Emerging Risks in Energy Trading, and Best Practices for Navigating Them
March 7, 2025 | by ltcinsuranceshopper
The energy market is the newest frontier for Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance risk. This sector is highly complex; it is dynamic, volatile, and under mounting regulatory pressures. With billions of dollars flowing through the energy industry daily, firms often operate across multiple jurisdictions, engaging in cross-border transactions with a vast network of clients, suppliers and partners. These global operations create heightened exposure to illicit financial activities, including sanctioned entities, politically exposed persons (PEPs) and high-risk intermediaries. Now more than ever, energy firms must implement more sophisticated AML and KYC controls to safeguard their operations, mitigate compliance risk, and avoid being the target of regulatory scrutiny.
COMMENTARY
Until recently, regulators have primarily focused on the financial services industry for sanctions evasion, KYC, and AML non-compliance. Enforcement actions and fines reaching hundreds of millions to even billions of dollars have become routine for financial institutions. Historically, the energy sector remained largely outside the regulatory spotlight. However, as financial criminals increasingly exploit energy trading firms for money laundering through shell companies and opaque transactions, regulatory scrutiny has intensified. Authorities are now actively investigating and penalizing illicit activities within the sector. Early in February, the Department of the Treasury’s Office of Foreign Assets Control sanctioned an international network for facilitating the shipment of millions of barrels of Iranian crude oil to the People’s Republic of China, signaling a tougher stance on financial crime in energy trading.
Tracy Moore The energy industry is starting to catch wind of the turning tides. As the energy and commodities sectors become increasingly complex, with stricter regulations and multi-layered transactions, energy firms are recognizing the importance of robust KYC and AML capabilities. According to Fenergo’s KYC & Onboarding Trends in Energy & Commodities 2024 research report, more than 78% of respondents agreed that the burden of managing and analyzing counterparty data significantly impact their ability to meet sanctions obligations. This aligns with the increasing need for energy companies, particularly those operating in oil and gas, to adhere to complex sanctions regulations and prevent inadvertent dealings with restricted entities. Additionally, almost 70% of respondents indicated that inefficient onboarding processes have directly led to lost trading opportunities, underscoring the critical need for fast, seamless integration of counterparties into business networks. Energy firms are starting to see gaps in their capabilities to marshal this activity. But the challenges that face them seem to get more complex by the day.
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.
