Fraud and Corruption in Public Services

Peter Tickner

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781032838540
• eBook ISBN: 9781351566612
• Topic: Business
• Subtopic: Financial Law
• Index: Business

Fraud, corruption and bribery in and around public services have become an increasing concern in recent years. The reported level of fraud and corruption affecting the public sector has remained unacceptably high despite numerous national and international initiatives intended to tackle these crimes and their consequences. Fraud and Corruption in Public Services is a definitive, practical guide to the diverse risks that arise in central and local government. There is guidance on civil and criminal law around fraud, bribery and corruption as well as the national and international governmental measures and initiatives for countering this form of criminality. Most importantly of all, the book offers advice, practical examples and strategies for preventing and combating fraud, bribery and corruption. The text is readable, well-informed and intensely practical; illustrated throughout with real-life examples from the author's 40 year career.

PART I
Fraud and Corruption in Context

Chapter 1
Fraud and Corruption Affecting the Public Sector

There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.

Benjamin Franklin (1706–1790)

We hang the petty thieves and appoint the great ones to public office.

Aesop (620–560 BC)

Background to the Book

I find myself instinctively drawn to Aesop’s cynical view of public office, although the vast majority of public servants I have met or worked with over a 40-year career were motivated by their sense of public duty rather than a desire to act corruptly. However, whether working in the National Health Service, central government or local government, I have always found that if we looked for signs of fraud or corruption that we would find them. Most of my working career has been spent tackling fraud and corruption in public services, from my early inexperienced days as an external auditor in the NHS through to my last full-time public sector appointment running a fraud investigation branch while Director of Internal Audit at Scotland Yard. Since then I have advised a number of public sector and related bodies in their efforts to prevent and detect fraud and corruption affecting public services.

It is an inevitable by-product of the state machinery even in the most sophisticated and advanced types of government that opportunities exist for malicious, mendacious or opportunistic individuals to defraud the taxpayer. While much of this book covers this sad state of affairs in the context of the UK economy, I have included plenty of food for thought on fraud, corruption and bribery affecting the machinery of state in the US, Canada, India, Australia and New Zealand, as well as other parts of Europe and major economies further afield.

This book is intended to provide a practical guide to the extent of fraud, corruption and bribery against the state, current thinking on appropriate countermeasures, preventative strategies and real case studies of actual crimes, how they are detected and the steps taken to deal with discovered fraud corruption. Wherever possible I will also analyse the successfulness or otherwise of measures taken in each of the identified cases.

Drawing the Boundaries

In the modern world, where the state and the private sector can overlap, it is often hard to draw clear boundaries about what we mean by the public sector. For the purposes of this book, I have chosen to define the boundary of the state that best fits the world that I have known as the public sector in practice. In broad terms, this is from the centre outwards:

1. Central Government – government departments and functions controlled directly by an appointed minister of government, such as a secretary of state.
2. Bodies and functions controlled at arm’s length by central government – Government agencies, sub-departments, non-departmental government bodies and private sector run operations acting as an arm of the state.
3. Local authorities and any services and functions provided by local authorities through part or wholly owned enterprises, such as shared service operations and special purpose ‘vehicles’ – companies set up to run specific local authority services or support functions.
4. Not-for-profit organisations set up to provide services to the community on behalf of central or local government, e.g. housing associations.
5. Private companies and businesses providing a specific service to a group of local authorities, such as payroll, finance, facilities management or security.

All of the above include in their scope any consultants, contractors or sub-contractors providing specific services to that particular department, agency, authority or body for the delivery of public services.

A Quick Refresh on Fraud and Corruption

Most of us have an innate understanding of what we mean by fraud, but much of what we think of as clear examples of fraud official sources or the courts may not define as such. Even with the belated existence of the Fraud Act and the even later Bribery Act in the UK, it is not hard to find conflicting definitions of fraud, bribery and corruption between official and statutory bodies, not to mention the main professions with a legitimate interest in dealing with fraud and corruption. I like to keep definitions as simple as practically possible and as consistent as possible with any relevant criminal legislation. So for the purposes of this book I would suggest the following definitions.

