Countering Fraud in Social Benefit Programmes

1. The case for the prevention of external fraud

1.1. What is the issue?

Social welfare expenditure represents 20 to 30 per cent of overall government spending in many OECD countries (OECD, 2019[1]). Fraud in social benefit programmes (SBP) diverts funds away from beneficiaries and negatively affects vital services. Calculating the cost of SBP fraud is a difficult task, but country-level data suggest the amounts can be significant. In 2014, the French government detected SBP-related fraud worth an estimated EUR 425 million (French Government, 2015[2]), and in 2015, the United States Medicare Fraud Control Units recovered EUR 647 million in defrauded amounts from private providers (HHS Office of Inspector General, 2016[3]).

For the purpose of this paper, the term “social benefit programmes” refers to all government programmes that make available some kind of entitlement, whether it be a service, product or financial allowance to a beneficiary. Such programmes include tax credits and subsidies for children, unemployment benefits, subsidised or free housing, food cards (stamps), pensions, and subsidies or rebates for medical goods and services. Some SBPs involve direct transfers of money to recipients, such as pensions, unemployment benefits or disability pensions, or transfers of goods, such as housing and medical equipment. In other cases, SBPs subsidise companies and organisations that provide goods and services to beneficiaries at lower costs.

Fraud in SBPs causes more than financial losses. Fraudulent schemes can deprive people of adequate care, services and products. This can have particularly grave consequences in different sectors, such as health and social security. For instance, in Sweden, a so-called “personal assistance” scam against the Social Insurance Agency left people living with disabilities without care, while a company employed fictitious caretakers and defrauded the Swedish government by billing for work that was never performed (Radio Sweden, 2014[4]) (Allum and Gilmour, 2019[5])1. Furthermore, fraud in SBPs can compromise citizens’ trust in government. Government integrity, defined as perceptions of the extent of both high-level corruption and low-level corruption, are the first and second most important determinants of trust in government and the civil service, respectively. Integrity is a more important determinant than many other factors, such as government reliability, responsiveness, and openness (Murtin et al., 2018[6]). While corruption is not the focus of this report, these findings are instructive. Combating fraud in SBPs is likely to help governments preserve trust while providing more effective service delivery and minimising financial losses. A lack of public integrity, even if only perceived, undermines a government’s legitimacy and citizens’ trust and at worst, their trust in the system overall.

The economic downturn in the wake of the COVID-19 crisis brings this obligation to the fore, as governments bolster SBPs as part of economic stimulus packages. For example, the European Commission has proposed a EUR 750 billion recovery instrument, Next Generation EU, which will prioritise the actions needed to ensure Member States’ recovery in the aftermath of the crisis, and help workers keep their incomes and businesses to stay afloat. In Australia, the government announced a AUD 130 billion JobKeeper Payment scheme to help keep people in jobs in anticipation of the significant economic impact of the crisis. This is not the case everywhere. Many SBPs have experienced a drastic rise in caseloads because of the COVID-19 crisis, yet many are without an adequate increase in dedicated resources. The circumstances related to COVID-19 exacerbate existing risks, and create new challenges with implications for accountability and integrity measures.

Ensuring the integrity and accountability of SBPs is critical, in times of crisis or not. The remaining sections in this chapter provide an overview of external fraud in SBPs. The first section recognises the synergies between measures to prevent fraud and those to detect, while emphasising the additional value of the former. The chapter then addresses fundamental issues of definition, including that of “external fraud” for the purpose of this report. Finally, the chapter ends with a section that notes several critical “conditions” for fraud prevention that deserve a brief mention. This chapter sets the stage for the rest of the report, which explores governments’ initiatives and tools to prevent and detect external fraud in SBPs. The report draws inspiration from the OECD Recommendation of the Council on Public Integrity and related international standards, as well as insights from OECD member and partner countries. The target audience of the report is policy makers and practitioners, e.g. programme managers, auditors, risk managers and anti-fraud professionals.

1.2. Preventive measures can result in higher returns on investment than sanctions

Governments are making progress in countering fraud in SBPs in an era of constantly evolving risks and tactics by designing tools and techniques to leverage data in their prevention efforts. To make sure that progress is sustainable, governments can strengthen their approaches further by addressing common challenges, which include:

• over-reliance on prosecution mechanisms and ‘pay and chase’ models that are costly and inefficient

• inaccurate or incomplete measurement of fraud

• limited risk-based approaches and evaluation of control activities

• inadequate research on behavioural aspects of fraud and what motivates perpetrators, and therefore on effective deterrence strategies

• lack of strategic thinking behind the use of data and application of data analytics tools in SBPs.

At times, public organisations rely on detection mechanisms rather than preventive controls. Both are vital, and prevention and detection mechanisms often inform each other. For example, the results of investigations or data mining may lead to changes in control activities. However, some research suggests that preventive controls yield greater cost-benefits compared to investigations and prosecutions following detection. For instance, a cost-benefit assessment of strategies for countering fraud conducted by the UK National Audit Office estimated that for every GBP 1 spent, sanctions and penalties saved GBP 1.60, whereas preventive controls saved GBP 11.45 (National Audit Office, 2015[7]).

