Capital Quarter Winter 2019/2020: What is fraud costing your mine?

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Economic challenges abound in the mining sector. But these are being made much worse by the actions of fraudsters that are going unchecked. 

The international mining sector faces many financial pressures that affect its profitability. Many of these relate directly to mining expenditure – like rising energy prices, increased construction costs, geological difficulties or increasing pay demands. Other pressures come from indirect mining costs associated with haulage, rail freight charges, roadway upkeep, security of plant and machinery, water treatment and camp costs. It appears that whatever the cost in mining, it’s going to be big.

A mine general manager will invite departmental heads to talk about the costs of drilling, engineering, diesel usage, truck maintenance or average tonnes

produced per day, week or month. And he will consider how output can be increased. There will be discussions about crushing, smelting and refining – all designed to increase the all-important financial margin.

The hidden enemy

Meanwhile, in the background, being given very little attention, and rarely getting any mention at all at senior management 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 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’. With no apparent deterrent, what starts off as a few dollars of extra pocket money, gradually escalates until the profitability of the company is being compromised.

You may not be able to steal a tyre from a 400-tonne capacity dump truck in the boot of your car, but if you can make it disappear on paper you have earned yourself lots of money. If the back office is not managed sufficiently well, any increase in production will be offset by the increased profitability of the fraudsters.

Those you least suspect

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 abuse their position over more junior members of the workforce.

There is also evidence that local workers in less influential positions in the company can exert pressure on more senior employees to do wrongful acts by using their status outside the organisation. This may be because they have influence within a tribe or external group.

Contractor malpractice

You can guarantee that there will be pressure placed upon procurement staff to award contracts to friends and family members. Collusion between outside contractors to rig bids for work opportunities is also highly likely. 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. Sometimes they are appointed as a sub-contractor, or contracts are deliberately alternated between one contractor and another on a rotation basis.

Fraudulent examples

On one mine in Central Africa, PKF Littlejohn fraud investigators identified overruns on a number of externally managed vehicle maintenance contracts. Staff were being managed and paid from a manual booking-on sheet. We mapped this data against workers entering the site at its securitye controlled entry/exit gates. Our analysis showed that many of the workers who had allegedly signed in via the booking-on sheet, had not in fact been on the mine site. The contractor had even managed to negotiate an additional fee to complete the contract, due to the overrun. The fraud was stopped, the policy was changed, and the overcharge reclaimed.

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 and supplying inferior products. As a result, he wasn’t getting the best value for the exploration company but was benefitting financially himself.

Invoice fudging

In a third example, a multinational parts supplier was invoicing for parts it was allegedly supplying in relation to a vehicle fleet. Each invoice contained 18 items per sheet and had as many as 130 pages. It was impossible for anyone in the accounts department to check the validity of the invoices, so each one was being paid on trust.

Using specialist analytical software, the PKF Littlejohn fraud team was able to extract the data from the invoices, put it into Excel and sort it. What a different story the sorted data told. We found multiple entries of high and low value parts in the same invoice, which could never have been found without the data analysis. The mine was able to substantiate a case and reclaimed the over a charged items. They made a cost saving many times the fee for our PKF investigators.

Act now

You may be aware that these kind of situations exist within your operations. But perhaps you feel powerless to stop them, or don’t know to what extent they are happening. If that’s the case or if you would like more advice on this subject, please get in touch with our fraud team.