1 Good practice in tacking externa fraud Xxxxxxxxxxx GOOD PRACTICE GUIDE Tacking externa fraud
2 Good practice in tacking externa fraud Xxxxxxxxxxx The Nationa Audit Office scrutinises pubic spending on behaf of Pariament. The Comptroer and Auditor Genera, Tim Burr, is an Officer of the House of Commons. He is the head of the Nationa Audit Office which empoys some 850 staff. He and the Nationa Audit Office are totay independent of Government. He certifies the accounts of a Government departments and a wide range of other pubic sector bodies; and he has statutory authority to report to Pariament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. Our work saves the taxpayer miions of pounds every year: at east 9 for every 1 spent running the Office.
3 Good practice in tacking externa fraud Xxxxxxxxxxx Contents Foreword 5 Introduction 6 Part 1: Understanding and managing the risks 10 of fraud Taking a strategic approach to tacking externa fraud 11 Assessing the scae of the threat 13 Understanding the types of fraud risks 16 Focusing resources on the most effective anti-fraud measures 17 Setting targets and monitoring performance 17 Responsibiities for tacking fraud 18 Part 2: Deterring and preventing externa fraud 20 Changing pubic attitudes to fraud 21 Changing staff attitudes to create an anti-fraud cuture 23 Contros to prevent fraud 24 Strengthening interna contros and checks 26 Part 3: Detecting and investigating externa fraud 28 and imposing sanctions Detecting fraud 29 Investigating cases of fraud 33 Imposing sanctions 36 The recovery of money defrauded 39 Evauating the effectiveness of sanctions 41 Working with others in tacking fraud 41
4 4 Good practice in tacking externa fraud Xxxxxxxxxxx
5 Good practice in tacking externa fraud Foreword 5 Foreword Reports pubished by departments, HM Treasury, the Nationa Audit Office and the Committee of Pubic Accounts show that much good work is being done across departments to prevent and detect fraud against pubic funds. But arge sums of pubic money are sti ost each year through externa fraud. These osses arise from a wide range of different types of fraud. At one end of the scae are peope who see an opportunity to make a sma gain. At the other extreme a reativey sma number of organised crime groups carry out premeditated systematic attacks for arge sums of money. The aw abiding pubic have the right to expect government departments and agencies to safeguard pubic funds and to crack down on those committing fraud. A types of fraudsters weigh up the potentia gains against the risk of getting caught and the sanctions they may face. Government departments and agencies need to make fraud as unattractive as they can. Not acting against fraud can undermine the reputation, integrity and professionaism of the organisation and perceptions about the quaity of the services it provides eading to a oss in pubic confidence. A number of departments are carrying out fraud risk assessments to show the scae of the probem and are assessing how these risks can be reduced. Tota eimination of fraud is unikey ever to be achieved, but it is important for momentum to be maintained, and good practices deveoped and shared. The purpose of the guide is to demonstrate and expain some of the good practices used by organisations in tacking externa fraud. It incudes checkists to hep you assess your current practices. The guide shoud be of interest to pubic sector managers who are responsibe for expenditure programmes and for protecting revenue, incuding poicy staff, financia managers and interna auditors. Smaer departments and agencies wi need to consider how practices used in some of the arger departments can be adapted and appied to their own circumstances. We are gratefu for the hep provided by the departments and other organisations in producing this guide. John Kingman Second Permanent Secretary HM Treasury Caroine Mawhood Assistant Auditor Genera Nationa Audit Office
6 6 Good practice in tacking externa fraud Introduction Introduction 1 This guide concentrates on externa fraud which is where third parties, such as businesses, individuas or organised crime groups, stea money from a department or agency, either by obtaining payments to which they are not entited or keeping monies they shoud pay over to the department. Frauds may be opportunistic attempts by individua customers or businesses to obtain a financia advantage. The sums invoved in any one such case may be sma, but these can mount up to significant osses of pubic money if there are a ot of cases invoved. At the other end of the scae, departments or agencies may suffer from more systematic and premeditated attacks by organised crime groups. These may be fewer in number but the osses in each case are substantia. In some cases fraudsters may work in cousion with the department s staff. As we as diverting money that shoud be spent on pubic services fraud can undermine the position of honest citizens and businesses and support the activities of those invoved in other serious crime. 2 The Fraud Act incudes three casses of fraud: Fraud by fase representation; Fraud by faiing to discose information; Fraud by abuse of position. In a three casses of fraud, the Act requires that for an offence to have occurred, the person must have acted dishonesty, and that they had to have acted with the intent of making a gain for themseves or anyone ese, or inficting a oss (or risk of a oss) on another. There are aso offences of fraud specific to particuar departments activities. 3 A government departments and agencies have a responsibiity to deveop antifraud poicies to show those seeking to defraud the government that such action is unacceptabe and wi not be toerated 2. The annua Statement on Interna Contro summarises the processes used to identify and manage risks incuding fraud 3. In addition the Proceeds of Crime Act , the Money Laundering Reguations (2003 5, ) and reated egisation have paced responsibiities on reguated entities and every person carrying out reevant business within the meaning of the Reguations, to report where they know, or suspect, or have reasonabe grounds to suspect, that money 1 Fraud Act Managing Pubic Money, Annex Managing Pubic Money, Annex Proceeds of Crime Act The Money Laundering Reguations 2003 (Statutory Instrument 2003, Number 3075) 6 The Money Laundering Reguations 2007 (Statutory Instrument 2007, Number 2157)
