As the government battles to recoup some of the mammoth costs incurred as a result of coronavirus, public finances are under fire from all quarters. The double whammy of astronomical spending to fund the public health response and plummeting tax revenues have had profound economic consequences: the OBR expects 2020 economic output to be 11% lower than it was in 2019, marking the biggest annual contraction in over 300 years.
It’s an economic outlook that makes the scale of public sector procurement fraud all the more galling. According to the most recent Annual Fraud Indicator, compiled by Portsmouth University’s Centre for Counter Fraud Studies (CCFS) in partnership with accountancy firm Crowe, procurement fraud across the public sector deprives the public purse of an estimated £12.3bn a year out of a total public sector fraud cost of £40.3bn. Take tax fraud out of the equation and procurement fraud represents around half of all public sector fraud by value.
No explicit strategy
Despite the astronomical scale of the problem, and the undeniable and largely unspoken impact on public services, it’s a problem that grows by the year and for which the government has no explicit strategy, says Jim Gee, CCFS chairman and a Visiting Professor. Gee is also a Partner at Crowe and National Head of Forensic Services at the firm.
“The truth is, there isn't a proper strategic initiative to tackle fraud in the public sector - that died when the National Fraud Authority was abolished in 2014,” Gee told ICAEW Insights.
Rishi Sunak’s £100m Budget pledge for a taskforce to tackle COVID fraud may have hit the headlines, but Gee adds that this ignores the ongoing situation of money defrauded from the totality of public expenditure in normal times.
Scale steadily increasing
Procurement fraud covers a wide range of misdemeanours, including the awarding of contracts in exchange for bribes, individuals personally benefiting from corporate supply contracts, the submission of false or duplicate invoices and goods and services that are under-delivered or not delivered at all. In practice though, most of the procurement frauds that occur are high-volume, low-value transactions that are very difficult to detect.
What’s also true is that the scale of fraud has increased steadily since the 2008 recession and data from the Office for National Statistics suggests that the pandemic has resulted in an even bigger spike in numbers. Individuals under financial pressure, remote working capabilities, temporary relaxation of controls and risk processes - whatever the causes, the reality is, no one really knows the true extent of the problem.
However, a failure and reluctance to quantify losses makes procurement fraud an even harder nut to crack. “The other thing about fraud is it's not a static risk. It mutates like a virus, so it's very difficult to detect,” Gee says. Until public sector organisations know the extent of the problem, there's no incentive to do anything about it and the resources committed to tackling procurement fraud will remain woefully inadequate, he warns.
Investment to tackle fraud ‘a no brainer’
Gee points to the US where under the Improper Payments Elimination and Recovery Act, public sector agencies are required to publish in their financial reports the total cost of fraud and error every year. “If there were a credible, measured cost of fraud, there would be a lot more pressure on politicians to reduce it. It would be a lot better funded and the cost of fraud would reduce. The truth is that what is being done isn’t proportionate to what is lost. At the moment, they can pretend that it isn't there.”
Admittedly, justifying any discretionary expenditure in the current political climate is an unenviable task. However, the return on investment makes the decision a no-brainer, Gee says. As the former CEO of the NHS Counter Fraud Service, the efforts of Gee’s team helped slash the cost of fraud by 60% over eight years, delivering savings of £811m, 12 times the £67m cost of its programmes.
Gee advocates a strategy that focuses on prevention, detection and suitable sanctions for perpetrators underpinned by solid communications. “You need a strong anti-fraud culture. There’s always an honest majority but all too often it's passive, not active. It’s important to mobilise those people so that peer group pressure is strong, and you send out a strong message that fraud is unacceptable.”
Meanwhile, efforts to deter and shrink the dishonest minority hinge on communicating messages about the likelihood of being detected, the probability of professional investigations that will uncover evidence, and the certainty of sanctions that will be imposed.
While all efforts should be made to identify and eliminate weakness in processes and systems, certain warning signs can help you detect fraud. Here, data science and data visualisation techniques that flag up anomalies are a powerful weapon in organisations’ anti-fraud armoury.
“Once detected, you need a professional investigation, you need to apply sanctions - not just criminal sanctions, but there may be civil action to recover the money, disciplinary action in terms of employment, or maybe contractual action against the supplier. Finally, you need to do your best to get the money back.”
Those public sector organisations that continue to see fraud mitigation as an overhead are missing a trick, Gee says. “If you reduce fraud, you have more money to invest in better public services, then it’s not just about morality or ethics but there’s a business case to do this.”
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