AUDITOR-GENERAL 21 DECEMBER 2021 LETTER TO FINANCE AND EXPENDITURE COMMITTEE REGARDING PROGRESS BY MSD ON IMPLEMENTING OAG RECOMMENDATIONS.

This long letter gave a rosy picture of the work being done by MSD and it did not take into account the information we later put together for our documents on MSD review failures,  MSD misleading claims and MSD and Treasury unacceptable actions.

The Treasury and MSD have worked with Ministers to agree policy decisions clarifying some eligibility issues. These include that:

• Under the previous Alert Level framework, if a region moved from Alert Level 3 or 4 to Alert Level 2, or from Alert Level 2 to Alert Level 3 or 4 during a revenue test period, businesses in that region would be allowed to meet the revenue decline test by attributing their revenue decline to a combination of Alert Level 4, 3, and 2 effects, but not to Alert Level 2 effects alone.
• To be eligible for the Wage Subsidy, a group of organisations with a common owner (where the revenue generation and employment functions are separated within the group), must apply the revenue decline test across the whole group. Wage Subsidy applicants that apply as a group must base the revenue decline test on a complete and accurate representation of their whole business. The intent of the Wage Subsidy revenue decline test is to reflect changes in external trading activity.

  COMMENT:  Cabinet papers show that Treasury officials tried twice to get Ministers to  give wage subsidies to businesses regardless of any drop in revenue and for two or three times longer than necessary. When that was not entirely successful, they must have turned to encouraging MSD officials to have lax eligibility rules and an unwritten policy of pay and walk away. We made an OIA request to the MSD for any documents relating to advice given to Ministers about dealing with some of the main wage subsidy problems but were told that this had not happened. These problems had been identified by us and six academics and over 150 news media articles but the MSD chose to ignore them in favour of advising Ministers of the views of those who received the wage subsidy who they called stakeholders. The above quote has been copied because it shows the involvement of Treasury and that Ministers were only consulted about relatively minor matters. 

TWO QUOTES FROM APPENDIX 2 of the  report by the auditor-General  

`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.’

COMMENTS:   The MSD ignored recommendations by the Auditor-General, Deloittes and us to write to all recipients. This way of confirming eligibility and compliance is referred to above as being relatively inexpensive.

‘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’.

COMMENTS:  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 considered that a wage subsidy response is required ‘where keeping people in jobs is critical’      

A FEW QUOTES FROM OIA DOCUMENTS RELATING TO THE ABOVE LETTER   

The Ministry’s response to the Auditor General’s recommendation to test the reliability of the post-payment assurance work carried out does not include sending a standard letter to the 339 recipient sample, and as such your request is refused under section 18(e) of the Act as this information does not exist. For this work, in all cases, the person who submitted the wage subsidy application is contacted by phone in the first instance.

• Have any of the above 1,000 and the above 339 recipients written to since July 2021 repaid all or part of the wage subsidies received without providing the documentary evidence requested or prior to providing it?

Due to the Alert Level escalations in August 2021 and the Ministry’s focus on supporting the COVID-19 response, including administering the wage subsidy, finalising this work and analysing the results has been delayed.

The information you have requested is held in notes on individual application files. In order to provide you with this information Ministry staff would have to manually review hundreds of files. As such I refuse your request under section 18(f) of the Act. The greater public interest is in the effective and efficient administration of the public service.

• Please advise how many complaints have been re-opened for investigation since May 2021 and whether all complaints will be properly investigated?
• In order to provide you with the number of complaints re-opened for investigation since May 2021, Ministry staff would have to manually review thousands of files. As such I refuse your request under section 18(f) of the Act. The greater public interest is in the effective and efficient administration of the public service.

STAFF INSTRUCTIONS

       If at any stage during your conversation with the applicant you suspect they may have committed fraud, you must stop the conversation and issue a caution. The caution must be in the following terms:

a. the person has the right to refrain from answering any further questions and is entitled to remain silent;

2. the person has the right to consult and instruct a lawyer before deciding whether to answer any questions;

1. that anything the person chooses to say will be recorded and may be given in evidence.

TEMPLATE LETTER

If you don’t provide the documents requested, we may decide to get some or all of it from other sources, such as Inland Revenue.

However, if [you consider] or [the company considers] that any of the above information would be likely to incriminate [you] or [the company], you are not required to answer this request for that information. We recommend seeking legal advice.

