Video transcript: The future of fighting fraud in the public sector

Transcript for a video of a presentation about preventing fraud in the public sector filmed at the 2019 Audit New Zealand client updates.

Title: The future of fighting fraud in the public sector

Paul O'Neil

Thanks very much, and thanks in particular to Audit New Zealand for inviting me here today. And I appreciate that talking about fraud is a bit like yelling “Fire!” in a crowded theatre; it gets a reaction. But that’s sort of what I’m after, to a large extent. I do want to shake people out of a little bit of complacency, because I think that’s one of our biggest risks. I also want to take advantage of the fact that I’ve got a room full of people that I’m talking to about fraud who are here voluntarily and who aren’t being talked to as potential suspects, so a lovely, smiling, happy crowd. Wonderful, not what I’m used to.

In terms of what I do want to cover, as well, it’s ambitious: it’s the future of fighting fraud in the public sector. Probably not quite as ambitious as Peter having to guess what’s happening with the oil crisis or Brexit; I don’t envy those tasks. But what I would like to do is, I suppose, talk a little about what the SFO does, dispel any myths or mystery around that – because I won’t presume that you know much or anything about us. Talk about what we’re seeing at the moment – so what are the trends, what are some of the individual cases, and what are we concerned about? And also, to leave on an uplifting note, talk about what we’re doing to respond to that. Because I think New Zealand does have some systemic issues around the way in which it deals with fraud in the public sector, and corruption in particular. And there’s also some legal challenges as well where our legislation needs a bit of a dust-off, and we’re working towards that. So that will be a light at the end of the tunnel, hopefully.

I’ll start out by just talking very briefly about who we are. I won’t take you through an organisation chart of the SFO or that will start an early run at the buffet. The point of that, I suppose, is to say that there’s 50 of us, so we’re not large. And, of those 50, there’s 35, give or take, operational staff – not a huge number. And, I suppose, the other thing to note: we’re a little bit unique as well, in terms of how we investigate crime, in that we get the complaints in, we review them, we triage them, we commence an inquiry, we might commence an investigation. And then we go all the way through a prosecution, taking it to trial, sentencing, the whole lot. That’s quite unique in the sense that we don’t look at a crime, investigate it, wrap it up and then hand it to some independent prosecutor or some separate agency.

And that’s deliberate; it’s modelled on the UK SFO approach. Because we take the view – and this is seen as best practice internationally – that the types of cases we look at, you effectively end up investigating them twice, if you like, if you look at them at an investigative level and then wrap them off and send them somewhere separately. So we do look at them throughout their life cycle. I suppose the view can be taken: does that affect our independence? We would obviously say no, and we have a director who makes the prosecution and the investigation decisions, and her decisions can’t be called into question by a court, so there is that independence in that sense. And there’s also complete political independence; we do not have political interference or even involvement, or any detailed knowledge, unless absolutely necessary for extraordinary circumstances, into our cases. So we do have that independence.

We also have a separate panel of barristers who act on our cases who lead them at the prosecution end in conjunction with an SFO team. And, again, that just gives that measure of independence where they’re giving us their expert legal advice, but also that cross-check, I suppose, that we’re taking the right cases. In terms of those cases, Serious Fraud Office Act 1990 – somewhat old, a little bit fit for purpose, I suppose. Doesn’t define fraud, which is interesting. But what we’re left with is what is, at the moment, a pretty narrow mandate: to investigate, detect and prosecute serious or complex fraud. What that means is that conversations like I’m having today to try and give you some insight, they’re not part of our core mandate at the moment. Which I think is – and I’ll go on to belabour this point – a little bit of a gap, I suppose. Our mandate is narrow.

And, with our 35 operational staff, what that results in is about 10 to 12 prosecutions a year. Which, for the office the size we are, is a large number. But, ultimately, unless you can leverage off that – unless you can get the learnings of that out there, actually get the lessons disseminated into the relevant communities or sectors or segments of the country – then we aren’t having full impact for that. All you’ve got at the end of your 12 prosecutions is 30 people in jail. Great, that’s a necessary thing, but it’s quite a blunt instrument, so we do need to do better as a country in terms of how we tackle fraud and corruption, particularly in the public sector.

