Fraud Risks Inherent in Oil and Gas

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Insightful presentation on inherent fraud risks in the oil and gas landscape.

Insightful presentation on inherent fraud risks in the oil and gas landscape.

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  • 1. Fraud Risks Inherent in the Oil and Gas Business John F. Lipka U.S.A. Security Advisor Encana Oil & Gas (U.S.A.) Inc.
  • 2. Oilfield Vendor Fraud Oilfield vendor fraud has been present since the first well was drilled. Oilfield fraud can be perpetrated by any vendor selling products to a company; supplying services; purchasing goods. Easier to accomplish with collusion from an employee of the company.
  • 3. Oilfield Vendor Fraud Reasons why vendor fraud is prevalent: Vendors maintain or increase business volume by passing some of the additional profits back to the employee. Vendors can and do make excessive profits through misrepresenting work performed or misstating rates charged. Employees obtain income that is in addition to their salary from the company and is usually “tax free” since it is not reported to the IRS.
  • 4. Impacts of Vendor Fraud Vendor fraud impacts the company several ways including: Inflated operating or drilling costs which may affect operational decisions. Substandard work or equipment provided by the vendors which could increase financial/safety risks. Continued conflict of interest (COI) between the vendor and the employee – competitive environment, bid rigging, invoice padding?
  • 5. Who Benefits From Oilfield Vendor Fraud? The people that can benefit from vendor fraud are: Employees responsible for selecting the vendor to be used for a specific job, service, or product. Employees responsible for approving work tickets or invoices for payment. Materials or supply management employees responsible for determining which vendors to use and negotiating the contract rates. High level employees who can influence the normal vendor selection process performed at lower levels. The vendors themselves making the unreasonable profits.
  • 6. Who Benefits From Oilfield Vendor Fraud? The employees of the company in collusion with the scrupulous vendor can profit by: Material gifts from the vendor. Material entertainment from the vendor . Cash payments from the vendor.
  • 7. Methods of Vendor Fraud There are several different methods used by vendors to defraud the company. Some of the more common ones are: Invoice company for a greater number of hours than worked. Ghost employees of the vendor. Vendor employees get paid for less hours than the hours billed to the company. Invoice company at higher labor rates than the local area rates. Company employee using a vendor that has a higher contract rate than other local vendors doing similar work. Vendor employees billed at amounts higher than contract rate. Vendor employees billed at higher job classification than actual work performed. (skilled vs. non-skilled labor rates)
  • 8. Methods of Vendor Fraud (continued) Invoice Company for incorrect equipment/materials charges. Vendor charges for equipment not needed or used for the job performed. Vendor charges for materials not used or materials are for the personal benefit of company employee. Vendor charges for equipment or material at higher prices allowed by the contract. Invoice company incorrectly for other services. Vendor charges for pw hauling or disposal at rates inconsistent with the terms of the contract. Vendor charges for pw hauling not performed or lists incorrect barrels hauled. Vendor charges disposal fees for hauling not performed or lists incorrect barrels disposed. Vendor freight charges are inconsistent with federal/state regulations. (excessive weight)
  • 9. Methods of Vendor Fraud (continued) Vendor invoices include improper party billings. Vendor charges for services performed by third parties in any of the above categories where work is not subject to audit clause. Vendor charges include material purchases from related companies at inflated prices. Vendor may include a third party billing for work performed by a related company at inflated prices.
  • 10. Vendor Schemes Over the years, vendors have devised several schemes for making “kickbacks” to company employees who are in collusion with them. Some of the common disguises of “kickback” payments are listed below: Cash or Checks Cash for “kickbacks” is obtained by: Checks made payable to cash and charged to legitimate business expenses with no supporting documentation. Cash obtained by the vendor through the operation of an ad hoc 2nd business (sale of hay, cattle, used equipment). Checks made payable to persons or entities other than the employees involved in the scheme. Corporations or assumed named companies established to receive “kickbacks” based on fictitious invoices or disbursement support which describes payments for consulting services, brokerage fees, contract services, materials and supplies, and partnership distributions Checks made payable to relatives of the employee or persons involved in a romantic relationship with the employee.
  • 11. Vendor Schemes (Continued) Non-cash “kickbacks” Services Driveways, road work, used oil field pipeline fencing or other heavy equipment services. Home repairs or improvements (landscaping, patios or patio covers, barbecue pits, ATVs, roping arenas, etc.) Vehicles including boats, cars, trucks, airplanes, motorcycles, golf carts, travel trailers, motor homes, or horse trailers. Personal items such as jewelry, furs, clothing, liquor, golf clubs, firearms, customized cowboy boots, or other expensive miscellaneous items.
  • 12. Vendor Schemes (Continued) Travel and Entertainment Gambling trips. Excessive and/or frequent restaurant and night club bills. Transportation and expenses for the employee’s vacation. Unusual hunting, fishing, golf, or ski trips not offered by the vendor to other companies as a normal course of business. Purchase of sexual favors for the employee. Livestock related “gifts” such as horses (roping) or cattle, bulk hay.