Affidavit Page 155  section 235

2 In early May, when post-payment auditing was predominantly  random,  only  5% of applications audited required partial or full repayment. By the end of October, predominantly targeted auditing found repayments required in 15% of cases and in 35% of cases for resolved investigations.

Page 156 section 236

WSS application and declaration.

COMMENT:   The Declaration did not cover or make clear some important requirements.)

COMMENT :  Businesses who commit fraud and are caught are not prosecuted if they repay or if they are established and jobs could be affected. ).

MSD 2022 AFFIDAVIT

29. Client Service Integrity is a function of Service Delivery at MSD and responsible for managing MSD’s response to benefit fraud. Client Service Integrity

has around 100 Client Service Integrity staff who have been trained in investigating benefit fraud.13 These are experienced investigators with specialist training.

COMMENT:  Staff had no accounting and business training so may not have known what documents to request and how to analyse them.)

50. The third step is for MSD to contact the applicant to discuss their application. MSD will typically ask the applicant about:37

51.1 The number of employees and whether they are full-time, parttime, casual or under contract.

51.2 Whether all of their employees are legally employed in New Zealand and have consented to their inclusion in the application.

51.3 Whether the subsidy, as a contribution to the cost of wages and salaries of employees, has been passed on to all employees included in the application and how this has been done.

51.4 What steps the applicant is taking to retain the employees named in their application.

list end nesting level 1

50.2 Whether the business has experienced the required percentage decline in revenue including who calculated their decline and how the calculation was done.

50.3 Whether the decline is attributable to COVID-19 (and if so, in what way).

50.4 Any actions the applicant has taken to mitigate their decline in revenue, which can include engaging with their bank, drawing on their cash reserves, making an insurance claim, seeking a loan from IR, moving their business online or transitioning their staff to work from home.

COMMENT:  The questions are “typically” asked so we don’t know if they all were asked and what was asked and what the reply was. There is a question about steps taken to retain employees but this was not in the Declaration. The period for which revenue declined is not stated but logically it should be for the period of the subsidy.

55. Although not explicitly stated in the pre-payment check guidelines, if the MSD staff members has reason to suspect that the application has been made fraudulently, general practice is for that application to be referred for investigation.

COMMENT:  A major omission  that could be deliberate.  See also para 103 )

104. As at 4 February 2022, 1,148 cases have been referred for investigation. 513 have been referred for voluntary repayment or closed without further action (described as “resolved” in MSD’s reporting to its Minister). 635 investigations are underway.

COMMENT:  Only 1148 investigated with no definite action taken on about half and the remainder still being investigated with probably the same outcome. It is not known how many recipients were asked to make a voluntary repayment and why such a feeble request would be classified as resolving the case.

MSD 2022 affidavit

118. The Auditor-General made two recommendations about MSD’s postpayment integrity checks in its 4 May 2021 report. First, the Auditor- General recommended that MSD implement additional post-payment verification measures. By the time the Auditor-General’s report was published in MSD had already updated the declaration for the March 2021 wage subsidy scheme

to require applicants to prepare and retain evidence to support their application and this continued for the August 2021 wage

subsidy scheme

. All pre-payment and post-payment integrity checks now

require an applicant to produce this evidence so that our

Client Service Integrity staff can verify the application information.

COMMENT:  All businesses have to keep good records so this evidence could have been requested from the start. There was no need for the Declaration to remind businesses to retain records. )

( ) 

119. Second, the Auditor-General recommended that MSD test the reliability of a sample of its post-payment checks against documentary evidence held by applicants. In late July 2021 MSD responded by identifying a sample of 339 early Wage Subsidy recipients (representing 486 applications) who had been subject

to a random post-payment check. MSD contacted this sample group to discuss their eligibility and to provide documentary evidence to confirm their entitlement.

As at 4 February 2022, 334 of the 339 recipients have provided documentary verification to support their entitlement with 89 per cent of these requiring no further action and 9 per cent requiring a partial or full refund.

Four  recipients were referred for further investigation

COMMENT: The post payment checks had failed to ask a few basic questions so 11% of those who should under lax rules have made a repayment were not identified.  See our document MSD review failures to find out how poor the review was. If there had been a standard letter using accounting advice about the documents to be requested, repayments could have been 30%  or more of those written to.  The sample of 339 was 0.0004% of the 750,000 recipients.

124. This resulted in a random sample of 1,000 recipients representing two per cent of wage subsidy recipients and 10 per cent of total wage subsidy expenditure up to up to 9 June 2020.