In terms of how we look at cases, there are a few things we look at. The first thing is the scale, the number of victims or the financial value. To be honest, it’s all about context, is that I have read in the papers that our financial threshold is some magical figure of one million, two million, and I’ve even read five million – like Auckland property prices: going up for no apparent reason, with no basis. The reality is, if you’re in the middle of the GFC and Hanover and Bridgecorp are falling over and $500 million is being lost, a million-dollar case isn’t very big. In more normal financial times, it might be. So it is all about context. It’s certainly a factor that we look at, and the number of people affected is even more of a factor. So it’s probably fair to say anything under a million dollars may not take our attention, but it depends on a number of other things.

Public interest – and I do draw a very important distinction between public interest and what the public might be interested in; they are different things. What we will look at is if it’s public funds or there is a public impact. And, in that sense, we will take cases where we think there’s a real systemic risk or a widespread interest in that case being pursued. If it’s just person A and person B who have a beef, it may well be fraud between the two of them, but we have to question whether that’s a good use of our limited resource to intervene in that one-to-one situation. Are we getting maximum value for New Zealand’s money in intervening in that?

On the other hand, two of the biggest cases we took last year were two massive mortgage frauds, one in the residential lending sector, another in the commercial lending sector. They were really important cases for us to take. Not the sexiest prosecutions in the world, I can assure you; we weren’t doing it for our entertainment. But really important, in the sense that they were of such a scale that they had the potential to distort the residential lending market and the commercial lending market in relation to property, and that’s a huge risk for New Zealand. We also had professionals facilitating that fraud, lawyers and accountants willing to put their practicing certificates on the line, and accountants doing the same thing, in order to facilitate that fraud. Massively important that we send the message to those professional bodies that that won’t be tolerated.

Similarly, within the banks themselves; the frauds couldn’t happen in either instance without an insider facilitating it. And we’ve sat down and had a number of conversations with financial institutions about how they deal with misconduct. Because what we were seeing, and what we continue to see to a certain extent – although I’d like to think it’s getting less – is people having an issue within their organisation, detecting it, spotting it, and moving them on. Saying, “Right, we’re the blue bank; we’re going to move that to the yellow bank. We’ve got it; out the door.” That’s not okay; that’s not a way in which to deal with this problem. All you’re doing is passing that issue on to another person. So, again, that was really important that we could stamp down on that insider element to this type of conduct. And so that’s just one example where that was a real systemic to New Zealand, so we took those two cases.

Complexity: legal, factual, evidential. In that sense, we like to think of ourselves as having particular expertise in these types of cases. We do them better; we have a core of accounting expertise, investigative expertise and legal expertise that isn’t held anywhere else in the country. The police do a great job at certain levels of fraud, but they’re simply not resourced and set up to do it, and the recent events of Christchurch just demonstrate that certain things just have a bigger priority, and they have to have a bigger priority. But we don’t have to prioritise; we just do financial crime. Whereas within the police, where they have fraud, that will get deprioritised, as it has to do in certain circumstances.

The last one – and this is a really important one – the nature and consequences; for example, corruption. The point there is we might have monetary thresholds and how many people are affected for most other types of offending, but if it is public sector money and it is public sector corruption, we will come down on that as hard as we can. We’ve taken a case for a thousand-dollar bribe within a local government context. We lost that case, but that’s okay; it was the right case to take, and that demonstrates that that’s just not going to be tolerated. And that’s massively important.

And there’s our strategic plan: lots of blue and orange up there, which I can’t read and I’m closer than you are. But the point of that is to say that New Zealand being a safe place to invest and do business, and our reputation for being corruption-free, is massively important. It’s a huge brand for New Zealand. We are, typically, top of the Transparency International Index for not being corrupt, effectively. It is just a perceptions index, but I know, engaging with our overseas colleagues, that perception is real, to the extent that they rely on it; they see it as a real thing. It’s of enormous value to us, and we need to protect that.

