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Overcoming Counterparty Onboarding Challenges in Energy & Commodities

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Geopolitical events in the last 24 months have led to increased sanctions, increased scrutiny, and increased risk and compliance complexity for energy and commodities firms. Financial crimes, such as corruption and sanctions evasion, have become crucial risks for the sector to manage and require a rapid, effective response from firms.

To combat this increased risk, firms dealing in energy and commodities are having to strengthen their counterparty onboarding process and the way they use and manage this data.

In a recent Fenergo webinar on Energy Trading and Sanctions Risk when Onboarding, the panel’s discussion centered around several challenges that firms in the commodities and energy trading sector are currently facing, particularly around legacy onboarding systems and data silos. 

Rory Doyle, Head of Financial Crime Policy at Fenergo, noted that many firms in the sector have legacy systems and infrastructure dating back to as far as the 1980s. These systems and processes were not designed for modern regulatory or data management requirements, or for financial crime risks that are being faced today. The difficulty this creates is a decentralized, siloed spread of data – data that teams need a holistic view of in order to assess risk and perform tasks like sanctions screening. In fact, when polled, the greatest proportion (29%) of our audience cited de-centralized or siloed data as the biggest challenge they face when onboarding counterparties and suppliers. 

The second greatest challenge cited by our audience was the ever-evolving global sanctions landscape – which reflects the operational and regulatory challenge that firms face in the current political climate and the impact this is having on accessing new business.

Rawad Halawi, a Partner at Deloitte, noted the lack of regulatory scrutiny of the energy and commodities sector historically as the cause of underinvestment in risk management and compliance processes. Financial services, for example, are subject to established, globally enforceable regulations centered around the prevention of financial crime. Because of their obligation to comply with stringent Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, financial institutions tend to have far more digitalized, developed, and standardized approaches to risk and data management.

KYC and Onboarding Minimizes Sanctions and Financial Crime Risk Exposure

Paul Iezzi, EMEA Channel Partner Manager at LSEG Risk Intelligence, emphasized the importance of KYC and onboarding in the energy sector, citing complexity, client demand for adaptability, and the rapid nature of geopolitical changes as key challenge areas where KYC can help firms.

Technology's role in onboarding and KYC is crucial for levelling the playing field for sanctions screening, with centralized systems being particularly effective for managing counterparty data. The panel agreed that legacy systems are generally complex, creating data and process silos in the energy and commodities trading sector.

Legacy approaches have also led to disconnected or outdated systems that limit firms' ability to effectively assess counterparty risk. When polled, just 12% of the energy and commodities professionals in the audience said that their current technology systems aren’t limiting their ability to assess counterparty and supplier risk effectively. 

António Rodrigues, Galp Energia’s Head of Compliance, highlighted the importance of understanding adverse media, political exposure, and bribery risks, as these vary across countries. Data plays a crucial role in understanding and mitigating sanctions and bribery risks at every touch point.

How AI Overcomes Sanctions Complexity in Energy Markets

Sanctions are becoming more complex, diverse, and difficult to understand. Onboarding counterparties is complex, but is made even more so by the constantly shifting global sanctions landscape that all businesses are expected to comply with – regardless of their sector. Artificial Intelligence (AI) can mitigate the pitfalls of poor onboarding. Improved accuracy and reduced manual workload are just the tip of the iceberg when it comes to how AI mitigates the pitfalls of poor onboarding and benefits KYC and onboarding processes. 

Automation in particular was called out by the panel as a solution for not only financial compliance, but for benefits in the following areas:

  • Operational efficiency and revenue growth
  • Speeding up due diligence processes, freeing up a firm’s front office staff to focus on revenue-generating activities
  • Automation and data integration can streamline compliance processes and increase profitability

Best Practice for Counterparty Data and Financial Crime Risk Management 

To address these issues, the speakers recommended that firms:

  • Invest in new technology and automation to break down data silos and provide a centralized view of risk
  • Utilize technology to bridge the gap between work required and limited KYC resources
    Prioritize integrating good quality, structured data that can power automated processes more efficiently
  • Consider implementing perpetual KYC policies using ongoing monitoring and transaction monitoring
  • Consult industry experts and leading firms for best practices and industry insights on peer activities
  • Adopt a risk-based approach for onboarding and counterparty lifecycle management, including proper training and due diligence infrastructure

How Fenergo Helps Energy and Commodity Trading Companies

Fenergo's KYC and Onboarding solution allows Energy and Commodity Trading organizations to digitally onboard counterparties and suppliers efficiently, while remaining compliant with KYC and AML regulations.

Get started with digitalizing KYC and onboarding processes for counterparties and suppliers today. To understand how Fenergo enables Energy & Commodity Trading companies, book a demo with the team.