A Competitive Advantage

Is Compliance A Competitive Advantage?

Paying the Penalty

As 2024 ended, the costs to many Wall Street banks in fines for improperly monitoring electronic communications (such as WhatsApp) approached $2.0 billion. Perhaps even more shocking was the $1.3 billion TD Bank paid in October due to failure to implement and maintain an adequate Anti-Money Laundering (AML) program. As 2025 started, a senior executive at Trafigura was found guilty of bribing Angolan oil officials to procure favourable business terms.? The company was fined heavily, and the employee received a custodial term.

In 2024, multiple fines were levied across commodity participants for breaking market rules (such as the CEA: Commodity Exchange Act) and engaging in money laundering, insider trading and other market-related malfeasance. In June, Trafigura paid a $54 million settlement for using inside information to trade gasoline futures and manipulating a fuel oil benchmark to help their swaps and futures positions. Many other merchant traders, oil companies and investment banks fell afoul of the regulators and, through non-compliance, accrued severe fines, custodial sentences for staff, and reputational damage.

Many fines (and the associated legal costs) could have been avoided or significantly reduced had adequate compliance training been provided and employees sufficiently educated on non-compliance penalties and punishments. Regrettably, some employees will still choose non-compliance for personal profit, and others will maintain indifference to training and education. Still, a robust compliance program enforced by competent professionals can protect the business's and most employees' interests.?

But can it also be a competitive advantage??

Sustainability and ESG

Given the challenges of climate change, ESG focuses heavily on the Environment. Many companies’ ESG programs aim to reduce emissions and achieve carbon neutrality or Net Zero. Verified carbon credit (VCC) markets are developing rapidly to aid this transition. Through increased transparency of the underlying process and a better understanding of the environmental impact, these credits are shaking off the earlier stigmas of greenwashing, which questioned utility, motive, and adherence to true carbon neutrality.

Secondly, the S, or social issues, often make headlines as companies strive to act responsibly in their communities and create inclusive, safe working environments alongside non-discriminatory staffing policies. Failing to do so or being found to create a hostile and prejudiced environment can result in reputational damage and legal action. Recent headlines regarding Fast Fashion Retailer Shein’s clothing production highlighted child labour and unsafe working conditions in their manufacturing chains abroad.

Governance is the least mentioned letter of the three, yet it can be the most damaging when governance issues occur. Unethical business practices, insufficient risk management, and poor adherence to regulations and laws can lead to devasting fines, prison sentences, and bankruptcy. In the early 2000s, Enron Corp, a one-time commodity behemoth, imploded spectacularly, ticking every one of the boxes above.?

Since Enron, more corporate scandals have occurred due to poor governance and oversight. Good governance depends on ensuring compliance with the rules and regulations of the environment and jurisdiction in which a company operates. Dedicated compliance professionals are guardians of a trading company’s welfare and are key to long-term success.

With ESG as their primary metric, businesses can champion their good sustainability practices. Numerous studies claim that adherence to ESG principles can be a game-changer, delivering a competitive edge and helping companies to make money. ?

How much does compliance contribute to this, and does it provide a competitive edge?

The classic 3 Cs framework applied to commodity trading.

?The 3 Cs framework (see below) is a simple idea that organises three factors that must be optimised to create a competitive advantage for a company. The model is a 3-factor Venn Diagram that includes Customers, Competitors, and the Company. The intersections of each element produce commercial scenarios such as competitive advantages, profit and loss, and, at the centre, price wars. By asking business-related questions for each segment, key questions for management are identified. These include whether you have a competitive advantage, what it is, and how to minimise costs and maximise profits. Although the theory was designed broadly for corporates, these questions are critical to those who trade, including the role and scope of the compliance focus.?

The Competition circle might become the Market circle because traders compete against the market in everything they do. Many traders have customers, such as counterparties, needing price risk management (derivatives) or fixed physical supply contracts (fuels or electricity). Anyone who trades in the market is, by default, a customer of the Market. At the same time, all of them face and compete with the Market. Everyone wants to trade at the best price for themselves, make money, and avoid unnecessary penalties. However, this happens more often in complex markets with human actors than they like. A solid compliance department helps minimise those risks through education, observation, and interaction.

A good compliance team is an advantage for those in the Market.

In the Customer circle, it is accepted common wisdom that customers prefer to deal with reputable counterparts; Regulated Markets and Exchanges want the same for their constituents. Reputation and adherence to Regulation are some of the most essential things any participant can have and do. By operating ethically and lawfully, a reputation grows over time. When a trader has an issue with an Exchange or a counterpart over a wrong order, a mistake, or even malfeasance, a good reputation and relationship allow for better outcomes and speedier resolution to the problem. Better outcomes in trading are profits or de minimus losses when losses (because of errors or malfeasance) become unavoidable.

A compliance team fosters good operating practices with the market, exchanges, and all regulators and provides education on the dos and don’ts of all trading markets.

In the Company (Trader) Circle, we find ESG at the intersection of Customers and Markets. ?An effective compliance program (the G) can reduce costs by reducing fines and legal fees. Compliance Departments also improve business prospects by developing a company’s reputation with clients, Regulators, and Exchanges, contributing to staff retention.

Traders who are thoroughly educated on market rules and regulations (as well as pitfalls) are more confident in their activity and market engagement. A strong relationship between trading and compliance becomes a positive feedback loop as training traders helps them work confidently and securely, producing better outcomes.

As we have said, better trading outcomes mean profits (or minimising losses).

The intersection of all three circles is known as a Reuleaux triangle. In the corporate 3 Cs schematic, the intersection of company, customer, and competition is a price war. Price wars have a significant, albeit temporary, cost because they decrease profit margins in the short term.

?In the modified 3Cs trading version, where the company, customer, and market intersect, price wars are replaced by compliance. Given the benefits of a good compliance operation to any trading business, the reverse is a profit increase (price wars decrease profits and should be avoided), as good compliance can add to the bottom line for all circles.

Compliance IS a Competitive Advantage?

The 3 Cs framework is ambiguous and does not provide a definitive path to success. However, it highlights themes and ideas to boost profitability and seek that competitive edge. The role of Compliance in every circle, particularly in all the intersections, is clear:? A strong compliance department adds value in many ways.?

Like trading talent, the lifeblood of any trading operation, compliance talent (and focus) can make or break a company. Even though the compliance department is not designated a Profit Centre, its performance can and will affect the bottom line.

Compliance is critical to Good Governance, the third pillar of all ESG efforts. A well-staffed and well-funded compliance department is a competitive advantage for commodity traders.

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Kevin O’Reilly

February 2025, Berlin

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