7 Good practice in tacking externa fraud Introduction 7 aundering may be taking pace. Most government departments are not cassified as reevant businesses but it is good practice to assess the risks and potentia exposure; and, where appropriate, departments shoud regard themseves as reevant businesses and act accordingy. These reporting responsibiities aso appy to the Nationa Audit Office as externa auditor. Money aundering invoves not ony the direct proceeds of crime, but any deaings with crimina property. It incudes possessing, or in any way deaing with, or conceaing, the proceeds of any crime. Any faiure to report suspicions of money aundering is now a crimina offence. Reguated entities must take appropriate measures to ensure that key staff are aware of the provisions of the Act and the Reguations, and appoint a Money Laundering Reporting Officer to report their knowedge or suspicions to the Serious Organised Crime Agency. 4 In response to the Fraud Review of , the Government provided 29 miion of new funding to impement its recommendations, incuding the setting up of: a Nationa Fraud Strategic Authority to define and co-ordinate deivery of a nationa strategy that sets out a vision of success in tacking fraud; the steps needed to reaise it; and measuring the impact that these efforts are having. The Fraud Loss Measurement Unit of the Nationa Fraud Strategic Authority to provide robust estimates for repeat measurement of osses before and after action has been taken; and a strategic assessment of the risks and possibe osses from future threats. The Nationa Fraud Reporting Centre and Inteigence Bureau to be the hub in which knowedge about fraud is coated and managed. It wi provide an outward facing service to the pubic; the business community and poice forces; receiving reports of fraud offences and incidents, adding inteigence and providing packages of anaysed information to target investigations and other action. These may incude crimina investigations conducted by the poice, confiscation investigations or other forms of action taken by government departments, agencies or by industry. The Nationa Lead Force for Fraud to provide resources and support for poice forces in tacking fraud. The City of London Poice wi take on the ead roe. 5 Departments and agencies face a wide range of different risks from externa fraud which are demonstrated in Figure 1. There are aso many other types of fraud perpetrated by third parties, such as fraud by contractors. In some departments or agencies externa fraud is a sizeabe and continuing probem for their main business but in others it may ony occur occasionay. 7 Fraud Review Fina Report, Juy Review%20Fina%20Report%20Juy% pdf
8 8 Good practice in tacking externa fraud Introduction Figure 1 The diversity of externa frauds faced by the pubic sector Benefit caimants who fai to decare a earnings, income or capita, or who concea famiy circumstances, to obtain benefits to which they are not entited. Peope who caim exemption from paying for prescriptions to which they are not entited. Dentists who caim for treatments which they have not carried out. Peope who evade vehice excise duty. Peope or businesses who caim grants to which they know they are not entited. Peope who work in the hidden economy and do not pay income tax or nationa insurance contributions on their earnings. They may aso caim means tested benefits from the Department for Work and Pensions to which they are not entited. Peope and businesses who register with HM Revenue & Customs but fai to decare a transactions/income or assets on which tax is due. Staff couding with criminas to defraud the department or agency. For exampe in 2005 an empoyee in a department sod detais of departmenta records to an externa accompice to aow them to frauduenty caim 1.25 miion of payments from the department. Serious criminas obtaining arge sums, for exampe: through evading tobacco, acoho and hydrocarbon oi duties; setting up what appear to be egitimate companies but intend to carry out frauds, such as to stea VAT; committing organised fraud against the benefit system through stoen, forged or counterfeit instruments of payment; or through creating fictitious benefit caims. 6 Departments shoud consider whether they need to deveop a package of measures specificay taiored to each type of fraud. There wi not be a one size fits a approach. But there is much vaue in promoting a wider understanding of how others tacke fraud and good practices which are successfu esewhere. Smaer departments and agencies shoud consider whether they can adapt and appy practices used by arger departments in tacking externa fraud. 7 The guide shows how a number of departments are tacking fraud by taking an integrated strategic approach which is summarised in Figure 2. It aso expains why they are taking this approach and what it invoves. The strategic approach accords with the HM Treasury s guidance The Orange Book: Management of Risk 8 and Managing the Risk of Fraud: A Guide for Managers 9 which provide guidance on the identification and management of risk, and guidance on controing identified fraud risk to acceptabe eves of exposure. 8 The Orange Book: Management of Risk Principes and Concepts, HM Treasury, October Managing the Risks of Fraud: A guide for managers managing_the_risk_fraud_guide_for_managers.pdf
