Auditor-General ignores scams

Billions of dollars should be repaid by businesses who were overpaid or who wrongly obtained or retained Government Covid-19 assistance but no action has been taken to make them do this. Public servants arranged dishonest schemes with loose rules designed to channel as much taxpayer money as possible to businesses. The Auditor-General was very critical of the post payment management of these schemes but failed to recommend that letters be sent to all recipients requesting them to repay all money that was wrongly retained. 

In the two months after the introduction of the wage subsidy in March 2020, there were many reports of abuse and it was clear that most businesses had been overpaid. The Auditor-General knew about this and should have issued a report within a month or two and recommended that recipients be requested to make repayments. This would have ensured that repayments of thousands of millions of dollars were made but a report was not published until a year later. In the meantime four different wage subsidies had been paid out and some important changes that should have been made were not made. The MSD did not issue any publicity about the need for repayments and say anything about potential prosecutions in order to deter fraud. 

Despite numerous news media articles about abuse of the wage subsidy, the National Party had nothing to say about the need for repayments to be made and how billions of dollars could be recouped. However, they wrote to the Auditor-General on 3 August 2022 about the cost of living payments made to those on low incomes and said that the first payment of $116 made by the IRD on 1 August 2022 could have gone to some citizens living overseas. The Auditor-General replied and wrote to the IRD before the second payment was due on 1 September 2022. Despite Cabinet instructions to not pursue repayments of the small amounts involved, he said that it was unacceptable that the IRD did not know who had wrongly received payments and that they should be identified and repayments should be requested.  This highlights his failure to say the same after three years for repayments of the wage subsidy by businesses where the total involved is many thousands of times higher. 

In February 2021 a researcher started sending details of wage subsidy research with verifying documents to the Auditor-General and said the following regarding their reporting intentions stated in September 2020: ‘There have been over 150 news media articles about wage subsidy abuse and also a range of official and business data showing how businesses were far better off in 2020 than in 2019, even without the wage subsidy. In view of this, the Auditor-General should be investigating abuse by most recipients of the wage subsidy and not just public organisations, who were unlikely to abuse the wage subsidy or have repaid it.   

Merely reporting on how the wage subsidy scheme was managed and lessons for the future is not sufficient. Recommendations should be made on how to get repayment of the over $5,000 million which was wrongly obtained or retained.

The researcher advised that a judicial review was being sought of the failure of the MSD to do its job properly and the same could happen for the Office of the Auditor-General.      

Their stated reporting intentions in September 2020 included the following:

  • ‘How well was the integrity of the Scheme managed (including the recovery of money from anyone who might have deliberately or accidentally received more than they should have)?’

This seemed to be more about what happened in the past rather than being about how to get repayments from all those who deliberately or accidentally wrongly received payments.

 When the report on management of the wage subsidy was issued in May 2021, it was highly critical of the post payment management of the wage subsidy but it did not deal with some fundamental problems. These included the poor advice given to cabinet, the failure to include some important requirements of Ministers in the Declaration signed by applicants, the failure to seek the advice of Ministers on what action to take on the over $5 billion of overpayments and on the widespread abuse of the wage subsidy. The recommendations in the report failed to state that the MSD must write to all recipients and do everything possible to recover all overpayments and all money wrongly obtained or retained.    

A QUOTE FROM APPENDIX 2 of the report by the auditor-General  

‘It is anticipated that the evaluation will provide information and recommendations to inform future responses to crisis situations, where keeping people in jobs is critical’.

Keeping an attachment or connection to employees was stated 11 times in advice to Ministers as   being a main reason for the wage subsidy.  However, this requirement was not mentioned in the Declaration so those who were in essential services or worked from home or had work delayed or experienced   a post lock down boom, all claimed the wage subsidy and were never asked to repay any of it. The Auditor-General did not mention this important omission from the Declaration and failed to recommend that repayments should be sought from businesses for those weeks when they were operating normally and jobs were not at risk.

