Audit Committee,

Meeting date: Wednesday, May 28, 2008

Official Report 139KB pdf

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“National Fraud Initiative in Scotland 2006/07”

Item 2 concerns the report "National Fraud Initiative in Scotland 2006/07". I invite Russell Frith to address the committee.

The report summarises audit work that was carried out across local government and the health service over a two-year period.

The idea of the national fraud initiative is to assist councils and other public bodies to identify and detect fraud and other overpayments that might occur in their systems. It enables public bodies to investigate matches and take action if fraud or overpayments are identified, and it helps the auditors to assess the arrangements that bodies have in place for the prevention and detection of fraud.

The Audit Commission in England has been running the initiative since 1996. In Scotland, we piloted some aspects of it from 2000, and 2004-05 was the first time that we performed a full roll-out of the exercise across local authorities in Scotland. For 2006-07, in addition to local authorities, we brought in health boards, the Student Awards Agency for Scotland and the Scottish Public Pensions Agency, which picks up national health service and teachers' pension schemes.

We aim to match the various data sets to identify indications that fraud is taking place. The fact that there is a match does not necessarily mean that there is fraud; it means that there is something that should be followed up to determine whether it is fraud or another form of overpayment.

One of our areas of work involves matching the pensions records of local government, the NHS and teachers with the Department for Work and Pensions register of deceased persons. That identifies pensions that are still in payment to people who have died, which happens with a degree of frequency. The exercise enables the whole pensions database to be checked quite effectively, especially when compared with the way in which most pension schemes performed checks in the past, which involved writing to pensioners and—basically, but with more subtlety—asking them to confirm that they were still alive.

Did they include a stamped, addressed envelope?

Usually, yes.

The other main area that we consider is housing benefit. We match the payroll records of local government, the NHS and, just for good measure, ourselves, with the housing benefit records of all 32 councils. In doing so, we are trying to identify cases in which housing benefit is being claimed but the correct earnings are not being declared. That is quite a fruitful area for us.

We provide the matches to the local authorities and health boards through a secure website, and they are responsible for following them up, using the various filters that we provide, so that they can prioritise the matches in order to concentrate on the ones that are most likely to be fruitful.

In the 2006-07 exercise, we have so far uncovered around £10 million of fraud, other overpayments and forward pension savings. That is less than we found in 2004-05, which was the first time that we ran the exercise, when the sum came to around £15 million. However, that is pretty much what we expected because, in 2004-05, we picked up cases that had been outstanding for a long time, whereas, this time, most of the identified cases should have been running for no more than a couple of years.

In addition, the considerable publicity about the exercise should have deterred people from committing fraud, although I am not sure whether that worked, because in at least one case the same person was identified in both exercises.

Many of the matches require the co-operation of other public agencies to follow them through. The Department for Work and Pensions in particular co-operates with local authorities to follow cases through. This time, the case with the biggest single value is an example of an NFI match that identified a tenant who allegedly worked with a council and received housing benefit. As the case was pursued, it was established that the tenant had a partner who was also a council employee and who also did not declare their earnings. It has been estimated that the total overpayment in that case was around £100,000. The parties are being reported to the procurator fiscal.

Our ability to match complete data sets gives us a reasonable degree of assurance about the overall error levels in the data sets. If low levels, or no levels, of fraud or overpayments are identified, the public bodies can take significant assurance about the quality of the data sets and, in some cases, the integrity of their workforce.

One of the main issues for us this time concerned the legal powers to conduct the exercise and, in particular, to extend it. That is also one of the main issues in looking forward. The exercise has been based on local authority auditors' powers to obtain information for the purposes of audit not only from local authorities themselves but from other organisations that may hold information that is relevant to the audit. Similar powers do not exist for the Auditor General's part of the public audit process.

The Serious Crime Act 2007 provided our sister organisations in England, Wales and Northern Ireland with explicit data-matching powers. We have discussed with the Scottish Government's criminal justice directorate the prospects for introducing similar legislation in Scotland at the next suitable opportunity, and the response has been quite positive so far. We believe that such legislation is essential for the NFI exercise to progress in the future. It is essential not only to provide a level playing field across the whole public sector—the exercise is quite heavily weighted towards local government at the moment—but to help identify cross-border fraud. Fraud does not stop at artificial boundaries. One of our problems with the current legislation is that we cannot share data on matches across borders.

That is a brief summary of the exercise. I would be happy to answer any questions that members have.

Thank you.

You said that you had uncovered almost £10 million of fraud, other overpayments and forward pension savings. Can you confirm the cost of the exercise?

The cost of the processing was around £125,000. It goes up to around £350,000 if we include the cost of the time that our staff spent on it.

So there is a significant return from a relatively small investment.

Yes.

That, of course, is before one takes into account the deterrent factor, which we cannot quantify. People now know that the system is working, and councils' systems of control in particular have become much more effective.

What is the scale of the initiative in relation to the scale of the problem? Do you think that the initiative is capable of being extended or do you think that it is as far-reaching as it can be?

It is undoubtedly capable of being extended. A significant issue to look at is single-person council tax discounts. The Audit Commission's pilot work in England has shown that to be a fruitful area, given that there are significant levels of misclaiming of such discounts. We are in the process of running an exercise on that for the first time with about half the councils in Scotland. I cannot tell you the outcome of that exercise, because the councils have only just got back the matches.

The report refers to cancelled discounts improving the council tax base and says that the Audit Commission's rule of thumb estimate is that the potential savings could exceed £200 million throughout the whole United Kingdom.

