reStartEvents 5:9 DC metro & Beyond V-Career Fair Employer Directory.pdf
Fraud Risks Inherent in Oil and Gas
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.
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
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
