misinvoicing, but also the complexity of trade contracts and the coherence of multi-document shipping bundles in order to minimise expected enforcement losses. Verification institutions face informational and behavioural constraints that become increasingly fragile as documentation complexity rises. The model shows that higher penalties or audit intensity do not necessarily deter TBML and may instead induce greater opacity and document engineering. Plausibility constraints, document unbundling, and verification design play a more central role than penalty escalation. The analysis explains persistent empirical detection gaps and the evolution of sophisticated TBML typologies observed in the literature. The paper reframes TBML as a problem of endogenous contract design under verification frictions, with implications for enforcement strategy, welfare, and future empirical identification.
Konstantinos Likas (Mon,) studied this question.