125. Reminder emails to non-respondents were delayed due to the

establishment of the August 2021 wage subsidy scheme

but by October 2021 535 replies had been received of which 532 employers confirmed they met the eligibility criteria and complied with their obligations.

MSD wrote to non-responders on Friday 18 February 2022 to reconfirm their eligibility. Responses will be assessed, and results will feed into MSD’s analysis.

COMMENT: If there had only been 50,000 recipients, the sample size of 1,000 would have been 2%. There were at least 750,000 recipients so the sample represented 0.001%.  It appears that MSD forgot to send a reminder email but this was prompted by our OIA request on 25 January 2022

126. These two pieces of assurance were deliberately targeted at the first wage subsidy scheme (from 17 March 2020 until 9 June 2020).

This was before enhanced integrity controls were put in place from 10 June 2020 for the Wage Subsidy Extension and Resurgence payments.

SOD 34 (h) (i) They have accepted that the MSD did not write to all recipients as recommended and when they did write to a sample of 1000 they did not request any verifying documents. What they did say was::    

1. The Ministry of Social Development is in the process of assessing what steps, if any, are required to strengthen the integrity of the wage subsidy schemes  

 COMMENT   This should have been started two years earlier.

42 (f)  They again do not deny that a sample of 1000 were not asked for documents.

MSD Conclusion list of 1 items

129. Since it was tasked with administering the wage subsidy schemes MSD has developed processes for reviewing the legitimacy of wage subsidy scheme applications and investigating and prosecuting wage subsidy fraud. Throughout this time, MSD has continuously reflected on and enhanced its processes and will continue to do so including with the assistance of an audit partner.

COMMENT:  The MSD ignored all the research Data and information we provided and news media items and the criticisms of 6 academics. This showed a massive overpayment  of the original and extension wage subsidies but they did not want to admit what they had done or create any extra work for themselves so they ignored the data  and instead did some phone call checks. The reviews and evaluations recommended by the Auditor-General have been designed to get another  poor result so the MSD would not be embarrassed about its earlier checks and would not have to do extra work. 

The MSD does not mention its many failures to act in the public interest so please see the section called Summary of MSD failures.

AUDITOR-GENERAL RECOMMENDATIONS NOT PROPERLY IMPLEMENTED

AUDITOR-GENERAL 21 DECEMBER 2021 LETTER TO FINANCE AND EXPENDITURE COMMITTEE REGARDING PROGRESS BY MSD ON IMPLEMENTING OAG RECOMMENDATIONS.

This long letter gave a rosy picture of the work being done by MSD and it did not take into account the information we later put together for our documents on MSD review failures,  MSD misleading claims and MSD and Treasury unacceptable actions.

The Treasury and MSD have worked with Ministers to agree policy decisions clarifying some eligibility issues. These include that:

• Under the previous Alert Level framework, if a region moved from Alert Level 3 or 4 to Alert Level 2, or from Alert Level 2 to Alert Level 3 or 4 during a revenue test period, businesses in that region would be allowed to meet the revenue decline test by attributing their revenue decline to a combination of Alert Level 4, 3, and 2 effects, but not to Alert Level 2 effects alone.
• To be eligible for the Wage Subsidy, a group of organisations with a common owner (where the revenue generation and employment functions are separated within the group), must apply the revenue decline test across the whole group. Wage Subsidy applicants that apply as a group must base the revenue decline test on a complete and accurate representation of their whole business. The intent of the Wage Subsidy revenue decline test is to reflect changes in external trading activity.

  COMMENT:  Cabinet papers show that Treasury officials tried twice to get Ministers to  give wage subsidies to businesses regardless of any drop in revenue and for two or three times longer than necessary. When that was not entirely successful, they must have turned to encouraging MSD officials to have lax eligibility rules and an unwritten policy of pay and walk away. We made an OIA request to the MSD for any documents relating to advice given to Ministers about dealing with some of the main wage subsidy problems but were told that this had not happened. These problems had been identified by us and six academics and over 150 news media articles but the MSD chose to ignore them in favour of advising Ministers of the views of those who received the wage subsidy who they called stakeholders. The above quote has been copied because it shows the involvement of Treasury and that Ministers were only consulted about relatively minor matters. 

TWO QUOTES FROM APPENDIX 2 of the  report by the auditor-General  

`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.’

COMMENTS:   The MSD ignored recommendations by the Auditor-General, Deloittes and us to write to all recipients. This way of confirming eligibility and compliance is referred to above as being relatively inexpensive.

