Financial sanctions risk management

As the sanctions landscape continues to change, we wanted to better understand the unique challenges the Energy trading and supply sector is facing with respect to financial and trade sanctions. We invited experts from the Office of Financial Sanctions Implementation (OFSI), Shell International Trading and Shipping Company and the Department for International Trade (DIT) to share their insights with us at a roundtable. The highlights from the session are below.

Regulatory changes in the energy sector

Regulatory change continues to be a challenge for many organisations and this is no different for those operating in the energy trading and supply sector:

• Organisations in the energy sector should be cognizant of the increasing use of ‘smart’ sanctions which seek to target specific sectors, or entity types, to achieve their goals while minimising wider adverse impacts. The OFSI’s Russia Guidance for example, has specific consequences for the energy sector, due to its restrictions on Russian state-owned enterprises, which include a number of energy companies.
• Globally, the regulatory focus on the banking sector is expanding to include the energy trading and supply sector and increased regulatory action from the US is expected.

Guidance and expectations for the management of new sanctions risks

In addition to evolving regulation, guidance with respect to the management of sanctions risks also continues to evolve:

• Recent development of sector specific guidance e.g. OFSI’s maritime guidance recognises that expertise sits within the industry and seeks to provide a principles-based, rather than prescriptive approach. Ultimately the guidance highlights how organisations are expected to implement controls which are proportionate to the specific risks they face and no single solution, such as Automatic Identification System (AIS) monitoring, can be seen as a ‘silver bullet’ to manage the risks highlighted by the guidance.
• In addition to more robust guidance, it is clear that in recent years we have witnessed increasing divergences between the UK autonomous sanctions regime and the decisions of the European Commission. Yet it is recognised that sanctions are most effective when implemented multilaterally. Therefore, while guidance and enforcement may not be coordinated, alignment on designation remains important.

Challenges in implementing robust risk management approaches

Effective management of sanctions risks is proving difficult due to a number of key challenges faced by organisations in the energy trading and supply sector, which include:

• Lack of data: In contrast to the financial services industry, where engagement relies on a significant amount of data obtained from the terms of financing arrangements or KYC clauses, trading organisations receive little information, especially when part of a trading chain. Obtaining a full view of risks and identifying typologies is therefore challenging, however the industry continues to adapt to the sanctions landscape and enhance its sanctions compliance arrangements.
• Industry engagement: The application of more comprehensive due diligence requirements in the energy trading and supply sector has traditionally been met with resistance by counterparties, however the benefits of employing more robust due diligence to manage sanctions risks are becoming clearer for those operating in the energy trading and supply sector. Industry-wide, a robust education and awareness campaign coupled with increased dialogue with the regulators on the operational impact of such requirements are necessary to affect meaningful change.
• Technology: Technological improvements will bolster sanctions screening capabilities. As it stands, systems are not automatically updated to reflect designations, resulting in the need for manual blocking of counterparties and transactions. While ‘cooling off’ periods can be helpful, ultimately more sophisticated, data-analytics driven technology should be pursued as a long-term solution.

This is the first in our series of roundtable for the energy trading and supply sector, which will cover a range of topics that will help organisations in the commodities trading sector manage their financial crime risks in a more robust way.

If you would like to join our mailing list to receive invitations for future events please contact Rawad Halawi.