A review of the $15 billion wage subsidy scheme, ordered by the Auditor-General, won’t land until next year. However, it’ll exclude any scrutiny of the scheme’s checks which, as yet, haven’t led to a single prosecution. David Williams reports

It was a key recommendation in a highly critical report.

Auditor-General John Ryan’s review of the wage subsidy scheme’s management panned post-payment checks, which are key to identifying fraud in the high-trust scheme, which paid more than $13 billion to businesses by the end of last year. The checks were too lightweight, Ryan suggested, since they didn’t often rely on documentation, like financial accounts.

The report, released in May, suggested several improvements, including demanding a sample of applicants provide evidence to back-up their eligibility, and prioritising remaining enforcement work, including prosecutions.

The last of five recommendations was aimed at the Ministry of Social Development (MSD), which administers the scheme, as well as Inland Revenue, the Business Ministry, and Treasury. They should “carry out timely evaluation of the development, operation, and impact of the wage subsidy scheme and use the findings to inform preparation for future crisis-support schemes”.

Now, four months after Ryan’s report was released, MSD confirms two separate evaluations will be done – but external consultants are yet to be appointed. (In March, Cabinet approved $1 million for MSD to evaluate the March 2021 wage subsidy schemes and previous schemes.)

The first report, on the scheme’s implementation, will be finalised by July next year. The other, on whether the scheme achieved its intended outcomes, will be completed later in the year.

George Van Ooyen, MSD’s group general manager client service support, says: “We want to ensure any evaluation process is robust, considers the various complexities and is done correctly – this does take time.

However, neither review will delve into the effectiveness of the maligned post-payment checks. Van Ooyen says this was covered by Ryan’s report and a “different approach” is needed.

“MSD is committed to continuing to work to meet the Auditor General’s recommendations.”

This absence of scrutiny surprises Canterbury tax researcher Dr Michael Gousmett, who says the checks, which were cursory in the main, were fundamental to verifying recipients were actually eligible for subsidies totalling billions of dollars.

“To entirely ignore that process I think is a fundamental oversight on their part.”

He also wonders why the evaluations will take so long. The longer they take the more costly they’ll be, Gousmett says, quipping: “Where do I sign up?”

Jilnaught Wong, Professor Emeritus of accounting at the University of Auckland, who has also been critical of elements of the scheme, says: “There is no reason why audits of recipients cannot be a part of the evaluation process.”

Van Ooyen confirms no prosecutions have been made but investigations are ongoing. “We are committed to prosecutions where that action is appropriate.”

“This is going to cost the taxpayer a lot of money for a long time.” – Michael Gousmett

Checks on wage subsidy eligibility have been made and have borne fruit.

Almost 250,000 applications were declined at the first stage, after the information supplied by businesses was checked with the IRD.

Of the 1,026,420 applications approved, $15 billion had been paid by late last month, while $744 million had been repaid by 19,014 recipients. About $23 million of that was paid after a demand from MSD.

However, many of those repayments were the result of public pressure, including prominent business voices like entrepreneur Nick Mowbray.

Think Briscoe Group, The Warehouse, and Summerset, which, between them, paid back $88.1 million. (But not hold-outs like Fletcher Building or Skyline Enterprises.)

It’s worth remembering the scheme was based largely on trust which, Auditor General Ryan says carries greater risks of fraud and error.

“I have no doubt that there’s money out there that people have quietly managed to squirrel away, just because of the way the system operated,” Gousmett says.

Some will say it’s a company’s job to maximise profits and if the subsidy’s there, why not?

Because it’s morally wrong, Gousmett says. If companies can afford to pay it back they should. “This is going to cost the taxpayer a lot of money for a long time, because the Government’s had to borrow to fund it in the first place.”

Business New Zealand chief executive Kirk Hope doesn’t buy the idea the wage subsidy benefited a great many businesses, who enjoyed a financial windfall. As for audits, he says it makes no sense to apply risk criteria for a normal economic cycle to an economic crisis.

“You should be saying the purpose of it was to keep people connected to their jobs,” he says. “When businesses were applying they didn’t know what the outcome was going to be.”

(As this NZ Herald story explains, and Hope is happy to recount, the business lobbyist was instrumental in the scheme’s adoption by the Government. It also consulted with unions.)

