Sanctions Screening in Trade Finance: Letters of Credit, Bills of Lading, and Dual-Use Goods

Trade finance is where the banking system touches physical cargo, and that is precisely what makes sanctions screening so hard here. A wire transfer hands a compliance team a few names and an amount. A documentary credit hands them a shipper, a consignee, a notify party, a vessel, a port of loading, a transhipment point, an HS code, and a goods description written by someone who has never read a sanctions list. Any one of those fields can hide a designated party or a controlled item.

The exposure is not small. The World Trade Organisation (WTO) estimates that roughly 80 to 90 per cent of world trade relies on some form of trade finance, credit or risk mitigation, and letters of credit alone cover about 12.5 per cent of world trade, based on SWIFT Institute data.

Three recent developments have made this work more challenging. First, the lists have grown at a pace screening systems were never designed for. EU vessel designations climbed from 25 ships in July 2024 to 671 by July 2026, while the UK moved from 17 to 621 over the same period. Both figures have climbed again since. Second, the goods keep shifting. In November 2025, the EU published Delegated Regulation 2025/2003, replacing Annex I of the Dual-Use Regulation. Controls on quantum computing components, advanced semiconductor manufacturing equipment, additive manufacturing machines and peptide synthesisers were added. Third, regulators have pushed more of the burden onto banks. In October 2024 the US Bureau of Industry and Security (BIS) issued best-practice guidance urging financial institutions to screen customers, and their customers' customers where appropriate, against entities that have shipped Common High Priority List items to Russia since 2023.

Legal risk is reciprocal. In Kuvera Resources v JPMorgan Chase, Singapore's highest court interpreted the bank's sanctions clause strictly and objectively. The court held that fear of an adverse finding by the Office of Foreign Assets Control (OFAC) did not excuse non-payment against a complying presentation. Screen too loosely and you face penalties. Screen too aggressively and you face a claim. This series works through where those pressures actually land. The following topics are going to be covered in this article:

• FfWhy Trade Finance Is a High-Exposure Sanctions Area
• What You Screen in a Trade Finance Transaction
• Screening Trade Documents: Letters of Credit and Bills of Lading
• Dual-Use Goods and Export Controls
• Transhipment and Destination Obfuscation
• Building Sanctions Screening Into the Trade Finance Workflow
• How Sanction Scanner Helps

1- Why Trade Finance Is a High-Exposure Sanctions Area

Look at what a single documentary credit actually contains. A letter of credit for a commodity cargo brings together an applicant, a beneficiary, an issuing bank, an advising or confirming bank, sometimes a reimbursing bank, a vessel and its owner, ports of loading, discharge and transhipment, and the goods themselves. Then add the parties that surface only once documents arrive. Screening typically extends beyond buyers, sellers and their banks to third-party inspection companies, insurers and their agents, shippers, notify parties, carriers, vessel owners, masters, charterers and freight forwarders.

That multiplicity is the core of the problem. Any one of those parties can be a sanctions target, and any bank in the chain that processes the transaction can bear the liability.

The exposure sits closer than most people assume. OFAC civil enforcement runs on strict liability, so intent is not part of the test. Under the 50 per cent rule, an entity owned 50 per cent or more in the aggregate by blocked persons is itself treated as blocked, even when it appears on no list. In OFAC's own phrasing, a US financial institution cannot so much as advise a letter of credit if the underlying transaction is in violation of OFAC regulations. For non-US banks, clearing a payment through a US correspondent is usually enough to create a nexus. The 2021 settlement with Union de Banques Arabes et Françaises (UBAF), a French bank specialising in trade finance, showed how that plays out in practice. UBAF agreed to remit $8,572,500 to settle potential civil liability for 127 apparent violations. Between August 2011 and April 2013, it operated US dollar accounts for sanctioned Syrian financial institutions and indirectly conducted USD business through the US financial system, and part of the conduct involved back-to-back letters of credit and other trade finance transactions with sanctioned parties, all cleared through a US bank. OFAC determined the violations were non-egregious and voluntarily self-disclosed.

Then there is the data itself. Trade documents were never built for screening. Inconsistent or partial data is normal, with variations in vessel names, port spellings and transliterated company names, along with missing vessel identifiers. Kuvera showed how thin the ground can be. The carrying vessel had been renamed, ownership had transferred years earlier, and it sat on no OFAC list at the time of screening.

Two structural gaps make it harder still. Around 80 per cent of world trade moves on open account rather than documentary instruments, where the bank has no visibility of the underlying trade documents and is limited to screening the clean payment. Identifying dual-use items is a separate problem, because the technical complexity is high and banks often lack the specialist knowledge required.

