Unaoil allegations show vulnerability of extractive industries to corruption

January 01, 1970

Last week The Huffington Post and its Australian partner Fairfax Media published a bribery and corruption investigation into Monaco-based company Unaoil. The company allegedly bribed government officials on behalf of multinational corporations to secure technology business deals in the energy sector.

The media outlets allege Unaoil secured contracts for its clients in the Middle East, Africa and countries in the former Soviet Union by paying an estimated $1trillion in bribes to corrupt officials.

The title of the article, 'World's Biggest Bribe Scandal', may sound like journalistic sensationalism, but the allegations threaten to draw in many global firms such as Rolls-Royce, Samsung, Hyundai, Halliburton and Leighton Holdings.  These companies have committed to investigate such allegations.  Unaoil itself refutes the allegations. However, whilst agencies are at the 'probing' stage of their investigations, should they find evidence of wrongdoings then action from enforcement agencies is likely to follow.

Enforcement action rising in extractive industries

In May 2015, the Australian global resources company BHP Billiton agreed to pay a $25 million penalty to settle charges from the US Securities and Exchange Commission that they violated the Foreign Corrupt Practices Act. The global resources company had sponsored foreign government officials as guests, mainly from Africa and Asia, at the 2008 Summer Olympics in Beijing. Only yesterday the company was reported to be embroiled in the Panama Papers scandal, with links to the law firm Mossack Fonesca, which is accused of manipulating the grey area of international financial secrecy.

Statistics suggest the rate at which enforcement action is being taken against firms in the extractive industries is increasing. TRACE's annual Global Enforcement Report showed that 61 such cases were brought between 1977 and 2010, rising rapidly to 113 by 2012. The 2014 report again shows the sector facing the brunt of all investigations and actions, with the highest number of actions concerning domestic and foreign officials.

The extractive sector now accounts for the highest number of enforcement actions taken in any given industry. An OECD report found the sector responsible for 19% of all foreign bribery cases between 1999 and 2014.

There are many possible reasons for this trend. Oil and gas sectors are vulnerable to high risk of bribery and corruption because of companies' reliance on third parties to support the extraction of resources.

Transparency International notes that over the next 20 years, it is expected that 90% of production of oil and gas will come from developing countries. It warns that in these countries: "too often, wealth stays in the hands of politicians and industry insiders."

Some companies may therefore fear they cannot develop in emerging growth markets without engaging in bribery and corruption.

The fall in the price of oil in recent years might also tempt companies to cut corners to stay competitive. But as the TRACE report shows, regulators will not turn a blind eye to corruption because of market conditions.

Cross-border enforcement action

The Unaoil case may become the latest demonstration of regulators in different countries being more willing and able to work together to pursue allegations of bribery and corruption.

The majority of the companies implicated come from nations that are members of the Organization for Economic Co-operation and Development (OECD). All member governments have a commitment to protect against bribery of public officials, and we could therefore see investigations into all the companies, across all the jurisdictions known to have been involved.

Already, towards the end of last week, authorities in Monaco announced that they had raided Unaoil's offices and the homes of its executives in response to a request from Britain's Serious Fraud Office. The FBI, U.S. Department of Justice and anti-corruption police in Britain and Australian have also launched a joint investigation into the allegations. Meanwhile in the Middle East the Iraqi Prime Minister Haider al-Abadi has called on the country's watchdog to take legal action following the media reports.

Compliance as a positive business force

The case for companies to maintain anti-bribery and corruption policies and processes is compelling. Firms that engage in bribery and corruption face large fines, reputational damage, and may be excluded from lucrative procurement opportunities.

Yet it is not too late for companies with a poor reputation to turn things around. A report by MLex last month showed how Siemens rebuilt its reputation and integrity after a number of corruption cases over the last 10 years. It introduced a new compliance programme, based around preventing, detecting and responding to risk.

Through initiatives such as safe whistleblowing procedures for employees to report misconduct confidentially, Siemens' built a culture of compliance now recognised as a positive force within the business. An outlook that views compliance as a strategic growth enabler, establishing the company as a credible and attractive business partner and helping it compete in the international marketplace.

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