An Investigation of the Bre-X Mining Scandal

In the present work we study the Bre-X mining scandal which occurred in 1997 near the Busang River, Indonesia. Contents Introduction 3 Bre – X Scandal 3 2.1 Impact on stakeholders 3 Critical Review of the Events 4 List and describe the ethical behaviours that were conducted which directly resulted in this deceit? 5 If you were employed as an Engineer at BreX Mining, what realistic actions could you have taken to remain in compliance with the code of conducts as laid by Authorities world over.

Engineering Innovation and Ethics
Abstract
The topic of Ethical conduct by employees and associates of any firm
has been receiving increased importance recently. However, at times
its been found that few of the personnel of firms are found to be
indulging in practices which are in contradiction to the code of
conducts as laid by Authorities world over. In the present work we
study the Bre-X mining scandal which occurred in 1997 near the
Busang River, Indonesia. The company had reported large deposits
of gold near the river which were found to be fake. We study which
actions of the employees where in contradiction to the code of ethics
as laid by Engineer’s Australia. We further analyse what corrective
measures could have been taken to mitigate the resulting scenario.

Contents
1. Introduction 3
2. Bre – X Scandal 3
2.1 Impact on stakeholders 3
3. Critical Review of the Events 4
3.1 List and describe the ethical behaviours that were
conducted which directly resulted in this deceit? 4
3.2 Engineer’s Australia(EA) code of ethics in contradiction to the
company and its associates’ behaviour? 4
3.3 What were the pressures and motivations that resulted in this
Course of action by the company? 5
3.4 If you were employed as an Engineer at Bre‐X Mining, what
realistic actions could you have taken to remain in compliance with
the Engineer’s Australia Code of Ethics? 5
3.5 What would have been the outcomes of these actions to you,
the company, and to its investors and the wider community? 6
4. Recommendation 6
5. Conclusion 7
References 7
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1. Introduction
The emphasis on the “Code of ethics for Engineers” has been gaining importance in the
recent times. To this effect, Engineers Australia(EA) has has provided some guidelines with
respect to the conduct of professionals. These guidelines could be followed inculcated by
professionals not only in Australia but working anywhere and are, generally, applicable
across sectors. These guidelines help to provide a means to keep a tabcheck on the
malpractices and also maintainuphold the quality of project being undertakenat hand. They
not only enhanceimprove the customer experience but also maintain the authenticity help to
achieve excellence of in the work. Thus it should be borne kept in mind to adhere to these
guidelines while undertaking any projects.
However, it has been its seen that many a various times some people few persons or firms
act in ways that could hamper the prove to be damaging to the interests of the stakeholders of
the project. In this study, a review of one such scandal malpractice which happened occured
in 1997, in the mining industry, has been done. It is seen termed as one of the largest scandals
of the mining industry. It involved a Canadian mining company, Bre-X, and its key
personnel. Herein In this report, first a presentation of the scenario, which took
placeoccurred at the gold mines atnear the Busang River in Indonesia, has been
givenprovided. Thus, the main reason of this report is to provide an examination of The the
resulted consequent scandal which led to heavy losses for the stakeholders. This section is
followed by the section on a critical review of the scenario which answers the questions
raised in the report. Finally, the last sections provide and the lessons the teachings in code of
ethics that could be learnt from the case.
2. Brief overview of Bre- X mining Scandal
Bre-X was a mining company founded by Canadian businessman David Walsh in 1989. It
was found to be doing a fraudulent activity regarding the gold deposits near Busang River on
the Indonesian island of Borneo( Alden, 2020). The company had bought the land near the
Busang river in 1993, on the recommendation of geologist John Felderholf. The stocks of the
company shot up by 1997 as the company was claiming gold reserves of 200million ounces.
It was a huge reserve to be identified. This caught the attention of bigger firms and
organisations and they approached the company with various offers. Apart from companies,
people also invested in company stocks. In 1997, Bre-X, Indonesia and US miner Freeport
McMoran entered into a joint venture after Bre-x’s mining licence was revoked by Indonesia.
And this led to the detection of the fraudulent gold deposits. When a team of miners of
Indonesia and US went for gold exploration, they failed to find any of the large deposits as
claimed by the company (Casey, 2019). The next day the stock value of the company crashed
vastly.