Audit NZ provides Government organisations with an interim audit report so that factual errors can be corrected and a final report is then issued. Summaries are sent to the Auditor-General so this should prevent findings and recommendations being changed. In the case of the MSD, two interim reports and a final report were provided and there were important changes made between them to findings and to recommendations and one recommendation was deleted. An auditor should never do this so it appears that the MSD has put pressure on the Auditor-General to make these changes. The result was feeble recommendations that could easily be circumvented by the MSD, while at the same time making it look like the MSD and Auditor-General were doing something. The public rely on the Auditor-General to ensure the good stewardship of public money so what has happened sets a very bad precedent.

On 21 December 2021 the Auditor-General wrote to the Finance and Expenditure Committee and gave a rather rosy picture of the wage subsidy review work being done by the MSD. However, it did state the following:

‘MSD does not yet know whether the findings from its follow-up work are indicative of wider non-compliance with the requirements of the Scheme. If they are, this could involve a substantial amount of public funds. This reinforces the importance of MSD knowing more about the extent of non-compliance across all iterations of the Scheme and taking action to recover funds paid to applicants who did not meet the criteria or their obligations.’

A researcher wrote to the main author of the wage subsidy report and copied in others at the OAG in January 2022 and attached documents containing latest research. In February and March quotes from newsroom article were sent and the research that revealed that the recommended reviews and evaluation had been badly designed and undermined and would not reveal the full extent of repayments required. 

The Newsroom article said that the wage subsidy scheme would not be compared with schemes in other countries and that a further curveball was that the evaluation would only look at employees and not businesses. The Auditor-General seems to have gone along with this window dressing cover up designed to hide the billions of dollars squandered on businesses.

The MSD knows from poorly designed sampling that 15% had to make repayments so 15% of $18.8 billion in wage subsidies is $2.8 billion and this figure would have been far higher if the investigations had been done properly.   Other MSD statistics indicate that as high as 35% or 41% should be making repayments. In addition to this the Auditor-General knows that over $5 billion was overpaid in 2020 for weeks when almost all businesses were operating normally and had normal revenue.

The Auditor-General report on the wage subsidy did not comment on the advice given to Cabinet Ministers and what cabinet agreed to. In contrast to this, the letter to the IRD commented on some of what Cabinet agreed and said that the Cabinet paper did not include the risks involved.  

The Auditor-General‘s report did not comment on the failure to include in the Declaration signed by recipients the main requirements of Ministers as stated in the wage subsidy objectives. This MSD failure resulted in a huge amount of additional money being paid out but it was ignored. 

The letter to the IRD said:  ‘As I have said recently in relation to the Strategic Tourism Assets Protection Programme, where there are criteria, it is important that they are sufficiently clear to enable decision makers to apply them accurately and to assess whether they have been met.’

The letter said: ‘I would expect there to be specificity and certainty when spending public money.’

The letter often refers to what Cabinet agreed to but Cabinet relies on official honesty and integrity and will usually not be aware of important considerations that have been left out. The wage subsidy objectives were very clear but the often stated main requirement of Ministers to support struggling businesses to retain an attachment to employees during a Level 3 and 4 shutdown was not included in the Cabinet minute and the Declaration signed by applicants. Cabinet ‘agreed that the Covid-19 wage subsidy will only be payable to employers who have taken active steps to mitigate the impact of COVID-19 on their business activities’ Note the use of the word only.   The wage subsidy was to be ONLY paid to those who took the active steps specified in the Declaration they signed but no verifying evidence has ever been requested and there is nothing in any document to indicate that in the few hundred cases investigated recipients were asked for evidence of the active steps taken. There is some evidence that most recipients did not comply with what they agreed to.          

Cabinet said that businesses would not be supported for the duration of the impact of covid-19 and work had to be done on determining the decline in revenue but this did not happen. Businesses were paid for 12 or 20 weeks when the vast majority only had a revenue decline for 5 or 7 weeks.

The prediction of a one month decline in revenue was not a criteria for payment because it was unclear and as the letter referred to, there was no specificity and certainty.

Cabinet did require the MSD to identify and take action on wage subsidy fraud but this has very rarely happened.

In the letter to the IRD, the Auditor-General  3 times refers to the need for good stewardship of public money and said that it was unacceptable for the IRD to not know all those who should not have received a cost of living payment. Despite Cabinet instructions to not pursue any repayments, the Auditor-General told the IRD to identify and write to those who should not have been paid and proactively take steps to try to recover the few million dollars involved.

