The Future of Sanctions and Regulation in Energy and Commodities

The energy and commodities sectors are increasingly exposed to growing risks related to sanctions and due diligence requirements. This trend is driven by a combination of geopolitical tensions, regulatory changes, and the global push for transparency and accountability.

Risk Assessment is More Critical Than Ever for Sanctions Compliance

One critical area is counterparty risk assessment. Firms must ensure that their business partners are not subject to sanctions. Sanctions regimes have become more complex and expansive, targeting specific countries, industries and even individual entities. 

This requires robust screening mechanisms and continuous monitoring to stay ahead of rapidly changing sanctions lists across jurisdictions.
For energy and commodities firms, this means navigating a labyrinth of restrictions that can vary across jurisdictions. Non-compliance can result in severe penalties, reputational damage, and operational disruptions. The overlapping and sometimes contradictory nature of sanctions from different countries further complicates compliance efforts.

Mounting Due Diligence Requirements for Energy and Commodities Trading

Due diligence requirements are also intensifying, particularly in response to environmental, social, and governance (ESG) concerns. Firms are now expected to conduct thorough assessments of their supply chains to identify and mitigate risks such as human rights violations, environmental harm, and corruption. Regulatory frameworks like the EU's Corporate Sustainability Due Diligence Directive (CSDDD) exemplify this shift, imposing stringent obligations on companies to monitor and address adverse impacts throughout their operations and supply chains.

The stakes are high. Failure to meet due diligence standards can lead to legal liabilities, financial losses and erosion of stakeholder trust. Moreover, the digitalization of compliance processes and the use of advanced technologies like artificial intelligence are becoming essential to manage these risks effectively.

Regulatory Horizon Scanning – What does the Future Hold?

Energy and commodities trading companies are increasingly likely to fall under anti-money laundering (AML) regulations due to their exposure to financial crime risks, such as money laundering, bribery, and sanctions violations. Regulatory bodies like the Commodity Futures Trading Commission (CFTC)* are broadening their focus to address these risks, especially as trading activities in physical and financial markets grow more complex and interconnected.

Non-financial industries are also increasingly coming under the scope of AML regulations, including cryptocurrency and digital assets, real estate, luxury goods, art, precious metals, gaming and gambling, and professional services like law firms and accountants. These expansions reflect the growing complexity of financial crimes and the need for broader regulatory oversight that will likely come to also include energy and commodities trading firms.

The CFTC’s resources on AML predict that, in the future, it is possible that registrants including commodity pool operators (CPOs) and commodity trading advisors (CTAs), “may be required to comply with anti-money laundering regulations.” Though it also notes that CPOs, CTAs, SDs, MSPs, and RFEDs do in fact  have certain AML-related reporting obligations under existing regulations. They also have obligations under the sanctions programs that target jurisdictions or individuals and further U.S. foreign and domestic policies.

Sanctions requirements for energy and commodities firms are also expected to rise due to ongoing geopolitical instability in Europe and the Middle East, which has heightened concerns about national security and global economic stability. Despite a broader trend toward deregulation in some sectors, sanctions remain a critical tool for addressing geopolitical conflicts and curbing illicit activities. The U.S., for instance, imposed over three times as many sanctions annually in 2022 and 2023 compared to a decade earlier, reflecting the growing reliance on sanctions as a policy instrument. This trend underscores the likelihood that sanctions will continue to expand, particularly in sectors like energy and commodities that are deeply intertwined with global geopolitics.

What does Effective Counterparty Risk Management Look Like?

In this evolving landscape, energy and commodities firms must adopt proactive strategies to stay compliant. Navigating these interconnected risks is a compelling reason for energy and commodities firms to prioritize the adoption of  an integrated compliance strategy. Leveraging advanced technologies for real-time monitoring, fostering a culture of compliance, and staying informed about global regulatory developments are essential steps. In doing so, firms can not only meet regulatory expectations but also strengthen their operational resilience in an increasingly complex environment. 

This includes investing in robust compliance systems, fostering a culture of accountability, and staying informed about regulatory developments. By doing so, they can navigate the challenges posed by sanctions and due diligence requirements while safeguarding their operations and reputation.

Navigate the Changing Compliance Landscape Successfully with Fenergo 

Fenergo enables energy and commodity trading companies to digitalize their KYC and onboarding processes for counterparties and suppliers, helping them manage risk and remain compliant with sanctions requirements.

Book a demo to discover how Fenergo's innovative platform can simplify regulatory obligations, protect your operations, and ensure seamless compliance.

_{*The Commodity Futures Trading Commission is an independent U.S. government agency that regulates the U.S. derivatives markets, including futures, options, and swaps.}