Even if it can find fraud in the wage subsidy scheme, MSD may be reluctant to chase it

The wage subsidy paid out around $14 billion, with tens of thousands of applications ranging from major companies to sole traders. Photo / 123rf

OPINION:

In August 2020, Deloitte wrote a firm warning for its clients that had accessed the $14 billion wage subsidy scheme: the Ministry of Social Development (MSD) was beginning to audit applicants, so make sure your paperwork to prove you were eligible is in order.

"While the swift move into audit phase may seem harsh", the warning stated, statistics which emerged from fraudulent use of hardship grants following the Canterbury and Kaikoura earthquakes "prove that some people will take advantage of 'high trust' opportunities".

Robyn Walker, a partner at Deloitte who co-wrote the warning said it was prepared partly on the back of the experience of the firm's clients who claimed wage subsidies after the Christchurch earthquake (a smaller scheme which the Covid-19 wage subsidy was based on).

"They got some intense scrutiny," Walker said.

"People who had experienced that said 'you need to keep all of this stuff'. People had tough times supporting their claims."

MSD appeared to be talking tough. By October was publicly claiming to have carried out almost 10,000 "random and targeted audits", warning that businesses may have to repay the money and could face prosecution.

But another seven months later, and more than a year after the scheme began firing money out to applicants at breathtaking speed, no prosecutions have been announced and the work to establish problems came under scrutiny.

The report of Auditor-General John Ryan, published last week, revealed that in the main part the "audits" MSD had been claiming fell short of what was usually meant by the word.

Auditor-General John Ryan wrote that its examinations "consisted mainly of verbal confirmation of information from employers" not an objective testing of documentation which the word "audit" implied.

For the most part, MSD was calling companies by phone and asking them to confirm verbally that the information they had provided was correct.

"I am not persuaded that the reviews provide enough confidence that all applications that merit further investigation have been identified," Ryan wrote.

"It is possible that the post-payment work is less than what Cabinet would have expected".

MSD has dropped the use of the word 'audit' and said it accepts the Auditor-General's findings, which focused on improving prioritising enforcement and prosecution.

But the ministry was vague about whether it would pursue prosecutions, saying only that decisions would be made "in the weeks and months ahead".

Public servants still working on the wage subsidy told the Auditor-General they want to move on and return to their normal work.

In the case of MSD this is largely staff who would typically investigate welfare fraud. This is an area the ministry dedicates significant resources, chasing and prosecuting alleged frauds, often over relatively modest amounts, to maintain confidence in the system.

The same test would presumably be applied to the wage subsidy, which has attracted considerable scrutiny and pressure for repayment.

Proving fraud in court could be tricky. It would appear to require proving businesses knew at the time they made the application that their revenue was not going to fall in the way required.

The other key condition, that the businesses had taken "active steps to mitigate the impact of Covid-19" is highly subjective.

In some cases, MSD has little evidence to go on. The Auditor-General revealed that where businesses did not have internet connections, staff would read out the conditions of the wage subsidy over the phone, making it impossible to prove they understood the conditions.

Even where MSD does believe it could prove fraud, the nature of the business in question may make it highly reluctant to press go on a prosecution because punishing one claimant may simply reinforce the perception that big business is getting away with a major injustice.

Hundreds of millions of dollars has been repaid, often following heavy public pressure.

But there are plenty of examples of some of New Zealand's wealthiest people who have retained the subsidy for their businesses in ways which are completely legal but often controversial.

The Auditor-General's report acknowledged the controversy in his report but points out that it is not his job is not to audit private companies. This report was not about the merits of those claims and the Government has shown little interest in chasing large organisations on moral grounds.

In all likelihood no one genuinely wealthy has broken the law.

Instead, where fraud does exist (and given the size of the scheme it is inevitable) it is likely to mostly have occurred among businesses with a small number of staff or indeed who are self employed.

The Auditor-General pointed out that many thousands of applications from sole traders were refused by MSD.

Prosecuting a sole trader over $7000 when so many wealthy organisations and families claimed many millions in subsidies may do more damage to confidence in the scheme than good.