Presumably, the Auditor-General thought that it was acceptable for the MSD to know that hundreds of thousands of recipients were keeping about $5 billion overpaid and a further $5 billion wrongly retained. They and the Auditor-General knew the types of businesses and the names of many of the businesses involved but they chose to ignore all this. It was also regarded as acceptable for the MSD to not write to all recipients and to not proactively take steps to get repayments.

The letter to the IRD stated that it is ‘important to be sure that public money is being spent appropriately, and in accordance with the key policy intent.’

 The MSD and Auditor-General did not ensure that public money was spent appropriately and they ignored the advice to Ministers and the main policy objectives.    

The reports on the wage subsidy, Strategic Tourism Assets Protection Programme and emergency housing were very critical of the failures by officials but did not recommend that they do anything about repayments.  These reports did not mention whether any of the payments made were outside the appropriations made and, therefore, unlawful. The letter from the National Party asked whether the payments made were outside the appropriation and the reply and letter to the IRD each referred to appropriation several times.

The watchdog and stewardship roles of the Auditor-General have been overlooked in regard to repayments of the wage subsidy so almost no action has been taken in the public interest.

The Serious Fraud Office, Minister of Social Development and the public have all stressed the importance of holding to account those who wrongly obtained or retained the wage subsidy and the Auditor-General should have made sure that the MSD did this.    

In September 2022 a researcher wrote to the auditor-General regarding the above and ended by saying:

‘It is now 16 months since your wage subsidy report was issued and 8 months since your letter to the Finance and Expenditure Committee was published but it appears that you have not told the MSD that their many failures are unacceptable and you have done nothing to ensure that the MSD proactively takes steps  to recover the billions of dollars that should be repaid. assurance you will write  and publish a letter to the MSD and advise them to write to all recipients of the wage subsidy in order to recover all money overpaid or wrongly obtained or retained.

The reply from the Auditor-General outlined the wage subsidy work his office had done but failed to deal with each of the issues raised in the letter. His letter ends by stating that he had been requested to direct the MSD but that was not correct and he had only been asked to advise them. The reply to him stated this and provided the following new information:

‘The fourth recommendation in your report was to:

  1. prioritise remaining enforcement work, including:
  • seeking written confirmation from applicants (which could be targeted towards larger or risk-indicated applicants) of compliance with the eligibility criteria and the obligations of receiving the subsidy;’

The MSD has taken the ‘remaining enforcement work’ to mean writing to a sample of 1,000. Your 21 December 2021 letter to the Finance and Expenditure Committee about progress being made accepts this approach and said: ‘In our view, seeking confirmation of eligibility from applicants has been useful to identify non-compliance and is relatively inexpensive compared with other actions MSD could take to protect the integrity of the Scheme. ’

 This ignores about 730,000 recipients who have never been written to, despite recommendations by Deloitte and twice by your office. There would be a huge payback frofm using this cost effective method. ( Last week news media in Ireland reported that 42,500 employers had been written to about the wage subsidy and they repaid E336 million )      

The MSD requested repayments of superannuation from 7302 who had been stuck overseas because they could not get an MIQ place. They also told those receiving the winter energy payment that it was very important that they make a repayment of up to $20.46  per person per week if they were overseas for more than a month. In contrast, the MSD has failed to request repayment of many billions of dollars of wage subsidy overpayments and payments wrongly retained.” 

The reply said that his decision to ignore the need for thousands of millions of dollars to be repaid, failed to take into account the following ‘relevant factors’ and was ‘unreasonable’

  1. Over $5000 million was overpaid for weeks when businesses were operating normally but has been ignored by the MSD
  1. Numerous reports of businesses that should have repaid and reports about a high proportion of each business sector that was not affected but wrongly obtained and retained the subsidy.
  1. A MSD Review that was deliberately flawed but did reveal that at least $2.8 billion should be repaid by those who wrongly obtained or retained the subsidy.
  1. Over $800 million repaid, with about 95% being voluntary. If repayments had been requested, as recommended several times, vastly more would have been repaid.
  1. The information provided to the OAG in the past means that he did have evidence of widespread abuse by recipients and details of 20 failures by the MSD.
  1. The Serious Fraud Office, Minister of Social Development and the public have all stressed the importance of holding to account those who wrongly obtained or retained the wage subsidy.
  1. The May 2021 report was very critical of the post payment management of the wage subsidy by the MSD so, clearly, if they had acted differently vastly more money would have been repaid.
  1. The way the MSD deals with those on Benefits or low incomes who are overpaid or commit fraud is a huge contrast to what has happened with the wage subsidy.
  1. The way that the Auditor-General dealt with incorrect payments of the cost of living payment is also a huge contrast.

