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Practice Guide to Auditing Mining Revenues and Financial Assurances for Site Remediation

Mitigating the Risk of Fraud and Corruption

Fraud and corruption in the mining sector can vary widely in scope and can involve officials with varying levels of authority. Some frauds are minor, perpetrated by public servants influenced by bribes or other benefits, while others are massive, as when high-ranking officials in resource-rich countries funnel royalty payments to their personal bank accounts in tax havens. Frauds can happen in jurisdictions where controls are minimal, but they can also happen in jurisdictions with a well-developed regulatory environment. There is always a risk of fraud and corruption and this risk is higher when there is a strong reliance on data self-reported by the industry and much room for judgment and discretion when applying existing regulatory processes.

Performance auditors can play a role in the worldwide fight against fraud and corruption in the natural resources sector. While the mandate of audit institutions regarding fraud and corruption may often be limited, performance auditors may detect instances of fraud and report these to the appropriate authorities. Furthermore, performance auditors can design their audits of public sector entities to include the examination of controls in place to prevent and detect fraud and corruption.

When it comes to fraud and corruption, the management of natural resources, including minerals, is a high-risk sector. This is mainly because of three factors:

  • The very large revenues that can be derived from natural resources by governments can provide significant financial rewards for individuals and companies that commit fraud.
  • In many countries, there is limited information available to the public about natural resource revenues. This limits oversight opportunities and reduces the likelihood that frauds will be detected.
  • Governments often have exclusive control of this sector and put in place a complex regulatory environment that allows for significant professional judgment in evaluating compliance. Because officials often have much discretion in applying regulations, there are many opportunities for abuse.

There are indeed many opportunities for fraud and corruption in the management of natural resources. The allocation of exploration and production rights, for example, gives rise to opportunities such as the bribing of officials to rig bidding processes for exploration rights or to allocate rights without following due process. Similarly, the production phase, during which much revenues are generated, can lead to various abuses, including illegal extraction (operating without a licence), underreporting of production, tax evasion, invoice kickbacks, and bribery of officials to turn a blind eye to instances of non-compliance, to name a few.

Additional Guidance on Addressing Fraud and Corruption

The United Nations counts fraud and corruption among the most serious challenges faced by the world community today. In recent years, the importance of fraud and corruption in the natural resource sector has been highlighted by the INTOSAI’s Working Group on Environmental Auditing, which published a guide on this topic in 2013: Addressing Fraud and Corruption Issues when Auditing Environmental and Natural Resource Management: Guidance for Supreme Audit Institutions.

Overall, fraud and corruption in the natural resource sector deprives governments all around the world of significant revenues every year, especially in developing countries with weak institutions and little oversight. To explain this situation, it has been argued that a lack of reliable public information about the flow of revenues to governments from extractive companies makes it impossible to monitor such funds and guard against fraud and corruption.

Based on this argument, there has been a worldwide effort to encourage governments to increase transparency about the payments they receive from natural resource extraction companies. This has resulted in the creation of international groups (for example, the Publish What You Pay coalition) and initiatives (for example, the Extractive Industries Transparency Initiative, which is a global standard to promote the open and accountable management of natural resources). Because of these initiatives, many governments have now enacted legislation that requires greater transparency or have committed to adopt such laws. For example, in 2014, Canada adopted the Extractive Sector Transparency Measures Act.