Part 1: Introduction

Ministry of Social Development: Preventing, detecting, and investigating benefit fraud.

1.1
The Ministry of Social Development (the Ministry) is New Zealand's largest government department. It provides policy advice and social services aimed at improving social outcomes for New Zealanders. The Ministry is responsible for administering the social security benefits system. Nearly $13.7 billion of public funding was allocated for social benefits and other allowances in 2007/08.

1.2
Administering the benefits system is a complex and large-scale activity. It is vital for public confidence in the integrity of the benefits system for the Ministry to ensure that people receive their correct benefit entitlements. This includes having effective systems, policies, and procedures to prevent and counteract benefit fraud.

Defining benefit fraud

1.3
There is no single legal definition for the concept of fraud. Instead it is often used to cover a wide range of offences involving some form of deliberate dishonesty for the purpose of gain.

1.4
The Ministry does not use a precise definition of benefit fraud, but is guided by section 127 of the Social Security Act 1964 in determining what it regards as benefit fraud. That provision of the Act creates particular offences concerning social welfare benefits.

1.5
In practice, the Ministry categorises cases as benefit fraud where it has investigated benefit overpayments, determined deliberate intent, and decided to prosecute. Cases of benefit overpayment where a decision has been made to take some form of enforcement action other than prosecution are referred to as “substantiated overpayments”.

1.6
For the purposes of this report, we use the term “benefit fraud” more widely, to include cases of substantiated overpayments, regardless of whether criminal prosecution resulted from investigation. Our focus was not on the outcome of investigations, but rather on the systems, policies, and procedures used in looking at matters that may or may not be ultimately proven to be fraud.

The purpose of our audit

1.7
The purpose of our performance audit was to assess the effectiveness of the Ministry's systems, policies, and procedures for the purposes of preventing, detecting, and investigating benefit fraud.

How the Ministry prevents, detects, and investigates benefit fraud

1.8
The Ministry has a large specialist Integrity Services group, which is responsible for providing services to protect the integrity of the benefits system by preventing and reducing benefit fraud and debt. The group is organised into five business units - Benefit Control, Debt and Data Match, Intelligence, Operational Support, and Internal Fraud.

1.9
The Integrity Services group has nearly 500 staff in 15 locations around the country, including a national office. There are 10 regional Benefit Control Units, a National Data Match Centre, and four regional Debt Collection Centres. Figure 1 shows the organisational structure of the Integrity Services group.

Figure 1
Organisational structure of the Integrity Services group

1.10
The Integrity Services group works with other groups in the Ministry as part of its role to counteract benefit fraud. The Integrity Services group interacts particularly closely with Work and Income, the service delivery arm of the Ministry responsible for providing income assistance and employment services to the Ministry's clients.

1.11
Figure 2 summarises the main roles of the five business units within the Integrity Services group. It also shows which business units were specifically covered by our performance audit. (We discuss the scope of our audit in more detail in paragraphs 1.22-1.27).

Figure 2
Roles and responsibilities of business units within the Integrity Services group

Business unit	Roles and responsibilities	Covered by our audit?
Benefit Control Unit	This Unit includes 10 regional Benefit Control Units around the country with responsibility for: creating local benefit integrity initiatives; delivering regional benefit fraud prevention programmes; ensuring that Ministry clients receive full and correct benefit entitlements through early intervention programmes; screening local allegations of benefit fraud; and investigating benefit fraud and taking enforcement action.	Yes
Debt and Data Match Unit	The Debt and Data Match Unit includes a National Data Match Centre and four regional Debt Collection Centres. The Unit's main roles include: data matching, and managing and screening the Benefit Fraud Allegations telephone line; carrying out desk-based investigations arising from the Benefit Fraud Allegations telephone line and data-matching activities; carrying out desk-based client-review programmes; referring cases to the Benefit Control Unit for investigation; collecting non-current debt; and conducting benefit fraud prevention initiatives and programmes.	Only the National Data Match Centre and the Benefit Fraud Allegations telephone line role.
Intelligence Unit	The Intelligence Unit's main roles are: gathering information to assist benefit fraud investigations; identifying emerging benefit fraud trends; managing internal and external relationships; developing and evaluating intelligence policies and programmes; and supporting other business units in the Integrity Services group.	Yes
Operational Support Unit	The Operational Support Unit's main role is to support the Integrity Services group's other business units and national office management, by providing: research and analysis; performance reporting; policy and programme development and evaluation; internal and external strategic policy, and service delivery support and advice; and internal and external relationship management.	Yes
Internal Fraud Unit	Preventing, detecting, and investigating staff fraud.	No

The prevalence of benefit fraud

1.12
Figure 3 summarises Ministry statistics relating to its activities to prevent, detect, and investigate benefit fraud for the three financial years to 30 June 2007. It covers two main areas of activity within the Integrity Services group - the activities of the Benefit Control Unit, and data matching by the National Data Match Centre.

