The practicalities of managing corruption risks in the extractives industry

Fraud and corruption have long been problem areas for businesses in the extractive sector. As our introductory speaker, Robert Welch from Kazakhmys pointed out, the industry is an easy target. It is labour-intensive, involving high-value commodities, is often based in remote parts of the world with high levels of inherent corruption and requires permits and licences, involving close contacts with governments. Not surprisingly, many mining businesses place fraud and corruption as one of their top ten business risks.

Identifying and managing potential bribery and corruption risks is therefore essential, if fines and reputational damage are to be avoided. It is also critical to get senior-level buy-in from the Board and executive management. This ensures a genuine ‘tone from the top’ that is more likely to be responded to and acted upon within the organisation. Once the risks have been identified a robust anti-bribery and corruption code can be developed and embedded.

The problem with managing corruption risks in this sector is that the blueprint can be far easier than the reality. As Robert Welch identified, there are a number of real challenges that make implementing robust and watertight anti-corruption controls feel like an uphill battle.

The five biggest challenges identified are: –

• Facilitation payments
• Due diligence
• Community projects
• Procurement
• Licences and permits

The discussion looked at the challenges that each of these pose.

Facilitation Payments

Making such payments has always been illegal under UK law; however, refusing to do so can be easier said than done, particularly in the many parts of the world where such payments have been part of life for decades if not centuries. While some support an outright ban, others argue that a more nuanced approach is the only practical solution. The problem with that is legality.

Some argue that placing the burden on companies rather than governments to prohibit such payments shows a certain lack of understanding on the part of the UK for the operating environments of many developing countries. It was suggested that companies might be less willing to enforce non-payment when it is they that have to bear the cost of any ensuing delays.

It was also argued that it is logistics companies, rather than extractives businesses themselves, that are left to deal with the facilitation payment dilemma. They either comply and bear the cost of the delay or pay and face the prospect of prosecution. There should be greater collaboration between the freight forwarders and their customers to assess the probable delays in shipments when resisting facilitation payments and this should be built into contracts.

Due Diligence

Knowing who you work with is an essential, if obvious anti-corruption control, but it too can be easier said than done. Some businesses have tens of thousands of suppliers and even after a risk assessment, can face the prospect of conducting due diligence on thousands of organisations. Some businesses are often forced to work with certain local companies but establishing if they are connected to government officials can be very hard. Some participants in the debate questioned the overall value of their current due diligence activities, particularly in high-risk markets where finding real information about a counter-party can be almost impossible.

The due diligence process itself throws up a number of serious challenges: –

• How do you know the information received is correct? How can you validate it?
• In some countries there is no register of businesses, so how do you know a company is legitimate and who really is behind it?
• Ownership is often far from clear, is it acceptable to work with such an organisation? Is it acceptable to say that information on ownership is not available?
• How do you know the answers to questions are correct and not just what you want to hear – particularly with paper-based or online questionnaires?
• Political connections are often well hidden and hard to spot

Due diligence is a challenge, it was said, but businesses need to start this process somewhere and make a real effort to find out who they are dealing with in order to reduce risks and demonstrate that ‘adequate’ effort is being made. Retrospective due diligence can appear insulting, but if it uncovers a problem that would otherwise have been undetected, which it sometimes does, it can also be a vital protective step.

Community Projects

Many mining companies operate in remote locations where the mine and the town are wholly entwined. Often this means that far more is expected from a mining company than jobs in the mine and tax revenues and there is little guidance as to how companies should navigate their way along this path. A demand to help communities by contributing to the local infrastructure is often an explicit or implicit part of the licence to operate and this can be highly complex.  When the decision on what community projects to support is made by the same local officials that grant the licences and permits the corruption risks are obvious. But in practice they are difficult to avoid completely. Some participants noted that they feel they are being left on their own to try and do the right thing, taking all the risk if it goes wrong, but receiving no support or guidance.

To minimise the risk of community projects being an indirect route for bribery the best companies will retain control of the criteria for project selection and will seek a neutral community partner. They will also keep tight controls over the expenditures on the project. It is also important to retain a right of veto over contractors and to ensure that contractors have no conflicting relationship with government officials. Local knowledge is essential.

Procurement

Although most extractive companies have strong procurement controls in place, it is still an area that presents considerable corruption risk. An example of pre-qualified companies e-bidding against each other in real time on an agreed set of procurement criteria was given. An e-bidding process was used which was perceived to minimise the risk, but an internal audit of the process revealed that only two bidders participated, one dropped out after the first round, leaving the other to win the contract unopposed. Further investigation revealed that there was nothing untoward, but the need to review and assess an apparently transparent process was clearly highlighted.

License Award

The final area that was touched on during the debate was the highly sensitive issue of licence awards. Participants in the debate noted that the role of agents in helping to secure licences is extremely problematic. Examples were given of sectors (pharma and banknotes) where companies are actively looking to reduce commissions and move away from an agent model towards a longer-term retainer and even direct employee model. While this might have the disadvantage of short-term costs, it clearly reduces corruption risks significantly.

GoodCorporation Business Ethics Debate: November 2013