9 Good practice in tacking externa fraud Introduction 9 Figure 2 The main eements of an integrated strategic approach to tacking fraud Understand the size of the probem Understand the types of risk Assign responsibiities for tacking fraud Monitor performance and review pans as necessary Prepare pans for managing fraud risks Set targets Impement measures to tacke fraud Prevent and deter fraud Detect, investigate and impose sanctions 8 The guide is structured as foows: Understanding and managing the risks of externa fraud (Part 1); Preventing and deterring externa fraud (Part 2); Detecting and investigating fraud and imposing sanctions (Part 3). Questions at the beginning of each Part are to hep you assess your organisation s practices. If you are not using a particuar practice you wi need to consider whether that is appropriate given your circumstances. 9 We hope that the guide is a usefu source of reference for pubic sector managers in demonstrating the experience and good practice of others. It does not seek to provide everything you need to know to tacke externa fraud. To do so woud require many voumes. However, the guide provides references to usefu sources of information and gives inks to where these are avaiabe on websites. The case exampes in the guide are for iustrative purposes ony. There may be many other exampes of good practice in other departments or agencies.
10 10 Good practice in tacking externa fraud Xxxxxxxxxxx Part 1 Understanding and managing the risks of fraud NHS fraud is not a victimess crime. Every pound ost to fraud deprives the NHS of vauabe resources it needs to provide patient care. Dermid McCausand, Managing Director, NHS Counter Fraud Service In ooking at this Part of the guide, ask yoursef whether your organisation: takes a strategic approach to tacking fraud risk; assesses the size of the threat from externa fraud and, where significant, undertakes a separate risk assessment; knows the size of the fraud threat/types of fraud committed/who is committing them/how often/and how much is invoved; has a package of measures in pace to tacke osses from fraud where these are significant; has targets to stabiise or reduce fraud; has aocated responsibiities for tacking, and ownership of, fraud risks to ensure that risks are managed, pans are impemented and progress monitored. This Part of the guide ooks at how you can tacke some of these issues and gives exampes of how others approach these issues. As you read through the guide you wi need to consider how appropriate the practices are to your circumstances.
11 Good practice in tacking externa fraud Understanding and managing the risks of fraud 11 Taking a strategic approach to tacking externa fraud Protecting tax revenues is an essentia part of the Government s commitment to prosperity and fairness. Its strategy has deivered a major improvement in revenue coection over the ast few years. Protecting tax revenues, HM Revenue & Customs strategy document, Budget Report Some organisations have taken a strategic approach to understanding and managing the risks of fraud because this: Fits in with good corporate governance. A major eement of good corporate governance is a sound assessment of the organisation s business risks. Fraud risk shoud be managed in the same way as managing any other business risk and shoud therefore be approached systematicay at both the organisationa and operationa eve. Figure 3 shows exampes of how departments and agencies have reduced externa fraud and Figure 4 provides the main eements of a strategy to tacke externa frauds. Figure 3 Exampes of how externa fraud has been reduced In the Department for Work and Pensions estimated that fraud against Jobseeker s Aowance, Income Support and Pension Credit has faen from 900 miion to 430 miion since a reduction of just over 50 per cent. In the 2008 Budget report, HM Revenue & Customs estimated that the set of strategic measures introduced to protect revenues over the previous 5 years had reduced tax osses in priority areas VAT, the main excises, the main direct taxes and Nationa Insurance Contributions by over 5 biion a year. Figure 4 The main eements of a strategic approach to tacking externa fraud Heps with deveoping a range of measures which appy proportionate and we targeted pressure at a eves of the probem. Can hep achieve a cost effective approach in tacking fraud by focusing on areas of greatest risk and where efforts may have the greatest impact. A strategic approach can provide a rationa and robust basis in bidding for additiona resources to tacke fraud. Set targets and monitor performance Strategic approach Assess the size of the fraud threat Can be a hepfu way of communicating to staff what the organisation is trying to do and what is expected from them. Some organisations have aso pubished their strategies as a way of informing the pubic that they have a we thought out approach to tacking externa fraud. This can aso send a deterrent message to potentia fraudsters that they are unikey to succeed in attempts to commit fraud against the organisation. As exampes, HM Revenue & Customs, the Department for Work and Pensions and the NHS Counter Fraud Service have pubished strategies. Focus resources on the most effective anti-fraud measures Assign responsibiities for tacking fraud Understand the types of risk: Who? How? When? Why?
