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"Facts are threatening to those invested in fraud"
Oil and gas is one of the global sectors in which financial crime can be substantial, from theft to oil bunkering in which countries such as Nigeria lose billions of dollars every year through to million dollar bribery to obtain high value contracts. When we look at the types of fraud and the areas of risk within the oil and gas sector, how do you make a significant anti-fraud impact.
The oil and gas sector in its approach to fraud and corruption prevention and detection are faced with a significant variety of fraud risk and the targeting of business areas.
CONFLICTS OF INTEREST
Conflicts of interest can be a significant challenge in certain regions where an organisation is required to employ locally or there are national requirements, where practicable, to use local suppliers to support the local economy. The local community, family or business relationships can be opaque that can have a significant impact on an organisations governance process and risk within supplier vetting, manipulation of tenders or award process including the sign off for payment of fictitious or incomplete works or services.
Such conflicts of interest may create a greater opportunity for an insider to either create a fictitious requirement or company to manipulate the award of single source contract or be covertly involved with a supplier that may manipulate the award process giving the appearance of competition or are engaged within asset management and the illicit appropriation of materials that can be sold on or resold back to the organisation.
It is rare within the oil and gas sector that projects are assessed for fraud risk and yet it is one area in which substantial losses can occur and costs can spiral out of control. A lack of fraud risk assessment at the design and planning stage of a project impedes an organisations ability to identify or manage fraud risk. Governance controls are further limited where ‘urgent requirements’ are made on a regular basis because of time or cost sensitivity. Normal procedures are dropped to ensure speed of procurement creating an environment where fraud can flourish.
Oil remediation is an important part of the sectors responsibility to protect the environment particularly where land is contaminated and is an area of fraud and corruption risk if not monitored correctly. Identifying that a vendor has the correct credentials and ability to dispose of the contaminated soil correctly must be an ongoing assessment to ensure that contaminated materials are not disposed of in rivers or in landfill to hide their misconduct.
Particularly where bribery and corruption are common, it is also an area where fictitious requirements can be created to facilitate the awarding of contracts to a local supplier where the work is either not carried out or the requirement never existed and the supplier didn't have the credentials to complete the work.
Facilities management contracts are also an essential part of the smooth running of the sector and operations and are one of the simplest areas in which fraud can occur. Due to the fact that many of these contracts are resource based including areas such as security and maintenance.
Where there is no effective monitoring of resources or services provided, it is easy for the contractor to submit invoices for goods, works or services that weren’t provided or inflating invoices where works or services were only partially provided and billing for the contracted amounts. This becomes more relevant where it is a multi-million dollar contract and the fraud is 25% or more of the value of the contract. Additionally, when audit is eventually carried out it is difficult if not impossible to identify whether specific resources were used.
CONSULTANCY AND SUBCONTRACTING
There a many aspects of this type of works or services in which fraud can occur. Where an insider threat isn't recognised as a significant threat or individuals don't understand the various methods of insider fraud methods, many illicit activities can go on undetected.
It is not unusual for consultants to have personal or professional relationships with other businesses. As they are working inside a business they are rarely seen as an insider threat and as such may have unfettered access to systems and data that might help facilitate the award of work to a business they either own or have an active involvement in.
Procurement fraud is a wolf in sheep's clothing; train your staff to recognise the warning signs
Where vetting isn't adequately conducted on a subcontractor, this type of engagement may be used as a method of paying bribes to an individual who facilitated the award of a contract, or has an active ownership or shareholding in, and receives work from the main contractor as a method of bribe payment, whether or not the work was carried out.
The theft of physical assets such as equipment, tools or materials can have a significant financial loss and disrupt operations. It is not unusual for companies that consider procurement fraud as a risk to look at the front end of the procurement process, the onboarding of suppliers and the contract management. However, is the back end of the procurement lifecycle monitored. If there isn't adequate asset management in place that includes the end of life and disposal of assets, then there is an opportunity for organised criminality to creep in where assets are stolen to order.
INADEQUATE PROCUREMENT CONTROLS
Areas such as dual control measures within procurement department and segregation of duties can open the door to procurement fraud and corruption. Incidents such as a procurement manager vetting and adding a supplier to the trusted supplier list where they have a shareholding in the company. This risk is increases where the individual carries out the single source procurement process in the areas where they have a financial and business interest.
An organisations ability to scrutinise its own data sources is another key governance risk area. Departments retaining data in silos and the lack of understanding of the various methodologies of fraud and financial crime and how this data can be used to detect procurement fraud, limits an organisations ability to analyse its data or recognise which data sources are relevant for future analysis.
A risk assessment might for example identify quality and maintenance records as a valuable source of information and risk mitigation particularly where there have been a number of product or equipment failures and a risk of product substitution or counterfeit products hasn't been considered. In such a health and safety environment this type of risk should be give greater consideration.
