KYC, Sanctions Screening and Due Diligence in Commodity Trading: What a Compliant Counterparty File Looks Like

KYC, sanctions screening and due diligence in commodity trading are not a formality added by the compliance department; they are the mechanism that stops a buyer from sending a letter of credit to a company that does not exist, and stops a bank from freezing the payment once it is sent. A compliant counterparty file answers two questions: who is this company, and can it deliver what it offers. This article sets out what that file contains.

What a compliant counterparty file looks like

A complete file has five sections. Each one is built from documents obtained from independent sources, not only from the counterparty, and each is dated and signed off by the person who checked it.

1. Legal identity

• Certificate of incorporation and current extract from the official company register (Handelsregister, Companies House, KvK, Receita Federal, DMCC and so on), obtained directly from the register
• Articles of association and register of directors
• Registered address confirmed against the register, and operating address confirmed by a site visit, a utility bill or a third-party report
• Tax and VAT registration numbers validated through VIES or the national equivalent
• Identity documents of the signatories and a board resolution or power of attorney authorising them to sign

2. Ownership and control

The file identifies every ultimate beneficial owner holding 25 % or more, as required under the EU Anti-Money Laundering Directives, and traces the chain through any holding companies with register extracts at each level. A counterparty that cannot or will not disclose its UBOs cannot be onboarded by a bank, and therefore cannot be paid by a letter of credit.

3. Sanctions and adverse media

Sanctions screening is run against the EU, UK OFSI, US OFAC and UN lists and against the lists of the origin, transit and destination countries, covering the entity, its directors, its UBOs, the vessel and the correspondent banks. Screening is documented with the tool used, the date, the search terms and the disposition of every potential match. Adverse media screening and a check of litigation and insolvency registers complete the section. The file also records the export control status of the goods, where dual-use or trade restrictions apply, and the origin-related restrictions that affect products such as Russian-origin petroleum products or sanctioned-origin gold.

Rule: no document in a counterparty file is accepted on the counterparty's word alone; every item is either obtained from an independent source or verified against one, and the verification is recorded.

4. Capacity to perform

This is the section most buyers skip and most frauds exploit. For a seller of EN 590 the file records the refinery or storage contract, the terminal confirmation and the inspection company relationship. For a sugar exporter it records the mill registration with MAPA, the RADAR export habilitation and the shipping line or forwarder. For a copper cathode supplier it records the smelter or the LME warehouse warrant and the brand registration. Trade references are confirmed by calling the referenced buyer through its switchboard, and shipping history is checked where available through bill of lading databases or port records.

5. Financial and banking

• Audited financial statements for the last two or three years, or a bank reference letter obtained bank-to-bank
• Name of the counterparty's bank and confirmation that the bank will handle the documentary credit; an RMA relationship between the two banks for SWIFT messaging is confirmed by the buyer's bank
• Credit insurance or a trade finance institution's confirmation, if the transaction is financed

How due diligence separates producers from intermediaries

Most offers in the open market come from intermediaries. There is nothing wrong with an intermediary who holds a mandate from a producer, but the file must show that mandate: a signed, dated authorisation on the producer's letterhead, confirmed by the producer through contact details obtained independently. The questions that separate a performing counterparty from a letterhead are factual and quick to ask:

1. Where is the product physically, and who will confirm it: refinery, terminal, mill, smelter or warehouse?
2. Which inspection company has sampled it, under which report number?
3. Which bank will advise or confirm the letter of credit, and does that bank know the seller?
4. Which recent shipments can be verified with the buyer, the carrier or the port?
5. Who is the UBO and does that person appear on any list?

An intermediary with a genuine mandate answers all five within a day because the producer provides the answers. A broker chain cannot answer any of them, and the procedure it proposes, usually starting with the buyer's bank instrument, is designed to avoid the questions.

Standards and sources

The structure above follows the Financial Action Task Force recommendations on customer due diligence, the EU AML Directives, the Wolfsberg Group trade finance principles that banks apply to documentary credits under UCP 600, and the OECD due diligence guidance for mineral supply chains. The EU, OFAC and OFSI publish guidance on screening and false positives. A file built on these sources is accepted by any bank, insurer or counterparty that matters.

Practical format

Keep one indexed folder per counterparty with a one-page summary on top: legal name, register number, UBOs, sanctions result and date, capacity evidence, bank, reviewer and next review date, with the evidence behind each line. The summary is what a bank or a board asks for; the evidence is what protects the company when a transaction is later questioned.