And I often draw parallels with our environmental image. Again, if you attend or engage with other jurisdictions, that perception of us being clean and green and 100% pure, that’s real; people do see that and perceive that as being the case. A lot of people in this room will be pretty cynical about that, whether it’s actually the reality, but that’s a different question. It’s certainly perceived that way. And what we’re trying to do in relation to corruption is probably a little similar to what we’re trying to do with our environmental reputation, which is to close that gap between perception and reality – and, if I might be facetious, quick, before anyone notices. Because, at the moment, we’re perceived as being not very corrupt. Partly because our corruption looks a little different to other countries; partly because we’re not very good at spotting it and raising a hand when it does occur. But we need to make sure we do better, that we’re not complacent about it. otherwise, that reputation, which we trade off – believe me, we absolutely trade off it – that will go.

In terms of emerging risks and vulnerabilities, there’s a few overarching ones which are sort of unique to New Zealand. Our population growth – and this has been touched on to a certain extent by my colleagues from the Treasury – our population density has increased hugely. That is a risk factor in terms of fraud: where population increases dramatically, quickly, and intensively within certain areas, the risk of fraud and corruption does rise. Wealth distribution: we’re becoming a more unequal society in terms of wealth distribution. Again, that’s a factor across the globe in terms of rising perceptions of fraud and corruption.

Diversity of cultural norms. And, again, you’ve seen this in the figures – immigration has driven a lot of our economy’s performance. It’s done incredibly well on the back of it. And what we’ve done is we’ve introduced some really diverse and unique and forward-thinking ways of doing business. They’ve diversified our economy; they’ve really driven things, and those great new ideas have pushed us along and they’re fantastic. But I think we’re being a little bit naïve if we think that one of our established factors, which is an established cultural norm of corruption not being okay within New Zealand, that that’s just going to get absorbed by people coming into the country by osmosis. I don’t think it is. We have to do better about making sure our established norms that exist in New Zealand for how we do business are passed on, so that we’re not just taking in good new ideas and ways of doing business and ignoring our own obligations.

The point of those two coloured globes: the top one, it’s the Transparency International Index demonstrating which countries are perceived as being corrupt and which ones are not. The darker the colour, the more corrupt it’s perceived to be. And we’re down there in a nice halo of perfection in the bottom right-hand corner looking quite yellow, so we’re perceived as being not very corrupt, along with the Scandinavian countries. The issue with that is we can sit at the bottom right and say, “We’re wonderful. We’re not corrupt; aren’t we an island of perfection?” Fine. But, unless we’re just going to trade with ourselves and just do business with ourselves – and, again, the Auckland property market’s probably an example of where we’re tried to do that in order to get rich – unless we’re going to just do that and just engage with ourselves, we’re going to have issues.

Because the bottom map sets out the countries that we have formal trading relationships and are working on strengthening those in one way or another. The point there is, if we have business, established trading links with other countries who do have a perception of corruption and real corruption issues, if we’re doing business with them, then that’s still a risk. We live in a global economy. We’re doing business with other people who have these issues, so we have to take that on board. The obvious point is, we do have corruption. But, in any event, even if we fooled ourselves that we don’t, we’re having to do business with other countries where it’s definitely an issue.

What I would say, though, is – and going back to the first point: do we have corruption? – we absolutely do. What we don’t have, when I talk about it with other colleagues, is the type of corruption with money in a brown paper bag and people getting kidnapped and extortion happening on some dramatic scale, as you might see in TV or movies. But we have more insidious corruption. What we have in New Zealand is a failure to recognise conflicts of interest. And we might justify that to ourselves – and I hear these conversations all the time – that, “I have that interest, yes, I went to school with that person, but that’s a good thing because I know they’re the right person for the job. Yeah, I helped them out with the tender, but they were going to get it anyway because they’re the best person to do it.”

A failure to declare interests, and a failure to declare relationships. New Zealand’s a village; it’s a small place. “If I can’t do business with them, I may as well just shut up shop.” These are just justifications, and they’re just not true. Other countries that are smaller than us deal with this better, and those just aren’t justifications. So it’s a complacency in understanding what corruption is, because it can be as insidious as that. I suppose, in terms of that complacency, what we see is it’s led from the top, absolutely led from the top. You will very rarely have an instance where you go into an organisation and corruption has occurred where there hasn’t been a slackness of process or gaps that have emerged which haven’t been effectively sanctioned from the top, in that those processes have been allowed to be avoided. It’s very rare that that just happens. It happens within an environment where that’s seen as okay.

