Frauds and mistakes cost the public sector about £20bn a year. Stuart Watson examines the efforts underway to spot criminal activity and government errors, and to end the chronic leakage from ever-shrinking public budgets.
Each year the public sector loses a colossal sum to fraud and error. Figures are, by definition, hard to pin down – but the latest estimate by the National Fraud Authority (NFA) puts public sector losses at £21.2bn in fraud alone. In an era of falling budgets, this is a cost that politicians and civil servants are increasingly unwilling to bear.
“The government is ending the ‘pay first, check later’ status quo and clamping down on fraudsters,” Cabinet Office minister Francis Maude told CSW. “We need a stronger approach, including pre-screening applications for public funds before payment to prevent fraud, and a sharp focus on recovering money and detecting overpayments.” The government has already established a taskforce to tackle fraud in the public sector, he added; it’s overseeing a set of pilots that he expects to save about £1.5bn by 2014-15.
January will see the publication of the final report by the taskforce, which is based in the Cabinet Office and chaired by Maude. He has described tackling fraud – and the complacency that permits it – as one of the government’s top priorities.
At the launch of the taskforce’s interim report in June, Maude pointed out that £21bn equates to a quarter of the structural budget deficit: “If we can start to make really serious inroads into that, we are doing something incredibly important for the country – and also for people who work in the public sector, because the more we can take out of unnecessary cost, the better our chances of protecting jobs in the public sector and frontline services,” he argued.
Collecting more, losing less
HMRC and the Department for Work and Pensions, the departments responsible for collecting revenue and for the biggest single chunk of public spending, have been at the forefront of the drive to reduce fraud and error. According to the NFA’s 2011 annual fraud indicator, £15bn a year is lost through tax fraud alone, with a further £1.5bn defrauded from the benefits system.
However, the problem is one that affects many areas of government activity. Mike Haley, director of interventions at the NFA, warns: “Fraud isn’t just in the tax and benefit system. Other departments have to wake up to the fact that they have also been defrauded.”
The NFA believes that procurement fraud, for example, costs the public sector £2.4bn a year. Suppliers may collude to fix the price of goods or services provided to the public sector, or submit false or duplicate invoices to receive multiple payments on existing contracts. Around £515m is lost to grant fraud, which may include applications from fictitious organisations, or grants that are not spent on the purpose for which they were intended. Payroll and recruitment fraud can occur through the creation of false payees or amendments to salary payments or allowances, or when false information is provided in order to gain employment. Meanwhile, the NHS loses £165m to dishonest claims for exemption to prescription and dental charges, and non-payment of licence fees costs the BBC £200m.
What’s more, the problem is getting worse. Jim Gee, director of counter fraud services at accountants PKF and chair of the Centre for Counter Fraud Studies at the University of Portsmouth, says that fraud usually increases in times of economic hardship as people in difficult circumstances cook the books in an effort to stay afloat. He estimates that average fraud losses across all sectors of the economy were 4.6 per cent between 1998 and 2007; but since the recession began, he believes, the figure has grown to 6.1 per cent. Meanwhile, Haley warns, plans to move more government services online will open up new channels for fraudsters to attack and may make it easier for them to hide behind false electronic identities.
The coalition’s increased focus on tackling the problem led to the creation of Maude’s taskforce in October 2010. The body is composed of ministers, senior civil servants, private sector fraud experts and representatives from local government, and is supported by the NFA. Its remit has since been broadened to include the collection of overdue debt, and it has also begun to place a greater emphasis on losses through error.
The problem of error tends to be bracketed with fraud, because in many instances it is unclear where one ends and the other begins. It is not always possible to tell, for example, whether inaccurate information on an application form represents a deliberate attempt to defraud the state, or a simple mistake. In addition, the systems necessary to tackle one problem are often useful in reducing the other.
There are no reliable estimates of how much the UK public sector loses through error, because very few bodies have sought to quantify it. However, from July government departments have been required to include identified fraud, known errors and debt in their quarterly data summaries. Gee says that figures from the USA suggest that the proportion of fraud to error in incorrect payments by the state is about three to one.
Four ways to cut fraud
The taskforce’s interim report identified four priorities for reducing public sector fraud: collaboration; assessment of risk and measurement of losses; prevention; and zero tolerance.