12 12 Good practice in tacking externa fraud Understanding and managing the risks of fraud 1.2 In taking a strategic approach, some departments and agencies have taken an across the board approach to ooking at externa fraud, and some have ooked at individua fraud risks and produced a strategy for each. Others tacke fraud within the context of an overa strategy to combat osses from a types of non-compiance. The overa compiance approach recognises that there is a oss continuum ranging from inadvertent customer error at one end of the spectrum to fraud at the other with shades of grey in between A of these approaches can be equay vaid depending on a department s circumstances and the stage they are at in deveoping their approach (Figure 5). However, a common feature is that the departments and agencies deveop fraud risk assessment toos to identify the fraud risks, their ikeihood and impacts, and how to manage them. These toos need to be reviewed reguary to assess whether they remain appropriate or require updating to respond to the threat from new fraud risks. Figure 5 Exampes of counter fraud strategies The Department for Work and Pensions has deveoped a counter fraud strategy for a wefare benefits. First set out in 1999, the strategy proposed action on four fronts: Getting it right aiming to get benefit payments correct from day one; Keeping it right ensuring payments are adjusted as circumstances change; Putting it right detecting when payments go wrong and taking prompt action to correct them with appropriate penaties to prevent a recurrence; Making sure the strategy works by monitoring progress, evauating the strength of preventive measures and adjusting them in the ight of experience. The Department seeks to ensure that their goas of supporting peope in their efforts to find work, whist providing appropriate financia support where necessary, are not compromised by their efforts to prevent frauduent abuse of the benefits system. The NHS Counter Fraud Service s strategy consists of seven objectives: the creation of an anti-fraud cuture; maximum deterrence of fraud; successfu prevention of fraud which cannot be deterred; prompt detection of fraud which cannot be prevented; professiona investigation of detected fraud; effective sanctions where fraud is proven; redress for money defrauded. HM Revenue and Customs approach to tacking fraud has a number of key components: the deveopment of reiabe estimates of the size of tax osses as far as possibe; estabishing the nature and economics of the activity and behaviour that cause the osses, through the anaysis of inteigence and other data; a comprehensives set of responses based on: 1 Support: buiding services that are taiored to the needs and circumstances of taxpayers; 2 Prevention: ensuring that basic processes and design make the system as secure as possibe from fraud and avoidance; 3 Identifying and tacking those who set out to obtain an unfair tax advantage: using improved risk assessment and checks, with sanctions as appropriate taiored to behaviour. Monitoring effectiveness against key outcomes to measure the success of the strategies.