We have a difficulty in understanding the scale and extent of corruption in New Zealand. And the second and third bullet points probably go together, and this is some of the work that we need to do in order to get our heads round what corruption looks like in New Zealand. We have some really great work that’s being done in isolated areas of the public sector within New Zealand to prevent corruption, to prevent waste, error, and fraud generally. And, across the world, it’s quite common that the two areas which government across the world invariably get right is tax, because that’s where the money comes in. The sophistication across the globe of tax departments, in terms of detecting fraud using artificial intelligence, analytics, and ensuring that the tax take is fair and not subject to an unacceptable level of fraud, is astonishing. It’s fantastic.

And the other one is benefits or social welfare, or whatever any country round the world likes to call it, because that’s where all the money goes out. Again, countries around the world are fantastic at ensuring controls exist around those and making sure it’s good. But what we don’t have is – and, again, this is true across the globe – is linkages between those organisations so that those practices and those methodologies are being shared. There’s isolated work being done where they understand the problem, the techniques being employed and the ways to stop it, and they aren’t being shared across our public sector or across public sectors generally. We need to do better on that.

And the last one is where you pour out your sympathy for the poor Auckland lawyer, which is that the size and nature of the complex fraud we’re doing, we are not going to be able to arrest our way out of a fraud issue. We never have been able to; that’s never been true. As I say, 12 prosecutions a year – important, but a blunt tool. But what’s happening now is that the size and nature of cases is getting so big that that’s becoming even more true, if that’s logically possible. A large case a few years ago was 10,000 documents. A large case now – we have a couple of cases sitting in our books that have an excess of 10 million documents. And that’s becoming more common.

Two- or three-week trial was a large case, and now a two- or three-month trial is a large case. The nature of the legal challenges we face are getting more. Basically, we’re having to work harder and engage more effort to do the same number of cases. And that’s only going to continue. That issue exists in a civil and a criminal context. So, unless the criminal law is going to get more efficient and more sensible, which just isn’t going to happen, it’s becoming more the case that we need a new approach.

And that approach has to be focusing on prevention. At the moment, there is a real focus on prosecution of those large-scale cases, but not enough money and not enough time and effort is invested in a prevention model. That is seen as a world-class approach to how you engage with corruption and fraud within the public sector. The countries that are catching up with us and moving us down the Transparency International Index are doing exactly that: dedicated anticorruption agencies leading a coordinated approach across their public sector to prevent fraud. Alongside that, you need an agency who’s prosecuting it appropriately, because you always need that stick. But that’s where we need to head: a prevention model.

In terms of what we’re seeing – and I’ll run through this only very briefly, but it picks out some of the examples of what have been on our books recently. And, I suppose, because I want this to be valuable for you guys at a detailed level as well, some of the things we saw that perhaps led to the fraud. The first one was the Waitangi National Trust were defrauded by one of their financial controllers. Really simple thing, really. He was basically able to access other people’s passwords and other people’s approval passcodes for the accounting system and for other methods of approval. Through those people being sick and giving him their passwords; through those people leaving the organisations and not having those passwords closed down – they continued to exist after they left. And just not really good security; just a real trust environment rather than a process environment, and that allowed him to steal $1.2 million to spend on himself.

The second one, home detention for the chap defrauding government-funded disabilities trust. That was just an example where a person was able to push all of the trust’s work to one supplier and get kickbacks from that supplier. It wouldn’t have taken much scrutiny to see that the person, or the organisation, receiving all of the work for this trust wasn’t qualified or able to do this work. It should have raised red flags, but it didn’t. All the work went in that one direction, and it was spotted far too late. The last one’s one out of here in Christchurch where a couple was doing what was, on its face, incredibly noble work: providing developmental services for intellectually disabled people, and they were charged and pled guilty, in the end, to $500,000 worth of that charity’s money, spending it on themselves.

