Appendix 2: Our assessment of the progress made with implementing each of our recommendations
Recommendation 1: Use clear criteria.
We recommended that, when public organisations are developing and implementing crisis-support initiatives that approve payments based on "high-trust", they ensure that criteria are sufficiently clear and complete to allow applicant information to be adequately verified.
What has happened to date
MSD has committed to ensuring that criteria are sufficiently clear and complete to allow applicant information to be adequately verified. It has said publicly that: “In many cases where entitlements have been wrongly claimed, it is often due to uncertainty about the eligibility criteria, rather than deliberate attempts at deception.”1
MSD has continued to work with applicants to explain the criteria of the Scheme and the obligations of applicants during subsequent iterations of the Scheme. This has included using an updated and more detailed declaration form.
Inland Revenue has also continued to work with MSD to support the pre-payment checks of applicant information against Inland Revenue’s records. Those checks have become increasingly automated where multiple applications from applicants have been previously verified. Inland Revenue has also worked with MSD to provide more clarity about why automatic verification fails. It has supplied MSD with additional wording that could be used to provide the public with clearer information on the different types of application they could make depending on their circumstances. MSD has made this information available online.
Applicants’ obligations were strengthened in the March and August 2021 iterations of the Scheme. Applicants are now required to “prepare and retain evidence to support this declaration, such as records that demonstrate: how the decline in your revenue was attributable to the continuation of Alert Levels 3 or 4…”
Completing the declaration also involves applicants confirming that they “have taken active steps to mitigate the impact of the continuation of Alert Levels 3 or 4… on your business activities. This includes (but is not limited to) engaging with your bank, drawing on your cash reserves as appropriate, or making an insurance claim.”
MSD told us that records of compliance with the declaration are routinely requested from applicants when they are selected for a pre-payment integrity check. MSD told us that this will also be the case for the post-payment integrity work for the March and August 2021 iterations of the Scheme when it is carried out.
The Treasury and MSD have worked with Ministers to agree policy decisions clarifying some eligibility issues. These include that:
- Under the previous Alert Level framework, if a region moved from Alert Level 3 or 4 to Alert Level 2, or from Alert Level 2 to Alert Level 3 or 4 during a revenue test period, businesses in that region would be allowed to meet the revenue decline test by attributing their revenue decline to a combination of Alert Level 4, 3, and 2 effects, but not to Alert Level 2 effects alone.
- To be eligible for the Wage Subsidy, a group of organisations with a common owner (where the revenue generation and employment functions are separated within the group), must apply the revenue decline test across the whole group. Wage Subsidy applicants that apply as a group must base the revenue decline test on a complete and accurate representation of their whole business. The intent of the Wage Subsidy revenue decline test is to reflect changes in external trading activity.
There has also been some discussion with external stakeholders about the application of the “take active steps” requirement to mitigate the impact of Covid-19.
Our assessment of the progress made
Introducing requirements to maintain records as evidence of compliance with the declaration should make it easier for MSD to obtain that information during its integrity work. It might also encourage applicants to think more carefully about their compliance with the criteria and their obligations before applying for the subsidy.
In recent iterations of the Scheme, tens of thousands of applications were initially declined because information provided with applications did not match the records held by Inland Revenue. Inland Revenue had no evidence of a sole trader or self-employed status for some applicants. Other applicants were unable to provide sufficient evidence of a business activity.
Updating records and resubmitting applications takes time and many applicants have consequently experienced delays in receiving payment. Although this will be frustrating, applicants are obliged to supply correct information to Inland Revenue about their tax situation, and to keep that information current. Inland Revenue told us that since April 2020 it has received about 80,000 Wage Subsidy enquiries relating to self-employment.
MSD told us that there are a range of factors that may contribute to declined applications in the recent iterations of the Scheme. It appears that the length of time given to applicants to correct information with Inland Revenue is one of those factors. In the first iteration of the Scheme, this could be around 12 weeks. In the August 2021 iterations of the Scheme, it was reduced to three weeks, given the much shorter term of each iteration of the Scheme.