When governments rely on “pay and chase” models, they disburse entitlements and focus their anti-fraud strategies on investigations, prosecution and recovery (i.e. the “chase”). Given the nature of SBPs and the fact that they are vital for societal wellbeing, cases of fraud in SBPs draw considerable media and public attention. This visibility puts pressure on governments to produce results, usually in the form of investigations and prosecutions. While these are essential facets of an effective anti-fraud approach, they alone do not address the root causes of external fraud in SBPs or vulnerabilities in the control environment that allow fraud to occur in the first place. Instead, public organisations responsible for SBPs can adopt more cost-effective approaches that include comprehensive prevention and detection control activities to mitigate fraud risks.

1.3. What is “external fraud”?

Legal definitions of fraud can vary widely by country. In France, for example, the Social Security Code does not precisely define the elements of fraud, although it does refer to “abuse.” By contrast, the French Labour Code defines working illegally as fraud, which has implications for unemployment benefits. Canadian legislation divides fraud into two categories: “intentional fraud” and “unintentional fraud.” Unintentional fraud occurs when a recipient supplies incorrect information without the intention to deceive and obtain additional benefits (National Audit Office, 2006[8]). In Sweden, the government assumes its officials have a responsibility to ensure recipient data is accurate, putting the onus on the state as opposed to the beneficiary. When governments overpay recipients, even if this is because a recipient knowingly gave misleading data about income, the public organisation assumes it is partly responsible because of its ineffective controls. The organisation considers such acts to be error rather than fraud. By contrast, governments in countries such as the United Kingdom and the United States are more likely to place the onus for providing fully accurate data on the individual recipient. While legal definitions of fraud vary, common elements among them include: 1) a deliberate act or omission; 2) intending to deceive; and 3) intending to obtain benefits.

External fraud in SBPs, for the purpose of this report, is considered to be fraud perpetrated by individual beneficiaries or private providers of goods and services entitled to subsidies or rebates from an SBP. People often refer to this type of fraud colloquially as “welfare fraud” or “benefits fraud.” In general, external fraud involves overpayments of money to recipients and is intentional and claimant-driven, as depicted in Figure ‎1.1. This report does not focus explicitly on improper payments, which includes fraud, waste, abuse and error, including both overpayments and underpayments. For the latter, beneficiaries are not necessarily setting out to cheat the system. They could have simply made an error in their application, or the organisation responsible for the SBP may have made a mistake when processing their application. However, many of the prevention and detection mechanisms for external fraud in SBPs discussed in this report are applicable to improper payments.

Figure ‎1.1. Causes of payment discrepancies in social benefit programmes

Source: Adapted from (van Stolk and Tesliuc, 2010[9]).

Why is it important to consider external fraud as a distinct risk from internal fraud? The way in which public organisations deal with external fraud differs from how they approach internal fraud. For example, shaping organisational culture, setting the tone-at-the-top regarding fraud and corruption, ensuring separation of functions, managerial review of staff, and controls around recruitment are all essential for guarding against internal fraud. However, such controls are not sufficient for preventing and detecting fraud that is committed by an external actor.

1.4. Conditions for successful fraud prevention

For anti-fraud measures to succeed, at least three key conditions need to be in place, in line with the OECD Recommendation of the Council on Public Integrity: 1) strategic vision and commitment to implementing anti-fraud measures; 2) administrative capacity to undertake key fraud prevention, detection, and evaluation activities; and 3) public awareness and support for anti-fraud approaches.

Strategic vision for tackling fraud in SBPs can be communicated through anti-fraud initiatives and strategies, but not solely. Governments need to show commitment to prevention, and public organisations responsible for delivering SBPs need to develop implementation plans that provide clear and practical measures to fulfil the objectives of their anti-fraud strategies.

Ensuring that public organisations have the administrative capacity to carry out fraud prevention and detection activities, as well as implement adequate controls, is vital for countering fraud in SBPs. This is particularly pertinent given the availability of data analytics tools for fraud prevention and detection, an area that this report delves into more deeply in chapter ‎3. To take full advantage of data and the opportunities that new tools provide, it is essential that governments invest in skills development and resources. When implemented properly, these tools can simultaneously ease the administrative burden for public organisations and improve service delivery to beneficiaries.

Experience from OECD countries suggests that public awareness and support for anti-fraud approaches play a significant role in governments’ adoption of anti-fraud strategies, as well as in the detection of fraud cases through reporting. As such, it is vital that governments design mechanisms to communicate and engage with the public around the issue of SBP fraud.

Note

← 1.  In 2015, in the Swedish town of Södertälje, 34 people were found guilty of defrauding Sweden’s Social Insurance Agency. The scam involved a private company that had a contract to supply caretakers to assist people with severe disabilities and illnesses. The company employed fictitious caretakers and submitted falsified time report, billing the government for work never performed. The fake employees also qualified for allowances from the welfare system, including sick leave and parental leave. Overpayments totalled ^EUR 2.7 million but the trial, which took place over several years in three courts, costing the government EUR 6.6 million.