A semiconductor device has a plurality of conductive vias formed partially through a substrate. A conductive layer is formed over the substrate and electrically connected to the conductive vias. A semiconductor die is mounted over the substrate. An encapsulant is deposited over the semiconductor die and substrate. A trench is formed through the encapsulant around the semiconductor die. A shielding layer is formed over the encapsulant. The trench is formed partially through the substrate and the shielding layer is formed in the trench partially through the substrate. An insulating layer can be formed in the trench prior to forming the shielding layer. A portion of the substrate is removed to expose the conductive vias. An interconnect structure is formed over the substrate opposite the semiconductor die. The interconnect structure is electrically connected to the conductive vias. The shielding layer is electrically connected to the interconnect structure.