The oil industry is exposed to fraud risks and irregular behavior. Such risks, like any other in the business field, need to be managed, i.e. known, evaluated and mitigated. Therefore, it is the responsibility of top management to ensure the implementation of effective prevention, detection and timely response systems. 

Fraud and misconduct in the oil industry

Fraud is a broad legal concept that generally refers to an action committed intentionally, in order to obtain illicit profits. Irregular conduct, on the other hand, is a broader concept that usually refers to non-compliance with laws, regulations, internal policies and market expectations of ethical business conduct. 

The main schemes of fraud and irregular conduct in the oil industry, usually occur in the following forms: (i) conflicts of interest, (ii) corruption in the supply chain, (iii) alteration of agreed prices and/or qualities of oil and/or its derivative products, (iv) under-invoicing, (v) theft or pilferage of capital goods, (vi) overcharging of materials and labor essential to the operation of assets, (vii) undue activation or deferral of expenses, (viii) overvaluation of inventories, (ix) undue calculation of royalties, (x) overvaluation of oil reserves, among others.

Fraud mitigation environment and corporate development

A sound fraud strategy is one that is supported by the company's highest authorities and is ingrained in its culture. Fraud threats are dynamic and those who commit fraud or irregular conduct are constantly looking for new techniques to take advantage of new opportunities.

To ensure that controls against fraud and misconduct remain effective and in line with regulatory (international and local) standards, responsibility for the entity's fraud and misconduct risk management approach should be shared among senior management (i.e., those with significant control or a significant policy-making role). This fundamental oversight begins with prevention and should also be part of timely detection and response measures.

The Chief Executive Officer of a company is in an ideal position to influence the actions of employees through his or her executive leadership, thus playing a decisive role in promoting values and a culture with a high ethical component and the protection and integrity of the company and its assets.

Direct responsibility for anti-fraud measures should rest with a member of senior management or the Executive Committee, normally the Chief Compliance Officer, who will work in conjunction with internal audit staff and subject matter experts. The Chief Compliance Officer will be responsible for coordinating the entity's approach to preventing, detecting and responding to fraud and misconduct. 

Other senior managers of the company, such as the heads of the various departments (e.g. product development, marketing, legal consulting, human resources) should also be involved in the entity's anti-fraud strategies; such persons will monitor in the regularity of actions, the fields of operation in which risks arise, thus acting as experts in their areas of expertise or responsibility providing valuable assistance to the Regulatory Compliance Officer. 

Finally, the Internal Audit Department of the modern company is a major player in anti-fraud activities, supporting the approach adopted by the highest authorities to prevent, detect and respond to fraud and irregular conduct. 

Main effects of fraud and misconduct on the corporate entity

In the oil industry, the occurrence of fraud schemes and irregular conduct on a systematic basis, undermines public confidence and damages the reputation of the integrity of the corporate entity, with the negative effects that this entails in the company's line of business, such as: (i) limitations in the negotiation and request for financing for the maintenance and reinvestment of operations capacity that maintain and/or increase oil production levels, (ii) diversion of tax revenues, (iii) affectation in the commercialization of oil or derivatives due to price distortion or manipulation of qualities, among others.

By: Pedro E. Baute Caraballo.