The failure by the Auditor-General to provide an assurance that he would recommend that the MSD write to all recipients and request the repayment of all money overpaid or wrongly retained, is a clear admission that he had decided to ignore the thousands of millions of dollars that should be repaid.  His decisions are not in accordance with the OAG motto stated at the end of emails of ‘improving trust, promoting value.’     

Reserve Bank, IRD, Statistics New Zealand and other data show what happened to all the surplus wage subsidy money. It triggered a house and investment asset price bubble that benefited well paid public servants and their friends and relatives. The decision by the MSD and Auditor-General to ignore the need for thousands of millions of dollars to be repaid could have been made for ‘an improper purpose’.

The decisions made by the Auditor-General are worse than those made by the MSD because he has ignored his statutory duties and the statements about stewardship of public money he has often made on the OAG website and in reports.   The OAG website states the following principles but the OAG failed to ensure that the MSD complied with them.

Principles behind good practice

There are some fundamental principles that apply to most aspects of managing public resources.

Accountability: Public organisations should be accountable for their performance and be able to give full and accurate accounts of their activities. They should have in place governance and management arrangements suitable to address any concerns.

Fairness: Public organisations have a fundamental public law obligation to always act fairly and reasonably. What public organisations do should be open and impartial.

Integrity: Anyone who is managing public resources should do so with the utmost integrity.

Lawfulness: Public organisations must act within the law and meet their legal obligations.

Openness: Public organisations should act in a way that is – and is seen to be – transparent.

Value for money: Public organisations should use resources effectively, economically, and without waste in achieving their policies and delivering services to New Zealanders.’

If a Public Servant arranged for large sums of their employer’s money to be transferred to themselves or relatives or friends, this would be regarded as unlawful. Treasury and MSD officials did something similar by arranging a wage subsidy that was open to abuse by everyone and then deliberately fail to carry out proper post payment checks of businesses and self employed people who claimed the wage subsidy under a high trust model.  Treasury and MSD officials had partners, children relatives and friends who could have received payments and no-one would ever know because payments to individuals have been kept secret. The excessive funds given away drove up asset prices so that the value of their home and any other residential properties they owned increased by up to 43%. The New Zealand sharemarket increased in value between 1 February (pre Covid-19) and 31 December 2020 by 14% so the value of their savings increased. They probably also would have relatives and friends who owned businesses who received substantial payments and got the other benefits.  Vastly more money has been lost than if the public servants involved had each committed a fraud.

Their deliberate actions have impacted on the economy and the well being of New Zealanders by greatly increasing inequality and as a result adversely affecting unaffordable housing and child poverty. The consequence of failing to act in the best interests of the community and future generations has been to “divert public funds from those who most need the support of public services”.

On 3 October 2022 the founder of Orion Health was interviewed on RNZ. It is a software company with 300  employees around the world. He said that New Zealand has the worst procurement processes in the world. Orion Health has operated a vaccine register here and overseas for over 15 years with no problems and could have updated it for Covid-19 at a cost of under $100,000. However, they were not asked to do this work and the Ministry of Health paid $38 million to overseas consultants. The Auditor-General was asked to investigate but he did not find anything wrong or think that any action was required. It was not possible to reverse what had been contracted but some accountability could have been recommended to encourage better stewardship of public money. This would seem to be another case of the Auditor-General being very critical but not recommending that any remedial action be taken.    

In 2020 and 2022 there were Newsroom articles about the poor Government procurement processes in New Zealand.  These could encourage corruption and could waste many billions of dollars.       

The Auditor-General failed to recommend repayments be made to a dodgy $290 million Government tourism fund arranged by the tourism industry and the public servants employed to service their needs.

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