‘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’.

COMMENTS:  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 considered that a wage subsidy response is required ‘where keeping people in jobs is critical’      

A FEW QUOTES FROM OIA DOCUMENTS RELATING TO THE ABOVE LETTER   

The Ministry’s response to the Auditor General’s recommendation to test the reliability of the post-payment assurance work carried out does not include sending a standard letter to the 339 recipient sample, and as such your request is refused under section 18(e) of the Act as this information does not exist. For this work, in all cases, the person who submitted the wage subsidy application is contacted by phone in the first instance.

• Have any of the above 1,000 and the above 339 recipients written to since July 2021 repaid all or part of the wage subsidies received without providing the documentary evidence requested or prior to providing it?

Due to the Alert Level escalations in August 2021 and the Ministry’s focus on supporting the COVID-19 response, including administering the wage subsidy, finalising this work and analysing the results has been delayed.

The information you have requested is held in notes on individual application files. In order to provide you with this information Ministry staff would have to manually review hundreds of files. As such I refuse your request under section 18(f) of the Act. The greater public interest is in the effective and efficient administration of the public service.

• Please advise how many complaints have been re-opened for investigation since May 2021 and whether all complaints will be properly investigated?
• In order to provide you with the number of complaints re-opened for investigation since May 2021, Ministry staff would have to manually review thousands of files. As such I refuse your request under section 18(f) of the Act. The greater public interest is in the effective and efficient administration of the public service.

STAFF INSTRUCTIONS

       If at any stage during your conversation with the applicant you suspect they may have committed fraud, you must stop the conversation and issue a caution. The caution must be in the following terms:

a. the person has the right to refrain from answering any further questions and is entitled to remain silent;

2. the person has the right to consult and instruct a lawyer before deciding whether to answer any questions;

1. that anything the person chooses to say will be recorded and may be given in evidence.

TEMPLATE LETTER

If you don’t provide the documents requested, we may decide to get some or all of it from other sources, such as Inland Revenue.

However, if [you consider] or [the company considers] that any of the above information would be likely to incriminate [you] or [the company], you are not required to answer this request for that information. We recommend seeking legal advice.

Affidavit Page 155  section 235

2 In early May, when post-payment auditing was predominantly  random,  only  5% of applications audited required partial or full repayment. By the end of October, predominantly targeted auditing found repayments required in 15% of cases and in 35% of cases for resolved investigations.

Page 156 section 236

WSS application and declaration.

COMMENT:   The Declaration did not cover or make clear some important requirements.)

COMMENT :  Businesses who commit fraud and are caught are not prosecuted if they repay or if they are established and jobs could be affected. ).

MSD 2022 AFFIDAVIT

29. Client Service Integrity is a function of Service Delivery at MSD and responsible for managing MSD’s response to benefit fraud. Client Service Integrity

has around 100 Client Service Integrity staff who have been trained in investigating benefit fraud.13 These are experienced investigators with specialist training.

COMMENT:  Staff had no accounting and business training so may not have known what documents to request and how to analyse them.)

50. The third step is for MSD to contact the applicant to discuss their application. MSD will typically ask the applicant about:37

51.1 The number of employees and whether they are full-time, parttime, casual or under contract.

51.2 Whether all of their employees are legally employed in New Zealand and have consented to their inclusion in the application.

51.3 Whether the subsidy, as a contribution to the cost of wages and salaries of employees, has been passed on to all employees included in the application and how this has been done.

51.4 What steps the applicant is taking to retain the employees named in their application.

list end nesting level 1

50.2 Whether the business has experienced the required percentage decline in revenue including who calculated their decline and how the calculation was done.

50.3 Whether the decline is attributable to COVID-19 (and if so, in what way).

50.4 Any actions the applicant has taken to mitigate their decline in revenue, which can include engaging with their bank, drawing on their cash reserves, making an insurance claim, seeking a loan from IR, moving their business online or transitioning their staff to work from home.

COMMENT:  The questions are “typically” asked so we don’t know if they all were asked and what was asked and what the reply was. There is a question about steps taken to retain employees but this was not in the Declaration. The period for which revenue declined is not stated but logically it should be for the period of the subsidy.

55. Although not explicitly stated in the pre-payment check guidelines, if the MSD staff members has reason to suspect that the application has been made fraudulently, general practice is for that application to be referred for investigation.