The management and audit of procurement systems can be a valuable tool in identifying fraud risk but can be missed due to the lack of understanding of fraud or the tools and methods available to analyse data for fraud.
One of the challenges in the oil and gas sector is an organisations culture. The revenues within the sector are significant and the losses from fraud or other financial irregularity can also be substantial, however the risk appetite of the organisation, specifically the values that they are prepared to loose to get the job done can determines its response and the importance it places on its compliance resources and response.
The attitude towards the departments involved and the priority it places on the compliance framework including its engagement with staff, consultants, suppliers and its leadership will ultimately have a direct impact on the culture and an organisations ability to quantify the level of revenue loss. Thus investing in mitigation can be a simple method of protecting revenues and reputational risk.
PREVENTION THROUGH DESIGN
In building or enhancing a response to fraud a consistent approach should be taken to design out fraud risk. As a first step some of the key areas that should be considered in introduction of this process should include:
the design of a communication strategy that ensures the increase in reporting and involvement of staff and supplier to enhance the anti-fraud culture
strong and consistent vendor onboarding process that includes checking staff and supplier details against new vendors
continued or frequent analysis of organisation data sources that includes finance, procurement, quality and maintenance records
introduction of anti-fraud risk assessment at the project planning stage
creation of an annual fraud risk profile to monitor annual changes in fraud risk
As a starting point this process will enable an organisation to measure its anti-fraud performance, the areas of risk, the increase in reporting and the quantity and quality of risk information that supports an approach to risk assessment and fraud and corruption prevention and detection.
STRATEGIC APPROACH TO RISK
Preventing and addressing fraud within the oil and gas sector requires a multi-pronged approach. Such areas should include
Implementing strong internal controls to prevent and detect corruption and associated financial crime risk. This includes segregation of duties, regular reconciliations and thorough audit trails.
Developing and maintaining comprehensive ethics and compliance programmes that emphasise a zero tolerance approach to procurement fraud and corruption.
Introducing a hotline and anonymised whistleblower mechanism that provides a channel for employees, suppliers and other stakeholders to report suspicious activity without fear of retaliation.
Conducting a thorough and consistent due diligence process to ensure that all contractor or other parties are reputable and do not pass on their fraud and corruption risk.
Carrying out regular internal and external audits to identify irregularities or discrepancies in the procurement, finance or operational processes.
Introducing a training and awareness approach for employees is a valuable tool in identifying procurement fraud and corruption where staff recognise the typologies and various methods and know where to report it.
Implementing robust cybersecurity measures to help better identify threats and data breaches.
Having a robust control and counter fraud system will also support compliance with industry-specific regulations and international anti-corruption laws.
PROCUREMENT FRAUD DETECTION
Procurement fraud continues to be a significant concern for the oil and gas sector, causing financial losses, reputational damage, and erosion of stakeholder trust. As technology advances and data collection improves, the ability to detect and mitigate procurement fraud has also evolved.
Data collection and analysis: Discuss the sources of procurement fraud data used in the analysis and can it be broadened and/or added to other data to create a picture or organisation risk. Describe the current detection methodologies being employed, including data pre-processing, cleaning and how can this approach be enhanced.
Emerging fraud trends: From trust external data sources, identify the most prevalent types of procurement fraud in recent years, such as bid rigging, invoice fraud, and kickbacks. Clarify whether you are testing for any new fraud schemes that have evolved due to changes in technology, business practices, or regulatory environments.
Vendor evaluation and risk assessment: Explore how data analytics and machine learning are being applied to assess the risk associated with different vendors an can this benefit your organisation. Are you able to use of historical data and previous incidents to predict the likelihood of a vendor engaging in fraudulent activities.
Anomaly detection techniques: Employ anomaly detection methods to identify suspicious activities within procurement processes, that might include missing data. Can the use of artificial intelligence in recognizing unusual patterns that may indicate fraud attempts be of value in your current system.
Red flags and behavioural indicators: Red flags and behavioural indicators continue to be one of the positive methods in procurement fraud and corruption detection. To support the detection methodology, does an organisation collect data in areas such as non-compliance with procurement or finance procedures or anti-fraud policies.
In an age where data is becoming increasingly accessible and valuable, organisations have a unique opportunity to leverage advanced analytics to combat procurement fraud. This comprehensive analysis of procurement fraud data underscores the importance of data-driven strategies in safeguarding financial interests, maintaining trust, and fostering a culture of ethical business practices. As fraudsters become more sophisticated, continuous innovation in fraud prevention remains a necessity for businesses to stay ahead of the curve.
As always the simple approach can sometimes be the best approach, what approach would you add that can impact fraud risk within your organisation?
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