If the wage subsidy underpinned the economic recovery then the Government will recoup the cost through tax revenues, Hope says. He adds: “I would expect that there hasn’t been that much money paid out to people that were ineligible, and that the verification processes, if they were conducted, would bear that out.”

However, Wong, of the University of Auckland, says businesses could have easily gamed the system by delaying sending out invoices by a month, he says. “I don’t believe everyone’s been absolutely kosher about it.”

That’s why post-payment checks are important.

Fletcher Building posted a $350 million profit following its $68 million wage subsidy. Photo: Lynn Grieveson

It’s worth remembering the original wage subsidy’s requirements – a 30 percent loss of revenue over a month or 30 days, compared to the previous year. (Treasury officials pushed to have that removed early last year but Cabinet held firm.)

Such a revenue drop is not hard to imagine during a nationwide lockdown.

Businesses made declarations about these losses, as well as promising they took “active steps” to mitigate the impact of Covid-19, like using bank facilities or cash reserves. “Best endeavours” would be used to retain employees at least 80 percent of their regular income during the subsidy period.

Lump sums were for 12 weeks – far longer than the period of elevated alert levels. The contention of critics is many firms bounced back quickly.

IRD figures show net GST (payments by firms less refunds), a signal of business profitability, dropped by 21 percent in April and May last year, compared to 2019. But over June and July there was an increase of 28 percent on the previous year.

Astonishingly, more people were employed by the end of last year than the end of 2019. That might change, of course, as Auckland’s Level 4 lockdown bites. And while many economic indicators are favourable, Hope, of Business New Zealand, says: “I would say the economy is holding up, at best.”

The toughest months for businesses last year were from March to June, journalist Bernard Hickey wrote in March. Cash reserves were drawn down during the national lockdown and August’s alert level rise in Auckland.

But by October the reserves were replenished. By the end of the year, they’d been built up by a total of $21.7 billion.

Accounting Professor Wong co-authored a research paper, published earlier this year, draws a similar conclusion – that the grants were, in some cases, a wealth transfer.

It’s obvious some industries have been hit hard, like tourism and hospitality, Wong says. But professional firms, who retain the same clients year after year, and some retailers, have done well, especially those now selling products online.

“I’m sitting at home probably spending $1000 a month buying stuff online, which I never would have done.”

The scheme’s design didn’t allow for repayments based on profits or dividends paid. But business declarations included the caveat they may have to provide documentation to prove their claims of losses.

The Auditor General, Ryan, found this didn’t generally happen. Most so-called “audits” of recipients (MSD now calls them checks or reviews) were simply phone calls, without demanding to see evidence.

MSD’s Van Ooyen says in the vast majority of cases, employers are doing the right thing. But how would it know? Indeed, Ryan was not persuaded the ministry’s reviews “provide enough confidence that all applications that merit further investigation have been identified”.

Checks on the $15 billion scheme, with more than one million applicants, are being done by about 100 MSD investigators. Earlier this year, at least, they were being helped by 11 full-time equivalent compliance staff from Inland Revenue. The Auditor General’s report said: “It is likely that between 40 and 50 ministry staff who usually work on benefit fraud will be working on subsidy investigations for another 12 to 18 months.”

Integrity checks and complaint follow-ups

MSD has made 7196 post-payment “integrity checks”, and the ministry received 5139 complaints about potential abuse of the scheme. (Thousands more were received by the Business Ministry and Inland Revenue.)

By the middle of last month, 1058 cases – 0.1 percent of applicants – had been referred for investigation. About 450 of those were referred before July last year, and the total has only increased by 41 cases since early March. Of the total, 541 cases are resolved (77 more than in March) and 517 are still being pursued.

Possibly the most telling figure is zero – no prosecutions.

“That’s very surprising,” says Wong. “I’m sure there’ll be at least one out there that didn’t do it honestly.”

The Auditor General’s report from May says: “A number of prosecutions are anticipated.”

Yet the wheels of justice still turn for beneficiaries. In the financial year to July 2020, MSD completed 65 prosecutions for benefit fraud. (A decline from 453 prosecutions in 2016/17.)

“It’s wild, in my opinion,” says Auckland Action Against Poverty coordinator Brooke Pao Stanley. “It just goes to show the system’s really racist – it continues to persecute people.”

