How Can Commodity Traders Take Global Enforcement Seriously?

Regulators are narrowing focus on commodity traders who have paid over USD 6 billion in fines resulting from global enforcement action over the last 2 years, an amount that continues to grow. We have also seen a historic move from Swiss regulators with the Swiss federal prosecutor recently charging Trafigura with bribing foreign officials in Angola, the first charge of this nature. Swiss authorities aligning with global enforcement trends signals a new (and potentially aggressive) era for Swiss enforcement against commodity traders.

Fines imposed on commodity traders do not include the millions additionally spent on internal investigations, control gap assessments and triaging risks areas when under immediate pressure to demonstrate change. Once the smoke has cleared and external pressure has subsided, further substantial costs might be incurred to look back more thoroughly over this rushed remediation.

The question is: who will be next? If (Swiss) senior managers are to sleep well at night, commodity trading firms need to learn from other sectors and invest in implementation of a sustainable, robust compliance framework that meets international standards.

Fraud and corruption risks transcend sectors and borders

We’ve seen the significant impact an inadequate compliance program can have on companies and individuals in many sectors, particularly with activities like commodity trading that are international by nature.

Lacklustre compliance frameworks and weak internal controls can result in fraud and corruption, leading to hefty penalties and significant resources spent after the fact to try and understand what went wrong and how. A company might even eliminate certain services or trading activities to avoid similar issues recurring or reputational damage, which can take years to unwind.

Where pressure, opportunity and rationalization of bad behaviour come together, people can find themselves in the centre of what researchers have dubbed the “fraud triangle” (Lin et al, 2022). Companies can mitigate this risk by at least removing the “opportunity” of weak internal controls.

Parallels with Switzerland’s protective banking tradition

A poignant case is the international focus on the banking industry over the last 25 years. Swiss banking secrecy has a well-regarded tradition dating back hundreds of years and is an institution that Switzerland is committed to protecting. However, pressure from foreign governments (e.g. the United States) and accusations of assisting with fraud and tax evasion forced Swiss banks to bend their bank secrecy rules and pay over 1.5 billion in settlement agreements. Some Swiss banks were forced to close as a result.

Critically, there was no clear violation of domestic Swiss banking laws. Swiss banks largely failed to look outside the “Swiss bubble” to acknowledge and appreciate the globalisation of enforcement and the impact of foreign laws on their organisations, suffering significant consequences as a result.

The commodity trading industry similarly operates in international markets and high value deals, and it is on the precipice of this “next stage” in the globalisation of enforcement. On 21 September 2023, the Swiss Nationalrat voted in favour of more supervision of commodity traders in relation to their compliance with Russian Sanctions. Given the size of the sector and the international reputation for Switzerland, this draws another parallel to the Swiss banking sector.  

However, the Trafigura charges signal an unprecedented acceleration of domestic enforcement not previously applied to the Swiss banking sector. As these charges stemmed from investigations by US and Brazilian authorities, it indicates the Swiss authorities have strengthened their international cooperation and no longer hold themselves apart from international standards of corporate anti-bribery and corruption. The outcome of this case will set a bar for how heavily the Swiss authorities intend to penalize such actions, and thereby signal how seriously commodity trading firms should reconsider the strength of their compliance programmes. These developments point to a significant conclusion: the Swiss appetite towards enforcement against commodities traders has changed.

The good news is we can use past lessons to map a constructive way forward by controlling the narrative and limiting the amount of political turmoil.

Shaping proactive compliance in the commodities sector

This journey begins with proactively recognising industry-specific critical compliance risk areas, including:

• Corruption: commodity traders typically generate significant financial flows and often operate in countries which have weak governance and low levels of transparency and accountability. This results in a high-risk environment for corruption (e.g., bribery and kickbacks), exacerbated by the relatively increased interaction between commodity traders and local government authorities. Bribery is a particular concern, as seen in recent high-profile cases where companies targeted government officials and state-owner enterprises.
• Sanctions: currently a key topic in the commodity world, violation of sanctions could lead to financial or reputational damage. The constantly changing sanctions landscape makes it particularly challenging and complex to remain compliant.
• Environmental, Social & Governance (ESG): while in early stages of regulatory enforcement, ESG appears set to make a meteoric impact on organisations due to the sheer weight of public sentiment towards the issue. While corruption and sanctions are somewhat “unrelatable”, ESG issues are ever present and impactful on our day to day (e.g. extreme weather conditions) with related pressures from communities that use the vehicle of social media to influence the mass population. Predictions are that ESG will be one of the largest areas of enforcement in the future.

These risk areas are pieces of the overall compliance puzzle facing commodity trading companies. A robust compliance program involves assessing, implementing and (independently) certifying a risk-based compliance framework, with both proactive and reactive measures, including the foundational elements highlighted in this pyramid.

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Begin with a tailored risk assessment

An overarching assessment of the existing compliance framework starts with a comprehensive “top down” and “bottom up” review, which could contain, but not limited to, the following elements:

TOP DOWN

Provide impetus, framework and direction for company personnel

• Governance and tone from the top
• Country and industry-specific risks
• Group policies & Whistleblowing
• Past regulatory settlements

BOTTOM UP

Identify what is really happening within the company or transactions

• Cashflow analysis and financing arrangements
• Provenance of assets/rights
• Substantive testing (incl. General Ledger)
• Assessment of existing controls
• Sales distribution methods

Commodity trading companies should first assess their existing compliance program to identify the appropriate building blocks to form a strong compliance foundation. This includes identifying critical weaknesses and/or historical incidents of fraud and corruption, before they become known to parties outside the organisation (international regulators, for example). This also allows the company to control the narrative and contain the magnitude of the fallout.

Commodity trading companies have an important choice to make: take a gamble that global enforcement action won’t affect them, or proactively invest in their compliance environment and build a program with material impact.

FRA have been deeply involved in providing compliance reviews, recommendations and assisting with implementation for several commodity trading companies. Read more about our Advisory expertise.