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Muriel Newman: Labour Creates Fraud Opportunities

Muriel Newman MP's Column

Labour Creates Fraud Opportunities

Last week the Auditor-General, Social Services Minister, and the Chief Executive of the Social Development Ministry (MSD) fronted up to the Social Services Select Committee to answer questions regarding the recent $1.9 million MSD staff fraud.

It appears the employee concerned had a history of fraud – casting doubt, not only on the department’s financial monitoring systems but also, on its hiring practices.

MSD is one of the largest public sector departments, employing around 5,000 staff and administering New Zealand’s biggest payroll system, paying out over $13 billion in social security benefits and pensions annually. However, the 2001/02 audit report on MSD’s Financial Control and Management Systems shows that on a scale ranging from excellent, to good, satisfactory, or adequate, it ranks only ‘satisfactory’.

In its report, the Audit Office recommends that MSD make, what appears to be, some rather elementary procedural changes, such as requiring independent authorisation when debts are about to be written off. This would ensure that paper trails supporting benefit decisions are more robust, and eliminate the potential for case managers to make unauthorised changes to client bank accounts. While the Minister assured the Committee that the department was “working on” these modifications, questions remain as to why such basic changes haven’t already been actioned.

The Audit Office identified MSD’s recent major restructuring as a serious risk factor for fraud. The restructuring of the Department of Work and Income was ordered by the Government – in spite of recommendations against such restructuring by former State Services Commissioner Don Hunn in his May 2000 inquiry – in order to dis-establish the role of controversial Chief Executive Christine Rankin.

Parliamentary Questions later revealed that, in the lead up to the restructuring, there was no consultation, costings, or planning – just a scheme hatched between the Prime Minister and the Ministers of State Services and Social Services to get rid of Ms Rankin. That restructuring, as well as disrupting the public service, created an ideal opportunity for a fraudster.

During the briefing, the Minister and Chief Executive went to great pains to point out MSD’s zero tolerance policy for staff fraud: “Public sector organisations rely on public trust and confidence in their activities, and this is critically undermined when there is misuse of public funds. No level of fraud is acceptable”.

While their attitude and approach to staff fraud is laudable, I want to know why the same zero tolerance standards do not apply to beneficiary fraud as well. The problem is that, far from toughening up on beneficiary fraud detection, the Labour Government has gone in the opposite direction.

Benefit fraud is not only a huge cost to the taxpayer, but it undermines the integrity of the entire benefit system. In his book ‘Why Are Your Taxes So High’, former IRD Chief Tax Advisor Dr Patrick Carragata estimated that New Zealand’s total level of benefit fraud is around $1 billion.

Yet over the past decade, the highest level of benefit fraud identified was in 1999/00, when $104 million was detected. Since then, fraud levels have continued to decline – a direct result of Labour’s changes.

Since being elected, Labour has worked closely with the Beneficiary Unions, introducing many of their 120 social policy demands. These range from making the DPB more accessible, to changing the way benefit fraud is investigated.

The major changes in the fraud area have been to restrict the way the Benefit Fraud Unit – renamed the Benefit Control Unit to satisfy the Beneficiary Unions – is able to go about its business. The Minister softened the ability of fraud staff to carry out “cold calls”. These changes have included: advise the client and give them a written statement confirmation that if it is not convenient to talk, an interview can be arranged at another time and/or place; allow them to have a support person present at the interview, and they may ask the investigator to leave at any time.

The results have been predictable, the amount of fraud detected collapsed. Treasury had warned the Government this would happen – according to a December 2000 Official Information Advice report, Treasury stated that restricting the operation of the Benefit Control Unit and the way it detected fraud “has impacted on the ability of the Unit to identify and prove fraudulent activity”. As a result, it forecast, fraud established over a four-year period would decline by $75 million, creating a corresponding increase in benefit expenditure.

Parliamentary Questions show that the Treasury prediction of a decline in fraud detected has become a reality, with DPB fraud detection dropping from $46 million to $20 million. This is the most difficult type of fraud to prove and now, under Labour’s new provisions, detecting DPB fraud will become far more difficult since a woman living with her partner can receive the DPB if she can show she lives in a violent relationship.

I think this is wrong. Essentially, if a woman lives in a destructive relationship she should be encouraged to leave – not subsidised to stay. The end result, however, is that as well as softening DPB requirements, Labour has now sanctioned living with a partner on that benefit. As a result, fraud will almost certainly increase – but, under the new regime imposed by this Government, much of it may well remain undetected. This will undermine the integrity of the benefit system and, ultimately, taxpayers’ willingness to fund it.

There should be one standard, a zero tolerance to fraud across the board for staff and beneficiaries alike.


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