The unacceptable actions of Treasury and MSD officials

Most of the businesses and professional firms we have personal knowledge of have wrongly obtained or retained part of the wage subsidy they received.  They were able to work almost normally and suffered no genuine decline in revenue. We have not complained about them because we have concentrated on the big picture and we did not want to pick on a few businesses when hundreds of thousands of other recipients had done the same thing or worse.  However, we did make some OIA requests to find out whether the MSD had investigated some well known businesses who clearly should have repaid part of the wage subsidy they claimed, but the response we received showed that nothing had been done by the MSD and no interest was shown in following up the research data we provided for each business. They said in one document that they intended to complete checks on the wage subsidy by the end of 2020.

For more than a year the MSD did everything it could to avoid investigating and prosecuting abuse of the wage subsidy. In 2020 Deloitte and the Auditor-General told the MSD to write to all recipients to ensure their compliance with eligibility and post payment obligations.   We also several times tried to get them to write to recipients but they failed to do this.

We have tried to work with the news media and a few others to bring pressure on businesses for repayments to be made and these voluntary payments currently stand at $760 million. This indicates that many times more would have been repaid if the MSD had written to recipients.  Only a tiny proportion of repayments were a result of work done by the MSD.

The MSD only dealt with 10% of the complaints they received by having a phone conversation with an employer and not requesting any verifying documents. The public and Ministers were told that these were audits but the Auditor-General said that this was not correct and was misleading. Some of what the MSD told the Finance and Expenditure Committee of Parliament was also misleading. The committee noted that despite a 170% increase in payments by the MSD, they did not request any extra staff or resources to investigate fraud.

In May 2021 the Auditor-General issued a report that was critical of the post payment management of the wage subsidy by the MSD. Two of the main findings were that verifying evidence should have been obtained and that prosecutions were critically important. In June 2021, The Gama Foundation applied to the High Court seeking a Judicial Review of the failure of the MSD to properly investigate and prosecute any wage subsidy recipient. These developments resulted in the MSD making some token gestures at investigations but they failed to start prosecutions before the last round of wage subsidies commenced in mid-August.  If they had made a big announcement about prosecutions prior to this happening, many of those who applied could have been deterred and the taxpayer might in the end have saved over $1,000 million.

The MSD filed two prosecutions in September 2021 but one may have been withdrawn when a repayment was made. We understand that the MSD in October 2021 referred 10 cases to the SFO for investigation but these would only represent the tip of the iceberg.

On 2 March 2020 Business New Zealand put forward the wage subsidy they wanted and two weeks later it was approved by Cabinet. Treasury officials got a previous payment cap of $150,000 removed and made a big effort to ensure that businesses were paid for 12 weeks despite a predicted lockdown of 4 weeks.  They tried hard in two cabinet papers to get the wage subsidy paid to all businesses regardless of any drop in revenue but this was not successful so it appears they then arranged with MSD officials to have lax wage subsidy rules and a Declaration that was open to fraud. The main wage subsidy was paid for 5 or 7 weeks when most businesses were experiencing a big post lockdown boom in revenue but repayments were not requested. Beneficiaries are required to repay overpayments and recently Superannuants trapped in Australia for more than six months were told that they would have to make repayments.

The MSD officials ignored over 150 news media articles and criticism by 6 accounting and business academics and instead held stakeholder meetings with those who had received the wage subsidy and said that any proposed changes would   have to be referred to the stakeholders, The MSD refused to properly investigate and prosecute anyone. This is a huge contrast to the way that they investigate and prosecute overpayments and fraud by beneficiaries. In the 2016/17 year they prosecuted 453 beneficiaries so they do know what to do if they want to prosecute.

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 an average of 45% in the two years from March 2020. 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 only a few individuals were involved.

At different times we used OIA requests to bring all the important facts to the attention of MSD officials and used OIA requests to find out from documents what action they had taken or intended to take. It was clear from the responses received that they did not intend to do anything worthwhile so were not acting in the best interests of taxpayers. They said that they had not sought or been given any directions as to what to do regarding overpayments and 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”.

In view of the wasteful use of many thousands of millions of taxpayer dollars, an investigation of the deliberate actions of Treasury and MSD officials is justified.  If this is outside the work normally carried out by the Auditor-General, it does highlight a problem area that needs to be fixed.

In December 2021 the Auditor-General wrote to the Finance and Expenditure Committee and the letter included the following:

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:  The above quote has been copied because it shows the involvement of the Treasury with the MSD and that Ministers were only consulted about relatively minor matters.

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 Finance and Expenditure Committee said in August 2021:

“Since the release of the Auditor-General’s report, a working group including representatives from the relevant agencies, has been established. This group has been meeting weekly to “coordinate and discuss monitoring and evaluation of the Wage Subsidy Scheme”. We look forward to this group releasing its findings.”

Another  2021 highly critical Auditor-General report on the performance of the MSD showed that the high trust model did not work and officials had no concerns about wasting large amounts of taxpayer money. A stuff editorial said:  Ryan’s report this week stands as a stinging humiliation of the MSD, and its curiously inattentive minister, Carmel Sepuloni. The ministry’s performance on this issue was woeful.

Thank you! Your subscription has been confirmed. You'll hear from us soon.
Subscribe to our newsletter.