Only Acceptable in the '80s: Modernizing KYC for Energy & Commodities

Our inaugural know your counterparty (KYC) trends research into energy and commodities firms paints a picture of an industry attempting to weather the challenges of today’s compliance landscape armed with systems and processes from the 1980s. 

To dig deeper into this survey data, Fenergo brought together experts in energy and commodities, risk and compliance, and digitalization from Chartis Research, London Stock Exchange Group (LSEG), and Deloitte. Their insights into the industry’s challenges provide a rich backdrop to our research findings.

You can watch the whole session, From Data to Dollars: Unveiling the Results of our Energy and Commodities Survey, here.

Sanctions: A Growing Problem That’s Exposing Compliance Issues

Given the current geopolitical climate and the record volume of sanctions that have come into force in the last two years, the compliance approach of many energy and commodities firms is outmatched by reality.

Fenergo’s research reveals that nearly eight in ten (78%) US energy and commodities firms struggle to meet sanctions compliance obligations due to AML and KYC data challenges. For seven in ten (69%) firms, their cumbersome onboarding processes have even cost them trade relationships.

More than revenue growth targets are threatened by sanctions compliance issues. In our webinar to unveil this data, Alex Tame from LSEG explains the impact of mainstream media and public pressure will likely result in more regulatory scrutiny – and enforcement actions for the unprepared – in energy and commodities:

“Commodity traders paid over $6 billion in fines in the last two years alone…Certainly, I think that's going to get more challenging because the spotlight that the Ukraine war and Russia's shadow fleet has thrown on the sector, the global set focus on ESG has seen all of these things getting more coverage in mainstream media that in turn drives public awareness, drives awareness within government, and then more increased regulatory scrutiny.” – Alex Tame, Senior Channel Partner Manager, Risk Intelligence, LSEG

Referencing an Oxford University study on the damage of enforcement actions for non-compliance with sanctions and regulations, Alex highlights the far-reaching damage that non-compliance wreaks on businesses:

"The cost of remediating whatever the infringement that had caused them to be fined in the first place was something like nine to 15 times the cost of the fine. So, you can't overestimate the damage of that sort of remediating and the loss of business through reputation is going to impact you as well.” – Alex Tame, Senior Channel Partner Manager, Risk Intelligence, LSEG

Counterparty Onboarding and Supply Chains – Why is Compliance so Complicated?

The energy and commodities industry is global and plagued by inherent complexities, such as its diverse asset types and market structures, which makes it difficult for firms to gain full, true transparency of their supply chains and counterparties. Ray Acorda from Deloitte points to dealings with high-risk jurisdictions, complex supply chains, and international trading as another part of the equation that complicate KYC and due diligence processes:

“We're not dealing with simple products, simple customers and clients. We're dealing with very complex entities that also add to this as well. Also, much of the foundational trading infrastructure is not necessarily, how would I say, completely digitalized or exposed.” – Ray Acorda, Assistant Director, Deloitte UK

Echoing Ray’s sentiment about complexity, Sid Dash from Chartis Research highlights the pervasiveness of these issues, as evidenced by the fact that managing even a low-risk counterparty is complex in the energy and commodities sector:

“I also think that the energy companies themselves, the counterparties, can be quite complicated. The architecture of a counterparty, the hierarchies. Which entity are you dealing with? Is it a joint venture? Are you dealing with a market entity versus the holding company? Lots of these issues are far, far from simple even with even with what is what you would consider low-risk counterparty.” – Sid Dash, Research Director, Chartis Research

Outdated Systems and Manual Processes are Rampant in Energy and Commodities

One of the glaring trends that emerges from Fenergo’s survey data is that manual processes and inefficient counterparty data management are causing issues at every step of the way for energy and commodity firms. Firms surveyed cite headcount as the number one cost center for KYC budget – followed by manual outreach, sanctions screening, and report generation. Alex Tame points to a lack of automation as a burden on compliance teams and something that causes firms to have to increase headcount: 

“A lack of automation means you're going to be putting too much stuff through a manual process. That's going to be challenging because you know, corporate entities don't generally have huge compliance teams.” – Alex Tame, Senior Channel Partner Manager, Risk Intelligence, LSEG

One example of incumbent systems being outdated in the sector comes from counterparty trading risk management/energy trading risk management (CTRM/ETRM). 

Ray Acorda quips about the outdated nature of many ETRM systems:

“They're from the 80s, aren't they?” – Ray Acorda, Assistant Director, Deloitte UK

Sid Dash similarly characterizes ETRM infrastructure across the industry as historical, but highlights that many firms have upgraded their systems: 

“There are plenty of new options and, and many of the existing players have upgraded. But you're absolutely right, much of the industry's ETRM infrastructure remains pretty historical.” – Sid Dash, Research Director, Chartis Research

Strong Compliance Frameworks and Perpetual KYC are Critical

Energy and commodities firms have an obligation to prevent financial crime, as well as to detect and report it when financial crimes like corruption, fraud, bribery, or money laundering do occur within their supply chain. Being able to do this effectively is dependent on a firm’s ability to effectively understand and manage risk across their supply chains and counterparties. Garry Teekah from Fenergo highlights the importance of perpetual KYC and having a strong review framework in place beyond just the initial onboarding stage:

“No one's a criminal when they onboard to a product. Everyone will kind of clean up everything and make it look good. But do you have a strong review framework? Do you have a strong perpetual KYC event-driven basis to review so that you can monitor those actors in perpetuity?” – Garry Teekah, Senior Manager, Market Development, Fenergo

Effectively meeting sanctions and risk management obligations requires energy and commodities firms ensure that the processes in place at every stage of the counterparty lifecycle support ongoing, thorough monitoring of counterparties and actors across supply chains. Centralizing the relevant data into a single, digitalized view aids transparency and the risk of compliance and sanctions breaches is greatly reduced.