Collaboration is key to addressing fraud because if a public agency moves to reduce the vulnerability of some of its operations, then fraudsters simply move onto a similar, less well-protected target; so cooperation is vital in order to coordinate anti-fraud work. John Farrelly, head of the Counter Fraud Centre of Excellence at analytics company SAS UK, claims that the public sector is still some way behind private business in co-operating to combat fraud: “In governments across the world, you see a very fragmented approach,” he says. “You have to focus and address the problem from the centre. One of the biggest barriers to tackling fraud is the existence of data silos in areas like health, welfare, tax and local government. Because of the way their systems have evolved separately, they don’t share data.”
To promote greater collaboration, counter-fraud champions have been appointed in all government departments. They meet regularly to share information and promote cross-departmental working.
Measuring the hidden risks
The taskforce recommends that all departments should measure potential losses to fraud and their degree of fraud risk. That information will allow them to put more effort into the areas of greatest risk and demonstrate where investment will provide the greatest return in terms of preventing losses.
The new approach to fraud is also characterised by a move to prevention. Haley says: “When NFA came into being in 2008, we went to talk to the financial institutions and realised the public sector had a completely different approach. Banks put 70 per cent of their [counter-fraud] resources into prevention, 20 per cent into recovery and 10 per cent into investigation. Government departments were spending 70 per cent on investigation going after relatively small offences, while the banks were interested in saving money, which is what we should have been doing.”
Meanwhile, a zero-tolerance approach will encourage every public servant to recognise fraud risk in their daily work. While fraud cannot be completely eliminated, an appropriate level of scepticism on the part of staff can greatly reduce the level of losses, the taskforce argues. Haley says a new e-learning tool on fraud will be introduced for all civil servants at the beginning of the next financial year.
As well as making general recommendations, the taskforce also examined eight pilot schemes, selected in order to demonstrate that losses could be reduced cheaply and quickly. The taskforce’s final report in January is expected to insist that schemes similar to HMRC’s FEAST and the DfT’s spend recovery audit must be rolled out across government.
The pilots also included a joint HMRC/DWP scheme that commissioned credit reference agencies and data-matching companies to verify the circumstances of 20,000 benefit and tax credit claimants and identify people falsely claiming to be living alone. Other schemes tackled grant fraud at the Big Lottery Fund and insider-enabled fraud at the UK Border Agency.
Invest to save
Such schemes can produce a significant reduction in losses for a relatively small investment. Gee, a former senior civil servant, headed the NHS Counter Fraud Service from 1998 to 2006, running a programme which saved £811m with an investment of £67m – a ratio of 12 to one. Many programmes, Haley suggests, can be run on a pure payment-by-results basis, with a supplier taking a cut of the money saved, and little up-front investment required.
However, many departments have little incentive to reduce losses to fraud or error, because any money they save or recover must be returned to the Treasury rather than reinvested in their own services. Indeed, sources have told CSW that local authorities actually have an incentive to see higher fraud and accidental overpayments in some parts of the benefits system – such as housing benefit – because the Treasury foots the bill for this benefit, while the budgets of councils with high numbers of housing benefit claimants are boosted in recognition of their greater levels of deprivation.
Haley would like to see a system put in place where individual departments can keep a percentage of the money they save, providing them with a greater incentive to take action. “The taskforce is asking HM Treasury to take a look at it, and we need more urgency around that,” he says.
Sharing information with outside partners and across government is bound to lead to concerns over information security. Data-mining techniques that cross-reference information from a range of sources, potentially including social networking sites, also worry civil liberties campaigners. “It’s an area a lot of people are afraid of,” admits Andy Fuller, associate director for fraud and error reduction at Fujitsu. “People involved in analytics are very careful about that. You couldn’t afford not to be.”
Nonetheless, while worries over data sharing are unlikely to go away, services provided by private businesses on a savings-sharing basis offer cash-strapped government departments an opportunity to drive down unnecessary losses without making any payments up-front – and if the Treasury can be persuaded to operate its own savings-sharing system with departments, the benefits of this kind of work may become more obvious to civil servants across Whitehall. A combination of the new techniques available to address the problem, and the sheer size of the sums involved, may help to focus civil servants’ attention on the issue in years to come; and if officials also see the potential to plug some of the gaps in their fast-shrinking budgets, then Francis Maude may find his counter-fraud work attracting a lot more interest within government departments.