In the oil and gas industry, fraud, bribery and other financial crimes hit the headlines regularly. Stories about poor practices in the supply chain, for example relating to human rights and the environment, are also rife. The sector is a consistent poor performer in the way it conducts due diligence and screening on customers and suppliers, so improving these areas could help companies reduce risk dramatically.
Sanctions and prosecutions against oil companies around the world have continued to ramp up. For example, the UK’s Serious Fraud Office has just brought two of its largest convictions ever against oil companies. In July 2020, it confiscated £5.5 million from two former executives of oil and gas explorer Afren, after they were found guilty of fraud and money laundering. In the same month, the SFO secured convictions against employees of Unaoil, for paying $6 million in bribes to secure offshore mooring contracts.
Events such as these can have devastating financial and reputational consequences. To avoid them, oil and gas companies need to upgrade their ‘know your customer’ and ‘know your vendor’ processes urgently. Within that, better adverse media screening and high-risk entity screening should make a significant difference.
Anti-corruption and counter-terrorist financing (CTF) laws and regulations are already stringent around the world and becoming more so in response to criminal and terrorist acts, such as the Paris attacks in 2015. Many countries, including Bermuda, the Channel Islands, Russia and several countries in Asia, have been strengthening their rules.
Also, this year the EU introduced two sets of changes to money laundering regulations. The fifth Money-Laundering Directive (5MLD) came into force in January 2020, followed closely by the sixth directive (6MLD), due in December 2020. Both updates underline the need for companies to defend against constantly changing financial crimes with effective due diligence systems.
5MLD specifically expands the requirement for enhanced due diligence (EDD) to take place on oil transactions (alongside arms, precious metals, art and tobacco).
This will oblige regulated companies to gather information on the intended nature of the business relationship; the source of wealth; funds of the customer; and its beneficial owner. This enhanced diligence should aim to understand the reasons for the transaction; obtain senior management approval; and increase transaction monitoring.
Though oil companies themselves are not obliged entities under AMLD regulations, their banks and other financial services partners are. So, most will recognise that they have a responsibility to conduct rigorous due diligence in line with the regulations. This is especially the case given that the regulations now specifically mention oil transactions as potentially higher in risk.
Supply chain diligence
Legal and regulatory breaches are bad enough. But the reputational impact of adverse news emanating from your supply chain could be even more damaging.
In addition to evidence of financial crime, companies should also look for a wide range of other abuses – for example, around human rights and the environment – in their supply chain due diligence. The oil and gas sector is particularly at risk here.
A recent report by the Responsible Sourcing Network identified oil and gas as among the three worst-performing industries in addressing child labour and other human rights abuses in cobalt supply chains, for example. Cobalt supply generally shows a deplorable level of risk, added the network.
Oil and gas firms are moving in the right direction. An EU study on supply chain due diligence, from January 2020, said many oil and gas companies are making progress towards implementing the UN Guiding Principles on protecting human rights throughout supply chains. But they need to do more, said the EU.
Don’t sideline issues
Environmental damage is also a huge issue for supply chain due diligence in the oil and gas industry – although, again, some companies have made progress.
Much effort has gone into areas like reducing resource use and carbon emissions, said the EU. But industry players say that has only taken them so far, and now they are looking at areas such as climate litigation.
‘The question is how to deal with sectors, such as oil, that are fundamentally unsustainable?’ said the report. ‘Perhaps for these reasons, due diligence practices for human rights and climate change have, to an extent, developed in silos within companies.’
Companies can no longer sideline this issue or pay it lip service, though.
Pressure groups are increasingly active, at a global, European and national level. For example, Global Witness has joined with other groups in calling on the European Commission to bring forward laws requiring companies to identify, prevent, mitigate and account for human rights abuses and environmental damage in their operations, subsidiaries and value chains.
Such laws already exist in some countries such as France and have received government commitment in Finland, Germany and Italy.Oil and gas companies need to prepare their supply chain due diligence processes for compliance now. Thorough due diligence will not only help them comply with legislation, it will also help them avoid disruption due to, for example, reliance on companies at risk from financial or other factors.
Case study: Centrica
In a 2019 report on modern slavery, gas supplier Centrica highlighted its response to such due diligence issues. Centrica works with over 14,000 suppliers across a wide range of industries and jurisdictions. It spent three years investigating its supply chain, then launched a strategy to boost diligence and remedy any issues, based on the UN Guiding Principles.
To streamline its due diligence processes, Centrica risk rates new suppliers using a third-party country and sector risk segmentation tool. This tool considers any slavery risk connected to a product or service. Suppliers that the tool identifies as high risk can then receive further, enhanced risk assessment and site visits, where appropriate.
Such tools are becoming vital in helping companies meet their ever-increasing customer and supplier due diligence responsibilities.
The EDD requirements for onboarding and monitoring a high-risk oil and gas customer or supplier can make the process challenging and expensive. For example, companies need to look beyond standard adverse media providers, and search other local sources such as court registers to determine detailed risk factors.
To address all the issues in this article, oil and gas companies need to improve due diligence by running know your customer, know your vendor, anti-money laundering, and EDD processes quickly and confidently. They also need to do it with better data, faster automation and rapid deployment.
Technology – enabled by machine learning and artificial intelligence – is now available to give them all the information they need about any customer, globally. As well as reducing risk, it can help them streamline and automate processes to reduce friction and cost; deploy almost instantly; and scale without any overhead.
Companies need a platform that can do all this digitally and in a way that ensures full compliance. Their CDD system should also reduce quality assurance failures, helping them save significant costs; improve regulatory confidence; and understand processes better.
By combining all these gains in one system, the right technology provider can become a powerful partner for your company.