The Bre- X mining scandal is considered as one of the largest scandals in the mining industry
(Casey, 2019).The investigations that succeeded the scandal , revealed that the gold samples
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were tampered with. It was found that the project manager Michael de Guzman had been
salting the ore samples with gold dust (Groia et al., 2008).
2.1 Impact on stakeholders
As it was initially claimed about the mines that they have one of the largest deposits of gold,
it attracted many individuals and groups. Many people bought the stocks in the company
worth millions. The Indonesian government too got engaged in the activity. However, when
the fraud was uncovered, it led to loss of stakeholders’ money and also a possible revenue
source for the local government.. It was also argued by some that unravelling of this scandal
led to falling of stocks of other companies in mining too, like Vancouver Composite (Brown
& Burdekin, 2000).
3. Critical review of events
This brings to light some of the conducts of the company which are not coherent with the
code of ethics as outlined by Engineers Australia. The 4 guidelines of Engineers Australia are
i) demonstrating integrity
ii) practicing competency
iii) exercising leadership and
iv) promoting sustainability
Doing a review of the events in this scandal sheds light to the following issues.
3.1 List and describe the ethical behaviours that were conducted which directly resulted in
this deceit?
 The conduct which directly resulted in the deceit doesn’t appear very clearly.
However it should be noted that the project manager of Bre-X, Michael de Guzman
had persuaded Felderhof and Welsh of the large gold deposits at the Busang River.
Herein his competency for persuasion can be seen, which is as per the guideline 2 of
EA.
 As it was later found that he had been salting the ore samples with gold dust. The
fraud could have been prevented if Felderhof and Welsh hadn’t proceeded. Herein
Welsh can be seen proceeding on the lead provided by Guzman, which is as per
guideline 3 of EA practising leadership.
3.2 Engineer’s Australia code of ethics were in contradiction to the company and its
associates’ behaviour?
An examination of the events which led to the Bre-X scandal, highlights that 3 of the EA’s
code of ethics were directly contradicted by the company and its personnel, guideline 1 ,2
and 3. A description of these is given in the following section.
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 In Bre-X case, we find that the geologist de Guzman had faked the gold deposits
which were found in Busang River, Indonesia. This was against the guidelines of
Engineers Australia (EA) specifically guideline 1: demonstrating integrity wherein its
required to demonstrate integrity. On the contrary to this guideline, he falsified the
information of the amount of gold deposits being recovered from the site. He had first
swayed Felderhof and then the company CEO Walsh of the gold deposits near
Busang River. Reportedly he had been doing that for almost 3 years (Groia et al.,
2008).
 This also puts the role of geologist Felderhof and Welsh under scanner. Felderhof
could have done the ore sample testing by himself. This would have made him
adequately informed about the amount of gold deposits and their quality as well.
Thus this doesn’t go in accordance with the second code of Engineers Australia,
guideline 2: practicing competency, where in its required to collect information and
take decision based on those information. Felderhof was also alleged of insider
trading, as a scandal of such scale can’t be operated without involvement of the hand
of a company insider.
 Further, as both Guzman and Felderhof were geologists, Felderhof didn’t peer review
Guzman’s claims. This act too dint comply with the code of Engineers Australia(EA)
guideline 2: practicing competency, wherein its required to practice competently by
seeking peer review.
 The succeeding investigations also probed the role of Welsh in the case. He was
interrogated about whether he discerned about the faked gold deposits. Welsh,
though, claimed all throughout the investigations that he was unaware about the fraud
(Alden, 2020). This act of Welsh didn’t comply with the third guideline of EA,
guideline3: exercising leadership, wherein he should have been aware about the
occurrence of these events.
 The role of assayers who tested the gold samples was also put under inspection. The
assayer who had tested the samples, had said that the gold was mostly in visible-sized
grain (Casey, 2019). The grains had shown signs which were typical of river-panned
gold dust. They had rounded outlines and depleted rims in silver. The assayer said
that the hard-rock gold grains can acquire rounded edges. This again was in
contradiction to the code of EA wherein the assayer should have inspected the ore
samples and given the correct results. These acts, again, don’t comply with the
guidelines 1 and 2 of the EA (Groia, Badley, and Jones, 2008).