13 Good practice in tacking externa fraud Understanding and managing the risks of fraud 13 Assessing the scae of the threat It wi never be possibe to measure 100 per cent of fraud; there wi aways remain undiscovered fraud. But better measurement is crucia to a propery designed and effective strategic response to fraud and to supporting better management of fraud risks. Fraud Review: Fina Report 1.3 Assessing the scae of oss from fraud is an important first step in deveoping a strategy for tacking externa fraud. An estimate highights the scope for potentia savings which can then hep to determine the reative priority that shoud be given to tacking fraud in the context of a the other cas on an organisation s resources. Such estimates then estabish a baseine against which performance can be judged. If repeated at intervas, estimates can hep an organisation assess how we they are doing and whether the threat is changing. There may be circumstances where an organisation decides it is not practicabe to produce overa estimates. Nevertheess they may be abe to use a range of techniques such as carrying out in-depth research into an area where fraud is suspected to gain a better understanding of the scae and nature of the threat (Figure 6). Figure 6 HM Revenue & Customs approach to measuring taxpayer compiance Where it is not possibe to produce reiabe estimates of the amount of tax ost to fraud HM Revenue & Customs may use the foowing techniques: audit based studies random enquiry programmes to provide estimates of noncompiance and to faciitate research into understanding the risks of non-compiance in specific taxpayer and customer groups; modeing techniques appied to compiance data to expain or predict taxpayer non-compiance. 1.4 Some may say that: It is too difficut to produce estimates of fraud and that it is not worth attempting to do so; The resources used to produce an estimate coud be better used on tacking fraud, for exampe, by carrying out more investigations. These issues are deat with beow. Producing reiabe estimates 1.5 A number of departments have produced estimates of fraud or osses from fraud and error. For exampe, HM Revenue & Customs has produced estimates of overa osses on VAT and of particuar types of oss such as missing trader fraud. This work is described in two documents Measuring Indirect Tax Losses 2007 and Deveoping Methodoogies for Measuring Direct Tax Losses which are avaiabe on the HM Revenue & Customs website. 1.6 Departments have used operationa research and statistica methods to produce such estimates. Two main methods used are statistica modeing and samping. Statistica modeing 1.7 Statistica modeing has been used to produce overa estimates of fraud or oss notaby on revenue activities. This invoves comparing eves of actua receipts or expenditure with the tota eve of receipts or expenditure that might be expected using other sources of data on the eve of activity under review (Figure 7). Figure 7 Exampes of statistica modeing Estimated evasion rates by the BBC on the teevision icence fee are cacuated using a statistica mode. In summary, the mode estimates the eve of evasion by subtracting the number of icences currenty in force from the estimated number of properties for which a icence shoud be hed. Repeating the modeing process at reguar intervas has shown an overa downward trend in the evasion rate in recent years with the atest figures showing a rate of 5.1 per cent for HM Revenue & Customs produce a top-down estimate for osses on VAT. This entais comparing the tota eve of expenditure in the economy that is theoreticay iabe for VAT with actua VAT receipts and assuming that the difference represents the tota revenue oss. The theoretica tax iabiity is a goba measure based mainy on data from the Office for Nationa Statistics. Bottom up estimates can be used in combination with the top eve estimates as a means of vaidating the eve of osses. Methods to produce bottom up estimates incude surveys and use of administrative and operationa data.
14 14 Good practice in tacking externa fraud Understanding and managing the risks of fraud 1.8 Points to consider for statistica modeing are: The data required may be incompete. The mode may use therefore a number of assumptions which mean that the resuts are subject to a margin of error. It is important to take this into account when making decisions on actions to reduce osses. Other work may be needed to give an insight into those committing the fraud or the type of action that might deter them. This may incude more in depth modeing work (see Figure 12 on the BBC). Further research may be needed into the causes of increases or decreases in the eve of osses and the extent to which this is due to anti-fraud measures impemented. Samping 1.9 Estimates of oss can be generated by checking a representative sampe of cases to see whether fraud is invoved, and extrapoating the resuts to the whoe popuation to estimate the tota eve of fraud oss in the area of expenditure or revenue (Figure 8). When checking individua cases it can be difficut to determine whether any discrepancy is due to fraud or error (reckessness, careessness or ignorance) because of the judgements that need to be made. In its work in estimating fraud in individua expenditure streams, the NHS Counter Fraud Service is deciding whether fraud is invoved by using the concept of fraud and burden of proof appicabe in civi aw that is whether someone knowingy or reckessy obtained resources to which they were not entited and the baance of probabiity. This is to ensure that a behaviour which can egay be determined as fraud is measured. Figure 8 The Driver and Vehice Licensing Agency use samping to estimate the amount of evasion of Vehice Excise Duty The Department for Transport commissions a roadside survey of over one miion passing vehices annuay in June to identify unicensed vehices. Statistica weightings are then appied to the observed evasion rate in traffic to cacuate the estimated evasion in the overa stock of vehices, and then the estimated Vehice Excise Duty revenue oss. The resuts are used to report performance against targets for the Department and the Driver and Vehice Licensing Agency A key consideration in producing an estimate of fraud oss on an area of expenditure/revenue is the eve of accuracy required. A greater degree of precision produces more reiabe estimates (essentia for assessing any rea change in the eve of fraud over time) but at additiona cost because the size of the sampe required increases (Figure 9). Figure 9 Generating precise estimates of fraud requires arger sampe sizes and incurs higher measurement costs The degree of precision of a fraud oss estimate depends on: the size of the sampe checked. For exampe, the NHS Counter Fraud Service set sampe sizes so that they can determine the eve of fraud in each area to within to +/- one per cent; whether the sampe is stratified according to the type of risk; use of skied reviewers abe to detect where fraud has occurred, the amount of oss suffered and the nature of the fraud; the quaity contro and vaidation arrangements to ensure the review process is correcty and consistenty appied.