So the financing bank ends up accountable for a transaction it can only see in fragments. That gap between exposure and visibility is what sets trade finance apart from ordinary payment screening.

2- What You Screen in a Trade Finance Transaction

Screening a trade transaction is not one check. It is four separate checks against four different reference sets, each with its own data problems:

Parties: Party screening is name matching, and it extends well past the obvious counterparties. Alongside buyers, sellers and their banks, the screened population usually includes third-party inspection companies, insurers and their agents, shippers, notify parties, carriers, vessel owners, masters, charterers and freight forwarders.

Vessel: Vessel screening works differently because it depends on identifiers rather than names. The International Maritime Organisation (IMO) number is a unique seven-digit code, which is precisely why vessels engaged in illicit activity broadcast false names, IMO numbers or Maritime Mobile Service Identity (MMSI) values to mask their movements.

Ports and Routes: Route screening is geographic and behavioural.

Goods: Goods screening is a classification exercise, not a list lookup, which is what makes it the hardest of the four.

The following table provides detailed information about these screening objects, what to check and the red flags:

Table 1: Screening Object and What to Check

These four run on different clocks and with different data. A clean party screen says nothing about the cargo, and a clean cargo screen says nothing about who really owns the ship carrying it.

3- Screening Trade Documents: Letters of Credit and Bills of Lading

A documentary credit has a life, and screening has to follow it rather than sit at a single point. Three control points carry most of the weight:

Issuance: Before the credit goes out, the bank screens the applicant, the beneficiary, every party named in the instrument, and the advising, confirming and reimbursing banks. The limitation shows up as soon as you look at what is actually available at that moment. Much of the transactional detail, including vessels and ports of call, is often unknown at trade inception and may be updated later. An issuance screen is therefore a screen of names, not of a shipment.

Amendments deserve their own pass. Significantly amended credits without reasonable justification, or changes to the beneficiary or the location of payment, are established red flags, and any change in the names of parties should prompt additional OFAC review.

Document examination: Document examination is where the shipment finally becomes visible. The bill of lading supplies the shipper, consignee, notify party, carrier, vessel and the ports of loading and discharge, and each needs screening in its own right. The documents then have to be read against one another, because the invoice, packing list, certificate of origin and insurance certificate should tell a single coherent story.

The clock is unforgiving here. Article 14(b) of UCP 600 gives each bank a maximum of five banking days following the day of presentation to decide whether the presentation complies. Any Article 16 refusal notice must go out within that same window; failing that, the bank is precluded from claiming a discrepancy and must honour it. A sanctions concern does not buy extra time. An ICC Opinion published in October 2025 addressed an issuing bank that held documents for weeks and returned them, citing internal compliance risk management, and found that the action was not a valid refusal under Article 16.

Pre-payment: Screen again before funds move. Designations land constantly, so a party that was clean at issuance may not be clean at settlement. This pass should also capture the correspondent and intermediary banks in the payment message, none of which were part of the original credit.

Red flags worth catching in the documents themselves are as follows:

• Vague or generic goods descriptions that resist classification
• Shipment locations or goods descriptions that do not match the letter of credit
• Price or quantity out of line with the market for that commodity
• Routing through transhipment hubs that makes no commercial sense for the stated trade
• The bill of lading data conflicts with the information provided in the invoice, packing list, or certificate of origin.

None of these are expensive to spot. All of them are expensive to miss. For more information check the comprehensive article about trade-based money laundering.

4-Dual-Use Goods and Export Controls

Dual-use items are goods, software and technology that can be used for both civilian and military purposes. In practice, the dual-use category covers a great deal of ordinary commerce, including microelectronics, sensors, bearings, machine tools and lab equipment. Two regimes do most of the work here. The US Bureau of Industry and Security administers the Export Administration Regulations (EAR) and the Commerce Control List, while the EU operates Regulation 2021/821 with its Annex I control list.

The structural difficulty is that the control list is only half the story. Non-listed items can still require authorisation because of end use, end user or destination risk, which means transaction review cannot stop at product classification. These are the catch-all controls, and more than half of EU Member States have gone further. They extended Article 4(1) authorisation requirements to non-listed items where the exporter has reasonable grounds to suspect a military end use.

Evasion tracks these weaknesses closely. HS codes are misclassified so the commodity falls outside a flagged tariff line. Goods are described in language too generic to classify. End-user documentation gets falsified, since procurement networks commonly provide vague or false declarations about end use and end users, claiming civilian purposes for items destined for military production.

