An oil and gas or mining company can avoid all kinds of reputational and legal challenges by swearing off deals with certain corruption warning signs. This month’s developments in an evolving scandal might have Royal Dutch Shell wishing it had done so.
Reports by journalists and the NGO Global Witness allege the multinational paid $1.3 billion for an oil license in Nigeria knowing much of the money would flow to a former petroleum minister convicted of money laundering in an unrelated case. Leaked communications also showed Shell staff speculating that the individual would then dole out the funds to other top Nigerian politicians. And that was just last week’s news: a steady drip of ever-worsening leaks about the deal has dogged Shell and its partner Eni for five years now, and prosecutors in Abuja and Milan look poised to argue that the companies acted illegally.
This case and others involving Unaoil, Petrobras and Och-Ziff underscore that oil, gas and mining sector corruption is alive and well. Such examples of how corruption risk creeps into deals between resource-rich governments and private companies are not atypical.
Also this month, we published a new guide to help companies, governments and others spot corruption risks and avoid problematic deals. Twelve Red Flags: Corruption Risks in the Award of Extractive Sector Licenses and Contracts (available here) is part of the Natural Resource Governance Institute’s (NRGI’s) growing program of anticorruption research, advice and advocacy.
Corruption in oil, gas and mining can be addressed if people ask the right questions. The schemes involved are often complex and opaque, but anyone who follows the headlines knows the players are not endlessly creative. From certain types of unqualified companies to suspicious payments and constraints on competition, clear patterns and warning signs of problematic behavior exist across resource-rich countries.
To find these, we analyzed over 100 real-world cases of license or contract awards where accusations of corruption arose. The cases came from 49 resource-producing countries across five continents, and include awards related to exploration, production, construction and engineering, transport, commodity trading and financial services. For each case, we asked: what signs could have tipped off interested parties that all was not well?
Based on this work, we developed a list of 12 red flags in clear, concrete terms. Many anticorruption practitioners already rely on the concept of “red flags;” our list builds on prior research by public and private sector organizations. The added value of our report, however, comes from its specific focus on the oil, gas and mining industry, and how its findings are grounded in a broad, global set of real-world cases.
We built our red flags list to help extractives companies, investors and anticorruption service providers spot corruption risks. Over the last two decades, an astonishing amount of information about how graft can infiltrate extractives sector licensing and contracting has reached the public domain, but this knowledge has often been scattered and specialized. By synthesizing lessons from a library of real-world examples, our list gives a solid basis for vetting deals, partners, related financial transactions and markets. It could inform all sorts of risk review efforts, from asset searches and AML compliance to due diligence, commercial intelligence and other bespoke investigations (e.g., for bribery or fraud). Its contents could also help companies ensure their compliance, audit and internal controls programs don’t overlook the risks on the ground in the countries where they work.
Looking beyond the private sector, law enforcement and intelligence officers could use our red flags list to structure investigations into a suspect award process or deal, or as a source of leads and questions. Officials from regulators, ministries, or state-owned companies who oversee and approve awards could draw on it to develop rules and procedures, or to detect high-risk behaviors as an award process unfolds. We also hope the list can help campaigners, activists and reporters identify important lines of inquiry and prioritize their scarce resources.
Twelve Red Flags is a tool for inquiry — not prediction. There is no foolproof way to assess corruption in extractives deals. Graft is always highly context-specific, and when a red flag appears, only an understanding of the broader context can tell interested parties how much concern and scrutiny is warranted. Users should not take the presence of any individual flag on a license or contract award as proof of corruption. Conversely, no one should assume that an award showing none of these signs is corruption-free.
Corruption can inflict devastating damage on resource-rich countries and their people. Nonetheless, our new red flags list shows that much of the playbook for corruption in the extractive industries is already known. Players serious about preventing embarrassing disclosures like Shell faced last week — or the threats of legal action, loss of share value or assets, career upheavals and reputational damage that can follow — need to study it closely.
Aaron Sayne and Alexandra Gillies lead the anticorruption programs of the Natural Resource Governance Institute (NRGI), a non-profit organization that promotes transparency and good governance in the oil, gas and mining sectors. Alexandra tweets on oil and corruption issues at @acgillies, and both can be reached at [email protected].