What precautions are required to be taken while doing international trade to avoid involvement with money laundering operations ( dealing with illegal money)? How to spot and avoid these type of transactions ? Is it ok to pay by Western Union in countries where Banking and credit card facilities are freely available?

I'm not quite sure what you are referring to, but there is a type of fraud where they ask people to "transfer payments" for them. These people receive money in to their bank or PayPal accounts, keep a percentage as "commission" and send on the rest, usually by WU or MoneyGram. The money will come from some other type of internet crime, and it's usually only the middle man who gets caught. Transferring payments in exchange for a percentage is by definition money laundering, and a crime. Some more information can be found here:

http://resources.alibaba.com/topic/10879/Being_approach_to_be_their_agent.htm

If you have actually agreed to something like this, I would advise you to go speak to your bank ASAP and ask them to reverse any transfers.

There is also a similar scam where they send checks instead, which can take several weeks to bounce after they have been cashed.

Businesses in the western world generally do not use WU for anything, and it should be avoided. Scammers like to use it as they can receive money anonymously.

Replying to [sivaras]:
Yes, Western Union is legal.