There have not been any fundamental changes in criteria in subsequent iterations of the Scheme, although a more detailed declaration form has been used. This should make it easier for MSD to obtain relevant information from applicants when performing integrity work. It should also mean that applicants are less able to argue that they were not aware of the records they were required to keep. However, in our view, the expected steps that could be taken to mitigate the impact of Covid-19 on a business could be further clarified.
Recommendation 2: Put in place robust post-payment verification measures.
We recommended that, when public organisations are developing and implementing crisis-support initiatives that approve payments based on "high-trust", they put in place robust post-payment verification measures, including risk-based audits against source documentation, to mitigate the risks of using a high-trust approach.
What has happened to date
MSD has not yet performed the post-payment verification measures for the March and August 2021 iterations of the Scheme. We were told that when that work starts, it will be informed by work jointly performed with Inland Revenue to identify the areas of risk to target. Looking into allegations of misuse in relation to the August 2021 iterations of the Scheme will also be part of the post-payment verification measures.
The first iteration of the Scheme involved applicants applying for up to a 12-week period and receiving a lump sum payment. The March and August 2021 iterations of the Scheme involved applicants applying every two weeks and receiving a payment every two weeks. MSD is performing some checks when the applicant first applies for the March and August 2021 iterations of the Scheme. The pre-payment checks that MSD is performing for the first application include the large employer checks we described in our May 2021 report. In our view, this is a reasonable risk-based approach for MSD to take.
Staff from Inland Revenue have been seconded to MSD to support MSD’s work.
The publication of recipients’ names continues to be an important post-payment accountability mechanism for the Scheme. As we noted in our original work, it appears to have encouraged some people to comply with the requirements of the Scheme or make repayments when they did not comply.
A similar approach has been used for the Government’s Covid-19 Resurgence Support Payment (RSP). This payment is different from the Wage Subsidy. The RSP is a payment to help support viable and ongoing businesses or organisations that have experienced a 30% drop in revenue, for a week or more, due to a Covid-19 alert level increase to level 2 or higher. Applicants can apply for both the RSP and the Wage Subsidy.
Our assessment of the progress made
The impact of MSD’s post-payment verification work on the March and August 2021 iterations of the Scheme cannot be known until that work has started and been completed. It is important that MSD delivers on its commitment to complete that work.
The level of financial risk associated with an individual application has reduced with the change to rolling two-week application periods. However, until MSD and Inland Revenue complete their analytical work, it is not yet clear whether, or to what extent, the overall risk profile has changed in subsequent iterations of the Scheme.
MSD has committed to performing risk-based post-payment verification work for the iterations of the Scheme that came after our report. It has also committed to asking for evidence from applicants as part of that work. When requesting that evidence it will be relying on the requirement in the updated declaration for applicants to keep records that demonstrate their compliance. That work is yet to start, so we are unable to form a view about its effectiveness. We will follow up with MSD once the work has started.
Questions for the Committee to ask MSD
We suggest that the Committee might wish to ask MSD:
- When will work start on the post-payment verification work for the March and August 2021 iterations of the Scheme and when might that work be completed?
Recommendation 3: Test the reliability of a sample of the earlier post-payment assurance work.
We recommended, in relation to the Wage Subsidy Scheme, that MSD test the reliability of a sample of the earlier post-payment assurance work it carried out against documentary evidence held by applicants.
What has happened to date
MSD has begun to test the reliability of a small sample of the earlier post-payment assurance work it carried out against documentary evidence. This work has found a level of non-compliance.
Inland Revenue staff seconded to MSD have assisted with this work from June 2021 onwards.
MSD asked a sample of 339 recipients of payments in the first iteration of the Scheme for documentary evidence to confirm their entitlement to the Wage Subsidy. As at 27 October 2021, 186 of the 339 recipients had provided documentary evidence
Of those 186, MSD determined that:
- 90.3% (168 cases) required no further action;
- 7.5% (14 cases) were required to provide a partial or full refund; and
- 1.1% (2 cases) had been referred for further investigation based on the evidence or lack of evidence provided.
