KYC Compliance: A complex and nuanced challenge for energy trading & supply organisations | Deloitte UK has been saved
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Know-Your-Counterparty (KYC) activities have long been a key control in the financial crime Risk Management Framework (RMF) for many organisations and enables them to understand who their counterparties are and assess their associated financial crime risks.
However, understanding and applying the requirements under financial crime legislation and regulation can be complex, particularly for energy trading & supply organisations, where only certain aspects of their operations fall within the scope of these regulatory requirements.
Optimising regulatory compliance continues to be a challenge when taking into account that many organisations in this sector have relatively small in-house compliance teams, which are grappling with a wide range of financial crime, compliance and operational challenges. This is often coupled with a range of technology and data issues, as well as the challenges of KYC being perceived as a "barrier to business" among some commercial trading teams.
Ultimately, obtaining accurate and complete KYC information is proving to be challenging across the industry, despite its criticality to mitigating against financial crime risks. So, what is hindering organisations in achieving their ambitions for more effective KYC processes? In this blog we explore some of the challenges that trading & supply organisations face with respect to KYC and look at some of the considerations to help overcome these.
1. Inconsistent and developing regulatory application
In the UK, the scope of UK Money Laundering Regulations 2017 (MLR) has traditionally focussed on organisations undertaking regulated financial services. As such, the scope of these regulations primarily apply to the financial or ’paper’ trading activities that energy trading & supply organisations undertake. Crucially though, as many organisations in this sector have global operations, they will also be subject to various MLRs in different jurisdictions and in turn, potentially differing standards with respect to KYC. In addition, the applicability of relevant Money Laundering Regulations within organisations often varies depending on whether the business activities fall under the scope of activities captured by the regulations. All of this can lead to challenges when attempting to implement consistent KYC standards across a business globally. While not all activities in energy trading & supply organisations are subject to KYC obligations, there are still major benefits to undertaking KYC in order to understand the broader financial crime risks (including bribery and corruption, sanctions and fraud) associated not only with counterparties but also those stemming from complex supply chains and ancillary or third-party services.
In addition to the complex application of the regulations, the requirements are often viewed by many in energy trading & supply organisations as being an obstacle to commercial ambitions, and in some jurisdictions as an invasion of privacy. Historically we have seen a reluctance from some counterparties to provide information and respond to KYC requests, typically as a consequence of the perceived limited regulatory obligation to do so and/or local data privacy laws impacting their ability to provide certain information. While substantial data can be obtained through public sources, some mandatory attributes, for example the identification and verification of ownership, are dependent on entities providing that insight. When a counterparty is disinclined to respond, this can ultimately lead to a loss of commercial opportunity for the onboarding organisation where they are unable to meet their KYC requirements.
2. Inefficient and manual KYC processes with inability to scale
The natural cycle of Ongoing Due Diligence (ODD) means that many energy trading & supply organisations are continually seeking to address the KYC gaps in their existing counterparty records, while in parallel trying to uplift onboarding practices and standards to align with regulatory expectations. Adapting the KYC process for both onboarding and remediation to ever-evolving regulatory requirements can require substantial resources and planning, which are not always readily available. Even within the same organisation we see different standards of KYC being applied across targeted remedial projects and Business-As-Usual (BAU) processes. To guarantee issues are dealt with appropriately, it is prudent to keep remediation projects and BAU activities separate; however, ensuring a consistent approach with clear requirements is essential for standardised results.
3. Deficient data and outdated systems
While not unique to the energy trading & supply sector, cumbersome technology and disparate systems, coupled with poor data quality, perpetuates issues in both onboarding and ODD including:
By addressing the root causes of these issues, as challenging as they may be, organisations will not only be able to meet their due diligence requirements but also create a more efficient process that enables them to more effectively identify and manage their financial crime risks.
The following optimisation points aim to achieve a process whereby information gathered is as accurate as possible, the requirements set out in KYC regulation and financial crime legislation are met and minimise business disruption:
Addressing challenges with an organisations KYC process can be complex and time consuming, and while many organisations in other sectors (e.g. Financial Services) have already enhanced their KYC capability, many organisations in the energy trading & supply sector are still going through this change.
At Deloitte we have supported a number of clients with a range of KYC activities including, KYC remediation services, KYC managed services and screening alert management and investigations. Our support has helped clients not only improve the KYC they have on their counterparties and meet regulatory requirements but also free up resources for BAU and other critical risk management activities and provide more robust governance and management of financial crime risks across their counterparty portfolio.
Katie is a Partner in Deloitte Forensic. She has over 10 years’ experience working in the Financial Services sector, principally specialising in Financial Crime. She has a particular focus on anti-money laundering (AML) and financial sanctions, supporting clients to comply with regulatory obligations and keep abreast of industry good practice. More recently, she has been supporting projects looking to redesign financial crime target operating models.
Rawad is a Director with the Deloitte Forensic Team. He specialises in delivering change/transformation programmes and solutions in the financial services industry. Specialist in Financial Crime (FC), Anti-Money Laundering (AML), Counter-Terrorist Financing (CTF) and Sanctions. Experience across Governance, Policy, Process, Operating Model Design/Delivery, Change Management, Digital Transformation and Automation.