Protecting the public purse: fighting fraud against local authorities

Quantifying the scale of fraud

The Audit Commission has revealed a ten-fold increase in fraud detection since 1990, in its recent report, “Protecting the public purse 2014: Fighting fraud against local government”. Fraud valued at £188 million was detected by England’s councils in 2013/14 and represents a 25 year high. Over the last couple of years, the number of detected cases of non-benefit fraud has fallen 4% to just over 57,400 albeit with the value of this fraud rising by 2% to £59 million.

This was the Commission’s final report before its closure at the end of March 2015, and looks at how fraud against councils has transformed since the beginning of the 1990s when it began its work on promoting good practice in the fight against fraud. From April 2015, its counter fraud activities will transfer to the Counter Fraud Centre, run by the Charted Institute of Public Finance and Accountancy (CIPFA).

The scale of fraud against local authorities is difficult to quantify precisely. The National Fraud Authority estimated that fraud cost local government £2.1 billion in 2013. This was viewed as a conservative estimate and shows that there is still a large gap between the level of fraud detected and the amount actually occurring.

Financial incentives for detection of benefit fraud ended in 2006 leading to councils focussing on non-benefit fraud over the past five years. Benefit fraud and “tourism” have been at the forefront of the political rhetoric for many years, and that will only continue going into the 2015 general elections. From 2016, benefit fraud will have its own dedicated investigative body, the Single Fraud Investigation Service (SFIS) leaving local authorities solely responsible for non-benefit fraud.

This coupled with emerging trends in fraud and new ways of delivering public services, in particular through digital technology, mean that local authorities need to keep on top of new threats and focus on the non-benefit frauds presenting the highest risk of losses. 

Emerging issues and trends

The report highlighted how fraud has transformed over the years and presents councils with a constant firefight. When one area is brought under control, another emerges – areas of concern highlighted in 2014 were council tax discount, Right to Buy, social care and insurance fraud. These types of fraud are often low value but with a higher volume.  Local authorities are also having to deal with more cases of high value fraud arising from employee fraud, bribery and now threats of computer enabled fraud such as data theft and mandate diversion fraud.  A number of these higher value frauds occur in the property maintenance or development directorates of local authorities.

Detected cases of insurance fraud more than tripled from 72 in 2009/10 to 226 in 2013/14 and their value rose by more than 60% to £4.8 million.

Councils are also detecting more fraud in schools. The Commission only took a baseline measurement of fraud in maintained schools in 2012/2013. In just a year period, the level of fraud rose by 6% and was found to be worth £2.3 million. Staff were found to be responsible for the majority of the fraud with vulnerable areas including embezzlement of school funds, payroll fraud and false expense claims. The Commission has called for schools to review their governance arrangements to reduce the risk. (The CIPFA Centre for Counter Fraud has recently published good practice guidance on tackling school fraud).

It was noted that figures should of course be treated with caution as annual percentage changes in value can be affected by a few very costly frauds in either year.

The report also noted that a future trend that may emerge is the involvement of organised crime in conjunction with procurement fraud. The report recommends that local authorities remain alert to this rising threat. 

Pressure to cut costs: fraud investigation

Councils are under constant financial pressure to reduce their expenditure and improve efficiency – fraud investigators are vulnerable as a result. Councils need to be aware that a reduction in fraud investigators could be matched by a reduction in fraud detection. Whilst the balance sheet may look more positive with cuts to the number of fraud investigators, there will potentially be unseen costs in unidentified fraud outweighing any costs savings made. This risk needs to be carefully considered before making any decisions.

It is important for local authorities to not overlook the cost of an average investigation especially when considering cutting resource in counter fraud areas. CIFAS (the UK’s Fraud Prevention Service) reported in November 2013 that the average cost of investigating a fraud of less than £25k in value on average costs around £22.5k.

What local authorities can do

There are still 39 councils that did not detect a single case of non-benefit fraud. It is highly unlikely that there was actually no non-benefit fraud against these councils.