Our assessment of the progress made
Although these may appear to be small numbers, it is important this information is carefully considered to determine what further work needs to happen to protect the integrity of the whole Scheme, and the significant public funds involved.
MSD does not yet know whether the findings from its follow-up work are indicative of wider non-compliance with the requirements of the Scheme. If they are, this could involve a substantial amount of public funds. This reinforces the importance of MSD knowing more about the extent of non-compliance across all iterations of the Scheme and taking action to recover funds paid to applicants who did not meet the criteria or their obligations.
MSD told us that it intends to analyse the results of all integrity and assurance work to inform a risk-based assessment of next steps, and what further integrity work needs to be completed, if any, to strengthen the integrity of the Scheme. MSD has said that this analysis will happen in 2022. It is important that this work is progressed.
We will continue to monitor the progress made with implementing our recommendations through our annual audit and ongoing engagement our sector managers have with the audited agencies, in particular with MSD.
When MSD’s testing work is completed, we expect MSD to consider whether further additional checks or changes to integrity work are required to protect the integrity of past, current, and future iterations of the Scheme. Even small levels of non-compliance across the Scheme as a whole involves significant public funds.
The deterrent effect of this testing work, and the level of additional recovery of funds, if any, are yet to be seen.
Inland Revenue has also carried out some post-payment integrity work. It has followed up with applicants who received a Wage Subsidy payment (in the period April 2020 to 31 March 2021) and who did not report this in their 2021 Income Tax Return. Where the applicant has repaid the amount (in full or part), Inland Revenue has required them to obtain and provide confirmation of this from MSD.
Questions for the Committee to ask MSD
We suggest that the Committee might wish to ask MSD:
- What is the most recent estimate of likely non-compliance in the Scheme, given the findings from the sampling of post-payment checks?
- Has, or will, MSD be considering whether additional checks of other recipients are required given the findings of the sample testing to date?
Recommendation 4: Prioritise remaining enforcement work.
We recommended, in relation to the Scheme, that MSD prioritise remaining enforcement work, including:
- seeking written confirmation from applicants (which could be targeted towards larger or risk-indicated applicants) of compliance with the eligibility criteria and the obligations of receiving the subsidy; and
- pursuing prosecutions to recover funds and/or to hold businesses to account for potentially unlawful behaviour.
What has happened to date
The follow-up work that MSD has done to seek confirmation from applicants about eligibility has identified some payments to ineligible applicants.
MSD contacted 1000 businesses by email, to seek written confirmation of compliance with the eligibility criteria and obligations of receiving the Wage Subsidy. The 1000 applicants have been selected randomly, but the sample includes only businesses with six or more employees and is weighted towards larger businesses that have more than 80 employees.
MSD told us that, as at 18 October 2021, 535 replies had been received. Of these, 532 employers confirmed they had met the eligibility criteria and had complied with their obligations. Three applicants who responded to MSD’s request indicated that they might not meet the criteria for the Scheme. Two of those applicants have paid back the subsidy in part or in full, and it was determined the third applicant was eligible.
There may be additional applicants who assess that they have not met the criteria when MSD sends reminder emails to applicants who have not yet confirmed their compliance with the eligibility criteria and obligations.
MSD plans to send reminder emails to those employers who have not yet replied, after applications from the August 2021 iterations of the Scheme have closed. In our view, seeking confirmation of eligibility from applicants has been useful to identify non-compliance and is relatively inexpensive compared with other actions MSD could take to protect the integrity of the Scheme.
A Wage Subsidy Scheme Recovery and Response Panel (the Panel) has been convened by MSD to consider enforcement cases. All cases referred to the Panel have been reviewed by MSD’s Principal Lawyer and by Crown Solicitors, Meredith Connell. To date, the Panel has agreed to MSD taking civil recovery action in eight cases. Five of those cases were provided one final opportunity to repay before court action began.
The Panel has also agreed to MSD starting two prosecutions. Charges have been laid in the Auckland District Court.
