Managing Bribery, Fraud and Corruption in the Oil & Gas Industry

The Oil & Gas Industry awakens to a new regulatory dawn

The oil and gas sector has been defending itself against bribery, fraud and corruption since the first oil well was drilled in the late 1800s.

The global nature and scale of the oil and gas sector, and the complexity of the working and contractual relationships with governments, venture partners, suppliers and other contractors, make compliance with anti-bribery and anti-corruption regulation something that requires significant management focus and closer audit scrutiny.

A firm’s efforts to combat financial crime should be subject to challenge

Financial Crime: A Guide for Firms Financial Conduct Authority

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EY - Global Fraud Survey 2016 Justifying unethical behavior and misconduct o Our survey found that a significant minority of

executives continue to justify unethical acts to improve a company’s performance. When presented with a series of options, more than one-third would be willing to justify inappropriate conduct in an economic downturn, while almost half would justify such conduct to meet financial targets.

o While the behaviours that these respondents

display can differ between regions, they should be deeply concerning to all companies.

EY - Global Fraud Survey 2016 Justifying unethical behavior and misconduct o Board members and companies’ audit committees should be aware that

regulators are focusing on these behaviours and they are very keen to hold individuals accountable.

o Despite 84% of respondents believing that the board is giving the correct level of attention to fraud, bribery and corruption-related issues, almost half believe that boards need a more detailed understanding of the business if it is to be an effective safeguard against these risks. In this context, awareness of risks is not sufficient - companies need to adapt and strengthen their existing controls to mitigate them.

o Worryingly, many respondents were CFOs and finance team members, individuals with key roles in protecting companies from risks, they appear ready to justify unethical conduct.

o The potential impact that such behaviors could have on a company, and the reliance that boards place on CFOs and finance teams to provide them with accurate financial information, these results are alarming.

Additional challenges brought about by the volatility in oil and gas markets, including geopolitical and regulatory challenges, means compliance functions are required to do more with less.

As oil & gas companies navigate through this current climate, effective monitoring of their hydrocarbon value chain and understanding all key stakeholders involved needs to continue to be a key investment area.

Audit teams need to adequately articulate and demonstrate in their findings, along with the business benefits behind any such investment.

Bribery, Fraud & Corruption

Audit

Compliance Pressure Points in the Oil and Gas Industry

Compliance Pressure Points - Procurement Procurement is a key bribery and corruption risk area for the sector due to the high levels of expenditure involved in oil and gas projects.

Locally Sourced Supplies Awarding contracts to local providers.

Remote locations of the operations, mandated government requirements.

Highly lucrative and highly sought contracts

Compliance Pressure Points – Procurement 2

Sole Supplier Sourcing While the majority of companies encourage competitive tendering, there can be a propensity within the oil and gas sector to source contracts with a sole supplier.

There are often valid reasons for doing so, such as a limited selection of technically skilled providers, providers already mobilized within a region or a need for expedited procurement.

While a relationship may appear above board on the surface, this type of contracting can disguise undisclosed conflicts of interest and kickback schemes.

Additionally, where the process has been improperly conducted, financial losses can be incurred that can compromise the quality of goods and services provided.

Compliance Pressure Points – Procurement 3

Split Orders An issue that EY often observes is the splitting of orders within the procurement process.

This can be done to lower the level of approval required or to avoid tendering for a supplier.

While this conduct can conceal fraudulent activities, it is not always undertaken with corrupt intent.

We often see staff viewing it as a necessity to bypass “bureaucratic” internal controls or to meet business demands.

Compliance Pressure Points – Procurement 4

Other Factors Third parties

Liability for the acts of third parties under ABAC legislation.

Remote operations.

Not connected to corporate systems and electronic controls, which limits management’s control.

Geographic isolation.

Compliance Pressure Points – Bid and Tender Process

State-ownership structure.

Significant Foreign Corrupt Practices Act (FCPA) violations.

Risks associated state-owned companies.

Transparency and appropriateness.

Compliance Pressure Points – Customs

Poor customs controls.

Clearance through customs.

The pressure or “motivation” to achieve results and meet development timelines.

Discretionary processes and fees.

Customs officers can hold a high level of control.

Compliance Pressure Points – Customs 2

However, these payments are treated differently under various ABAC statutes and could be considered illegal under some regulations, including the UK Bribery Act.

As a result of these challenges, companies often engage third-party agents with local knowledge, such as customs agents, to assist with imports.

Companies need to exercise caution in monitoring the activities of their third parties, as they can be liable for their actions under ABAC legislation.

Compliance Pressure Points – Licenses and Permits

Political unrest in North Africa and the Middle East.

Government licenses and permits.

Permits are often required for other activities, such as drilling, construction and the use of state-owned infrastructure.

Compliance Pressure Points – Licenses and Permits 2

Emerging markets.

Taxes and other remittances on revenues and royalties.

Indirect bribery.

The difficulty for companies to detect improper payments.

Compliance Pressure Points – Joint Ventures

Joint ventures with other companies, foreign governments or state-owned entities.

The appointment government officials to protect the interests of the state.

Perceived or real conflicts of interest and damage the reputation of the company.

Liability for the actions of joint venture partners who act on their behalf.

Compliance Pressure Points – Misappropriation of Assets

Oil and gas companies have substantial holdings of assets.

Large volumes of leakage in day-to-day operations.

