Canada's mining sector more exposed to fraud and corruption: Ernst & Young

Recessional cost cutting and global expansion equate to more risk

TORONTO, Nov. 2 /CNW/ - Mining and metals companies' exposure to fraud and corruption is now higher as a result of cost cutting in the sector and expansion into new territories, according to a new Ernst & Young report.

Fraud and corruption in mining and metals finds that certain characteristics predispose mines to fraud, including high-value commodities and labour-intensive operations. The risk is also higher given that the recovery in mining and metals has outpaced other industries, and strong demand for minerals is encouraging faster expansion.

"In the quest for expanded production and higher returns, Canadian companies are re-activating capital projects and exploration activities across the globe," says Mike Savage, Leader of Ernst & Young's national Fraud Investigation and Dispute Services practice. "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."

According to the report, this greater risk exposure needs to be top of mind with corporate boards, as the impact can be fundamental to an organization's ability to operate, including impacts to its bottom line, social license to operate, ability to access new projects, return of value to shareholders, and the reputation of the organization.

A 2006 Ernst & Young mining and metals risk survey identified that 61% of respondents had avoided investing in a company due to insufficient risk management, and 48% had divested for the same reason.

Savage says that although the risk of fraud is lower at home, Canadian companies need to be more proactive in preventing fraud and corruption in the various locations they operate around the world.

"The time to develop plans and procedures that protect against fraud is not when the world is knocking at your door looking for answers," says Savage. "Fraud and corruption are key risks that organizations should be prepared for."

The report also reveals that businesses with the appropriate foresight in fraud risk management are likely to fare better with regulators and law enforcement agencies if and when fraud does occur.

Many countries have refreshed their anti-corruption regulations and renewed their enforcement commitments. The new UK Bribery Act includes a failure to prevent bribes as a criminal offence. The US Dodd-Frank Act includes a bounty payable to whistleblowers of up to 30% of any fine collected by the US Securities and Exchange Commission. Both of these statutes can affect transactions outside of the UK and US.

The report finds that the best way to mitigate the risk of fraud is to recognize and manage exposures, rather than accepting them as costs of doing business in the sector. Mining and metals companies can proactively address exposures by implementing practical solutions such as targeted policies and procedures, fraud awareness training and risk-oriented site audits.