And that was probably a combination of factors. It was a strong personality. But also we see this a lot where the purpose is noble, and the work being done is good and looks, on its face, to be something that shouldn’t be challenged; it isn’t challenged. We’re not very good in New Zealand at speaking up. And, across those top three, you had a combination of strong personalities. It’s usually charm; sometimes it’s bullying. But, in any event, it’s people who ride roughshod over processes and get away with it. The last couple are active investigations, so I won’t go into them in any great detail, just to demonstrate a couple of issues we are seeing.

The bottom-left one, that relates to the education sector: are we doing enough really to determine – particularly in an environment where we’re saying that we want to facilitate people’s access to education – ensuring that the educational services that are being provided are actually the ones being provided? Is an 18-week course being done in one day? What controls exist to ensure that is the case? And the last one just relates to procurement. It’s a massive risk area for New Zealand generally. And, as I’ll go on to demonstrate, we’re needing to do a lot of work around procurement, because it’s a huge area where New Zealand is losing money.

In terms of red flags and things that we’ve seen – and this goes for probably most of our cases, but in particular in a public sector context – the things that we see, and I think you should look out for: isolated responsibility. And what I mean for that is people who hold relationships, contractual relationships or supplier relationships, too close. They don’t want anyone else to interfere in that relationship, to be on that phone call, to write that letter, to write that email; they hold that relationship incredibly closely. That could be a quirk of their personality, fine, but that’s also a real danger sign. If someone is holding that relationship so tightly they won’t let others get involved, that’s a risk. Shouldn’t be allowed to happen.

Avoiding decision-making, approval or delegation processes; that’s probably the biggest one. What we see is, often, on paper, some of the best processes you’ll ever see – wonderful stuff – but just not observed. Either because, “I know this person; I trust this person.” “Commercially, we just have to move quicker. We can’t be bothered with these processes.” “So-and-so’s away. I have to do it; I have to approve this. No, I understand this. Leave this with me. I’ve had a separate conversation, which means it’s okay.” All of those things. You could have someone who’s just lazy and likes cutting corners – but that’s something to detect in itself – but also, it could be a sign of something more insidious.

If those processes are there, they’re there for a reason; they need to be observed. If those processes, you look at them, you say, “Look, they’re not fit for purpose,” change them. Don’t ignore them; make them better. If you’ve spotted ways in which, “This just slowing us down, could be done so much better,” do it better, but don’t ignore them. And, going back to my earlier point, that only happens, and those corners only get cut, if people at senior levels within the organisations make it okay for those corners to be cut.

The next one – and this is a hobbyhorse of mine – is a failure to address and not manage conflicts of interest. I’ve heard repeatedly – and the noise is just getting louder – over the last little while people justifying conflicts of interest by saying, “They were managed. Yeah, I was in the room. I had a conversation around the merits of the proposal,” whatever it might be, “but I didn’t speak up for it. I wasn’t advocating for it; I was just setting out facts.” Or, “I was in the meeting for a little while and then I left for a little while and then came back.” Managing conflicts is an area where New Zealand falls down hugely. Oftentimes, the best way to manage it is they can’t be managed; you avoid them. Managing it and putting steps in place that (a) aren’t effective and then (b) aren’t observed anyway, the perception is terrible, even if there isn’t impropriety, and it certainly raises the risk of impropriety occurring. So conflicts of interest, avoid them. Remove yourself from them; remove your organisation from them. If you seek to manage them, it’s a massive risk.

Unexplained wealth. A couple of our investigators like doing a little slideshow where they show the carparks of people that they’ve caught and, in amongst the Brezzas and the Toyota Corollas are the Audi Q7s and the Porsche Cayennes. And my investigators, who are a suspicious lot, would happily handcuff them to their steering wheels and take them away on that basis alone. And I don’t necessarily suggest that – although it’s a free world; do it if you like. But, in and of itself, it’s amazing the number of times we get it said to us after the fact that, “That person, I always wondered how they could sustain that lifestyle, they could have those trips, how they could live like they did, when they were on the same wage as me. They’re living the same way as me. How could they do that?” I’d just like people to be wise before the event and not observe this to us after the fraud. Some pre-fraud observations would be great.

