Senior Marketing Manager
A new era of personal liability for commodity trading compliance officers is entering force as prosecutors intensify efforts to hold senior management accountable for failings. Federal enforcement agencies are aligning on an approach where Chief Compliance Officers (CCO) must “take ownership” of corporate compliance programs and how they are assessed.
While the Department of Justice (DOJ) and other bodies hope that increased responsibility “empowers” CCOs, industry leaders have largely been wary of the changes and many feel the regulatory tweaks leave compliance professionals at risk of prosecution. While true in most regulated industries, the matter of personal liability is keenly felt in energy, agriculture and metals markets, where the ongoing Russia-Ukraine conflict has presented significant compliance challenges.
The commodities sector has been synonymous with corruption in the past, and fragmented regulations and supervisory divergence across jurisdictions have created gaps in monitoring that have allowed—and continue to allow—bribery and misconduct.
Compliance risk is a major headache in the sector, but US regulators are committed to strenghtening controls across trading by focusing efforts on influential senior managers within firms, and forcing CCOs to assume liability for compliance programs.
“This approach could discourage qualified candidates from taking these important positions—especially for companies previously subject to enforcement actions which are most in need of strong CCOs,” said Sarah Paul, US head of corporate crime and Investigations at Eversheds law firm.
“At the same time, however, the emphasis on CCO empowerment could lead companies’ board of directors and/or senior management to devote more resources to making CCOs’ jobs easier and to the compliance function generally.”
Last year, as a result of $1bn settlement by mining giant Glencore to address extensive criminal charges, federal regulators updated guidance as part of wider efforts to add transparency to transactions. Guidance included stipulations for CCOs that anti-fraud programs must be individually approved by senior executives. The change concerned the application of Foreign Corrupt Practices Act (FCPA) and extends to any regulated entity that enters corporate resolutions, such as guilty pleas, deferred prosecution agreements, and non-prosecution agreements. Remote working arrangements have added to the headache for compliance officers tasked with assessing whether a trader’s optimized or speculated positions amount to questionable market behavior.
“The new DOJ approach stands as one of the most important events elevating the importance of corporate compliance over the last thirty years,” said Michael Volkov, of Volvok Law Group. “However, DOJ’s new certification requirements are bound to be controversial because it strikes at a CCO’s most significant risk; personal liability. This will be interesting to watch.”
Forward-thinking CCOs are turning to technology backed by AI and machine learning to reduce risk associated with foreign bribery, misconduct and market rigging. By deploying data-driven communication surveillance systems, financial insititutions can offer more complete surveillance as well as surface a much wider view of risk within the business. AI and machine learning driven solutions have both proactive and preventative effects, allowing firms to identify more issues as well as drive insight into potential new instances of problematic market conduct.
As commodity market activity primarily takes place over-the-counter (OTC) or privately, away from exchanges, physical production and inventory are, for the most part, unregulated, with weak reporting. UK regulators have complained they have little oversight of grain traded in the US and France, yet have greater clarity over the sale of energy and metals contracts.
Taken together, it can be difficult for regulators and market participants to gain a full view on a suspicious trade and relevant context. International regulators are moving towards a more standardized form of supervision and will put the onus on businesses to improve transparency.
“Market volatility is causing drastically higher and more frequent margin calls, which increase the costs of trading; as a result, many commodity contracts have moved from the exchanges to the OTC markets,” said Cadwalader Wickersham & Taft partner Peter Malyshev. “These trends call for enhanced compliance supervision on both the exchange and clearing side of the markets, and the end user and market intermediary side.”
Recently, nickel prices on the London Metal Exchange (LME) topped more than $100,000 a ton after Russia’s invasion of Ukraine, with trading suspended for a week, prompting investigations from the Bank of England (BoE) and Financial Conduct Authority in the UK.
“Due to opacity, fragmentation of reporting and lack of data in some markets, quantifying the size and scale of these fragilities and interconnections remained challenging, and addressing this globally should be a priority,” the BoE said.
History shows regulatory intervention increases during periods of market instability as bad actors take advantage of volatile trading conditions. For commodities traders something of a reckoning may lie ahead.
The size of the criminal bribery scheme engulfing Glencore was described as “staggering” by prosecutors, who said the actions threatened the fair and effective functioning of financial markets, and were endemic of poor culture beyond one firm. The energy firm’s “ineffective and weak” compliance program was deemed incapable of spotting misconduct or other market abuse offenses, and prosecutors sent a message to the rest of the sector that such a lax approach will not be tolerated.
More broadly, commodities traders are experiencing a similar exponential rise in data generation across electronic communications and data reporting obligations. Many forward-thinking firms are augmenting human surveillance with solutions capable of processing tranches of information far larger than any person could review. When deployed correctly, machine learning algorithms can find connections that are hidden to human reviewers, from across enormous volumes of enterprise data, from a multitude of sources including email, chats and messaging apps.
For CCOs and the businesses they supprt, the union of human expertise and and a surveillance platform employing AI is the best way to ensure a full view of risks, allowing for identification of potential issues that might otherwise instigate regulatory scrutiny and potentially lead to fines or even criminal charges.