Yes, that is the Audit Commission's initial estimate.

So we are talking about saving substantial sums in exchange for a relatively small investment, which we would all encourage. There is a substantial opportunity in respect of benefits claimants, although that is obviously a reserved matter. I remember reading a few weeks ago the story about the chap in Aberdeen who was claiming benefits for 36 children. It seemed rather extraordinary that nobody had picked up on the fact that it would have been a minor medical miracle if someone aged 29 had fathered 36 children—it would not be physically impossible, but it would be fairly unlikely.

Unfortunately, we would not have been able to identify that particular case, because it related to child tax credits, which is an HM Revenue and Customs matter.

Do we rely completely on information technology matching, or is any manual matching going on to pick up examples such as the one that Murdo Fraser mentioned? Is there any evidence that the methods of perpetrating fraud are becoming more sophisticated or is fraud fairly easy to spot with the systems that we have?

In the past, councils and other public bodies have attempted to uncover fraud and overpayments by manual matching. The advantage of the IT-based matching is that we can cover the whole data set efficiently and quickly. It is by far the best method. However, given that it takes a rule-based approach, as all IT systems do, once we have the matches, we then have to do some manual work to identify the cause. In some cases, the claims will be perfectly legitimate.

Are the methods of perpetrating fraud becoming more sophisticated?

In the areas that we are looking at, fraud is not particularly sophisticated in the first place, so it is relatively easy to pick up using the techniques that I mentioned.

Paragraph 22 of the report sets out the nearly £10 million of real savings. The paragraph also states that bodies are

"seeking to recover about £2.8 million".

Of course, seeking to recover money is very different from actually recovering it. Do we have any figures for how much bodies are actually recovering?

Not yet, because many cases are at an early stage in the investigation process. In a number of cases, the recovery rate per week will be low.

It is always difficult to get blood out of a stone and it is more than likely that the money that has been obtained fraudulently will have been spent by the time you find out about the fraud. We need to find fraudsters as quickly as possible. Do you foresee our being quicker to identify fraud publicly?

It would be possible to run the exercise more frequently, but that would start to bring more noise into the system. It takes at least 18 months for us to collect the data, run the analysis and return it to the councils, and for them to prioritise and carry out investigations. The most effective approach is to run the exercise every two years.

I presume that eventually it will act as a deterrent to some people.

In the report, we encourage the various public agencies that are involved in the exercise to respond promptly and to take points on board. For example, we think that the Scottish Public Pensions Agency could react more quickly. We know that it is committed to doing so.

The fact that £37 million will be returned to front-line services—regardless of whether the defrauding of the state was accidental or intentional—is a welcome step. When I read exhibit 4 on page 10, two categories caught my eye. I refer to the 1,552 housing benefit cases and the 969 blue badges that were cancelled. Is there a breakdown of the reasons that were given for failure to notify local authorities of the death of blue badge holders?

We are not aware of such a breakdown. I suspect that notifying the local authority of the death of a blue badge holder is not the highest priority for the person's relatives. We are in no way saying that all the badges concerned were being held and used to gain an advantage—a significant number may have been left in drawers and not sent back. That was one of the new matches that were introduced in this NFI round. It has proved quite effective in reducing the number of badges that could be misused. We hope that that will increase confidence in the blue badge system generally.

That is great.

I am concerned by the lack of powers that are available to Audit Scotland because it missed out on the Serious Crime Act 2007. I am not clear on how that happened. Why was Scotland not included in the 2007 act?

We understand that the previous Administration took a policy decision to that effect in the run-up to the Scottish election.

Presumably, there was sensitivity about introducing such legislation in close proximity to an election.

That is what we understand.

The report states that

"any new Scottish legislation will not be available in time for NFI 2008/09."

Why is that?

Because we are preparing for the exercise now and the data will be collected in October. We understand that the first available opportunity for legislation is likely to be early in 2009.

We are not overburdened with legislation at the moment, are we? Would it help if the committee pressed for earlier legislation on the issue?

It would certainly be appropriate for the committee to lend its support to the need for legislation.

I congratulate Audit Scotland on this good public service. I hope that the Government will consider early legislation on the matter. I have a sense that what you have found is only the tip of the iceberg and hope that this is the beginning of a wider anti-fraud programme. Do you have any such plans or proposals?

I am not sure that I agree entirely that what we have found is only the tip of the iceberg. We are covering 100 per cent the data sets that we cover, so we are getting a fairly good indication of the scale of overpayments in those data sets. If we can extend the NFI to single-person council tax discounts, for example, we may be able to discover larger amounts elsewhere.

I feel that the fraud that you uncovered was of a relatively low level, as it was found quickly by a computer sweep. I have the sense that deeper work could be undertaken. I congratulate you on what you have done, but more could be done to ensure that the public are not defrauded.

We look continually for new data sets to include. Another aspect of the more explicit powers is that we are allowed to use data sets that other organisations have volunteered—the Audit Commission has also piloted that with reasonable success. However, in that case, some of the benefit goes to the private sector as well as the public sector.

I wish you well in that work.

For the avoidance of doubt, will your examination of single-person council tax discounts be in the new programme that starts in October? That does not depend on your having new powers and is simply an example of good practice that you have heard about from the south.

That work does not depend entirely on having the new powers. We have already run the data matches, but they have only just been given to councils to examine.

That is why we do not have the information on that category yet.

Yes. However, the new legislation will certainly help to clarify the powers to do that and similar work.

I thank Russell Frith and the Auditor General for contributing. I have no doubt that we will return to the issue at some point.