People who don’t take time off. It goes back to isolated responsibility. If people don’t want to leave, and just want to sit there and control a relationship or a contractual issue, that’s a big risk area. Missing documents or records and lack in detailed invoices. Again, that could be just because the person is slack and they’re not very good at their job, and they just like cutting corners. Fine, that’s one explanation, but also, where you have missing documents or records and a failure to document processes that have happened, it raises the risk profile and it could be something more insidious. And none of these taken in isolation represent a definitive fraud, and even all of them don’t. But if you’re seeing a lot of these things, then it is something to inquire into further. Because the number of times we get told afterwards, we could tick these off when we’re having a conversation. People after the event are great at spotting these things.

Just in terms of our legal response, and I won’t bore you with the legal detail on this too much, but it is just to demonstrate that we are trying to do something about this. At the moment we have a public/private distinction in our legal framework with how we deal with fraud and corruption. That’s not the way it’s dealt with internationally. I think that will go. We need to define what constitutes corrupt conduct better; at the moment it’s an amalgam of case law and judicial-made definitions. We need to do better; we need to actually define corruption. It’ll allow me to bang this pulpit a bit better if I can just bring that up and say, “That’s corruption.”

Clarifying corporate liability. At the moment it’s difficult in New Zealand to chase corporations who allow bribery or corruption to occur. Legally, it’s tough. We shouldn’t be in that position where we’re facing technical arguments. If corrupt conduct has occurred at an organisational level, we should be able to pursue it. Creating a new offence for abuse of public office. Again, we have technical arguments around a person sitting within a public office saying, “This occurred, but it didn’t lead directly to that tender being won.” Or, “I didn’t directly take that piece of paper and pass it on to that person, which then resulted in a benefit.” I’d rather not to have to join those legal dots. Sometimes the offence, the corruption, is broader than that. It is an abuse of public office, that that person is generally using their public office for a private gain. Again, that’s the international standard.

And, responding to international trends, facilitation payments. They’re not okay in a foreign bribery context, and we’ve diminished the circumstances in which they can be okay. Should just be off the books. A facilitation payment being where you pay a little bit of money to make a process go quicker. At the moment, on our statute books, in a foreign bribery context, that can be okay. It needs to go; it just looks bad. And the requirement for the Attorney-General’s consent to prosecute, that’s never been practically an issue. But he is, or she is, a political appointment, and so, for New Zealand’s perception’s sake, we need to remove that and having it sitting down at a non-political level. Again, our international reputation suggests that we need to do that.

Taking a consistent approach to penalties and adopting a non-prosecutorial mindset. Again, if we just keep trying to arrest our way out of the fraud problem, we’re not going to win. And, lastly, just the systemic response, and this is the anticorruption work programme that the SFO is leading across the public sector. What we’re trying to do at the moment is develop a shared understanding of corruption in New Zealand, so we’re at the data-gathering phase. Once we have that information, what we’re trying to do at the moment is review the controls for the allocation, expenditure of public money, and that’s for central and local government. Because controls that exist in there at the moment are often directed at getting value for money, but are they directed specifically at fraud and corruption? And we don’t think they are.

We’re working with Auckland Council, who had their own issue with the Auckland Transport bribery case, and they have amended significantly their procurement controls, so we’re in there at the moment looking at the before and after effects of that. We’re designing a framework to measure the value of the savings. If we want to be able to sell to the powers that be, the fact that a prevention model is world-class, that’s fine. One good argument is that other countries are doing it; why shouldn’t we? But a better argument, as I’m sure you’ll all appreciate, is it gets money. It saves money. It makes sure the money that is coming in to go to that place which is worthy is actually going there. It isn’t getting ticked along the way.

And the last one is we want to implement an engagement programme so that the good work that we’re trying to do within the public sector, that we’re in the middle of trying to do at the moment, has a wider impact. So how do we disseminate that out across the private sector? If we can do all of that, and if we can shake some of our complacency, then we will move forward and we can keep our place at the top of the Transparency Index.

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