The extractive sector is more prone to corruption schemes. Transparency International’s Bribe Payers Index reveals that mining, oil and gas sectors are among those in which foreign companies are most likely to pay bribes.
Additionally, the presence of natural resource endowments is directly proportional to large volumes of revenues, which results in fierce competition and the involvement of public officials. Two key financial risks are bid-rigging and bribery. In large-scale corruption schemes regarding service procurement, usually seen in the oil and gas sector, competing contractors collude to submit deliberately inflated or deficient bids to determine the winner of a bidding process. In exchange, the winner may hire the losing bidders as subcontractors or pay them a share of the contract value. These behaviours represent a domino effect in which bribes are paid to cooperating public officials or politicians, oftentimes via kickback schemes. In exchange for granting contracts, top executives of state-owned companies receive bribes from contractors which they feed to politicians to finance their political campaigns. Compensation may take the form of cash or a share of the premium of the contract disguised as commission, for instance. Generally speaking, corporate bribery might lead state authorities to overlook illicit activities allowing companies to cut corners, such as circumvent rules regarding environmental preservation or obtain consent from local communities to undertake extractive operations on their land.
The extractive sectors are technically and structurally complex, making it easier to manipulate revenue flows for political or personal gain, and to conceal their activities. However, at the start of any appropriate commercial transaction, due diligence allows stakeholders to delve deeper and map the factual circumstances of the red-flagged operations, supply chains, and business partners. Companies can then address any harmful parts of the supply chain and engage constructively with suppliers. Effective due diligence on prospective bidders, suppliers and their sub-contractors will mitigate the overall risk and ensure that the persons or organisations involved are genuine and trustworthy.