15 Good practice in tacking externa fraud Understanding and managing the risks of fraud For some organisations, producing a nationa estimate may be sufficient. In others, it may be necessary to produce estimates which are aso broken down by region. This wi have important impications for the samping exercise and its costs, as separate sampes within each region increase the tota sampe that must be checked (Figure 10). Figure 10 Generating regiona estimates of fraud oss invoves arger sampe sizes Where a department needs estimates of the fraud oss within each of its regions, it wi have to take a separate sampe of transactions in each. To produce estimates that are sufficienty precise to revea any important differences between regions in the rate of fraud oss requires the samping of a much greater tota number of transactions than when generating ony a nationa eve estimate. Regiona samping wi revea which regions suffer the greatest and owest eves of fraud oss and whether there are significant changes between regions over time. The Department for Work and Pensions random sampe of over 40,000 cases a year covered each of neary 100 districts, three times a year, spit between each type of benefit caimant. Costs of estimating fraud 1.12 As indicated above, the costs of measurement vary according to: the frequency of the estimating exercise; the sampe sizes checked; the work invoved in checking each case samped; the work invoved in vaidating the resuts For smaer departments and agencies, a one-off estimate or one produced at intervas may be sufficient. Accepting ess precision by using smaer sampe sizes may be one way forward. Athough the resuts wi be ess reiabe, these wi indicate whether further work is desirabe. Others may require continuous measurement exercises to produce ongoing estimates of fraud oss. Whie this invoves greatest cost, it does mean that a department is abe to track changes over time in the estimated fraud oss, and the types of fraud committed. Figure 11 outines the Department for Work and Pensions continuous measurement approach. Figure 11 The Department for Work and Pensions continuous measurement approach The Department for Work and Pensions spent over 9 miion in as part of their ongoing measurement of fraud and error in Income Support, Jobseeker s Aowance, Pension Credit and Housing Benefit. The atest estimate shows that for the period October 2006 to September 2007, fraud osses were 210 miion on Income Support, 60 miion on Jobseeker s Aowance, 110 miion on Pension Credit and 140 miion on Housing Benefit. Tota osses across a benefits were around 800 miion or 0.6 of expenditure. The Department produces estimates of the incidence and magnitude of fraud, customer and officia error in these benefits every six months. The Department has carried out a programme of reviews for other benefits such as Disabiity Living Aowance produced in 2005 and Incapacity Benefit in The Department s aim is to produce snapshot estimates of the amount fraud and error. The size and risk of potentia oss determine which benefits are reviewed and how frequenty.
