Sanctions Evasion Reference

Letter of credit

A bank undertaking to pay a seller against presentation of specified documents, substituting the bank's credit for the buyer's.

also known as

documentary credit, LC

reviewed

2026-08-20

A documentary credit is deliberately blind to the goods. The bank examines documents for conformity with the credit terms and pays if they conform; it does not inspect cargo and is not required to. That is the point of the instrument, and it is also its exposure.

FATF’s risk indicators repeatedly flag inconsistencies between the credit terms and the shipping documents presented under them, amendments that alter description or destination late in the process, and the same documents presented to more than one institution.

Where this term is used

  • How is correspondent banking used to evade sanctions? — Using a chain of banks that each know only their own customer, so that a payment for a restricted party reaches a currency it could not access directly, without any bank in the chain seeing the whole transaction.
  • What is a phantom shipment? — A phantom shipment is a trade transaction that is documented, financed and paid in full when no goods, or far fewer goods, were ever shipped. The payment is the entire purpose.
  • What is trade misinvoicing? — Trade misinvoicing is misstating the price, quantity or description of goods on trade documents, so that value moves across a border in a direction and an amount the paperwork does not admit.

Related terms

  • Bill of lading — A document issued by a carrier acknowledging receipt of cargo, stating its terms of carriage, and in negotiable form serving as a document of title to the goods.
  • Phantom shipment — A trade transaction documented and paid for in full where no goods, or substantially fewer goods, were ever shipped.
  • Trade-based money laundering — Moving value by misrepresenting the price, quantity or quality of goods in international trade, so that the transfer appears as ordinary commerce.

Sources

  1. Trade-Based Money Laundering: Risk Indicators. Financial Action Task Force and Egmont Group, 2021.
  2. Trade-Based Money Laundering: Trends and Developments. Financial Action Task Force and Egmont Group, 2020.

All glossary terms