The global credit crisis is changing day to day, forcing many individuals and businesses to make non-routine decisions in times of uncertainty. Against this volatile backdrop, companies operating in the oil&gas sector face an increased risk of employee fraud and risk of corrupt practices.
A current Ernst & Young global fraud survey found that 85% of fraud is committed by employees, and the current period of economic turmoil provides a breeding ground for employee fraud as new motivating factors are generated by the changing situations.
Donald Cressey, the 20th-century criminologist, hypothesised that employees who commit fraud generally do so because there is rationalisation, pressure and opportunity. This has become known as the Fraud Triangle.
The global credit crisis increases all these factors as redundancies mean that layers of control are removed, opening up the opportunities; personal and work pressure on finances is heightened, and morale dips due to lower-than-expected pay and prospects, providing the rationalisation.
For these reasons, now more than ever, organisations need to implement a strong anti-fraud programme that helps prevent fraud and improves fraud awareness and escalation processes among employees, suppliers and customers.
Oil&gas companies are also particularly exposed to bribery and corruption risks due to a number of factors, including:
Hydrocarbon resources are often located in countries with weaker governance and high perceived corruption.
Pipelines transporting oil&gas often cross borders of countries with weak governance, high perceived corruption and political instability.
More than half of many countries’ oil&gas supplies are controlled by state-owned entities, meaning interaction with government officials and agencies is common.
Findings from Ernst & Young’s latest annual global fraud survey highlighted the increasing significance of bribery and corruption to businesses and the risks to entities and individuals of not dealing with it appropriately.
Worryingly, it revealed that 30% of respondents in the oil&gas sector said corrupt practices were prevalent in their sector – one of the highest percentages of all the sectors surveyed.
In addition, one in four of all respondents had recently experienced an incident of bribery and corruption, and a similar number had been asked to pay bribes to win business.
The global credit crisis comes at a time when Siemens was fined a record $1.6billion by the US Department of Justice, SEC and German authorities for corrupt practices, and the UK Government is under increased pressure to strengthen its bribery and corruption laws.
There are also signs that the Scottish Parliament is under similar pressure, and the Association of Chief Police Officers in Scotland (Acpos) has set up a group to improve the system of recording and investigating serious fraud.
This pressure continues to build, not least because of the premature end to the BAE investigation by the Serious Fraud Office (SFO); the decline in the ranking of the UK in the Transparency International Corruption Perceptions Index in late-2008, and the sharp criticism by the Organisation for Economic Co-operation and Development’s (OECD) working group on bribery in international business transactions.
As a result of the increasing pressure, the Law Commission has proposed some significant changes to the bribery and corruption laws in England and Wales. If implemented, the changes would mean that British companies could be liable to prosecution for any corruption in their activities overseas.
This would be a significant step for the UK to take, greatly increasing the strength of its laws in this area.
Like the Foreign Corrupt Practices Act in the US, which has the capacity to reach British companies, too, it is aimed at the bribery and corruption of public officials. There is a specific offence of bribery of foreign public officials and a new corporate offence of negligently failing to prevent bribery by an employee or agent.
The Law Commission’s proposal came within days of the SFO announcing a 50% increase in its overseas anti-corruption team head count and is a further indicator that the UK Government is reacting to the criticism levelled at it by the OECD in October – as is the fine of £5.25million levied by the FSA on Aon in January, 2009, for making suspicious payments.
Aon Corporation is a Chicago-headquartered provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting.
A comprehensive anti-fraud and corruption programme is an organisation’s best hope of preventing and detecting fraud and corruption in any business cycle. However, many organisations have been found to be lacking in this area.
There is evidence that fines imposed on companies by regulators have been significantly reduced for those that have been proactive in preventing and detecting bribery and corruption within their operations.
Where an anti-fraud and corruption programme has been absent or ineffective, businesses will still benefit from early detection and action. This can be achieved through a number of mechanisms, including:
Stakeholders should be more mindful of traditional “red flags” to mitigate their exposure. One well known red flag, for example, is management who avoid straight answers to reasonable questions.
Organisations should respond more aggressively to mitigate potential control breaches, such as those uncovered by routine internal audits, and should take a fresh and more sceptical look at whistle-blowing complaints.
Focus on key fraud and corruption risks and related controls. Fraud and corruption risks will be unique for each entity and each line of business, so there is no standard formula. A fraud and corruption risk assessment will define the fraud and corruption risk universe the organisation faces, prioritise those risks, identify the key controls to mitigate those key risks and correct or improve where gaps might exist.
Conduct fraud and corruption awareness training. This is an opportune time to raise the awareness of fraud in employees’ minds through organisation-specific anti-fraud training.
Ensure a measured response to concerns or allegations of fraud and corruption – that is, have a robust and considered fraud contingency plan. An ill-considered reaction can expose you further. For example, a premature confrontation with a suspected fraudster can undermine company morale if, in fact, the allegations prove to be false or misplaced. If the allegations are true, then the suspect has been given the chance to deny the allegation, destroy evidence and potentially hide misappropriated assets.
Additional findings from our annual global fraud survey revealed that 72% of companies surveyed did not provide training to their employees on their anti-fraud policies and 42% of companies did not have a formal anti-fraud policy. While many companies have improved their processes in detecting and preventing fraud, regular and repeated assessments are necessary.
Victoria Spencer is an advisory director with Ernst & Young