16 16 Good practice in tacking externa fraud Understanding and managing the risks of fraud 1.14 Costs can be spread over severa years by carrying out a roing programme of estimates. For exampe, the NHS Counter Fraud Service has set out to measure fraud across the Primary care services incuding the pharmaceutica, optica and denta services. Three exercises have been carried out across each of these areas. Exercises are aso underway ooking at fraud within the procurement process. Another aternative is to carry out a oneoff measurement exercise (with possibe foow up severa years ater) to confirm the significance of the eve of fraud. This can be a usefu approach where the eve of fraud is thought to be ess significant. Understanding the types of fraud risks 1.15 A department or agency wi be unabe to deveop an appropriate response based ony on the estimates of fraud. They aso ideay need to know: the types of fraud perpetrated against them, for how ong and the financia oss invoved; who the fraudsters are, their characteristics and behaviours, how often they carry out the frauds, which types of frauds they commit, how they do it, and whether they are opportunistic or organised Examination of detected fraud cases either from investigation or from the random sampes of cases examined to produce estimates of fraud oss, can give an insight into these (Figure 12). Larger departments which face serious threats aso have inteigence anaysts and/or commission research into the threats. At the other end of the spectrum, there are some departments and agencies that may have few or no recent instances of externa fraud. Checking a sampe of cases, or carrying out research into the possibe threats, wi hep to confirm whether the risks from fraud are ow. Figure 12 Exampes of work organisations have done to understand and manage fraud risks faced The BBC has commissioned market research programmes, over a number of years, which have shown that evaders of the teevision icence fee vary both in their behaviour and their attitude to the icence fee. Overa the research indicates that non-payers are more ikey to be younger peope and ess we off. They aso tend to regard the icence as unfair or just a tax you get nothing for. Further research was carried out to mode the evader popuation by matching evasion rates for postcode areas with commerciay avaiabe data on income and ife stye. This information heped to identify the characteristics of those most ikey to evade. Areas with high evasion rates are most ikey to have, for exampe, a higher than average proportion of younger peope, ow income househods, students and singe parent famiies. The Department for Work and Pensions coects information about the types of fraud, the characteristics of the customers and the way the fraud and customer errors are detected. These hep the Department target resources to detect and prevent fraud. For exampe, the Department estimates that the most common benefit frauds in the period October 2006 to September 2007 were caiming as a singe person, but iving with a partner as husband and wife ( 92 miion); fraud committed by customers iving abroad ( 93 miion) and undecared earnings ( 77 miion). The Department recognises that these frauds are high risk, and it targets investigations at this type of fraud. For Income Support, the Department generate separate estimates of fraud and error for each of their three main cient groups Lone Parents, Pensioners and Disabed peope/others. The measurement reviews aso provide estimates of the main causes of fraud and error and the proportion of benefits overpaid due to each cause. For exampe, this enabed the Department to estimate that in the period October 2006 to September 2007 the faiure of one parent caimants to discose they were iving together with a partner was the cause of neary haf of the amount overpaid for this reason across a benefits. HM Revenue & Customs uses centraised risk assessment and anaysis of buk third party data to identify groups posing a high risk of understating taxabe profits. It aims to deveop campaigns to everage the effects of its anti-fraud work beyond the imited poo that can be directy investigated on a one to one basis. The resuts show that its approach has reduced understated income.
17 Good practice in tacking externa fraud Understanding and managing the risks of fraud 17 Focusing resources on the most effective anti-fraud measures 1.17 There is no singe package of measures which can be appied universay by departments and agencies to tacke fraud. Measures need to be taiored to the type and size of threat faced. In deciding which measures to use and the extent to which to use them some departments have assessed the savings that coud be achieved by targeting their resources in a better way. Savings coud arise in three ways: The direct effects from recovering amounts defrauded. Where the measures invove reaocating resources into existing activities the department can ook at the current costs/ savings as a basis for estimating the return from increasing the eves of counter fraud activity. Where new measures are proposed, it is good practice to piot these beforehand to test and refine their operation, assess their ikey effectiveness and the type of savings that can be achieved. The preventive effect, through improved future compiance from those previousy detected committing fraud. For exampe, HM Revenue & Customs assumes that the VAT yied wi increase immediatey from businesses previousy detected committing VAT fraud, but that this additiona yied wi graduay reduce if no further checks are subsequenty made. The deterrent effects on others that become more compiant as they earn of the greater efforts being taken to crack down on fraud. In practice it can be very difficut to assess these deterrent effects with any accuracy and Departments do not aways seek to do so. Setting targets and monitoring performance 1.18 Some departments have set targets to stabiise or reduce fraud over a period of time (Figure 13). Focusing targets on the overa eve of fraud or oss is a good way of assessing performance, and generay a better measure than the amount of fraud or oss detected. The atter is difficut to interpret if the fu scae of fraud or oss is not known. Other measures of performance are usefu compements to estimates of tota fraud oss, such as changes in regiona eves of oss, the cost of tacking fraud compared to the return obtained and the rate of recovery of detected frauds. Figure 13 Exampes of Departmenta targets to reduce fraud and error The Department for Work and Pensions has a strategic objective to pay our customers the right benefits at the right time. Supporting this objective is the aim to drive down eves of fraud and error to deiver a reduction in benefit expenditure overpaid to 1.8 per cent and underpaid to 0.7 per cent by HM Revenue & Customs has a strategic objective to improve the extent to which individuas and businesses pay the tax due and receive the credits and payments to which they are entited. Key outcomes are: increase tax and nationa insurance contributions actuay received reative to the amounts that shoud be received; reduce the eve of incorrect tax credit payments as a resut of error and fraud as a percentage of finaised entitement; and maintain take-up of entitements to tax credits and chid benefit.