In addition, MSD has referred some complex cases to the Serious Fraud Office (the SFO).
Additional investigators have also been recruited. MSD told us that about 20 full-time equivalent investigation staff are undergoing training. Initially these staff will manage benefit integrity work, allowing experienced investigators to prioritise and progress Wage Subsidy investigations and, where appropriate, prosecutions.
In total, MSD told us that it has about 50 full-time equivalent staff currently working on pre- and post-payment Wage Subsidy integrity work.
MSD expects to continue its investigation work for the next 12 to 15 months.
Our assessment of the progress made
MSD has implemented our recommendation by seeking written confirmation and pursuing prosecutions. Although enforcement work is ongoing, MSD is giving priority to its remaining enforcement work.
Establishing a panel of specialists to consider enforcement issues is a sensible approach. Being able to draw on expertise should assist in the consistency of enforcement action decision-making.
MSD might pursue additional prosecutions. The effectiveness of prosecutions in recovering public funds, and any deterrent effect, remains to be seen.
MSD has taken sensible steps to ensure resources will continue to be available to support its investigative work for the Scheme.
MSD’s confirmation work to date has found some non-compliant applications. We expect MSD to consider what this means for its ongoing integrity work for past, current, and future iterations of the Scheme. This includes determining how representative the findings might be, what the findings mean for non-compliance across the Scheme, and whether additional confirmation work is required.
Question for the Committee to ask MSD
We suggest that the Committee might wish to ask MSD:
- Now that MSD has some results that show a level of non-compliance not previously identified, what are the implications for MSD’s ongoing investigative and enforcement work?
Recommendation 5: Carry out a timely evaluation.
We recommended that MSD, Inland Revenue, the Ministry of Business, Innovation and Employment, and the Treasury carry out timely evaluation of the development, operation, and impact of the Scheme and use the findings to inform preparation for future crisis-support schemes.
What has happened to date
MSD is co-ordinating an evaluation of the Scheme with support from the Treasury, Inland Revenue, and the Ministry of Business, Innovation and Employment. A high-level evaluation plan has been prepared and two external providers are to be procured to carry out the two main components of the evaluation work. Funding from the Covid-19 Response and Recovery Fund has been authorised by Ministers to fund the evaluation work.
The primary objectives of the evaluation are to:
- understand how well the Wage Subsidy was implemented over time;
- identify the extent to which the intended outcomes of the Wage Subsidy scheme were achieved in the short and medium-term for recipient employers and employees; and
- identify the lessons for policy design and delivery of future support schemes responding to economic crises.
MSD told us that Australia, New Zealand, and the United Kingdom respectively intend to conduct a process evaluation to understand how well each employment scheme was designed and implemented, and an outcome evaluation to examine the extent to which each scheme achieved its intended objectives. New Zealand and the United Kingdom are also planning to conduct cost-effectiveness analyses.
Our assessment of the progress made
It is anticipated that the evaluation will provide information and recommendations to inform future responses to crisis situations, where keeping people in jobs is critical. MSD anticipates the findings of the evaluation becoming available during the second half of 2022.
MSD, along with the Treasury, Inland Revenue, and the Ministry of Business, Innovation and Employment, has made significant progress in implementing this recommendation.
We accept that an evaluation of the scale proposed takes time, and to some extent will depend on the availability of relevant information and people. The same officials involved in the oversight of the evaluation have been directly involved in the design and implementation of ongoing iterations of the Scheme. It is appropriate that implementation has been their immediate priority. However, this has reduced the opportunity to immediately implement lessons from the evaluation during the ongoing iterations of the Scheme.
Although the timing of the evaluation might be too late to inform any iterations of the Scheme, the findings could inform whether similar schemes should be used in response to future crisis situations. We are pleased to see that some external expertise has been engaged to support oversight of the evaluation.
We will continue to monitor the progress of the evaluation work.
1: See “Top 10 employers asked to repay wage subsidies”, first published 15 November 2021, at www.newsroom.co.nz.