Figure 3
Summary of statistics on preventing, detecting, and investigating benefit fraud from 2004/05 to 2006/07

	2004/05	2005/06	2006/07
Benefit control activities
Investigations of allegations of benefit fraud	24,378	19,812	17,450
Early interventions^a	13,016	17,269	15,112
Selective client reviews^b	18,238	8,911	6,579
Total benefit control cases investigated or reviewed	55,632	45,992	39,141

Outcomes of benefit control activities
Number of substantiated cases of benefit overpayments	8,203	7,299	7,084
Total value of benefit overpayments	$42m	$36m	$42m
Number of prosecuted cases of benefit fraud	1,306	937	905

Data matching^c
Number of records compared with other agencies	9.1m	10.1m	12.0m
Data matches detected	156,170	119,871	209,316

Outcomes of data matching
Number of substantiated cases of benefit overpayments	25,483	30,381	18,588
Total value of benefit overpayments	$30m	$29m	$19m
Total number of substantiated cases of benefit overpayments	33,686	37,680	25,672
Total value of benefit overpayments	$72m	$65m	$61m

Notes:

Early interventions are a main benefit fraud prevention activity carried out by Benefit Control Units. We discuss early intervention programmes in Part 2.
Selective client reviews are a detection activity carried out by Benefit Control Units. We discuss these reviews in Part 3.
Data matching involves electronic matching of the Ministry's records with those of other agencies, and is also discussed in Part 3.

Source: Ministry of Social Development

1.13
Figure 3 shows that Benefit Control Units carried out nearly 40,000 investigations and reviews of Ministry clients in 2006/07. There were 905 prosecutions for benefit fraud and more than 7000 substantiated benefit overpayments, worth a total of about $42 million. In the same year, 12 million records were compared with other agencies' records, using data matching. This resulted in the detection of more than 18,500 cases of benefit overpayments, worth a total of $19 million.

Downward trend in number of cases reviewed by Benefit Control Units

1.14
There has been a downward trend in the total number of cases investigated or reviewed by Benefit Control Units in the three years to June 2007. This has been accompanied by a reduction in the number of substantiated cases of benefit overpayments, although there is no apparent trend in the total value of benefit overpayments.

1.15
The Ministry attributes this downward trend in the number of cases investigated or reviewed and the amount of overpayments detected in recent years by Benefit Control Units to four main factors:

A decline in the number of allegations of benefit fraud received from the public and referred from Work and Income. The Ministry believes this is partly the result of a reduction in the number of working-age clients and partly the result of training staff at Work and Income service centres to better determine each client's correct circumstances and entitlements.
A substantial decline in cases relating to marriage-type relationships.¹The Ministry has found that cases involving marriage-type relationships have become more complex in recent years, and take longer to investigate. This is because the results of certain Court cases have required the Ministry to gather more evidence to establish that a marriage-type relationship exists.
The reduction in unemployment in recent years. This has produced a significant fall in the number of Ministry clients receiving the Unemployment Benefit. This has lowered the number of cases investigated by Benefit Control Units of clients receiving benefits while working.
The effect of early intervention programmes (discussed in Part 2). The Ministry believes that these programmes have helped to detect benefit fraud earlier and also to identify cases where a client's circumstances have changed and they are not receiving their full and correct benefit entitlement.

More data matching, but downward trend in value of detected overpayments

1.16
The Ministry has steadily increased its data-matching activities in recent years. The number of records that the Ministry compared with records of other agencies rose from 9.1 million in 2004/05 to 12.0 million in 2006/07.

1.17
The total number of benefit overpayments detected by data matching fell during the same period, with a particularly marked drop between 2005/06 and 2006/07 (from 30,381 to 18,588). This was accompanied by a sharp reduction in the total value of benefit overpayments detected from data matching - from about $30 million in 2004/05 and 2005/06 to $19 million in 2006/07.

The size of benefit fraud

1.18
Most instances of benefit fraud involve benefit overpayments of less than $10,000. Figure 4 provides a breakdown of substantiated overpayment cases in 2006/07, and shows that more than 85% of cases involved overpayments of less than $10,000.

Figure 4
Number of benefit fraud cases, by value of overpayment

Overpayment band	2006/07	%	Overpayment totals	%
Less than $10,000	6069	85.7	$12.2m	29.0
$10,000 to $50,000	875	12.3	$18.9m	44.9
$50,000 to $100,000	110	1.6	$7.4m	17.6
Greater than $100,000	30	0.4	$3.6m	8.5
TOTAL	7084	100.0	$42.1m	100.0

Source: Ministry of Social Development

1.19
A small percentage of benefit fraud cases (less than 1% in 2006/07) involve benefit overpayments of more than $100,000. Marriage-type relationships are the most common source of these high-value benefit frauds.

