MSD outlines additional costs for rooting out wage subsidy abuse. David Williams reports
Investigations into alleged abuse of the wage subsidy scheme have led to a $1 million legal bill for taxpayers.
And for what, some ask. Almost two years into the pandemic, with $19 billion paid out in Government support, mostly as a wage subsidy, charges have been laid in just two cases, and $22 million paid back as “requested”. (Another $763 million was paid back voluntarily.)
A further 500 cases are under investigation by the Ministry of Social Development (MSD) – roughly the same as in August last year – while 10 cases have been referred to the Serious Fraud Office.
“I’m quite appalled,” says Canterbury tax researcher Dr Michael Gousmett. “I would have thought by this time there would have been a lot more active prosecutions underway. Someone’s making a hell of a lot of money out of it – ie. the lawyers – for no real return.”
Professor Lisa Marriott, of Victoria University of Wellington, researches the disparity between prosecutions for benefit fraud and tax evasion. She says, via email: “I appreciate that resources are limited and cases are complex but when you see that $785 million has been recovered but charges have only been laid in two cases to date, I find myself (probably like most people) wondering why this is the case.”
Responding to an Official Information Act request made by Newsroom in October last year, MSD outlined the additional internal and external costs for investigations. They include a $1 million external legal bill.
MSD’s group general manager of client service support George van Ooyen says Crown Law and Meredith Connell were engaged to help MSD’s legal department with advice.
“To date approximately $1,006,789.50 in legal costs has been accrued in relation to advice on establishing investigation and recovery approaches specific to the wage subsidy scheme, noting that the legal basis for wage subsidy investigations and recovery is quite different to that for benefit fraud investigations.
“This cost has included supporting the development of specific wage subsidy integrity and investigation guidance, advice on specific investigation cases, supporting referrals of decisions for enforcement action to be taken, and advice related to the integrity of the schemes.
The work is ongoing, Van Ooyen says.
Meredith Connell managing partner Steve Haszard says: “MC won’t be making any comment and I refer you to the MSD communications team.”
(The law firm reportedly repaid $1.6 million in wage subsidy.)
Consulting firm Deloitte was engaged to help with forensic accounting for wage subsidy investigations. In October last year – when the OIA response was lodged – the work had cost $92,000.
“The Government made a decision on those risks at the time.” – George van Ooyen
It’s worth remembering the situation when the scheme was announced.
The pain of a pandemic was starting to bite and the country expected mass layoffs and economic disaster. Once the first national lockdown was announced, the subsidy was pretty much the only source of revenue for many companies.
Businesses that endured a 30 percent loss of revenue over a month or so, compared to the previous year, were eligible to receive subsidy payments of up to $600 a week per employee, as long as they used best efforts to keep workers for the subsidy’s duration. It was, as Finance Minister Grant Robertson said at the time, a “high-trust model”. That meant, of course, there were higher risks that payments were made to the ineligible.
“The Government made a decision on those risks at the time,” MSD’s Van Ooyen notes.
Still, the structure has come in for harsh criticism. University of Auckland business school professor Robert MacCulloch told Stuff in 2020 the “botched” scheme’s set-up was flawed – it should have included a clawback clause for companies making big profits.
Subsidy applications arrived in a torrent – more than 70,000 in one day. Payments, too, were being pushed out quickly, peaking at nearly $1.8 billion on one particular day.
It would be unrealistic to expect MSD to do this work alone.
In March 2020, ministers set aside $18.9 million for MSD to administer the wage subsidy scheme. The money was to be used for information technology improvements and 199 extra full-time-equivalent (FTE) staff. Of those positions, 10 were to help with subsidy integrity checks.
(Initially, MSD called them “audits” but that changed to “checks” or “reviews” after a review by Auditor General John Ryan, who said most were simply phone calls, without demanding to see evidence.)
Expert staff from other agencies were brought in. They comprised:
• Up to 11 FTE from the Department of Internal Affairs primarily in May 2020;
• Up to 25 FTE from Inland Revenue at a time between June and October 2020;
• An additional nine FTE from Inland Revenue from July 2021, seconded to and funded by MSD, costing $202,000 by late September last year, by which time the number had reduced to five FTE.
“The ministry continues to recruit additional investigator resources to support ongoing demands due to COVID-19,” Van Ooyen says.
How comprehensive have investigations been?
Auditor General Ryan wasn’t impressed by eligibility checks on wage subsidy payments, based on his report from May last year.
“It is possible that the post-payment work is less than what Cabinet would have expected,” said the report, which said it was important to pursue prosecutions against law-breakers to maintain public trust and confidence in government schemes.
The first charges were laid last September. Ryan also called for a timely evaluation of the scheme.
The tax department ran its own analysis. It found 8 percent of sampled businesses might not have a revenue drop sufficient to qualify for the wage subsidy.
The investigative process has been opaque, Marriott, the Victoria University of Wellington professor, says.
“Are there any consequences if people are ‘caught’ and repay the Wage Subsidy when they were not entitled to it – or does repayment resolve the issue? If repayment of funds that were not legitimately claimed settles the matter, this suggests an element of ‘buying justice’.
“I would like to see more visibility around the repayment process and whether there are any consequences from claims that were made without entitlement, if the funds are repaid in full.”
More fuel was added to the fire in January of this year, when financial journalist Bernard Hickey revealed the owners of homes and businesses got $952 billion richer during Covid, while the real incomes of the “poor” went backwards. It was, Hickey said, a massive wealth transfer.
Personal bankruptcy rates, meanwhile, remain comparatively low, Interest.co.nz reports.
What’s happening now with investigations now?
About half MSD’s 100 FTE investigators, usually dedicated to benefit fraud, continue “to support” wage subsidy probes. “However the ministry may shift resources between benefit integrity and wage subsidy integrity work as required,” Van Ooyen says.
The ministry is committed to prosecutions where appropriate, he says – an oft-repeated line. A full investigation is needed before charges can be laid.
(Earlier this month, Hawkes Bay Today reported a trucking firm went into liquidation after a wage subsidy repayment demand of more than $100,000.)
The Serious Fraud Office, meanwhile, confirms about 12 staff, including two secondees from MSD, are working on 10 wage subsidy cases. “However, this number fluctuates depending on the status of the investigation and the expertise required,” says SFO director Julie Read, who notes investigators work on several cases at once.
In 2020, the SFO received extra funding of $3.9 million, to be spread over three years, to tackle Covid-related fraud. Read says the money has helped her office establish a dedicated fraud prevention team and “increased investigative resources” – totalling eight additional roles.
Marriott, of Victoria University of Wellington, says the SFO typically receives about 1000 financial crime complaints per year but prosecutes less than 10 cases – eight in 2020/21, and six in 2019/20.
“I have previously suggested that the SFO is underfunded – my view on this remains unchanged.”
Gousmett, the tax researcher, says the wage subsidy post-payment checks, deemed so crucial by the Auditor General, haven’t been good enough. He worries it may be a portent of what’s to come.
“Heaven forbid, if we had another whopping great outbreak of some kind in another year or two, we've set a precedent now for people to make money out of it.”
* This story has been updated with comment from Steve Haszard, and corrected regarding wage subsidy eligibility.
