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Trade Finance in Oil and Gas: Banks' Retreat and Compliance
Banks are exiting oil and gas trade finance—not because of a lack of demand, but because compliance economics have turned against them. This analysis breaks down the sanctions, AML, and settlement risks that make every link in the transaction chain a potential liability, and why tokenization does not change the rules of the game.
Following the de facto blockade of the Strait of Hormuz in March 2026, oil and gas trade finance faced a simultaneous surge in sanctions, logistical, and settlement risks. According to Kpler, oil and petroleum product flows through the strait declined from approximately 18 million barrels per day to 4.8 million in July and about 2 million in August.
For banks, this means screening not only counterparties and beneficiaries but also vessels, evasion routes, insurance, transshipment ports, oil origin, and transit payments. In September 2026, the United States imposed sanctions on Turkey's Golden Global Bank, accusing it of servicing Iranian oil trade; the bank denied the allegations.
Against this backdrop, the long-term contraction of the correspondent banking network persists: according to BIS and FSB data, the number of active relationships declined by approximately 22% between 2011 and 2019; the calculation is based on SWIFT data.
Why Banks Reduced Their Presence
The main reason for banks' retreat is the economics of transactions. Trade finance yields are limited, while compliance requires detailed verification of the entire chain: from beneficiaries to transshipment ports. Each route change multiplies manual checks that scale poorly. Legal control costs remain high even as transaction values grow.
Liability risk is asymmetric: in the United States, penalties can be imposed without proof of intent. The size of sanctions is tied to the transaction value, making the risk unacceptable. For bank employees, blocking a questionable transaction is easier than risking regulator scrutiny, reputational loss, and loss of access to correspondent accounts.
Constant changes in sanctions lists create additional uncertainty. Banks must track complex ownership structures, indirect stakes, and the influence of related parties. An error in interpreting the rules may surface after a payment has been processed, creating high operational risks for financial institutions.
The contraction of correspondent networks only exacerbates the situation. The fewer banks willing to work with complex jurisdictions, the more intermediaries are required for a single transaction. Ultimately, the withdrawal of players is driven by economics: with the same volume of regulatory obligations, transaction profitability has fallen to a critical level.
Obligations That Do Not Depend on the Type of Financing Party
Compliance requirements are tied to the transaction itself, not to the lender's status.
Banks, funds, factoring companies, and private investors are equally obligated to screen the parties and the subject matter of the transaction. Non-bank structures receive no leniency: they bear the same sanctions and AML risks but often have less internal infrastructure to control them. Replacing a bank with an alternative intermediary does not eliminate compliance risk—it merely shifts it to a new participant.
Parties and Indirect Control
Screening requires mandatory identification of all transaction participants and their ultimate beneficiaries. Under the OFAC (US) rule, a company is automatically blocked if sanctioned persons own a stake of 50% or more. These stakes are aggregated across the entire ownership chain through any intermediate structures.
At the same time, the "50% rule" accounts only for ownership stake, so hidden influence must be assessed separately. Director appointment rights, options, nominees, and trusts are subject to verification. The mere absence of a company's name from blacklists does not yet guarantee transaction safety.
Subject Matter and Transaction Chain
Absolutely all links in the logistical and financial chain are subject to thorough verification. This includes cargo origin, sellers, buyers, carriers, vessel owners, insurers, and payment agents. Contracts, invoices, bills of lading, and vessel movement routes must be fully reconciled.
For commodity transactions, a simple seller's declaration is no longer sufficient if signs of sanctions evasion are evident. Vessel changes or cargo blending obligate the financing party to gather actual evidence of the transaction's cleanliness. Mechanically retaining documents does not absolve from liability.
Price Restrictions
In operations with oil, Price Cap rules apply, monitored by OFAC (US), OFSI (UK), and EU authorities. Chain participants must collect price attestations, freight data, and use contractual guarantees. Australia's regulator (DFAT) also requires recording origin guarantees in contracts.
The depth of verification depends on the role: traders confirm compliance with the price ceiling through commercial documents. Insurers and banks may rely on client attestations but must respond to any "red flags." The UK's OFSI regime requires verifying each loading and disclosing the cost structure upon first request.
Extraterritorial Effect
US sanctions extend to any foreign persons with a minimal connection to their jurisdiction. Grounds for OFAC enforcement may include a dollar settlement, a US correspondent bank, use of US-origin software, participation of US citizens, or US-origin goods.
Even without a direct US nexus, companies may fall under secondary sanctions for significant transactions on behalf of blocked persons. OFAC actively applies these measures to foreign financial institutions. The main consequence is full asset freezing and closure of US correspondent accounts.
Liability
For businesses, violations carry the risk of asset blocking, large fines, loss of insurance, and isolation from markets. Civil liability in the US arises upon violation, even without intent. For example, in February 2026, OFAC recovered USD 3.777 million from an individual for transactions circumventing Syrian sanctions.
Company management bears personal liability for deliberate circumvention of controls or concealment of data. Willful violation of IEEPA is classified in the US as a criminal offense. Penalties provide for fines of up to USD 1 million and imprisonment for up to 20 years.
What Tokenization Does Not Solve
Tokenization changes the method of recording rights or settlement but does not turn a transaction into an circumvention channel. A digital token remains part of a specific economic operation with counterparties, goods, route, and settlement asset. Therefore, the same sanctions, AML/CFT, currency, and export control requirements apply to it.
Screening and Identification
The issuer, investor, borrower, seller, buyer, beneficial owners, platform operator, custodian, and recipient of funds are subject to verification. For digital assets, blockchain addresses and related transactions are additionally screened. OFAC includes virtual currency addresses in SDN entries and also states that sanctions obligations for digital currency and fiat transactions are identical.
