Public sector lost £21bn to fraud in 2010, says report

The public sector lost £21bn to fraud in 2010, according to a report published by the National Fraud Authority (NFA) this week.

The government’s lead organisation on counter-fraud activity revealed that the sector was responsible for more than half (55%) of the total cost of fraud to the UK economy of £38bn.

The NFA calculated that the private sector lost £12 billion to fraud during the period, while individuals and charities were hit for £4 billion and £1.3 billion respectively.

The authority said the increase in the figures for the public sector partly reflected new and more accurate figures for procurement and grant fraud. It also suggested that the implementation of improved methods for reporting fraud losses and the more comprehensive measurement techniques in the public sector compared to other sectors must also be taken into account.

The NFA Annual Fraud Indicator 2011 also included a breakdown of public sector fraud. Tax losses accounted for £15bn of the total, whether through evasion (£7bn), criminal attacks (£5bn), the hidden economy (£3bn) and vehicle excise (£46m). Welfare fraud was estimated at £1.5bn, split mainly between benefit fraud (£1bn) and tax credits (£460m).

Procurement fraud was to blame for more than half of the remaining fraud (£2.4bn out of £4.6bn). Other problem areas included housing tenancy (£900m), grants (£515m) and payroll (£329m).

Local government was meanwhile estimated to have suffered losses of £2.1bn. Housing tenancy fraud was the biggest issue, followed by procurement fraud, payroll and recruitment fraud, council tax fraud, and Blue Badge scheme abuse.

Publication of the report came as Cabinet Office Minister Francis Maude launched a new initiative designed to crack down on fraud in the public sector.

He said of the £21bn figure: “That's the equivalent of building 800 secondary schools, or employing over 615,000 nurses and it's a problem that we are not going to ignore. Ripping off the taxpayer will not be tolerated.”

Maude claimed that the Counter Fraud Taskforce had already made “serious savings” since its launch in 2010. It will produce a report in May 2011 with recommendations on a new approach to tackling fraud, error and debt.

The Minister has now launched a network of so-called “Counter Fraud Champions”. According to the Cabinet Office, these individuals will:

• “Create and maintain an anti-fraud culture through awareness raising campaigns with employees in their government department
• Measure fraud, error and debt and ensure it is reported
• Support a new government fraud alerts system designed to tackle fraud proactively. When one government department identifies fraudulent activity they will submit details of the methods and tactics being used to a central intelligence body – housed at the National Fraud Intelligence Bureau – that will analyse the information, match it to information held on other frauds and issue an ‘alert’ to all Counter Fraud Champions. This will ensure steps can be taken to protect departments from a similar attack.
• Undertake fraud risk assessments in order to identify areas most vulnerable to fraud, and ensure new policies and systems are fraud proofed
• Share good practice on combating fraud, including successful work in their own Department as well as the results of pilots being overseen by the Counter Fraud Taskforce.”

Fraud experts warned that public sector bodies could – as a result of the financial pressures they are under – struggle to maintain their investment in combating the problem.

Andrew Gillett, partner and head of casualty fraud at law firm Weightmans, said: “While it comes as no surprise to those working within the counter fraud arena that the cost and incidence of fraud is on the increase, now estimated to cost the UK economy £38bn from £30bn, and every individual in the UK £765 per year, it is the increase in the costs of fraud in the public sector which is particularly concerning in these times of austerity.”

Gillett added: “With the Audit Commission in its last publication on protecting the public purse sending the clear message that public sector organisations should at least maintain their investment in both time and money in projects and process to combat fraud, their ability to do so is ever challenging. Take for example the news of job cuts, including potential forced redundancies announced by Liverpool City Council this week.”

The Weightmans lawyer warned that while there may be savings now from cutting investment, these would be short lived. “In months or indeed years to come it will cost far more in terms of fraudulent claims, benefit entitlements, bribery and corruption,” he argued.

The charity sector estimate was based on collaboration with the Charity Commission, providing what the NFA describes as “for the first time…an accurate estimate of the level of fraud”.

Sam Younger, chief executive officer of the Charity Commission, said the £1.3bn figure “shows that instances of charity fraud remain low and the public can be assured that the vast majority of charitable money is going straight to good causes. [However] Charity trustees must be more fraud aware, and I hope that today's report is a wake-up call to any charity who thinks it will never happen to them.”