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Business risks facing mining and metals 2011 - 2012 - 10. Fraud and corruption - EY - Global

Business risks facing mining and metals 2011 - 2012

10. Fraud and corruption

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“Fraud and corruption is becoming a very real risk, particularly as mining and metals organizations are taking on projects in riskier locations. The effects of fraud and corruption are far reaching and can have a serious impact on a company’s social licence to operate and in turn its bottom line.”Paul Fontanot, Fraud Investigation & Dispute Services, Oceania Managing Partner, EY

Summary: Mining and metals have received significant bad press over alleged fraud and corruption in the sector. Increased level of activity in frontier countries is sometimes being undertaken with slimmed down control environments as companies look for ways to preserve margins.

For those companies seeking growth, the propensity to sometimes take on greater political risk is accompanied by a greater inherent risk of fraud and corruption.

Fraud and corruption is new to the radar in 2011 and beyond. It makes this list because of the increased political risk we’ve observed in a number of key mining and metals companies’ investment destinations and a change in the regulatory environment. For those companies that have chosen to grow, we’ve seen there was a propensity for them to take on greater political risk.

Target destination by risk level

(2011 data for first five months only)

Target destination by risk level

In 2010 and into 2011 we saw more companies venturing back into riskier regions, such as West Africa, South America, and Asia — specifically Papua New Guinea and Mongolia. This expansion into emerging and frontier markets also created a greater focus on sovereign risk, notably security of tenure and changes in mining, tax and royalty regimes.

This, alongside new fraud and corruption regulations, heightens the need for increased focus in this space, particularly as the consequences can be severe.

Frontier countries rate poorly on Transparency International’s Corruption Perception Index 2010 matched with quest for expanded production.


Country CPI score Rank Major commodities
Guinea 2.0 164 Bauxite, daimonds and iron ore
Democratic Republic of Congo 2.0 164 Cobalt, coppr,diamond,tantalum and tin
Papua New Guinea 2.1 154 Copper, gold and nickel
Russia 2.1 154 Coal, copper, aluminium, bauxite, nickle and diamonds
Mongolia 2.7 116 Coal, copper, gold and uranium
Indonesia 2.8 110 Coal, copper, gold, natural gas, nickel and tin

Source: Transparency International (www.transparency.org). The Corruptions Perceptions Index (CPI) measures the perceived levels of public sector corruption in 178 countries and territories. It scores countries on a scale from 10 very clean) to 0 (highly corrupt).


Steps mining and metals companies can take to respond to this risk:
  • Knowing and understand the key laws
  • Becoming familiar with the accepted standards and guidance for designing and effective compliance program
  • Conducting a corruption risk assessment


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