Fraud and corruption against government: Large gaps remain in Government’s understanding of risks

- PAC calls for action to tackle currently untracked fraud and error losses running to potentially tens of billions a year

- Whitehall must lead from the top in tackling problem and do more to recover losses, as public confidence in integrity of government comes under threat

Large gaps still remain in the Government’s understanding of its exposure to fraud and corruption. In a report published today the Public Accounts Committee (PAC) warns that, for the most part, the Government’s current system of fraud measurement still does not tell us where the problems are, or which public bodies are most affected.

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%. This implies that, in addition to the 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 - without knowing exactly where or how. To address such levels of uncertainty, the PAC is calling for an annual strategic intelligence report on fraud and corruption levels across Government.

In setting up pandemic support schemes, the Government relaxed controls over public funds to distribute financial support quickly in an emergency. Nevertheless, the report finds that basic public accountability standards could have been maintained, even at COVID’s height. The Government’s pandemic response highlights the importance of designing in counter-fraud measures to departmental spending. The Treasury should explain how it will embed processes to help public bodies address vulnerabilities sooner.

The report calls directly on senior Whitehall officials to lead from the top in giving the public the impression they are serious about fighting fraud. This is in light of the UK falling to 18th out of 180 countries in 2022 for perceived corruption levels (from 8th in 2017), according to Transparency International. Only 6% of the UK’s public bodies can demonstrate that they are achieving the expected value for money from their counter fraud work.

While it is too late to prevent £21 billion in pandemic fraud losses, with most unlikely to ever be recovered, the Government could be doing more to retrieve what it can. The Treasury must explain, having allocated an additional £900m to the DWP to tackle fraud without investing similar amounts in other departments, why it does not invest more to recover more. 

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. The Cabinet Office has blamed worsening public perceptions of the UK’s fraud and corruption on ‘noisy reporting’ from the media. It is time for some noisy reporting back from the most senior Government officials on quite how seriously it is tackling this worsening problem, with examples of fraud not being allowed to go unpunished.

“The risk of fraud and corruption in public life, both from internal and external threats, is of course ever-present. But this should be spurring Government to recognise and prepare for it as an ongoing risk, rather than simply accepting it. If senior officials and politicians simply shrug their shoulders and look away in the face of these outrages, then malign actors will continue to pick away not just at the public purse, but at the bonds of trust that knit us together as a society.”

PAC report conclusions and recommendations 

There is a significant risk that increased levels of fraud seen since the start of the

COVID 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. The latest Transparency International survey of public and business perception of corruption shows that the UK fell from 8th out of 180 countries in 2017 to 18th in 2022 for the perceived level of corruption. Emerging technologies both increase the scope for committing fraud at scale, which can be particularly attractive to organised crime gangs, and provide opportunities for fighting fraud if they can gain the confidence of the public. Government has started to invest in its counter fraud function. HM Treasury has committed to an investment of £1 billion since the pandemic to tackle fraud, which includes an investment of £900 million in the Department for Work & Pensions (DWP) over the period 2022–23 to 2024–25, from which the Treasury is expecting a return of £9 billion by 2025. They are also increasing the number of Public Sector Fraud Authority (PSFA) staff from 60 to around 150. However, while the counter fraud function has an important role to play in supporting government to- combat fraud, tackling fraud and corruption will require leadership at the most senior levels and a clear plan to demonstrate government’s resolve to get on top of the problem.

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

There are large gaps in government’s understanding of the extent and location

of fraud and corruption risks. Most departments are exposed to several types of fraud and corruption risk in their income and spending, but few produce regular, reliable, and comprehensive estimates of the level of fraud and corruption of their risky areas. Government expects the number of fraud measurement experts across public bodies to increase from 99 to around 180. But 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 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. PSFA estimates that, for the two thirds of government expenditure where it does not have specific estimates, the level of fraud and error is somewhere between 0.5% and 5% of expenditure. This implies 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.

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. Many departments lack senior counter-fraud professionals with influence in their organisations and counter-fraud staff have often struggled to get the attention, understanding and support needed from senior decision-makers. In part, this is because the counter-fraud profession itself is relatively young and needs time to reinforce itself as a function. But many of those working in the counter-fraud function are not members of the profession and have not been trained or assessed against the professional standards. The Cabinet Office and HM Treasury have said that government will conduct annual workforce and performance reviews to provide insights on areas outside tax and welfare that demand attention and support. HM Treasury, starting with an expectation of a return of £3 for every £1 spent, also says that it will, where possible, expect increasing returns on its counter-fraud investments.

Recommendation 3: The Public Sector Fraud Authority should:

1. a) update the Committee in 12 months on the outcomes of its next annual Workforce and Performance Review and whether public bodies start to invest the right amount in their counter-fraud and corruption capability and achieve value for money from their efforts.
2. b) 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.

Government has often failed to implement basic counter-fraud measures into

its new initiatives. 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. 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. Some lessons learnt have already been put into practice, for example, in the case of government’s energy schemes where customers received discounted bills from the suppliers rather than direct cash payments from government. 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:

1. a) 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.
2. b) work with departments, as part of its existing work to share best practice 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.

Government is not generating enough of a deterrence effect from pursuing those that commit fraud against the public purse. Most of government’s investigatory and enforcement capability sits in HM Revenue & Customs and DWP. PSFA will in due course set up a central enforcement unit. Some departments have the choice of referring a fraud they detect for prosecution or applying a civil penalty, normally with a lower burden of proof and lower fine. The latter can offer a more cost-effective route to investigate fraud and recover funds, but may not offer the same deterrent effect. Government has not set out the level of prosecutions and convictions for fraud that it wants to achieve in order to produce an effective preventive deterrent. 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. Government can do more to increase transparency on the extent of prosecutions to highlight the consequences of committing fraud, deter people from committing fraudulent activities, and reassure the public that fraud and corruption does not go unpunished.

Recommendation 5: The Public Sector Fraud Authority, in collaboration with other departments, should develop a cross-government communication strategy for highlighting 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.

It is very unlikely that most of the losses due to fraud and corruption will ever be recovered.While fraud detection levels are rising, a large gap still remains between the estimated underlying levels of fraud and amounts detected. In 2020–21, while PSFA estimated fraud and error losses between £3.5 billion and £29.1 billion excluding tax and welfare fraud, government only detected £243 million of fraud. 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. The Cabinet Office and HM Treasury say they will continue to try to recover as much of the £21 billion lost during the pandemic as possible, and will not write off any amounts, but accept that it is unlikely they will be able to recover most of it. But while it is too late to prevent this fraud and most will never be recovered, government could do more to retrieve what it can. HM Treasury has committed an additional £900 million to the Department for Work & Pensions on which it expects a return of £9 billion by 2027–28 through improved general compliance. It has not invested similar amounts to tackle fraud in the other 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; and
• why it is not investing more money to recover more.

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. And only a small proportion of the estimated losses, £21 million out of an estimated £1.1 billion, has been recovered so far. Central government has tried to provide some support to local authorities, for example, local authorities were provided with around £200 million for the cost of administering the schemes, and local authorities have been able to make use of the data matching functionality of the National Fraud Initiative to counter fraud. But 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. The Treasury agreed to speak to the Department for Levelling Up, Housing and Communities officials about what more can be done to support local authorities manage the risk of fraud and corruption in their spending.

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

1. a) how it plans to understand the challenges for local government counter-fraud work.
2. b) what support central government plans to provide to local government bodies who administer schemes and manage fraud and corruption risks to funds on behalf of central government./ENDS