 Another notable act was that any press releases done by the Bre-X company
regarding the deposits at Busang river were falsified. This was again contrary to the
guidelines of the EA, specifically guideline1.
3.3 What were the pressures and motivations that resulted in this course of action by
the company?
 The scandal is seen to be motived by the huge profits which the company could
have made from the gold reserves by attracting investors. Busang, Indonesia is
also known to be rich in mineral resources. Thus the company could have
exploited them for monetary profits.
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3.4 If you were employed as an Engineer at Bre‐X Mining, what realistic actions could you
have taken to remain in compliance with the Engineer’s Australia Code of Ethics?
 It should be noted that, the fraud could have been detected earlier if the geologist
Felderhof would have probed the claim by Guzman regarding the vast gold
reserves at Busang River. Thus, if I were an employee of the company, I would
have effectively probed and verified any such claims. Further, I would have
brought it to the notice of the concerned authorities.
 The assayer which had tested the ore samples also fiddled with the sample
outcomes. It should be noted that the core sample were prepared for testing by the
assayer in the jungle and not in the testing lab. Herein I would have probed why
the testing of the ore samples were done in the jungle and not in the testing lab.
The testing of the samples should have been done in a suitable lab.
 Finally founder of the company, Welsh could have acted prudently to account for
the fraud. He could have led the investigations to its appropriate conclusions,
which he, again, didn’t put up with. As an employee of the company I would have
persuaded Welsh to take account of the incidence and lead the investigations to
their conclusion.
 Further, if I were an employee of the company, I would have taken any of these
corrective actions which would have prohibited further involvement of
stakeholders, investors and would have also prevented the monetary and business
losses to the company.
3.5 What would have been the outcomes of these actions to you, the company, and to its
investors and the wider community?
 As a Bre-X employee, assisting helping to uncover the fraud would have been
seen as practicing good code of conduct.
 A timely exposure of the fraud would have saved the company from indulging
further in the exploration of the area. Also company could have avoided
bankruptcy.
 Since it was seen as one of the largest gold deposits at the time, it had attracted
involvement of local government bodies as well. This, too, could have been
avoided.
 Further, after the news it was seen that stokestock prices of the company rose
sharply as people had started investing in their stocks. Uncovering of the fraud,
led to loss of billions of investor’s money. This could have also been avoided.
4. Recommendation
 Remedial measures like appropriate probing of the deposits prior to the
involvement of other groups, should have been taken.
 It is crucial for professionals to follow on the guidelines and code of conduct
outlined by the EA.
5. Conclusion
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Thus its worth observing from this incidence that any malpractice by any firm, could have
vast and cascading implications on the stakeholders of the project or task. In the Bre-X
mining scandal it is seen that there were malpractices and non-compliance of EA guidelines
at multiple levels and by employees and firms both. It led to losses for not just the company
but the investors too. The deceit was uncovered after inspection by other agencies. Hence its
imperative to comply with the EA guidelines while undertaking any projects or tasks.
References
Alden, A. (2019). The Bre-X Gold Scandal, History's Biggest Mining Fraud. ThoughtCo.
Retrieved 6 March 2020, from https://www.thoughtco.com/the-bre-x-gold-scandal-
1439098
Brown, W., & Burdekin, R. (2000). Fraud and financial markets: the 1997 collapse of the
junior mining stocks. Journal Of Economics And Business, 52(3), 277-288.
https://doi.org/10.1016/s0148-6195(99)00033-8
Casey, J. (2019). Mining scandals: four incidents that shook the industry. Mining Technology
| Mining News and Views Updated Daily. Retrieved 6 March 2020, from
https://www.mining-technology.com/features/mining-scandals-four-incidents-that-
shook-the-industry/.
Groia, J., Badley, J., & Jones, A. (2008). The aftermath of bre-x: the industry’s reaction to
the decision and the lessons we all have learned. Groiaco.com. Retrieved 6 March
2020, from http://www.groiaco.com/pdf/The_Aftermath_of_Bre-X_Mar_4-08.pdf.
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