COMMENT:  A major omission  that could be deliberate.  See also para 103 )

104. As at 4 February 2022, 1,148 cases have been referred for investigation. 513 have been referred for voluntary repayment or closed without further action (described as “resolved” in MSD’s reporting to its Minister). 635 investigations are underway.

COMMENT:  Only 1148 investigated with no definite action taken on about half and the remainder still being investigated with probably the same outcome. It is not known how many recipients were asked to make a voluntary repayment and why such a feeble request would be classified as resolving the case.

MSD 2022 affidavit

118. The Auditor-General made two recommendations about MSD’s postpayment integrity checks in its 4 May 2021 report. First, the Auditor- General recommended that MSD implement additional post-payment verification measures. By the time the Auditor-General’s report was published in MSD had already updated the declaration for the March 2021 wage subsidy scheme

to require applicants to prepare and retain evidence to support their application and this continued for the August 2021 wage

subsidy scheme

. All pre-payment and post-payment integrity checks now

require an applicant to produce this evidence so that our

Client Service Integrity staff can verify the application information.

COMMENT:  All businesses have to keep good records so this evidence could have been requested from the start. There was no need for the Declaration to remind businesses to retain records. )

( ) 

119. Second, the Auditor-General recommended that MSD test the reliability of a sample of its post-payment checks against documentary evidence held by applicants. In late July 2021 MSD responded by identifying a sample of 339 early Wage Subsidy recipients (representing 486 applications) who had been subject

to a random post-payment check. MSD contacted this sample group to discuss their eligibility and to provide documentary evidence to confirm their entitlement.

As at 4 February 2022, 334 of the 339 recipients have provided documentary verification to support their entitlement with 89 per cent of these requiring no further action and 9 per cent requiring a partial or full refund.

Four  recipients were referred for further investigation

COMMENT: The post payment checks had failed to ask a few basic questions so 11% of those who should under lax rules have made a repayment were not identified.  See our document MSD review failures to find out how poor the review was. If there had been a standard letter using accounting advice about the documents to be requested, repayments could have been 30%  or more of those written to.  The sample of 339 was 0.0004% of the 750,000 recipients.

124. This resulted in a random sample of 1,000 recipients representing two per cent of wage subsidy recipients and 10 per cent of total wage subsidy expenditure up to up to 9 June 2020.

125. Reminder emails to non-respondents were delayed due to the

establishment of the August 2021 wage subsidy scheme

but by October 2021 535 replies had been received of which 532 employers confirmed they met the eligibility criteria and complied with their obligations.

MSD wrote to non-responders on Friday 18 February 2022 to reconfirm their eligibility. Responses will be assessed, and results will feed into MSD’s analysis.

COMMENT: If there had only been 50,000 recipients, the sample size of 1,000 would have been 2%. There were at least 750,000 recipients so the sample represented 0.001%.  It appears that MSD forgot to send a reminder email but this was prompted by our OIA request on 25 January 2022

126. These two pieces of assurance were deliberately targeted at the first wage subsidy scheme (from 17 March 2020 until 9 June 2020).

This was before enhanced integrity controls were put in place from 10 June 2020 for the Wage Subsidy Extension and Resurgence payments.

SOD 34 (h) (i) They have accepted that the MSD did not write to all recipients as recommended and when they did write to a sample of 1000 they did not request any verifying documents. What they did say was::    

1. The Ministry of Social Development is in the process of assessing what steps, if any, are required to strengthen the integrity of the wage subsidy schemes  

 COMMENT   This should have been started two years earlier.

42 (f)  They again do not deny that a sample of 1000 were not asked for documents.

MSD Conclusion list of 1 items

129. Since it was tasked with administering the wage subsidy schemes MSD has developed processes for reviewing the legitimacy of wage subsidy scheme applications and investigating and prosecuting wage subsidy fraud. Throughout this time, MSD has continuously reflected on and enhanced its processes and will continue to do so including with the assistance of an audit partner.

COMMENT:  The MSD ignored all the research Data and information we provided and news media items and the criticisms of 6 academics. This showed a massive overpayment  of the original and extension wage subsidies but they did not want to admit what they had done or create any extra work for themselves so they ignored the data  and instead did some phone call checks. The reviews and evaluations recommended by the Auditor-General have been designed to get another  poor result so the MSD would not be embarrassed about its earlier checks and would not have to do extra work. 

The MSD does not mention its many failures to act in the public interest so please see the section called Summary of MSD failures.