Combatting Fraud in the Oil and Gas Industry

Learn more about likely frauds in the oil and gas industry and what can be done to hold fraudulent actors accountable.

As the demand for and availability of low-carbon energy sources rises, and with the economic slowdown caused by the novel coronavirus, the oil and gas industry is facing financial challenges unlike ever before. These challenges are creating the conditions for large-scale fraud, including the concealing of environmental and safety problems. Learn more about likely frauds in the industry and what can be done to hold fraudulent actors accountable.

Since the start of the Industrial Revolution, fossil fuels have provided much of the energy used to fuel our modernizing economy. Today, given the urgency of global climate change, the need for transitioning as quickly as possible away from fossil fuels to energy sources that do not emit greenhouse gases is clear.

More than two-thirds of greenhouse gases added to the environment since 1988 can be traced to 100 fossil fuel producers. Roughly one-third of these emissions come from publicly listed, investor-owned companies that play a dominant role in public policy as well as the economy. Thus, it is critical to understand what actions are being taken by these companies to address climate change.

The need for transparency and accountability at these companies doesn’t stop with climate change. Toxic releases from the production, transport, storage and processing of oil and gas are major threats to public health and the environment.

The oil and gas industries are facing enormous financial pressures due to declining demand and excess supply.  Although it is possible that companies will shift to developing and producing clean energy, for which continued dramatic increases in demand are likely, there is also a significant risk that companies will engage in fraud to keep dividends flowing from existing business lines. Likely types of fraud include overstating carbon reductions and other societal benefits and understating or even concealing environmental harms and other costs.

From design, implementation, to the first barrel sold; oil costs billions to make and has an egregious environmental impact. As competition in the energy market rises, the oil and gas industry will continue to conceal its weakening position and fail to report toxic pollutants.

Furthermore, given the vast offshore drilling operations worldwide and the drilling and transport within the United States, there will be ample opportunity for waste, fraud, and abuse across the oil and gas industry. That’s why NWC has assembled key resources to assist potential whistleblowers and educate those who are interested in learning more about this issue.

What do likely frauds in the oil and gas industry look like?

The oil and gas industry encompasses all types of fraud from water pollution to falsifying accounting books. What constitutes as illegal activity is based off of several strong U.S. laws that have transnational applications and provide opportunities for prosecution.

Here are some likely frauds found within the oil and gas industry:

Hiding Environmental and Safety Liabilities:

Overstating Assets and Anticipated Revenue:

Are there any precedents for prosecuting illegalities in the oil and gas industry?

In the past decades, many oil and gas companies have been prosecuted for partaking in various forms of waste, fraud, and abuse. The most notable lawsuit followed the 2010 Deepwater Horizon explosion. BP Exploration and Production Inc. pleaded guilty to environmental crimes, obstruction of Congress, and paid $4 billion in criminal fines for its conduct leading up to the 2010 disaster. This was the largest criminal resolution in the history of the United States.

Corruption in the industry is not limited to environmental crimes. In 2018, South Korea based companies Hyundai Oilbank Co. Ltd and S-Oil Corporation pleaded guilty and paid approximately $52 million to the United States for conspiring to suppress and eliminate competition during the bidding process of new fuel supply contracts. The United States’ civil investigation took place due to a whistleblower lawsuit filed under the qui tam provisions of the False Claims Act.

In 2010, ExxonMobil agreed to pay the United States $32.2 million to resolve claims that it violated the False Claims Act by knowingly underpaying money owed to federal and American Indian leases for producing natural gas. This lawsuit was filed by whistleblower Harold Wright on behalf of the United States under qui tam or whistleblower provisions of the False Claims Act. Mr. Wright’s heirs received a $975,000 share of the settlement.

Fraud in connection with receiving government benefits often leads to prosecution. For example, after violating the Renewable Fuel Standard (RFS) program in 2016, Chemoil Corporation, an oil trading company incorporated in Hong Kong, agreed to a settlement worth over $71 million. Chemoil exported at least 48.5 million gallons of biodiesel but failed to retire renewable identification numbers (RINs) which are generated for the exportation of fuel. RINs are credits created when a company trades fuel to help them comply with RFS regulations, a program created by Congress to reduce greenhouse emissions. The EPA discovered Chemoil’s violations due to tips by RFS program participants; this was the largest settlement in the EPA’s history.

Many of high-impact prosecutions against oil and gas companies have taken place only because insiders delivered otherwise-unavailable evidence to law enforcement officials.

What laws protect those who come forward with information about fraud?

Potential whistleblowers have more rights than they may think. In recent years, a powerful suite of whistleblower laws has been enacted in the United States to enable private sector whistleblowers to report wrongdoing confidentially and to receive financial rewards for contributing to successful prosecutions.

