Fraud in the Mining and Extraction Industry

This article asks about fraud in the mining and extraction industry. How much is fraud costing your mining operation?

Financial pressures

The International Mining Sector faces many financial pressures that impact its profitability. Many of these costs relate directly to mining expenditure such as rising energy prices, increased construction costs, geological difficulties or increasing demands concerning pay. Other pressures relate to indirect mining costs associated with haulage, rail freight charges, roadway upkeep, plant and machinery security, water treatment, and camp costs. It appears that whatever the cost is in mining, it’s going to be big.

A mine General Manager will invite departmental heads to talk about the costs associated with drilling, engineering, diesel usage, truck maintenance, average tonnes produced per day, week or month and how output can be increased. There will be discussions around crushing, smelting and refining – all designed to increase the all-important financial margin.

How to increase profitability

Meanwhile, in the background, being given very little attention and rarely getting any mention at the SMT meetings, are other mining entrepreneurs who also have an interest in profitability. They too have discussions on how they can increase their margins. The only difference with this group is that they have their own interests at heart, not necessarily those of the company. This group will collude with other ‘interested parties’ both internally and externally to see how they can ‘make a bit extra on the side’. Unchecked and with no apparent deterrent, what starts as a few dollars’ worth of extra pocket money, gradually escalates until it reaches the point where the profitability of the company is being compromised. If the back office is not managed sufficiently well, any increase in production will be offset by the fraudsters’ increased profitability.

However, you may not be able to steal a tyre from a 400t capacity dump truck in the boot of your car, but if you can make it disappear on paper, you have earnt yourself lots of money.

Disappearing on paper

Experience has shown that members of the ‘in-camp fraud team’ will include some of the very people you would hope would uncover and report fraudulent activity. These are managers in prominent positions, quite often ex-pats who can exert pressure on more junior members of the workforce. Experience has also shown that local workers in less influential positions in the company can exert pressure on more senior employees to do wrongful acts due to their status outside of the organisation, for instance, their influence within a tribe or external group.

Fraud in the mining and extraction industry

You can guarantee that there will be pressure placed upon procurement staff to award contracts to friends and family members. There will be a collusion between outside contractors to rig bids for work opportunities. Working together, these groups can artificially inflate the price the mining organisation has to pay for external contractors. The bid-rigging will be aligned so that other members of the syndicate get a slice of the work. Be it either as a sub-contractor or the contract is deliberately moved from one contractor to another on a rotation basis. E.g. you can have this contract; we will get the next one.

Fraud Investigations

On one mine in Central Africa, PKF Littlejohn Fraud investigators identified over-runs on several externally managed vehicle maintenance contracts. Staff were being managed and paid from a manual booking-on sheet. This data was mapped against workers entering the site at its security-controlled entry/exit gates. The analysis showed workers who had allegedly signed in via the booking-on sheet had not been on the mine site. And the contractor had even managed to negotiate an additional fee to finish the contract due to the over-run. They stopped fraud, changed the policy, and reclaimed the overcharge.

In another example in West Africa. The Country Manager at an exploration mining operation had set up a number of his own supply companies using shadow directors to front them. He was awarding contracts to these companies, supplying inferior products and thereby not getting the best value for the exploration company, whilst benefitting himself financially.

Invoices

In a third example, a multi-national parts supplier was invoicing for parts was allegedly supplying in relation to the vehicle fleet. Each invoice would contain 18 items per sheet, and the invoice could have as many as 130 pages in total. No one in the accounts department could check the invoices’ validity, and each one was being paid on trust. Using specialist analytical software, the PKF Littlejohn fraud team extracted the data from the invoices, place it into Excel and sort it. What a different story the sorted data told. They found multiple entries of high and low-value parts within the same invoice. The mine was able to substantiate a case and reclaimed the overcharged items. They made a cost-saving many times the fee that the PKF Investigators charged.

You may be aware that these sorts of situations are happening within your operations. But feel powerless to stop it, or don’t know to what extent it is happening.

This article asked about fraud in the mining and extraction industry. How much is fraud costing your mining operation?

So if you think you have an issue with fraud in your business. But don’t know what to do, Octopus can help. Please get in touch with [email protected]

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