Where screening actually contributes: The consignee and the end user go through restricted-party screening. The Consolidated Screening List brings together four BIS lists, namely the Denied Persons List, Entity List, Unverified List and Military End-User List, alongside Commerce, State and Treasury data. A party appearing on the Unverified List is itself a red flag that should be resolved before proceeding. Ownership matters as much as the name, though the US position is in flux. BIS issued its Affiliates Rule in September 2025, extending Entity List restrictions automatically to any entity at least 50 per cent owned by one or more listed parties, and adding Red Flag No. 29, a duty to determine ownership percentages where a foreign entity is known to have listed owners. The rule was suspended from 10 November 2025 under the US-China trade deal and is set to snap back on 10 November 2026 unless BIS acts again. Banks building ownership screening now are building for a rule that returns, not one that applies today.

Beyond the lists, the useful question is a plausibility test. Does this description of the goods make commercial sense for the end user, considering the quantity and destination? A small trading company importing precision measurement equipment with no discernible customer base is a question worth asking, whatever the classification says.

Where screening stops: Commodity classification is a trade-controls exercise, not a screening one, and it usually sits outside the screening tool. Identifying items with both civil and military applications is technically demanding, and banks frequently lack the specialist knowledge required. Being clear about that boundary is better than pretending the screening engine has answered a question it was never built to answer.

5- Transhipment and Destination Obfuscation

Goods do not have to travel in a straight line, and that is precisely the point. Recent research on the Russia sanctions separates two distinct channels. The first is transhipment through countries that do not participate in the sanctions regime. The second channel involves misreporting shipment destinations, where goods nominally shipped to a neighbouring country never reach their declared final destination. Looking at Armenia, Kazakhstan and the Kyrgyz Republic, the published study puts the combined effect at roughly one third of the decline in direct European exports to Russia caused by product-specific trade sanctions, though earlier versions of the same research estimated under 10 per cent.

The trade data makes the pattern hard to miss. The European Bank for Reconstruction and Development (EBRD) analysis found that EU exports of sanctioned goods to those three countries rose by an extra 30 per cent relative to exports of other goods. Comparing the second half of 2021 with the second half of 2023, EU exports to Kyrgyzstan were up 856 per cent, Armenia 128 per cent and Kazakhstan 98 per cent. Institutional geography helps. Trade inside the Eurasian Customs Union, covering Kyrgyzstan, Russia, Armenia, Belarus and Kazakhstan, is not subject to customs inspections, and once unrecorded re-exports are accounted for, the International Monetary Fund (IMF) estimated Russia was the destination for as much as 77 per cent of Kyrgyzstan's 2022 exports rather than the reported 48 per cent.

Different cargo takes different roads. For technology and components, Hong Kong, Turkey, the UAE and the Caucasus and Central Asia corridor carry the volume. The EU's 20th sanctions package, adopted on 23 April 2026, added 60 entities to its dual-use export restriction list, 28 of them in third countries including China, Hong Kong, Turkey, the UAE and Thailand. The same package deployed the EU's anti-circumvention tool against a third country for the first time, banning certain dual-use exports to the Kyrgyz Republic. For sanctioned oil the map shifts. Chinese customs report no purchases of Iranian oil at all, showing instead increased flows from transhipment hubs such as Malaysia, Oman and the UAE, with front companies and falsified documents covering the gap. OFAC's 2025 maritime designations, most of them tied to oil and gas from Iran and other embargoed jurisdictions, clustered in the UAE, Hong Kong, Oman, Singapore, Malaysia, China and the Marshall Islands.

For a bank, none of this amounts to a country blacklist. It is a coherence test, asking whether the routing and the paperwork make sense together. The practical flags:

• A destination with no plausible end market for that volume or that item
• Transit points on the bill of lading that do not fit the stated origin and destination pair
• A consignee in a free trade zone with no visible operating footprint
• A counterparty incorporated after February 2022 with no trading history in the commodity
• AIS gaps or unscheduled port calls near a restricted jurisdiction

The declared destination on a shipping document is a claim about the future, not a record of the past. Treating it as settled fact is where most of these cases begin.

6- Building Sanctions Screening Into the Trade Finance Workflow

Most banks already run all of these controls. What tends to fail is sequencing and evidence, so the checklist below is less about adding steps than about fixing when each one happens and what gets written down.

• Screen the applicant, beneficiary, and every bank in the chain, including the ownership behind each name, rather than just the name itself.
• Screen the vessel by IMO number, not by vessel name, together with the registered owner, operator and manager.
• Screen ports of loading, discharge and transit, plus last ports of call against the declared voyage
• Screen the consignee and end user, and verify the end use of the goods if they are controlled or classified as dual-use.
• Cross-check documents against each other, reading the bill of lading against the invoice, packing list and the credit itself
• Re-screen at issuance, at document examination and before payment, because designations move faster than transactions do.
• Flag transhipment routing inconsistent with the declared trade, treating the stated destination as a claim to test
• Document every screening decision, including the alerts you cleared.