Misappropriated consumables can have a material impact to the bottom line of an operation.

These consumables are typically scarce or costly resources for local communities.

Compliance Pressure Points – Cash Based Economies

Heavy reliance on cash for the payment of local salaries, vendors and other ancillary expenditure.

The challenge to validate cash payments.

The risks of cash.

Not subject to rigorous documentation.

Compliance Pressure Points – People and Culture

Expatriate staff and Contractors

Expatriate cultures on-site can foster conflicts of interest.

Contractors can often hold positions of authority while bearing no real connection to the company.

Expatriate staff typically operate with a large degree of autonomy and responsibility.

Circumventing controls, either intentionally for personal gain or through a genuine desire for the operation to succeed.

Compliance Pressure Points – People and Culture 2

Local Staff and Contractors

Staff can become distanced from the corporate offices and rationalize control violations as a necessary way of conducting business in the region.

In small communities, local employees may have a strong network of relationships that have the potential to create conflicts of interest and increase the risk of bribery and corruption, such as those with public officials, vendors and community leaders.

A step-by-step approach to evaluate and address corruption

EY has conducted numerous corruption risk assessments and has assisted companies with the development of anti-corruption compliance programmes, including designing policies, financial controls, training, anti-corruption compliance internal audits and other monitoring mechanisms.

Through our work, we have developed a view of what companies should be doing to detect and deter corruption and protect their shareholders.

Key anti-corruption laws and accepted standards

Although anti-corruption laws have been enacted by many countries, the FCPA and the UK Bribery Act are generally the most expansive in terms of proscribed activities and jurisdictional reach.

The FCPA remains the most aggressively enforced by several orders of magnitude.

Though the UK Bribery Act contains provisions that arguably expand the reach of that law beyond the FCPA.

Key anti-corruption laws and accepted standards continued

The UK Bribery Act has a broader jurisdictional reach than the FCPA,.

It also explicitly outlaws commercial bribery.

Auditors should be familiar with these laws and the related guidance issued by the enforcement bodies.

Auditors should be familiar with the guidelines associated with the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance.

Eight Steps to an effective Anti-Corruption Compliance Programme

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 1. Conduct a Risk Assessment Programme The focus on actual risks.

Policies and controls to mitigate its corruption risk and analyse their effectiveness.

The creation of a plan for an anti-corruption programme.

The depth of the risk assessment.

There are no quick fixes when it comes to bribery and corruption.

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 2. Develop a Corporate Anti-Corruption Policy Company-wide anti-corruption policy based on the requirements of the FCPA, the UK Bribery Act and, where it applies more stringent requirements from local law.

Clear and unambiguous statement of the company’s position.

Commitment to accuracy in reporting.

Encouraging employees to report violations or seek guidance.

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 3. Implement anti-corruption policies and controls More than 90% of reported FCPA cases involve the use of third-party intermediaries such as agents or consultants.

Costly in terms of effort and resources needed to address the risks posed by intermediaries.

FCPA andUK Bribery Act. They are also likely to be illegal in the local country where they are made.

Given the different legal treatment accorded such payments by the various authorities and the inherent difficulties in enforcing a policy that prohibits bribery but allows facilitating payments, many companies are banning them altogether, with limited exceptions.

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 4. Implement Anti-Corruption Financial Controls Good controllership is the first line of defense against corrupt payments Limiting the number of opportunities for fraud, bribery and corruption to occur. Strict enforcement supports anti-corruption compliance. Reconciling bank accounts on a monthly basis is a key cash control. Increased financial controls in high-risk areas can be a critical firewall in avoiding regulatory scrutiny. Such controls include enhanced transaction review, approval and accounting procedures, controls around bank accounts and petty cash, enhanced vendor approval and payment processes, and increased scrutiny of high-risk transactions.

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 5. Conduct Anti-Corruption Compliance Training Training is imperative.

Every person in a position to obtain business through bribery or other improper means should receive anti-corruption compliance training.

Training all internal audit, accounting, financial and legal employees.

Using adequate training tools for all employees.

Enhanced training may be considered for specific groups.

Training material is continuously refreshed. Many companies complement their training with a certification programme.

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 6. Monitor the Programme Monitoring means anti-corruption compliance audits. This activity can also include data mining and forensic data analytics.

Anti-corruption compliance audits should be to test for substantive compliance.

They are part of an ongoing corruption risk assessment process. Anti-corruption audits should be stand-alone audits that are not integrated with a larger set of procedures.

Anti-corruption audits have a powerful deterrent effect.

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 7. Anti-Corruption Procedures in M & A O&G companies must develop a policy and specific procedures for anti-corruption due diligence in any contemplated merger, acquisition or joint venture.

Many FCPA prosecutions have arisen in the context of M&A, where past actions of corruption came to light in the due diligence.

The anti-corruption due diligence that can be performed in the context of M&A is subject to negotiation.

The acquiring company should put anti-corruption compliance high on its integration.

Eight (8) Steps to an effective Anti-Corruption Compliance Programme 8. Reassess Risk and Modify Programme Comprehensive corruption risk assessments should be conducted periodically, to make sure that the anti-corruption program is evolving to meet new risks posed by the changing business and regulatory environment.

If the business changes significantly, such a process should be accelerated.

Companies can also combat the risk of fraud, bribery and corruption through collective action, i.e., fighting corruption collectively with all stakeholders.

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ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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