Mining companies’ defenses against fraud and corruption are weak—Ernst & Young
Mining and metals companies’ exposure to fraud and corruption is now higher as a result of cost cutting and expansion into new territories, says a new Ernst & Young report.
Posted: Wednesday , 03 Nov 2010
An Ernst & Young report made public Tuesday asserts, "The global financial crisis has weakened mining and metals companies' defenses against fraud" as mining and metal companies must expand their operations to territories "that provided increased exposure to corruption."
While the recovery in metals prices has encourage mining companies to reactive capital projects and exploration activities, those activities are being undertaken in environments slimmed down by cost reductions brought on by the recent global financial crisis.
Mike Savage, leader of Ernst & Young's national Fraud Investigation and Dispute Services practice, said, "The fact that these projects are often undertaken in remote locations-along with the large amounts of money being spent and the reduced controls from cutbacks during the financial crisis-means that the risk of fraud and corruption is much higher."
In their analysis, E&Y determined certain characteristics predispose miners to fraud and corruption risks including:
--Dependence on local communities
--Highly regulated activities
--Largest source of local economic activity
--Large royalty and tax hikes
--Remoteness of operations
--Operating in countries with endemic corruption
--Requirement for large capital investments
--Frequency of M&A activity
In their analysis, E&Y said management of potential fraud and corruption in the mining sector is critical because it provides evidence of a culture of integrity; limits unpleasant surprises; reduces potential for class action lawsuits; and safeguards the assets and the reputation of the company on behalf of investors. "Ultimately, fraud and corruption risk is related to corporate governance, business ethics and crisis management," the E&Y report observed.
In their study, E&Y determined the potential exposure for mining companies to fraud and corruption is most common in the following areas:
1. There are high levels of government regulation
2. Operational risks are in remote locations
3. The area of procurement
4. Expenditure in remote locations
5. Local compensation and contract awards.
Paul Fontanot, partner in the Oceania Fraud Investigation & Dispute Services, said, "Fraud and corruption risk erodes the company's social license to operate. Such risk should be viewed in a similar way to ‘health and safety risk' because it has a similar effect-loss of reputation, financial impact and ethics questioned."
In their report, E&Y said 61% of those responding to their survey upon which the report is based have avoided investing in a company due to insufficient risk management, and 48% had divested their shares for the same reason.
However, E&Y observed that mining boards of directors are doing little to educate themselves about anti-fraud, bribery and corruption internal controls. "With the increased oversight and accountability for risk management placed on the board, it is imperative that risk and controls are being managed effectively," the report stressed.
"Establishing a robust compliance environment to mitigate these risks requires real investment-in leadership time, people and technology and training," said David L. Stulb, global leader, Fraud Investigation & Dispute Services.
The report suggests that mining companies can proactively address exposure by implementing practical solutions such as targeted policies and procedures, fraud awareness training and risk-oriented site audits.
To read the report, Fraud and corruption in mining and metals, Focus on business ethics 2010, go to www.ey.com/CA