Prevention and deterrence: whilst hard to quantify its actual impact, the prospect of detection can act as a powerful deterrent. It is usually more cost effective to prevent fraud than to take action afterwards. The report recommends that local authorities should widely publicise what fraud is, the likelihood of detection and the penalties that fraudsters would receive if caught. Information sharing with other local authorities could also be an important, and more cost effective, weapon in the fight against fraud. Local authorities should consider forming or joining a fraud forum.

Investigation and detection: the average number of full time fraud investigators employed by councils has declined steadily by 10% over the last five years. A fall in these numbers was seen to be associated with lower benefit fraud detection levels. Local authorities are under pressure to cut costs but also increase the detection of fraud, two goals which are not always mutually exclusive. Fraud constantly evolves - changes in government policies, such as Right to Buy and Social Care Choice, may have unintended consequences and heighten fraud risk.  Whilst one fraud risk may be under control, others will be developing so it would be advisable, where possible, to maintain the number of fraud investigators and see if cost cutting can be achieved by more strategic deployment of investigators to developing areas of fraud activity and resource management. Consideration of multi-authority collaboration could also be a way forward.

Recovery of losses and redress: there will be increased costs pressure after 2016, when central government funding for counter-fraud activity will cease. Councils will need to recover more losses than they have in the past, perhaps using legislation such as the Proceeds of Crime Act 2002 to do so.

Openness and transparency: councils should look for fraud and record how many frauds they detect. Doing so would show leadership, allow them to compare their performance with other organisations and alert them to emerging fraud risks more effectively. It is also important to remember that increasing levels of detection can actually be a positive sign in the fight against fraud and their publication can assist in deterrence. The key is the way in which the information is presented, as if done in the right way it could also improve the reputation of the authority amongst the public. 

The future

With the closure of the Audit Commission, Chairman Jeremy Newman has urged the government to mandate the provision of fraud data from all local authorities, to ensure that future reports are able to provide a complete and transparent picture and help alleviate public scrutiny.

The Commission also makes a number of recommendations for local authorities including:

• continued use of the Commission’s checklist at App 2 of the report to review their counter-fraud arrangements;

• adoption of a corporate approach to fighting fraud;

• actively pursuing potential frauds identified through their participation in the National Fraud Initiative (NFI);

• assessing themselves against the framework in CIPFA’s new Code of Practice on Managing the Risk of Fraud and Corruption (CIPFA also intend to publish good practice guidance);

• engagement with the new CIPFA Counter Fraud Centre

and for Councils in particular:

• protection and enhancement of investigative resources; 

• being alert to the risk of organised crime, notably in procurement;

• being alert to the risks of fraud, particularly in growing risk areas;

• focussing on prevention and deterrence

• focussing more on recovering losses from fraud;

• taking up the Commission’s offer of receiving a free fraud briefing available from the Commission via their external auditors.

The CIPFA Counter Fraud centre intends to publish a similar future report based on an annual survey of detected fraud in English local authorities, individual fraud briefings and will also offer training for the public sector with specific bespoke focus for local government investigators. It will also publish the next Fighting Fraud Locally strategy for local government after the closure of the NFA in March 2014.

In December 2014, the Justice Minister, Chris Grayling, announced the launch of a government fraud taskforce, to be chaired by David Hertzell, formerly of the Law Commission. Although David Hertzell is yet to make a formal announcement on the make-up and focus of the taskforce, it will be looking at the claims process to identify any current practices of lawyers, claims management companies and other intermediaries which fail to deter fraud, and any aspects of the current legal framework which could be strengthened to prevent fraudulent claims. It is likely that the review will cover EL and PL claims in addition to motor. The taskforce is expected to publish an interim report by March 2015 and we will be closely monitoring developments.

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Jamie Taylor, Counter Fraud Director, looks at the recent government unveiling of a new task force to tackle insurance fraud, with a remit extending beyond motor and whiplash.

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Contact

For further information please contact any of the authors:

Denise Brosnan, Partner on +44 121 200 041 or denise.brosnan@dwf.co.uk 

Arun Chauhan, Associate Partner on +44 845 404 239 or arun.chauhan@dwf.co.uk

Jonathan Collins, Trainee Solicitor on +44 121 200 0425 or jonathan.collins@dwf.co.uk

Fiona James, Director, Professional Support Lawyer on +44 191 233 5220 or fiona.james@dwf.co.uk