  • 13. Kick Back Schemes Bad Boy Buggies
  • 14. Kick Back Schemes (continued) Hunting & Fishing Trips “Epic Trips” *will talk about the trips *trophy hunts *pictures on their desks *vendors that own/lease hunting property
  • 15. Kick Back Schemes (continued) Weaponry
  • 16. Kick Back Schemes (continued) Vehicles
  • 17. Kick Back Schemes (continued) Oil Field Pipe Fencing
  • 18. Kick Back Schemes (continued) Cash -how is it passed to the employee? -2nd witness? -disbursement acct (2nd ad hoc business: hay, cattle, etc.)
  • 19. Factors for Suspecting Vendor Fraud Several factors can lead you to suspect a vendor is defrauding the company other than finding it by a random audit of the vendor: Third party information: Law enforcement agencies notifying the company’s security department. Disgruntled employee or vendor. Integrity Hotline At Quarterly safety meeting when topic is discussed. An employee of the vendor who is dissatisfied with his salary and thinks that some of the “kickback” paid to the company employee is rightfully his. An employee of the company that is not receiving a “kickback” and is jealous. A legitimate vendor that is being coerced by the Company employee to pay him “kickbacks”.
  • 20. Factors for Suspecting Vendor Fraud (Continued) Invoice Practices No existing “work order” or rate sheet (or lack of detail) Invoices lack adequate support Copies of invoices submitted in lieu of originals. Field tickets not legible nor detailed (job locations) Handwritten, “typed” or altered invoices. Type-style heading of invoices does not match text. No pre-printed heading on invoice. Statements or field tickets submitted in lieu of invoices. Invoice date does not agree with date(s) work was performed. Invoice “splitting” and/or duplicate invoicing.
  • 21. Factors for Suspecting Vendor Fraud (Continued) Contractor Practices Excessive labor hours or materials billed to job. Labor for multiple days combined under one day’s billings. Excessive or expensive materials used from vendor’s inventory. Miscellaneous expenses billed with no explanation provided. Changes in contract employee status (job position) or names. Frequent or repeated “add-on” and change order billings. Contractor overly-persistent in seeking payment for services. Payment sent to location other than primary business address. Charging for lodging, per diem not incurred Charging for equipment not provided, needed or already provided by company (ATVs, cameras, cellular phones, laptops)
  • 22. Factors for Suspecting Vendor Fraud (Continued) Employee Practices Contractor (vendor) given “preferred” status or jobs absence of bids. Contractor used on jobs for which is not qualified. Subcontractor/employee complaints about contractor ignored. Employee living above his means without apparent reason.
  • 23. Factors Leading to Vendor Fraud Vendor fraud is likely to occur when: M.O.? Situational Pressures – e.g. : Gambling Illicit sexual involvements Speculative investments Alcohol or Drug use Peer-group pressures Over extended loans on heavy equipment, ranch property, 2nd ad hoc businesses Extortion, black mail
  • 24. Factors Leading to Vendor Fraud (continued) Opportunities to Commit Fraud Too much authority for employees or suppliers in positions of trust without appropriate reviews and controls. Close associations between employees and suppliers. Remote or very “close hold” operational locations Out of sight, only a few vendors to choose from, limited turn over. Inadequate notification and training of company rules, practices and discipline related to fraudulent activity. Statement of Policy related to Conflicts of Interest (COI) and illegal and Unethical Practices. Annual disclosure statements from Officers and key employees. Inadequate personnel screening policies pre-employment, promotions to key positions, exit interviews.
  • 25. Factors Leading to Vendor Fraud (continued) Lack of Required Personal Integrity Almost every individual would commit some degree of fraud with the right combination of pressure, opportunity and low risk of discovery and punishment. Employee “under paid” or undercompensated; “I wanted my piece of the pie too”. Lack of adequate fiscal controls - viewed as Fraudulent activity “a cost of doing business”.
  • 26. Summary Construction Pipelines, remote right-of-ways Pad, road construction Invoice padding (heavy equipment, material) Need strong bid process, SOW, detailed work order Sensitize company Inspectors, Representatives that sign Field tickets “gift card” for fraud identified Contract Labor “Consultants” Land Brokers – IT, Lease Operators Additional charges added on Lodging, per diem Open ended term
  • 27. Summary (continued) Drilling & Completions Competitive phase “do what it takes” Drilling Supervisor/Superintendent “Company Man” Completions Supervisor Walk-in sales persons Older equipment supplied which requires more frequent service vs. newer equipment with service contract detailed Equipment ordered not used or remains on job site after SOW performed Bid process, compare rate sheets, service record, quality of equipment, 24/7 availability Time=money, capital ($$) intensive operations
  • 28. Take Away Strong communication, partnership (USADivSec with Finance/Auditing) When Findings describe possible fraudulent activity: Review Findings Develop Go-Forward strategy Freeze A/P balance pending resolution Vendor notification – positive experience Hold them accountable Get ahead of curve, proactive meetings, expectations, accountabilities, transparency
  • 29. Take Away (continued) Negotiation for payment (or % thereof) Criminal prosecution referral (intent) Discussion with other E&P companies (business practices) Lack of adequate controls, oversight, paper trail Process and vendor practices will improve Word gets out - quickly John F. Lipka USA Security Advisor John.Lipka@encana.com