According to EY, companies in the oil and gas sector operate in a high pressure environment. This pressure can create an imbalance between compliance and operations and has the potential to induce activities that may be misaligned with corporate policies.
Procurement is a key bribery and corruption risk area for the sector, according to EY. This is due to high levels of expenditure.
Locally sourced supplies
There is often a need for companies to award contracts to local providers. This can stem from the remote locations of operations, mandated government requirements or a commitment to supporting local communities. These contracts are often lucrative and highly sough after by local companies, creating circumstances where there is a higher risk of fraud, bribery, corruption and other abuses.
There can be a propensity with the oil and gas sector to source contracts with a sole supplier. There are often valid reasons for doing so, such as limited selection of technically skilled providers, providers already mobilised within the 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.
An issue often observed by EY 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. Staff often view such behaviour as necessary to bypass ‘bureaucratic’ internal controls or to meet business demand.
Bid and tender process
According to EY, many industries in the extractive industries sector are state owned, and because of this service providers to the sector must exercise caution when bidding for contracts with them. Significant Foreign Corrupt Practices Act (FCPA) violations have resulted from service providers paying bribes around tender processes with state owned companies.
Poor customs control has a major impact on the ability of an oil or gas site to operate efficiently. Delays in the customs process can be costly to companies. The pressure to achieve results and meet development timelines can create a heightened risk of bribery and corruption.
Businesses are particularly vulnerable when starting operations as they have to import drilling equipment and infrastructure. In emerging markets, customs clearance can to subject to discretionary process and fees. Customs officers can hold a high level of control and may solicit bribes to perform routine duties.
Facilitation payments can be routine practices in emerging markets, and company staff may consider these necessary in the course of business. However, these payments are treated differently under various anti-bribery and corruption (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.
Licenses and permits
Political unrest in North Africa and the Middle East, high oil prices and subsequent growth of new state owned oil companies have led to many governments of resource rich nations to seek increased control over the industry in order to increase tax and royalty revenues.
As a result, oil and gas companies are subject to increasing levels of government supervision and regulation. Government permits and license are critical to the operations of a company in the oil and gas sector.
In emerging markets, companies may be exposed to government officials seeking bribes in return for these permits. EY emphasises that bribes are not just direct payments to individuals. Indirect bribery can include contributions to scholarship funds, charitable donations, or payments to local development funds. These may in themselves appear to be valid transactions making it difficult for companies to detect improper payments.
Companies in the oil and gas sector are often involved in joint ventures with other companies, foreign governments or state owned entities. These joint ventures will often appoint government officials to sit on the board of directors to protect the interests of the state. These arrangements can increase the risk of perceived or real conflicts of interest.
Companies can also find themselves liable for the actions of joint venture partners who act on their behalf.
Misappropriation of assets
Oil and gas companies have substantial holdings of assets, both inventory and consumables, that can be of value to others, and can be at risk of theft or used as a bribe.
In emerging markets consumables such as fuel are typically scare or costly. Local staff may be incentivised to misappropriate these assets. Alternatively, in the absence of cash, these resources might be used to facilitate bribery. For example, fuel can be used for government vehicles.
Cash based economies
Oil and gas operations have a tendency to be heavily reliant on payment of cash for local salaries, vendors or other ancillary expenditure, particularly in developing regions. Cash is not subject to rigorous documentation standards and there may be insufficient controls to ensure it is used for the intended purpose.
For more on managing these risks see also 'Eight steps to anti-corruption compliance'.
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.oilfieldtechnology.com/exploration/08072014/compliance_pressure_points_872/