The first practical requirement is deciding in advance which fields feed the engine. Industry guidance recommends that a bank define the critical data elements to be screened, especially entity names, individual names and geographic locations such as cities, ports and countries, and establish a standardised form capturing the mandatory names to be pulled from trade documents. Without that, screening coverage depends on whoever keyed the transaction.

Ownership of the steps matters as much as the steps themselves. The Trade Finance Principles set out a three-lines-of-defence model, with business operations responsible for the day-to-day control environment, a second line drafting policy and monitoring execution, and internal audit providing independent assurance.

Then there is the evidence layer, which is where most enforcement actions are actually won or lost. OFAC's Framework for Compliance Commitments sets out five essential components, namely management commitment, risk assessment, internal controls, testing and auditing, and training. Internal controls are expected to identify, interdict, escalate, report and keep records relating to sanctions exposure. Retention rules are concrete. OFAC requires five-year retention of records relating to sanctioned transactions, including blocked asset reports and correspondence with the agency, and blocked property must be reported within 10 business days of becoming blocked.

One closing point on the audit trail. The records that matter most are usually not the hits you blocked, since those explain themselves. They are the alerts you cleared and the reasoning you applied at the time. Kuvera turned on exactly that, with a bank asked after the fact to prove its internal conclusion about a vessel, and failing to do so. A screening decision without a contemporaneous rationale is not a decision anyone else can defend later.

7- How Sanction Scanner Helps

Going back to the four screening objects from earlier, Sanction Scanner covers three of them directly, namely the parties, the banks and the vessel, together with the ownership sitting behind each.

Parties and banks. Screening runs against more than 3,000 sanctions, PEP and watchlist sources drawn from over 220 countries, applied both at customer onboarding and during ongoing monitoring. The name screening module covers PEP, sanction, remittance, payment, vessel and air screening, with the underlying data refreshed every 15 minutes. For a documentary credit, this means that the applicant, the beneficiary, the issuing bank, the advising bank, the confirming bank, and any parties that only become involved when documents are presented all use the same data set.

Ownership behind the name. This process is where trade finance screening quietly fails most often, because the OFAC 50 per cent rule and the BIS Affiliates Rule due to return in November 2026 both attach to ownership rather than to the name printed on the invoice. The Know Your Business (KYB) module retrieves real-time company data from global registers, including shareholders, directors and ultimate beneficial owners, then automatically reveals UBOs and connected entities and screens them through the integrated name screening module. Coverage extends to more than 76 million KYB records, updated every 15 minutes, with a company check returning in around 150 milliseconds.

Vessels. Vessel screening checks ships against sanctions lists and ownership data, with coverage of the OFAC, UN and EU lists, plus UBO analytics designed to surface the real owner underneath complex structures. The ownership question was the central issue in the Kuvera case, where the ship appeared clean at first glance, but the concerns were buried several layers deep.

Mid-transaction designations. Section 3 flagged the gap between issuance and payment. Continuous monitoring re-screens customers and transactions in real time during and after onboarding as sanctions data changes, which is the control that catches a designation landing while a credit is still open.

Fitting into the workflow. Checks can be performed via API, batch files or the web interface, so the screening layer sits inside existing trade finance operations rather than asking teams to rebuild around it.

Sources

[1] Office of Foreign Assets Control, U.S. Department of the Treasury. OFAC FAQ 401: Revised Guidance on Entities Owned by Blocked Persons (50 Percent Rule). 2025.

[2] Office of Foreign Assets Control, U.S. Department of the Treasury. Union de Banques Arabes et Françaises (UBAF) Settlement Agreement. 2021.

[3] Financial Crimes Enforcement Network and Bureau of Industry and Security. FinCEN and BIS Joint Alert on Potential Russian and Belarusian Export Control Evasion Attempts (FIN-2022-Alert003). 2022.

[4] Court of Appeal of Singapore. Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A. [2023] SGCA 28. 2023.

[5] European Commission. Commission Delegated Regulation (EU) 2025/2003 amending Annex I to Regulation (EU) 2021/821 (Dual-Use Items). 2025.

[6] European Bank for Reconstruction and Development. Trade Diversion and Sanctions Circumvention: Evidence from the Russia Sanctions. 2024.

[8] Office of Foreign Assets Control, U.S. Department of the Treasury. OFAC Framework for Compliance Commitments. 2019.

Judi Tero

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