Fresh scrutiny on the wage subsidy identifies potential rule-breakers from already-reviewed businesses. David Williams reports.

Tax department analysis reveals 8 percent of sampled businesses might not have met the required revenue drop required to get the wage subsidy, lending credence to claims initial checks on the $17 billion scheme were inadequate.

Question marks also hang over compliance measures on money doled out under the scheme since August of last year.

In May, Auditor-General John Ryan criticised post-payment reviews of wage subsidy applications – mainly verbal confirmation from employers and, in some cases, employees – saying it was unlikely all applications warranting further investigation had been identified.

“I have recommended that the Ministry of Social Development test a sample of these reviews against documentary evidence held by applicants,” Ryan’s report said. “In my view, the use of a high-trust approach at the outset needs to be balanced with adequate verification after the payment has been made to properly protect the use of public money.”

Audit NZ, which audits hundreds of public entities each year on the Auditor-General’s behalf, also reviewed the scheme, run by the Ministry of Social Development (MSD). It also recommended further compliance checks be made, and existing integrity and assurance work be analysed to assess what more needs to be done.

Some progress has been made.

Criminal charges have now been filed, in the Auckland District Court, against two people. MSD’s group general manager of client service support George Van Ooyen confirms one person faces eight charges of dishonestly taking or using a document, and the other faces three charges of receiving property obtained by an imprisonable offence.

Fulfilling another of Ryan’s recommendations, external consultants will evaluate the scheme, with their reports expected to be completed late next year.

Newsroom can now reveal details of MSD’s sampling done in response to Ryan’s report.

It used analysis by the tax department, Inland Revenue, to assess whether businesses met the required 30 percent revenue drop, and retained employees during the subsidy period.

An internal MSD memo from July, released to Newsroom under the Official Information Act, shows assurance checks focused on wage subsidy scheme payments made between March 27 and June 9 last year – involving almost 400,000 businesses and about $11 billion.

(Payments under all of government Covid-support schemes has now topped $17 billion.)

MSD investigators focused on 3751 random post-payment integrity checks undertaken between March 27 and May 22 – rather than those selected under a more targeted approach adopted later.

A sample of 339 businesses, responsible for 486 applications, were selected and asked to provide documentary evidence of their eligibility. (Businesses already under investigation, or who had since made a full repayment, were excluded.)

Inland Revenue analysed GST payments, employee numbers, and PAYE to ensure wage subsidy criteria were met.

“Results of this indicative analysis showed that just over 8 percent of the sample may not have met the required revenue drop and just over 6 percent of the sample may not have retained the employees applied for,” wrote Amy Henare, a director in MSD’s service delivery arm, who authored the July memo. “These were primarily in small to medium business size recipients with six-29 staff.”

Forty-five MSD fraud investigators are reviewing evidence provided by the sampled businesses. Nine Inland Revenue compliance staff have been seconded to MSD to help. Their secondment was meant to have finished by now but MSD confirms five of them will stay on until late next month.

“Where fraud is suspected, cases will be referred for further investigation,” the memo said.

MSD has also written to a sample of 1000 early wage subsidy recipients, mainly larger employers, asking for confirmation of their eligibility and compliance with obligations.

Van Ooyen says in an emailed statement: “We will not be commenting on any outcomes of this work, or the work to write to 1000 wage subsidy recipients, while it is ongoing.”

Lisa Marriott, a professor of taxation at Victoria University of Wellington, picks out the 8 percent of businesses in the sample which may not have met the required revenue drop.

“I would hope that the same eligibility criteria (i.e. GST reduction of 30 percent etc) would be extended beyond just the pilot sample – as 8 percent potential non-compliance is high when you are talking about amounts paid of over $10 billion.”

(Initially, MSD found non-compliance of 5 percent, under its random post-payment checks of the scheme, but that lifted to 15 percent a year ago, under a more targeted regime.)

Canterbury tax researcher Dr Michael Gousmett thinks the sample size of 339 businesses – 9 percent of random integrity checks and 0.5 percent of all wage subsidy spending – is too small to be sure it’s representative.

He’s surprised most MSD fraud investigators have gone back to benefit work. “Maybe we haven’t quite finished this project enough yet?”

The numbers involved are eye-wateringly large.

Almost 1.6 million applications have been approved across all government support schemes, with $17.2 billion paid out by October 8. The vast majority of those payments were wage subsidies – including more than $3 billion since the national lockdown was imposed two months ago.

Gousmett says it’s clear from the MSD review’s sample many businesses have taken advantage of the scheme’s high-trust model, while many others have unknowingly breached the eligibility criteria. That leaves the Government with a dilemma.

“It comes down to how much time, and energy, and cost we’re going to put in to try and find those amongst this big pool.”

The biggest factor in what to do next should be the cost of the scheme, Gousmett says.

“The Government’s had to borrow the money in the first place to pay it out. So, it’s costing us not only the forgone revenue from people that are taking advantage of the system but the cost to the Government of borrowing the money on top of that.”

“They really need to be doing a similar study on what’s going on this year.” – Michael Gousmett

The July memo by MSD’s Henare raises questions about post-payment checks over the last 12 months. It says the latest integrity work relates to wage subsidy schemes that closed on June 9 2020.

“We have not focused on later schemes, because enhanced integrity controls were in place by 10 June 2020 for the Wage Subsidy Extension (WSX) and Wage Subsidy Resurgence (WSR) payments.”

MSD’s Van Ooyen says the wage subsidy scheme has been continually improved since its inception – something the Auditor-General noted in his report.

“Our information checking processes have been enhanced and the eligibility criteria tightened across every new iteration of the scheme,” Van Ooyen says. “We have bolstered the wage subsidy’s integrity by putting in place pre-payment verification of business details, post-payment reviews and investigations, and enhancing communications to make sure businesses are aware of their obligations.”

Since the scheme was launched in March last year, more than 370,000 applications have been declined – about 140,000 in the last two months. As of October 8, about 20,500 businesses had repaid $760 million. MSD recently referred 10 of its investigations to the Serious Fraud Office.

Van Ooyen: “We continue to work closely with Inland Revenue and police to support our investigation processes.”

He adds: “MSD’s response to the recommendations does not necessarily preclude further work being done to address the recommendations in future.”

Agencies had received more than 12,000 complaints about possible abuse of the scheme by the end of June. By mid-August, 1058 cases had been referred for investigation and 517 were still being pursued.

Once August’s lockdown was imposed, MSD investigators were diverted to “pre-payment integrity checks for large employer applications, and integrity checks for previously identified risk areas”, a report to Social Development Minister Carmel Sepuloni said. There are also fresh allegations of abuse of the scheme.

“The ministry is considering recruitment of additional investigators to support ongoing demand.”

Gousmett doesn’t believe enough is being done. “They really need to be doing a similar study on what’s going on this year.”

If there’s another lockdown next year, and further wage subsidy payments, it’s not clear what’s been learnt, he says. Ideally, the message would be: If you abuse the system there’s a better chance you’re going to get caught. Right now, he’s not sure that’s the case.

“It’s a bit of a nightmare, really.”

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

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