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Deterrence, prevention critical for miners in fight against fraud

Deterrence, prevention critical for miners in fight against fraud

Photo by Reuters

18th September 2017

By: Henry Lazenby

Creamer Media Deputy Editor: North America

     

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VANCOUVER (miningweekly.com) – Fraud is a significant burden on the mining industry and is likely to cost companies an average of 5.85% of turnover every year. Therefore, catching it before it happens is often the best weapon to combat this scourge.

This figure is based on 20 years of data across more than 40 sectors, including natural resources, and the true cost to the mining industry is likely to be much higher, owing to the inherent fraud issues facing the sector and the endemic fraud issues in mining hotspots around the world, according to UK-based audit, tax and advisory firm Crowe Clark Whitehill head of forensic and counter fraud services Jim Gee.

Gee told Mining Weekly Online in an email interview that most fraud is high-volume and low-value, meaning it is difficult to identify and quantify.

“Many mining companies make the mistake of estimating their fraud costs by relying on instances of detected fraud,” Gee states, pointing to research by the Centre for Counter Fraud Studies at the University of Portsmouth (Europe’s foremost research institute in this area), which showed that detected fraud typically equates to about one-thirtieth of the total amount of fraud affecting an organisation.

“Mining companies using the old-fashioned approach and relying on instances of detected fraud will generally underinvest in counter fraud and fail to properly reduce their fraud costs,” he said.

However, mining companies that take a proactive approach and apply counter fraud good practice to cut fraud costs, can see reductions of up to 40% in two years, with an average return on investment of 12 to 1. 

“We have provided counter fraud services to mining companies that resulted in a return on investment of 100 to 1. This sort of reduction makes a significant contribution to improving profitability and gives companies the edge over their competitors,” Gee advised.

DETECTING DECEPTION
The single most important thing a mining company should do when fighting fraud is establish the current fraud costs.

Doing this provides the evidence base necessary for a proportionate and effective response. This is a fundamentally different approach to considering fraud risks and designing controls. Risk is defined as probability times impact, he said.

“Fraud happens in every organisation but the question is, how much and what type? It is not something that might happen at some stage in the future. It is happening right now and needs to be managed as such. Risk matrices will never provide adequate protection, so it is much better to get a grip on the issue and establish the evidence base,” he noted.

Once a mining company has the necessary evidence base, the next step is to prepare a counter fraud strategy. The strategy should define the aims and objectives of counter fraud work in the organisation, as well as define the actions necessary to deliver those aims and objectives, and identify who is responsible for delivering them. 

Outcome-based indicators should be defined to enable assessment after a reasonable period. Gee pointed out that an outcome-based indicator could be, for example, a 25% reduction in the company’s fraud cost within 12 months.

“Preparing a strategy, rather than a policy or procedure, helps companies move from treating fraud as a relatively abstract issue they hope never happens, to a tangible business cost that should be managed to the lowest amount possible,” he said.

PREVENTION
A mining company’s efforts should place more emphasis on deterrence and prevention. 

“It is much more cost effective to stop fraud from occurring than to rely on detection alone. Of course, detection has an important role to play and, when handled correctly, can also act as a significant deterrent to potential fraudsters,” Gee found.

He advised that mining companies should have a plan in place for what happens when fraud is detected. The initial stages of an investigation can determine the options subsequently available at the end of an investigation.

For example, mistakes in how suspected fraudsters are treated can result in claims for unfair dismissal, and/or the evidence obtained being inadmissible in civil or criminal proceedings.

“Fraud undermines profits, reduces a company’s financial health and, in the most serious cases, threatens businesses’ viability. Companies with effective counter fraud measures in place reduce their fraud costs and can use the savings to boost profitability. Sizable opportunities are available to forward-thinking organisations,” Gee noted.

For example, Gee’s team had worked with a large mining business in East Africa in 2008 and cut their fraud costs by 40% over 18 months. “Soon after we completed our work there was a sharp decrease in the price of the mined commodity. In the subsequent two years, the mine was the only one in the region not to downsize or reduce headcount due to its competitive edge,” he illustrated.

LEGAL FRAMEWORK
Legislation related to anti-bribery and corruption has encouraged organisations to put some measures in place but has done little to assist mining companies regarding fraud.

In fact, it could be argued that it has increased complacency as organisations that do not understand the difference between bribery, corruption and fraud will assume that anti-bribery and corruption measures are sufficient to address their organisations’ fraud issues. But fraud is different to bribery and corruption and requires a specific and tailored approach, Gee pointed out.

“Legislation is only as good as the enforcement associated with it, and the proportion of detected fraud that results in any enforcement action is miniscule. In the UK, for example, it is estimated that 0.6% of detected frauds end up in court and only 0.1% [of detected frauds] result in a conviction,” he stated.

International figures are not available, but it is likely to follow a similar pattern, he added. 

Gee noted that mining companies could not rely on legislation to be the driver for their counter fraud efforts. "Fraud is a business cost and should be managed in a professional and proportionate manner to deliver benefits to the business. Any organisation not managing fraud properly is failing in its duties to employees and investors,” he advised.

Further, mines often rely on government permits/authorisation; have long and complex supply chains, bringing high-value equipment crucial to keep operations going; and operate in countries at the top of global corruption rankings. When addressing corruption challenges, it is important that solutions are practical and tailored to local situations. 

“In our work we often encounter anti-bribery and corruption measures designed at the head-office level, which are completely impractical/ineffective in-country. Each country and mining operation will have its own challenges that require carefully considered solutions.

“It can be challenging to prepare locally specific measures, as input from in-country staff may be compromised by conflicts of interest related to historic and/or existing practices. Mining companies should obtain advice and support from experienced independent experts,” he recommended.

Gee added that getting the culture right is hugely challenging as social norms related to bribery, corruption and fraud vary from country to country. “In some countries, the culture is such that corruption is a way of life and fraud is tolerated as an inescapable part of doing business. Changing the culture within a mining operation is challenging but it is critical for effective anti-bribery, corruption and fraud efforts,” he said.

Counter fraud good practice is the key to reducing the cost of fraud. According to Gee, there are seven steps:

• Step 1: Establish the nature and scale of the problem
• Step 2: Develop a counter fraud strategy
• Step 3: Establish an implementation structure
• Step 4: Design and implement fraud prevention measures
• Step 5: Design and implement fraud detection measures
• Step 6: Design and implement investigative processes
• Step 7: Monitor outcomes

“With respect to preventing corruption, the best policy is to have a locally specific approach. Policies and procedures that are not informed by a mine’s in-country experience will be less effective,” Gee concluded.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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