A watchdog has warned the Foreign, Commonwealth and Development Office that it needs to be more proactive in rooting out fraud in UK overseas aid spending.
The Independent Commission for Aid Impact said the 2020 merger that created the FCDO from the Foreign and Commonwealth Office and the Department for International Development, along with Covid-19 and problems with FCDO's new Hera financial system, has resulted in increased risk of fraud.
In 2022, the UK spent £12.8bn on Official Development Assitance – as formal overseas aid is known. While the government doesn't publish fraud estimates for ODA, the Public Sector Fraud Authority estimates that between 0.5% and 5% of all government spending is lost to fraud and error.
In its 2020-21 annual accounts, FCDO reported just £2.2m was lost to fraud and error across its portfolio – a rate of 0.02% that compares favourably with the 0.06% rate that DfID detected in 2016.
However ICAI – an independent public body that is sponsored by the FCDO – said it believed the comparison was not an indicator of the department running a tighter ship on fraud in aid spending, but that fraud was instead going undetected.
"The PSFA considers reporting of ‘near zero’ levels of fraud to be an indicator of poor value for the taxpayer because it shows that either fraud is not being found or that controls are so tight that the quality of delivery is compromised," the watchdog said.
It said FCDO had failed to build its "second line of defence" to fraud both centrally and in the countries where aid is distributed.
"Central counter-fraud capability is under-resourced and has been unable to take a proactive approach to tackling fraud," the report said. "This has left in-country counter-fraud capability vulnerable.
"Similarly, the lack of investment in effective training for programme staff on FCDO’s new finance system, Hera, has led to inefficiencies and increased risk."
The report said FCDO's counter-fraud processes were focused on preventing fraud rather than finding it.
"FCDO is largely reactive, rather than proactive in discovering fraud and risks being left behind by increasingly sophisticated fraudsters," it said.
The report said FCDO's failure to provide better support to staff on the ground meant the department risked relying on the "accumulated skills and capabilities" of former DfID programme-management staff, rather than adapting to meet the "ever-changing fraud landscape".
Travel restrictions related to the Covid-19 pandemic had meant fewer field visits had taken place to locations where aid is distributed, reducing a vital tool for identifying and tackling fraud, the report found.
While ICAI acknowledged the impact of Covid-19 was beyond the control of the FCDO, it said the new Hera IT system had been poorly implemented, delayed by more than six months, and had caused inefficiencies.
Staff reported receiving inadequate training to use the system, resulting in a loss of staff time and an increase in duplicated effort. The report cited one staff member saying they believed that fraud would have become easier during the transition to Hera.
Among the problems cited were staff being allowed to use the system without training; the ability to create purchase orders even when there was no budget for them, and people "signing off things they don't understand".
Sarah Champion, who chairs parliament's International Development Committee, said the report showed the FCDO was not doing enough to ensure that UK aid spending is protected from fraud and corruption, and that it goes towards its intended purpose.
"Sadly, as with so much of the UK's aid programme, it seems that fraud detection and oversight have been diminished by cuts to ODA and the merger of DfID and the FCO," she said.
"The government needs to invest properly in its anti-fraud capability to ensure our aid budget – already much reduced in recent years – is not being diverted away from people who need it."
An FCDO spokesperson said the government is committed to stamping out fraud before it occurs and making sure every penny of development spending is achieving value for money.
"Programmes are delivered by trusted partners with proven expertise and robust due diligence checks are carried out before entering into any agreements," they said. "We conduct regular performance reviews of direct partners."
The department said it has permanent central fraud teams which provide support to FCDO posts in the UK and globally.