According to Mining News Pro - The mining industry has seen the biggest overall increase in fraud cases, climbing 30% over the last 4 years, from 20 cases to 26, a new report reveals.
The research, conducted by SEON, reviewed the Association of Certified Fraud Examiner’s Report to the Nations and compared the figures to the report 4 years prior, to identify which industries have suffered the largest increase in fraud.
The mining industry also suffered the largest median loss —$475,000 — of all the industries examined. Despite the increases in fraud cases in the industry, this median financial loss has decreased by 5% in the last four years, SEON reported.
Fraud in the mining industry can take many forms, from inventory theft to improper asset evaluations. The four main types of mining fraud are: environmental, forestry, occupational and reserves or resources reporting.
SEON reported that despite the increase in reported fraud cases and the large median financial loss, the median financial loss in mining fraud has decreased in the last four years – by 5%.
High Risk of Fraud in the Coal Industry
According to the International Energy Agency (IEA), the coal industry accounted for almost 40% of electricity generation and more than 40% of energy-related carbon dioxide emissions in 2019. Even as the coal industry struggles in the United States and Europe, it remains powerful globally, and, while the pandemic drove a drop in coal demand in 2020, IEA forecasts a rebound for coal demand in 2021 led by China, India, and Southeast Asia. Figures from Global Coal Plant Tracker show that in 2020, 189.8GW of coal power capacity is under construction and 331.9GW is in planning.
The coal industry also continues to receive support from major financial institutions; the 2020 Banking on Climate Change report identified at least USD 54 billion in financing for coal mining and at least USD 38 billion in financing for coal power.
Growing concern, however, about coal’s climate impacts and competition from renewable energy has put tremendous pressure on the industry to prove that it can remain a major player long-term. As coal-fired power plants close and major financiers and insurers begin to back away, experts have begun to predict the ‘beginning of the end’ for the coal industry, suggesting that, while the industry remains powerful, it will face greater financial pressure moving forward.
To predict the conditions that lead to a high risk of fraud, anti-fraud professionals and researchers frequently rely on a concept called the “fraud triangle,” a model for understanding three conditions that lead to fraud: opportunity, motivation (which can take the form of incentives or pressure), and the ability to rationalize fraud. A combination of growing pressure to meet impossible financial expectations, a lack of effective oversight and scrutiny, and a history of rationalizing industry-wide deception, suggests that, as major players in the coal industry become desperate to extend the life of the coal industry, the industry is at a high risk for financial fraud. As the risk of financial fraud grows, coal whistleblowers could play an essential role in detecting and prosecuting fraudulent schemes.
The risk of securities fraud
When companies face financial pressure, the potential for fraudulent behavior is particularly acute. The risk of fraud is high where finance, production, sales and operations managers face pressure to deliver positive results, and companies allow internal controls to erode. Data from a recent EY survey shows that, in the oil, gas and mining industry, 42% of employees would engage in fraud to meet financial targets and 36% would engage in fraud to help a business survive a downturn. As the coal industry faces growing regulatory and financial threats to the core of its business model, the pressure to meet targets and prove the industry’s long-term viability may tempt some to engage in securities fraud.
In 2012, a financial scandal at Rio Tinto revealed how executives under pressure could allow a fear of revealing negative news to snowball into billion-dollar fraud. Facing significant pressure to prove that the company could rebound from the high-profile failure of a recent acquisition, executives at Rio Tinto hid data showing that deposits in a new, highly publicized coal project in Mozambique contained only half as much coal as originally estimated and that the coal was less valuable than originally thought. While the USD 3 billion-dollar fraud was ultimately uncovered, the company wrote down the value of the project only after raising USD5 billion in U.S. debt offerings that contained misleading statements and omissions.
Allegations from a former employee at Australian coal mining company TerraCom suggest that similar fraudulent schemes concerning the quality of coal could be taking place today. In 2020, a former general manager at TerraCom alleged that TerraCom had pressured coal inspectors at inspection giant ALS to fraudulently improve coal analysis results. According to the Australian Financial Review, ALS conducted an internal investigation and informed the Queensland fraud police that between 45% and 50% of coal export certificates were “manually amended without justification” between 2007 and 2020. By altering the certificates, the lab employees and clients were able to exaggerate the amount of energy that the coal would give off, improving its value, while also potentially understating its environmental impact.
In addition to overstating the value of their coal, some companies could attempt to mislead investors and the government about the extent of their liabilities. Companies could attempt to shed liabilities by selling assets to smaller, underfunded companies destined for bankruptcy or fraudulently understate the liabilities in their own bankruptcy process. A 2019 study of U.S. coal companies published in the Stanford Law Review found that, between 2012 and 2017, four of the largest coal companies in the U.S. managed to evade USD5.2 billion of environmental and retiree liabilities through bankruptcy filings.
False promises about the potential of “clean coal” technologies have also proved not only generally misleading but conducive to financial fraud. Promising viable clean coal technology, the CEO of Bixby Energy was able to raise USD 57 million from investors before it became known that the technology had never worked. In another case from 2016, a whistleblower revealed that Southern Company had been lying about the cost and timeline of its flagship “clean coal” Kemper Project, which had received hundreds of millions of dollars from the U.S. federal government. In 2019, the U.S. Department of Justice opened an investigation after the company wrote off USD 6.4 billion in costs related to the project.