Many U.S. laws applicable to fraud within the oil and gas industry have transnational applications. A whistleblower does not need to be a U.S. citizen in order to receive assurances of confidentiality and monetary rewards, and the company engaged in wrongdoing does not need to be U.S.-based in order to be held accountable.

Among the most important whistleblower laws is the Dodd-Frank Act, passed following the financial crisis of 2008-09. Since this law was enacted, the Securities and Exchange Commission and Commodities Future Trading Commission have awarded hundreds of millions (US$) to whistleblowers who exposed fraud in securities and commodities trading and helped produced monetary sanctions in the hundreds of millions (US$) for the benefit of shareholders and economic fairness. The Internal Revenue Code’s whistleblower provisions have produced similar positive results in reining in tax fraud.

The Foreign Corrupt Practices Act (FCPA) allows anyone to report bribery or the falsification of accounting books and records. In 2019 alone, a record $2.6 billion in corporate fines were levied, and there were 54 enforcement actions brought by the FCPA units of the U.S. Department of Justice and Securities Exchange Commission. In 2018, the FCPA received its largest settlement in history following the prosecuting of illegal bid-rigging by Brazil’s state-run oil company Petróleo Brasileiro S.A.

Another critically important whistleblower law is the False Claims Act (FCA), which regulates fraud in connection with those receiving compensation or other benefits from the government. In 2019 alone, whistleblowers helped to recover $2.2 billion in monetary sanctions for U.S. taxpayers, with whistleblowers receiving $271 million for their contributions to these successes in 2019.

The Act to Prevent Pollution from Ships (APPS), a law adopted by the United States following the creation of the International Convention for the Prevention of Pollution from Ships (MARPOL), allows both U.S. citizens and foreign nationals to receive up to 50% of monetary penalties when potential violators are found guilty. Between 2006-2016, the U.S. courts awarded 205 whistleblowers a sum of approximately $33 million in prosecutions under APPS. APPS regulates discharges of pollution from vessels, including oil drilling rigs.

Importantly, all of these programs allow for confidential reporting. The vast majority of whistleblowers choose to keep their identity confidential, and agencies make every effort to protect the identity of the whistleblower so that they can report fraud – and still keep their job.

When reporting fraud, it’s important to follow the designated channels. By going straight to the media or bypassing procedures for disclosure to government authorities, whistleblowers may potentially forfeit their rights. NWC always recommends retaining a whistleblower lawyer to help navigate the complex set of rules and regulations.

How the National Whistleblower Center can help

Do any of the above types of fraud look familiar? Do you think you’ve witnessed, or you know of another kind of fraud not mentioned here? You could have a whistleblower case.

Providing legal assistance to whistleblowers is a top priority of the National Whistleblower Center (NWC). NWC’s Legal Assistance Program (LAP) helps whistleblowers exercise their rights in three ways. Through the LAP, NWC educates and trains potential whistleblowers; assists them in finding a whistleblower attorney; and supports high-impact whistleblower litigation.

NWC works with an independent public interest law firm, the National Whistleblower Legal Defense and Education Fund (“Fund”), which provides a secure intake form that allows whistleblowers to submit basic information about their case on a confidential basis.

Potential whistleblowers looking for a whistleblower attorney are encouraged to submit their concerns to the Fund’s intake site. Once submitted, the intake form will be reviewed by a highly qualified whistleblower attorney, who may make one of several recommendations.

If the Fund sends the intake form to NWC for its independent evaluation, NWC will carry out an evaluation to see if an attorney in its Cooperating Attorney Network may be able to provide assistance.

And in a limited number of cases, NWC may determine that the success of a case will be critical for strengthening whistleblower protections and combatting corruption. In this event, NWC may elect to make donations of staff time and money to support the case.

Working on these high-impact, NWC-supported cases provides three unique benefits to whistleblowers and the cause of whistleblowing:

  • We recruit top attorneys from leading private and nonprofit law firms to represent the whistleblower;
  • The law firms typically offer their services to whistleblowers with no upfront payment of fees or expenses, and charge contingency fees that are significantly below the market rate (Contingency fees are fees charged only if the whistleblower secures a financial reward); and
  • If the whistleblower prevails, an important precedent is often set that furthers the cause of whistleblowing, and the law firms donate a percentage of attorney fee recoveries to the National Whistleblower Center to advance its mission of whistleblower protection.

Although it is not a law firm and does not provide legal services, NWC supports high-impact whistleblower cases with communications and policy work and deploying its attorneys to work on cases at the National Whistleblower Legal Defense and Education Fund, one of the members of its Cooperating Attorney network.

If you want to learn more about how our legal assistance program works and how we could help you, you can learn more here.

And if you want to contact us directly with questions or to report fraud, here’s how:

  • Fill out our secure online intake form here
  • Contact us via email: coordinator@whistleblowers.org

But before you contact us, it’s critical you know how to avoid potential retaliation. There are always risks to blowing the whistle. To reduce these risks, review our list of cybersecurity best practices here.

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