An address match with a list is not the only criterion. An address may be controlled by a blocked person without separate designation in the SDN List. Therefore, analysis includes the origin of funds, the cluster of related wallets, transaction counterparties, and the address's connection to the token issuer or owner.
Settlement Asset and Infrastructure
Tokenized settlement requires determining what exactly discharges the obligation: a bank transfer, deposit token, stablecoin, electronic money, or another digital asset. Each instrument has an obligor—an issuing bank, payment organization, token issuer, platform operator, or another service provider.
If the chain uses a bank, payment provider, crypto exchange, custodian, or money services business, it retains its own identification, monitoring, and reporting obligations. In the US, an MSB must register with FinCEN, implement an AML program, and file suspicious activity reports. Tokenization does not remove the correspondent bank or change its sanctions restrictions.
Traceability
A public ledger does not reduce the volume of data available to supervision. It records addresses, timestamps, amounts, transfer sequences, and links between wallets. This data can be cross-referenced with KYC profiles, exchange accounts, supply documents, and beneficiary information.
Blockchain transparency does not equal establishing identity. An address may be pseudonymous, distributed among several persons, or linked to a mixer and intermediate wallets. Therefore, on-chain analytics supplements but does not replace client identification and source-of-funds verification.
Legal Enforceability
A token grants the holder only those rights that are enshrined in the issuance terms, contract, and applicable law. If the document confirms a right to goods or receivables, it is necessary to determine the mechanism for transferring control, priority of pledge, enforcement procedure, and actions in the event of bankruptcy of the issuer or custodian.
UNCITRAL MLETR permits functional equivalence of an electronic document to a paper one provided there is a reliable method of identification, exclusive control, and preservation of record integrity. At the same time, the model law does not override private international law rules and the choice of applicable legislation. If a jurisdiction does not recognize a token as a property right or negotiable document, a registry entry alone does not create a secured claim.
Tokenization changes the method of recording and settlement but does not alter the scope of obligations or remove the operation from applicable regimes. It can accelerate reconciliation, enhance transparency, and automate certain control actions, but it does not replace screening, banking infrastructure, insurance, legal verification of collateral, and enforceability.
| Criterion | Bank Letter of Credit | Bank Trader Lending | Private Credit Fund | Tokenized Accounting Structure |
|---|---|---|---|---|
| Compliance obligations | Full screening of parties, cargo, and route | Full screening of borrower, goods, and chain | Same sanctions and AML requirements | Same requirements plus address screening |
| Access to settlement infrastructure | Direct bank clearing and correspondent channels | Bank accounts and correspondent channels | Requires a separate payment intermediary | Depends on bank, issuer, or provider |
| Availability of insurance coverage | Usually included through the bank structure | Requires separate arrangement or confirmation | Not provided automatically | Not replaced by digital accounting |
| Typical decision timeline | From several days to weeks | From weeks to months | From several days to weeks | Faster with ready infrastructure |
| Main limitation | Rigid limits and documentary conditions | Expensive compliance and bank limits | No own settlement infrastructure | Does not change the rights and obligations of parties |
Conclusions
Before entering commodity finance, an organization must establish a control framework: identification of clients and beneficiaries, sanctions screening, supply chain verification, vessel and route monitoring, assessment of goods origin, control of price restrictions, documentation of decisions, and procedures for escalating suspicious transactions. For digital transactions, analysis of addresses, transactions, and the settlement asset issuer is added.
It is impossible to fully delegate the establishment of participant identity, assessment of indirect control, verification of cargo origin, interpretation of red flags, and the decision on transaction admissibility. An external provider may supply data or a technical tool, but responsibility for the final decision remains with the organization.
The form of the transaction does not eliminate risks. The organization retains liability for sanctions violations, AML/CFT deficiencies, falsified documents, loss of insurance coverage, payment blocking, correspondent bank refusal, and legal unenforceability of collateral.
Financing should be deemed unavailable if it is impossible to establish beneficiaries, confirm cargo origin and price, explain the route, exclude participation of blocked persons, or ensure a lawful settlement channel. Such signs require refusal, not a search for a circumvention structure.
This material does not contain recommendations on structuring operations, selecting jurisdictions, counterparties, or providers and does not constitute legal advice on sanctions compliance.
Frequently Asked Questions
Does a lender's non-bank status exempt it from obligations to screen transaction parties?
No. Obligations depend on the nature of the operation, participants, goods, route, and settlement asset, not merely on the presence of a banking license. A fund, factoring company, or private investor must screen beneficiaries, sanctions lists, cargo origin, carriers, insurers, and payment intermediaries. Delegating individual checks to an external provider does not transfer responsibility for the final decision.
Why can a bank refuse a transaction that formally does not fall under restrictions?
A bank assesses not only the presence of a direct prohibition but also the likelihood of violation, errors in documents, secondary sanctions, and loss of correspondent access. An opaque ownership structure, vessel change, cargo blending, unclear goods origin, or incomplete route can create unacceptable operational risk. Given the asymmetry of consequences, refusal is often economically more rational than conducting a transaction with a small margin.
Does digital settlement change the scope of applicable requirements for a transaction?
No. Tokenization, stablecoins, or other digital settlement change the form of accounting and value transfer but do not cancel sanctions, AML/CFT, currency, and export control requirements. Wallet addresses, transactions, the token issuer, custodian, and payment provider may additionally be subject to verification. If a bank or regulated payment intermediary remains in the chain, it retains its own identification and monitoring obligations.
