Government 'flying blind' on levels of fraud and corruption

The Public Accounts Committee has published 'Tackling fraud and corruption against government', which finds that large gaps still remain in the government’s understanding of its exposure to fraud and corruption to the extent that it is unable to effectively measure or combat it.

While the Public Accounts Committee (PAC) conceded that some fraud and corruption are inevitable, the government’s current system of fraud measurement does not identify where the problems are or which public bodies are most affected.

The PAC is calling for an annual strategic intelligence report on fraud and corruption levels across government departments and the government has two months to respond.

Dame Meg Hillier MP, Chair of the Committee, said, “The Government is flying blind on the levels of fraud and corruption perpetrated against it, despite widespread awareness of the toxic threat posed by these despicable crimes." She warned that by failing to tackle the situation effectively, fraudsters would "... pick away not just at the public purse, but at the bonds of trust that knit us together as a society.” 

The PAC pointed out that the Public Sector Fraud Authority (PSFA) does not have specific estimates for two-thirds of government expenditure, but estimates that fraud and error levels for that expenditure is somewhere between 0.5% and 5%. 

• An estimated £10 billion of tax fraud and £6.4 billion of benefit fraud lost in 2022-23.
• The government also lost somewhere between £2.5 billion to £28.5 billion to fraud and error.
• Only 6% of the UK’s public bodies can demonstrate that they are achieving the expected value for money from their counter-fraud work.

• The UK has fallen to 18th out of 180 countries in 2022 for perceived corruption levels (from 8th in 2017), according to Transparency International.   

Conclusions and recommendations

Conclusion 1. There is a significant risk that increased levels of fraud seen since the start of the COVID-19 pandemic undermines public confidence in the integrity of government.

• Fraud against government rose from £5.5 billion in total over the two years before the pandemic to £21 billion in total over the two years since the start of the pandemic.

Recommendation 1. HM Treasury and the Cabinet Office should, in the Treasury Minute response to this report, set out the steps the government is taking to both restore public trust in the administration of public services and encourage senior officials to demonstrate leadership in tackling fraud and corruption.

Conclusion 2: There are large gaps in the government’s understanding of the extent and location of Fraud and corruption risks.

• The current system of fraud measurement does not tell us, beyond the well-known problems in tax and benefits, where the problems are or which public bodies are most affected.
• Where the government does attempt to measure fraud, it often includes more innocent errors because it finds it difficult to establish the intent behind the misinformation provided. Conflating error with fraud can give the impression that government is underestimating and obscuring where the real fraud problems are.
• The PSFA estimates that in addition to the £10 billion of tax fraud and £6.4 billion of benefit fraud last year (2022–23), government lost somewhere between £2.5 billion to £28.5 billion from fraud and error, but it does not know exactly where or how.

Recommendation 2: The Public Sector Fraud Authority should publish an annual strategic intelligence report on the level of fraud and corruption across government and where across government’s activities the main risks and issues lie. This should build on the previous landscape reports and use better-targeted fraud measurement and assurance exercises to provide an overall estimate of the extent and location of fraud and corruption by recognising the difference between fraud and error.

Conclusion 3: Departmental counter-fraud staff often lack the credibility and authority needed to exert influence at senior levels. 

• Historically, counter-fraud experts have focused on investigating suspected fraud and have not been brought into wider policy-making and design and lack senior counter-fraud professionals with influence.
• Many of those working in the counter-fraud function are not members of the profession and have not been trained or assessed against professional standards.  

Recommendation 3: The PSFA should:

• Update the Committee in 12 months on the outcomes of its next annual Workforce and Performance Review and whether public bodies invest the right amount in their counter-fraud and corruption capability and achieve value for money from their efforts.
• Set out what it has done to address any identified weaknesses in the effectiveness of departments’ efforts to tackle fraud and corruption, including their understanding of risks, resourcing of counter-fraud and delivery of counter-fraud outcomes.

Conclusion 4: Government has often failed to implement basic counter-fraud measures into its new initiatives. 

• The government’s COVID-19 response highlighted the importance of designing counter-fraud measures, including controls, reporting and recovery, into new initiatives at an early stage of the policy cycle.
• The government could have maintained several basic standards of public accountability, even at the height of the COVID-19 emergency: more transparency; better management of conflicts of interest; promptness in addressing known fraud risks; and timely financial reporting. 
• The government’s introduction of the Initial Fraud Impact Assessments (IFIAs) is a welcome development that will help public bodies address known vulnerabilities sooner. HM Treasury intends to embed the IFIAs into its spending approval processes. It has trained 700 of its staff on matters relating to fraud.

Recommendation 4: HM Treasury should:

• Confirm, in its Treasury Minute response, how it plans to embed Initial Fraud Impact Assessments (IFIAs) within its formal departmental spending approval processes; and the consequences for public bodies if they do not meet its expectations.
• Work with departments to help them use IFIAs to inform Accounting Officer Assessments and to ensure that a summary of the IFIAs, where they flag significant risks, is included in the published summary Accounting Officer Assessments sent to the Committee.

Conclusion 5: The government is not generating enough of a deterrence effect from pursuing those who commit fraud against the public purse. 

• Most of the government’s investigatory and enforcement capability sits in HM Revenue & Customs and DWP.
• PSFA will in due course set up a central enforcement unit.
• Departments are also not yet able to demonstrate that they have the right balance between civil and criminal sanctions to achieve both the optimal recovery of funds and a deterrent effect.

Recommendation 5: The Public Sector Fraud Authority, in collaboration with other departments, should develop a cross-government communication strategy for highlighting the government’s efforts in pursuing fraudsters and the effectiveness of counter-fraud measures. It should, in the Treasury Minute, confirm it will oversee the implementation of this strategy.

Conclusion 6: It is very unlikely that most of the losses due to fraud and corruption will ever be recovered. 

• The PSFA estimated fraud and error losses between £3.5 billion and £29.1 billion excluding tax and welfare fraud, but the government only detected £243 million of fraud.
• The government also only ever recovers a small minority of this detected fraud. For example, in 2020–21, only £29 million of the £243 million detected fraud was recovered. Enforcement and recovery powers are also fragmented across government departments. 

Recommendation 6: HM Treasury should work with departments to help them recover as much of the money paid out to fraudsters as possible and set out in the Treasury Minute:

• Its expectation of the extent of departments’ recovery of losses due to fraud.
• The return on investment it expects from money spent on recovery.
• Why it is not investing more money to recover more.

Conclusion 7: Central government often relies on local government to manage fraud risks on its behalf but does little to support local authorities’ capability to do so. 

• For example, the Department for Business, Energy and Industrial Strategy required local authorities to pursue any losses from error and fraud they identify arising from payments in COVID-19 business grant schemes. However, as all recovered monies must be paid back to central government, local authorities have had no financial incentive to go beyond the minimum required action to identify losses.
• Only a small proportion of the estimated losses, £21 million out of an estimated £1.1 billion, has been recovered so far.
• The different governance architecture in place across local government has added a layer of complexity to the interactions of central and local government.
• Local government bodies have also struggled to maintain timely financial reporting. 

Recommendation 7: HM Treasury should set out, in its Treasury Minute response:

• How it plans to understand the challenges for local government counter-fraud work.
• What support central government plan to provide to local government bodies that administer schemes and manage fraud and corruption risks to funds on behalf of central government.

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External links

The Public Accounts Committee: Tackling fraud and corruption against government