Energy and Mining – Perfect storms for fraudsters?

Both the energy and mining sectors often operate in difficult territories. Nearly 70% of the countries in which operations take place are rated as below ‘4’, where ‘10’ is the top of the ethical ladder, and ‘zero’ at the bottom in Transparency International’s ‘Perception of Corruption Index’. This, combined with an often greater focus on theft and physical security, opens the doors to fraudsters and is frequently compounded by an ever-increasing need to drive down costs. This reduces the governance and control environments and increases the exposure and risk to costly financial and reputational damage and unwanted attention from regulators, law enforcement and the financial markets.

The very nature of operations, such as high-value commodities, plant and machinery, labour-intensive and locally dependent workforce with remoteness from head office, to name but a few. This means it is difficult to reduce the risks and it is therefore paramount that the controls, policies and procedures are proportionate.

Due to the extensive range of activities in both sectors, the different types of fraud and corruption is considerable, whether it be from contractors over-charging or under-providing goods and services, through to top-level corruption in granting access to land and drilling rights or in mergers and acquisitions.

The covert and deceptive nature of fraud and corruption means it is difficult to detect. Therefore it is necessary that more effort is directed into raising fraud awareness, and designing prevention controls and mechanisms, taking a more proactive stance rather than simply reacting to allegations, by which time it is often far too late.

What can you do?

To ensure your organisation is robust against fraud and corruption you can take some simple steps including:

  • Undertake due diligence, and know who you do business with up and down the supply chain. This is vitally important; even more so as it is one of the ‘adequate procedures’ that needs to be in place to mitigate a UK Bribery Act s.7 offence of ‘failing to prevent bribery’.
  • Imposing your standards on your suppliers, contractors and agents. Ensuring consistency throughout your chain gives assurance as to the quality of the service you receive. It is worth getting your contractors and suppliers to agree to adhere to your anti-bribery policy and make your whistleblowing procedures available to them.
  • Ensuring robust security of buildings, compounds and cargo and all controls associated with them.
  • Checking Information Technology is up-to-date with the latest threats and security solutions.
  • Providing training to your staff. Equipping your staff with the knowledge of what to look out for and how to report suspicions, plus the appreciation of how important controls are as the foundation of a robust anti-fraud, anti-piracy and anti-bribery culture.
  • Educating staff members in whistleblowing procedural policies.
  • Being vigilant in checking documents. Simply checking the provenance of documentation through the use of known contacts can be a useful tool for determining the validity.
  • Monitoring transactions (one of the UK Bribery Act’s ‘adequate procedures’) through the various stages to look for unusual patterns or anomalies. Creating reward and bonus structures which do not encourage bribery.

Apart from the obvious risks that manifest through the complexity of the transactions and the multiple parties involved, there are many other factors ranging from the distance from the goods, other parties, unclear contracts, lack of due diligence, not enough checking, too much trust, not enough prevention, deterrence, detection or sharing of intelligence, through to not having or making available enough time and money to secure the process. Add the differing cultures coupled with indifference of some of the parties in the chain and combine the size of the prize against the level of risk, this mix makes the energy and mining sectors honeypots for fraudsters.

For help with any of these steps, please contact John Baker.

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