Management of fraud and corruption in the mining and metals sector is critical as it can erode a company's license to operate through loss of reputation and financial impact.
The global financial crisis has weakened mining and metals companies' defenses against fraud. To meet rising metals demand, mining and metals companies are operating in territories that provide increased exposure to corruption.
Corruption exposure in new markets
The recovery in metal prices has encouraged mining and metals companies to reactivate capital projects and exploration activities. Often in the quest for expanded production and higher returns, these projects are being conducted in countries more prone to corruption, and hence greater risk.
Cost reductions from the financial crisis have created slimmed-down control environments, which only put companies at greater risk.
Recognizing this situation, those most responsible for governance of the organization (e.g., the board of directors) are searching for risk mitigation strategies that also contribute to their corporate sustainability efforts. Draw upon our experience “at the coalface” to:
- Update your understanding of the rapidly changing fraud and corruption risk environment
- Make a high level assessment of your company's changing exposure
- Create a roadmap that combats fraudulent and corrupt practices.
Mining and metals sector: predisposed to fraud?
Highly publicized press over alleged fraud and corruption in the sector — a major iron ore producer in China, a global diversified in Cambodia and a global copper and gold producer in the Democratic Republic of Congo — has only increased the notion that the sector is an easy target for fraud and corruption.
Certain characteristics predispose miners to fraud and corruption risks, including:
- Labor-intense operations
- High-value commodities
- Dependency on local communities
- Highly regulated activities
- Largest source of local economic activity
- Large royalty and tax takes
- Remoteness of operations
- Operating in countries with endemic corruption
- The requirement for large capital investments
- Environmental impact
- Frequency of merger and acquisition activity
Fraud and corruption are typically covert events that can go undetected for years, or altogether. This is because the people committing these acts understand the weaknesses either in the processes or systems, and exploit them. They also improve their skills as they continue to perpetuate these activities, effectively learning on the job, making them harder to detect.
Whether one is referring to a lapse in safety standards, a bribe paid overseas to retain an existing contract, or a senior executive acting for personal gain, the speed of the reaction of regulators, law enforcement and the financial markets can quickly overwhelm management and boards of directors alike.
Without tackling corruption risk effectively, your company can face irreparable damage. Some elements include:
- Your social license to operate
- The ability to access new projects
- The return of value to shareholders
- The reputation of the organization
Management of potential fraud and corruption in the mining and metals sector is critical for the following reasons:
- Provides tangible evidence of a culture of integrity
- Helps to minimize fraud and facilitates early detection
- Limits unpleasant surprises that can distract management
- Addresses concerns of external auditor and board of directors
- Limits potential for class action lawsuits
- Safeguards the assets and reputation of the company on behalf of investors
Ultimately, fraud and corruption risk is related to corporate governance, business ethics and crisis management. And like crisis management, the time to develop your plans and procedures is not when the world is at your door looking for answers.
Addressing the need for ethical business conduct and how your organization will deal with any lapses is of paramount importance. These plans and procedures need to be developed through an understanding of how fraud and corruption is committed and the personal and business indicators of that behavior.
As the people involved in the commission of these types of offenses do not want to get caught, and want to keep what they have taken, they will exploit their knowledge of your controls and processes to continue to commit their crimes.
To combat this, it is necessary to increase the perception and reality of detection through clever tactics and solutions, aimed at preventing and detecting.