FRAUD AGAINST THE STATE

Any action by individuals or organisations intended to cause a loss to the taxpayer or misuse of state provided funds through false representation, deliberate omission or suppression of information.

CORRUPTION

Actions by more than one party to collude in causing a loss to the taxpayer or misuse of state provided funds through false representation, deliberate omission or suppression of information.

BRIBERY

The suborning of state officials or those representing the state into acts of misfeasance, malfeasance or nonfeasance to cause a loss to the taxpayer, or unfair gain by an individual or organisation against the interest of the state.¹

Legislation

It is somewhat sobering to note that until 2006 there was no official definition of any criminal offence of fraud in the UK. While Scotland had Common Law fraud offences, fraud was not defined and the only Common Law fraud offence in England was (and still is) that of conspiracy to defraud. Criminal prosecutors had to rely almost exclusively on the Theft Acts 1968 and 1978 for their source of definition of criminal fraudulent behaviour. While the US tackled much of fraud in similar fashion and their collective examples were followed by other state systems, particularly in former commonwealth countries and those under UK or US influence for their parliamentary or democratic systems, other state legislators attempted to define criminal fraud in more precise terms.

In civil legislation, generally, the same difficulties of definition have not arisen. Fraud is often referred to in its broader publicly understood context when deciding upon the rights and wrongs of civil actions between organisations or organisations and the public sector. Civil cases are generally decided by solitary judges or panels and are on a balance of probabilities based on the disclosed material available to the judge or panel. At least since the middle ages it has been an axiom of UK legislation (and later of US and Irish legislation, among others) that ‘fraud is odious’ and heavy penalties can be incurred by individuals and organisations found to have fraudulently misrepresented any aspects of a civil action or defence against a civil action to a court. Where such instances come to light, judgements can be re-assessed and those responsible for misleading the courts imprisoned and or fined as well as being ordered to make compensation to any injured party as a consequence of their fraud.

Consequences of a Lengthy Recession and its Aftermath

The current economic climate has had a profound effect on the nature of fraudulent and corrupt activity that affects the public services. Evidence of this can be seen not only in the nature of cases of public sector fraud and corruption that have come to light in recent years but also in the proactive measures that many governments have felt obliged to put in place to reduce or minimise the risk of fraud and corruption against the state. Outside of the UK, the US government during the Obama presidency has from 2010 onwards put through several successive Acts designed specifically to target and reduce error and fraud affecting spending by US public services.

Two key factors are at work following any recession that inevitably lead to more fraud and corruption against the state and therefore the taxpayers of that state. First, during any recession – and particularly a lengthy recession where any recovery is weak or patchy – the likelihood of a private sector organisation that is in any way financially weak going to the wall increases exponentially. This also means that attempts to defraud such organisations are limited by the viability of the organisation. Once it ceases to trade as a separate entity, so, by and large, do the opportunities to defraud the entity as well. Therefore the private sector becomes a less fruitful area for sustained fraudulent activity and that encourages fraudsters and would-be fraudsters to target the one sector that doesn’t ‘go bust’ and generally can be relied upon to pay its bills, the state. Equally, those running private sector organisations that are being squeezed financially or under threat of going to the wall will be more tempted to commit fraud or other acts against any public sector clients.

The second key factor is the effect of a prolonged recession and delayed recovery on the public servants and related organisational employees who provide public services. With a few notable exceptions (such as the catering industry) public servants have generally had less disposable income and lower salaries and fringe benefits (such as healthcare or bonuses) in return for better potential pensions when they retire. While the division between the benefits of being a public sector employee or working in the private sector are no longer so clear cut, public sector employees have felt the effect of government measures to curb public sector borrowing far more directly than the private sector, whether through arbitrary pay freezes or job losses and compulsory redundancies. Public sector workers may feel unable to cope financially or that the action of the state towards its employees has removed any potential loyalty to the state enterprise of which they are part. In such circumstances, where opportunities arise, previously well-behaved or loyal state employees may succumb to temptations of offered bribery or corruption or indeed my feel under pressure to commit fraud in order to make ends meet.