1.20
In late 2006, the Ministry uncovered a major benefit fraud, as summarised in Figure 5.

Figure 5
New Zealand's largest benefit fraud case, detected in 2006/07

The country's largest benefit fraud was discovered in late 2006. It involved one offender using 123 false identities to fraudulently claim $3.4 million in benefit payments from the Ministry over three years. The benefit fraud was detected after a bank alerted the Ministry in late 2006 to suspicious transactions in multiple accounts, with several of the accounts receiving benefit payments. A special investigation by the Ministry and other agencies resulted in the offender being arrested and charged with multiple counts of fraud. The offender used fake birth certificates to obtain other forms of identification, including driver licences, IRD numbers, and Community Services cards. The offender pleaded guilty to 10 representative fraud charges and was sentenced to imprisonment in October 2007. At the time of our audit, the Ministry was in the process of using provisions of the Proceeds of Crime Act 2002 to seize assets and investments from the offender and to recover the payments obtained fraudulently.

1.21
The major benefit fraud discussed in Figure 5 was detected while we were determining the scope of our performance audit, so many of the Ministry's responses to the fraud were introduced during our audit (see paragraphs 1.26-1.27).

How we carried out our audit

1.22
To assess how effectively the Ministry prevents, detects, and investigates benefit fraud, we examined relevant documentation and interviewed staff from within the Integrity Services group, including:

national office management, the Operational Support Unit, and the Intelligence Unit located at the Ministry's national headquarters;
the National Data Match Centre;
the Eastern Debt Collection Centre, which manages the Ministry's Benefit Fraud Allegations telephone line; and
three regional Benefit Control Units (Auckland South in Otahuhu, East Coast North Island in Napier, and Northern South Island in Christchurch).

1.23
We also interviewed staff at Work and Income service centres co-located at the same sites as the Benefit Control Units that we visited. The national network of Work and Income service centres provide the main face-to-face contact between the Ministry and its clients. As a result, the service centres have an important prevention role to ensure that clients receive their full and correct benefit entitlements. Staff in Benefit Control Units work closely with staff in Work and Income service centres on benefit fraud prevention and investigation activities.

Outside the scope of our audit

1.24
We did not examine the Ministry's debt collection and minimisation activities related to benefit fraud, or how the Ministry deals with internal fraud.

1.25
The Integrity Services group works with other parts of the Ministry to help minimise benefit payment errors, which arise when overpayments are made to clients because of mistakes by Ministry staff, systems, or processes. Our audit did not assess how effective the Ministry is at minimising benefit payment errors.

1.26
Our audit did not specifically examine the effectiveness of the Ministry's responses to the major benefit fraud detected in late 2006, but involved a wider examination of the Ministry's systems, policies, and procedures for counteracting benefit fraud. However, some of the Ministry's responses to the major benefit fraud are covered by our audit findings.

1.27
For example, the Ministry has introduced a number of changes to its systems, policies, and procedures. We discuss these changes in:

Part 2 (preventing benefit fraud):
- adoption of an intelligence-led approach for preventing, detecting, and investigating benefit fraud, including establishing a dedicated Intelligence Unit;
- increased involvement of the Integrity Services group with the rest of the Ministry, and the creation of a Ministry-wide senior governance group to oversee integrity, security, and intelligence issues;
- changes to client verification systems, policies, and procedures; and
- increased collaboration with other government agencies for fraud prevention.
Part 3 (detecting benefit fraud):
- introduction of birth records data matching with the Department of Internal Affairs; and
- the Intelligence Unit's role in detecting cases of multiple identities

Our expectations

1.28
We consulted several good practice guides and other reports to prepare audit expectations for our assessment of the Ministry's systems, policies, and procedures for preventing, detecting, and investigating benefit fraud. These guides and reports are listed in the Appendix.

1.29
We expected the Ministry to have:

assessed and estimated the risks of benefit fraud, and put in place necessary and relevant preventative systems, policies, and procedures to minimise those risks;
implemented effective systems, policies, and procedures to detect benefit fraud; and
implemented effective systems, policies, and procedures to investigate suspected benefit fraud, and to take appropriate enforcement action for confirmed benefit fraud cases.

1.30
We set out our expectations in more detail with our audit findings in Parts 2, 3, and 4.

1: The Ministry considers a client to be in a marriage-type relationship if they are married, or in a civil union or de facto relationship with someone of the same or opposite sex. There also needs to be a degree of companionship in which two people have an emotional commitment for the foreseeable future and are financially interdependent.

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