Professor Lisa Marriott, of Victoria University of Wellington, has been researching the disparity between prosecutions for benefit fraud and tax evasion for about 10 years. (She suspects more tax evaders may have been prosecuted last year, for the first time.)

On the wage subsidy scheme, she says: “It’s much more similar to benefit fraud because it is actually taking money, in some cases, that you’re not entitled to.”

She adds: “I hope there are some prosecutions because I’m quite sure there are some cases that do deserve to be prosecuted.”

Van Ooyen, of MSD, says in many cases entitlements have been wrongly claimed “due to uncertainty about eligibility criteria, rather than deliberate attempts at deception”.

“We are encouraged a number of businesses that incorrectly claimed for the wage subsidy have contacted us and are repaying any outstanding amounts. Others have refunded money because their situation has changed.

Hope, of Business NZ, says people who were trying to game the system deserve to be tracked down and prosecuted. “But I don’t think there were that many people,” he says. “Generally people were trying to do the right thing and sometimes got it wrong.”

Marriott suspects the mentality amongst business owners might be “safety in numbers” – “everybody thinks everybody else is doing it.”

Concerns over MSD’s perceived failure to act prompted Christchurch’s philanthropic Gama Foundation to take the ministry to court.

Gousmett believes that without proper verification, the amount of wrongly claimed subsidies could stretch into billions of dollars. Meanwhile, Wong says the lack of prosecutions could simply be a sign MSD hasn’t done a good job of monitoring the wage subsidy. Or, perhaps, “they’re just overwhelmed with doing other things, just to keep businesses afloat”.

He’s cognisant of the effect, though. “Our children and our grandkids will be paying all the debt back through higher taxes. It’s a hell of a lot of money.”

Deputy Prime Minister Grant Robertson said in March last year the wage subsidy would use a high-trust model and an “appropriate audit process” would act as a backstop. Photo: Mark Mitchell/Pool

Changes to subsequent iterations of the wage subsidy scheme suggest there were flaws.

Early in the pandemic, ministers were told paying the subsidy in shorter tranches could shave billions off the cost but would add to uncertainties for businesses. Uncertainty on one side of the ledger, perhaps, but billions of dollars of debt for taxpayers on the other. The 12-week lump sum was recommended, and embraced.

Officials acknowledged in a joint agency report last November that the high-trust scheme had a “heavy reliance on voluntary compliance”. (One effective policy, though, was the naming of recipients, which appears to have put off some big firms in the latest lockdown.)

While the scheme was effective at saving jobs and companies, the wage subsidies were implemented rapidly, and the high-trust model “involves trade-offs with scheme targeting and integrity”, the report said.

As Marriott, of Victoria University of Wellington, says: “High trust is absolutely fine for most people, but not for all people, and we know that there’s always going to be some people who will take advantage of a system like this to exploit it.”

Officials suggested a message could be sent by “increasing visibility and publicity around audit, enforcement and repayments, including through ministerial communications”. But the big stick wouldn’t be wielded – rather the heightened publicity would “incentivise voluntary compliance”. (Consultation for the report was mainly with business groups.)

More advice could be provided on repayment obligations for firms that experience a bounce-back in revenue or profits, officials said. No such condition has materialised.

Last December, Cabinet decided future schemes would be triggered by an escalation to at least Alert Level 3 for seven or more consecutive days. Payments would be matched to the duration spent in the top two alert levels, rounded to the nearest fortnight.

These criteria have been adopted for the latest scheme, as well as an explicit demand businesses keep records to verify their claims.

Auditor General Ryan’s report from May said it’s crucial to pursue prosecutions if illegal behaviour is found to “maintain public trust and confidence” in the scheme – to disrupt what Marriott calls the “safety in numbers” ethic. Post-payment checks needed to be adequately resourced and prioritised, the report said.

Four months on, Ryan’s watching with interest.

“We track an organisation’s progress in responding to our recommendations,” Ryan tells Newsroom in an emailed statement. “We do intend to do targeted follow-up on the wage subsidy, and that work will look at all of the recommendations we made.”

David Williams is Newsroom's environment editor, South Island correspondent and investigative writer.

Leave a comment