While there have been detailed studies in the UK looking at the levels of fraud against public services, it is too early to draw any scientifically based opinions about the level of fraud during and after the recent recession. All major commentators have however been united in their view that there will have been an increase in fraud and corruption generally during times of hardship. Evidence from earlier recessions suggests that this is the likely pattern and I for one am inclined to that view, for the reasons set out above.

Pressures on Public Officials

In addition to the economic effects of a recession on the personal finances of individual public sector employees, public officials at all levels in the current economic climate can find themselves under pressures as a result of attempts to limit the burden on the taxpayer of the state that can lead to decisions being taken that unintentionally increase the risk and likelihood of fraud and corruption against the state.

At a senior level, decisions to ‘do away’ with a controlling function or reduce the number of supervisors or expensive experienced staff can have unintended consequences, opening the door for potential fraudsters.

At more junior levels, the consequences of reducing employee numbers and cutting out controls that prevented fraudulent activity can lead to a combination of inadequate means available to staff to detect or prevent fraudulent activity against the organisation and inadequate resources to be able to deal effectively with known areas of fraudulent and corrupt activity.

The Risks of Not Getting the Counter-fraud Message Across to Those That Run Public Services

While within central government there has been an awakening in recent years of the risks of fraudulent activity against the state, the work of central government bodies in tackling the problem has had to be offset against a backdrop where the available resources to take adequate and effective measures may be removed by another arm of the state. There is still a tendency for state bodies to act unilaterally on such matters and therefore the measures taken by one body, or even different arms of the same body, can be counterproductive in the fight against fraud and corruption.

It is quite revealing to see the awakening of awareness in the first UK government minister given responsibility to set up central government’s Counter Fraud Taskforce. In the June 2011 foreword to the joint National Fraud Authority/Cabinet Office paper ‘Eliminating Public Sector Fraud’, the minister concerned, Francis Maude, noted:

Since establishing the Counter Fraud Taskforce in October 2010, I have been alarmed at the prevalence of fraud we have discovered across government. It has numerous guises such as overpayments to suppliers, fraudulently claiming benefits or false applications for public grants. HM Revenue and Customs (HMRC) estimates that there is at least £15 billion each year not paid to the Exchequer due to tax evasion. The National Fraud Authority estimates that £2.4 billion is lost to procurement fraud and £515 million is lost to grant fraud each year … Local government loses £2.1 billion each year to fraud. That means 3 pence in every pound spent by the government goes to people who should not have it.

This is simply not good enough. No business in the world would put up with this scale of fraudulent activity, but its continuance is symptomatic of the situation whereby, for far too long, no one has concentrated on how to run the machinery of government properly.

… We no longer accept that fraud in inevitable. Fraud can be defeated, but only if we adopt an all-persuasive, sustained, zero tolerance culture. It is time to end the ‘pay first, check later’ status quo and start putting £21 billion of taxpayers’ money to better use.

One cannot help but applaud the sentiment (and the correct use of the apostrophe in that last sentence!) but to my mind the current political and economic climate runs counter to the minister’s best intentions. It has not been nor, in the foreseeable future, is it likely to be the situation that public sector fraud can be stopped. Measures and steps can be taken to minimise the risk and reduce damage, but the practical reality of current circumstance and also the generally secretive nature of fraudulent and corrupt activity means that it is not possible or practical to prevent all fraudulent activity against the state. Even if the ideal world of zero tolerance existed with sufficient counter-fraud resources to support it, the cleverest and most secretive corrupt and fraudulent individuals and or...

Table of contents

• Cover Page
• Halftitle Page
• Title Page
• Copyright
• Foreword
• Preface
• Acknowledgements
• Part I Fraud and Corruption in Context
• Part II Counter-Fraud Measures and Initiatives
• Part III Fraud and Corruption Cases
• Part IV Public Sector Fraud Risks in Practice
• Part V Dealing with Fraud and Corruption
• Part VI The Way Forward
• Appendix 1: International Legislation on Fraud and Corruption Covered in Chapter 4
• Appendix 2: Useful Links for Further Public Sector Fraud and Corruption Information
• Index