18 18 Good practice in tacking externa fraud Understanding and managing the risks of fraud 1.19 Performance data on outcome targets may not be avaiabe unti ong after the period measured due to the amount of work invoved in samping cases, checking, cacuation and vaidation of the resuts. To monitor performance in-year, managers may rey on output resuts to indicate whether the outcomes are ikey to be achieved. For exampe, managers may monitor: the resuts of operationa checks on transactions; fraud investigation activity and outcomes (see Part 3, Figure 31); number and types of sanctions imposed (see Part 3, paragraph 3.39 and Figure 39); rate of recovery of defrauded amounts detected (see Part 3, paragraphs ). Responsibiities for tacking fraud 1.20 The responsibiity for tacking fraud and managing fraud risks start at the top of the organisation within the senior management board. At this eve, ownership of fraud risks is assigned and responsibiities aocated for managing individua fraud risks. Athough everybody in the organisation has a roe to pay in tacking fraud (paragraphs 2.5 to 2.7), some departments have aso set up centra units or foca points with responsibiity for tacking externa fraud. These have coordinated work on deveoping the department s strategies ensuring their impementation, monitoring resuts and providing advice and guidance. Fraud can be a moving target as the scae and nature of the risks change, so that reguar monitoring of the situation is needed to identify and respond to new threats. A foca point for tacking fraud can hep. HM Revenue & Customs, Department for Work and Pensions and NHS Counter Fraud Service each have centra units (Figure 14). Where fraud numbers and osses are significant, departments aso have teams of professionay trained investigators or enforcement officers dedicated to investigating cases of fraud. Figure 14 Exampes on how departments have assigned responsibiities The NHS Counter Fraud Service remit To have overa responsibiity for a work to counter fraud and corruption within the Department of Heath and the NHS with particuar priority for countering fraud in Famiy Heath Services. The Department for Work and Pensions The Fraud and Error Strategy Division is a centra unit which advises on fraud poicy. Cases sent for investigation are either referred to the Fraud Investigation Service or Customer Compiance, both of which sit within Jobcentre Pus. The Fraud Investigation Service investigates potentia frauduent attacks against a benefits made by the Department or administered on its behaf. It concentrates on those cases that are ikey to resut in a sanction. Customer Compiance was set up in Apri 2006 to dea with cases where a fu crimina investigation is not deemed appropriate but where action is needed to: identify eves of incorrectness; put it right and recover any overpayment; and ensure future compiance. The approach invoves a robust face to face interview with customers in receipt of benefit. The approach is intended to target investigation resources more efficienty on deaing effectivey with the cases of fraud most ikey to resut in a crimina sanction Regardess of the arrangements in pace, departments and agencies need to ensure that someone is fuy responsibe for ensuring that the pans for tacking fraud are impemented in the way intended and that sufficient resources are in pace. That individua shoud aso be responsibe for performance against targets. There is no point in having a we thought out strategy if it is not then put into effect.
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20 20 Good practice in tacking externa fraud Xxxxxxxxxxx Part 2 Deterring and preventing externa fraud 2.1 Deterrence invoves convincing potentia fraudsters that frauds against a department or agency are not worthwhie. Prevention measures aim to stop frauds entering departments systems. Effective mechanisms for deterring and preventing fraud are essentia eements in combating fraud. Reaisticay however, some fraudsters wi never be deterred and not a frauds wi be prevented. In these cases, prompt detection and professiona investigations are needed (Part 3). Measures to deter and prevent fraud can be costy and departments need to ensure they are we designed for greatest effectiveness. Figure 15 sets out the main eements for deterring and preventing fraud. In ooking at this Part of the guide ask yoursef whether your organisation: seeks to infuence customers and the wider genera pubic s attitudes to fraud; sends a strong message to potentia fraudsters that they are ikey to be caught and sanctions wi be imposed. For exampe are there press reeases on peope/businesses prosecuted and are there any targeted or wider campaigns regionay or nationay? considers the fraud proofing of new programmes; ensures fraud contros are appied consistenty and their use is monitored. What is the roe of Interna Audit in this? considers strengthening contros where new fraud risks appear or where fraud starts to escaate; has an anti-fraud cuture where staff understand the standards of conduct required and their persona responsibiities in preventing fraud; appying contros and reporting cases of suspected fraud.