Emerging Risks in Energy Trading, and Best Practices for Navigating Them

The world is becoming increasingly volatile. The Russia-Ukraine war is now entering its third year while conflict in the Middle East continues to escalate. Meanwhile, a new U.S. administration is driving shifts in trade policy with new sanctions and tariffs being rapidly introduced. Energy firms face a heightened risk of inadvertently violating sanctions due to the complexity and difficulty of keeping abreast of rapidly evolving rules, especially in regions with high geo-political uncertainty. The energy industry is global in nature. Energy trading often involves multiple parties with multiple regulatory jurisdictions and frameworks. This can lead to regulatory arbitrage, where bad actors exploit differences in laws to launder money. The complexity increases with the involvement of shell companies or intermediaries in high-risk jurisdictions. Oil and gas payments can be disguised through complex supply chains, intermediaries, and offshore trading hubs. Tracing the origin of funds through a web of global intermediaries and parties is similar to navigating a maze, blindfolded. These highly complex and opaque supply chains make it incredibly difficult to identify high-risk counterparties and ensure ethical sourcing.

The energy industry has been known to be slow to adopt new technologies. Manual, paper based-processes, legacy systems and data silos in energy trading make it difficult to implement effective KYC processes. Poor data quality and outdated technology only perpetuate onboarding inefficiencies and compliance gaps. Additionally, the shift toward digital platforms in energy introduces new avenues for money laundering. Inherently, the global reach of energy firms is vast, and firms rely on digital platforms to streamline trading processes, complete transactions, and reduce costs. The advantages of operational efficiency are numerous. Nevertheless, a significant risk must also be acknowledged. By relying heavily on digital platforms, without proper AML and KYC guardrails in place, it becomes easier for criminals to move illicit funds through accounts globally, further complicating the AML challenges compliance teams need to navigate. On the flip side, while technology can enable illicit activity, it can also be a powerful tool in combat it. Firms must adopt technology to help them effectively manage counterparty and supply chain risk, to avoid significant fines and reputational damage. The right technology solution can not only ensure compliance but also deliver efficiencies when it comes to counterparty onboarding and ongoing risk monitoring. Firms will ultimately benefit from adopting such technology through greater risk management and quicker time to onboard, providing an enhanced counterparty experience—all of which is limited without technology. Ultimately, technology can reenergize traditional, manual processes and provide an antidote to AML and KYC challenges for energy firms. Digital platforms offer a standardization of the request submission operations that feed into KYC workflows, ensuring speed but also removing the bottleneck of manual processes. Additionally, tools can present more visibility to internal teams by connecting the front and middle offices, meaning that traders and operations teams are aligned on request statuses, which can then effectively be communicated to counterparties. This helps deliver on the counterparty expectation of speed and provides firms with a tool to help fight against financial crime and stay out of regulators’ agenda, supporting in building trust and driving business growth.

For energy firms looking to gain efficiencies, artificial intelligence (AI) is a topic that is taking center stage. AI is commonly viewed as a tool for trading execution and algorithmic trading, but its benefits also extend to AML and KYC processes. Not only does it offer better fraud detection measures, enhanced due diligence, and streamlined onboarding, but it also provides scalability. Firms can take in large quantities of data without burdening the compliance teams. Moreover, the ability to offer better illicit finance detection allows teams to use their time for more strategic and personalized investor relations insights, cross-selling, and beyond. The energy trading landscape is constantly evolving, with new risks emerging on a daily basis. As it becomes more intertwined with global finance, the risks of sanctions and AML and KYC non-compliance grow. However, by adopting a proactive approach, leveraging cutting-edge technology, and fostering a culture of compliance, firms can not only mitigate these risks but also transform regulatory adherence into a strategic advantage. AML and KYC can no longer be treated as a mere check-the-box activity. Energy firms must critically assess existing compliance frameworks, strengthen their risk management capabilities, and invest in technology to stay ahead of evolving threats. Those that take compliance seriously today will be better positioned to navigate the complexities of tomorrow. —Tracy Moore is Director of Thought Leadership at Fenergo.