Oil and gas is one of the global sectors in which financial crime can be substantial, from theft through 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.
"Facts are threatening to those invested in fraud"
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 and 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 company to manipulate the award of single source procurement or be covertly involved with a supplier that may manipulate the award process giving the appearance of competition or linked to 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 where 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. The monitoring of this process is essential and a supplier’s 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.
Facilities management contracts are also an essential part of the smooth running of the sector and are one of the easiest areas in which fraud can happen. Due to the fact that many of the contracts are resource based including areas such as security and maintenance if there is no effective monitoring of resources it is easy for the vendor to submit inflated invoices for resources that weren’t provided that could lose or inflate a significant percentage of the contract value.
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 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.
The management and audit of eProcurement 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 lose 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.
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.
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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