Approach means fewer fraud charges

It is easy to have a knee-jerk reaction to news the Government is prosecuting 90% fewer people for benefit fraud than it did five years ago.

Those who are scrupulous about paying tax may feel resentful because they consider the Government is going soft on those who misuse the privilege of having access to their hard-earned dollars.

Predictably, the Act party has been quick to jump on that bandwagon, suggesting not only has the Government gone soft on benefit fraud but it has given up on prosecuting fraudsters.

But it is more complex than that.

It is true, according to New Zealand Herald reports, that the number of successful prosecutions has dropped from 594 in 2015-16 to 63 in the year to June 2020. At the same time, the number of investigations has dropped from 3333 to 693.

In that five-year period, the value of prosecutions dropped from $24million to $3.7million, and the value of investigations completed into benefit overpayments went from $48.8million to $12.3million.

The Ministry of Social Development says this change stems from an early intervention and less punitive approach instigated during the National-led government in 2015. This approach was also supported by the Welfare Expert Advisory Group.

This early intervention strategy means low-level cases can be responded to quickly and sorted out with prosecution reserved for the serious cases.

What may have been forgotten by some who are critical of this approach is that MSD was the subject of a scathing report from the Privacy Commissioner John Edwards in 2019 concerning the way the ministry was carrying out its fraud investigations.

He found that since 2012 the ministry’s routine failure to ask beneficiaries for information before approaching third parties had likely impacted thousands of people who may have had large amounts of sensitive information collected without their knowledge. This intrusion included text messages of an intimate nature, and, in at least one instance, an intimate picture shared with a sexual partner.

He found the ministry’s behaviour excessive, disproportionate to the ministry’s legitimate needs and inconsistent with its legal obligations and information privacy principles.

Poor record keeping made it hard to establish the extent of what had been going on. Mr Edwards’ report noted there had been concerns about information gathering and record keeping in fraud investigations since 1994.

He also pointed out that between 49% and 64% of fraud investigations resulted in no prosecution or debt established, meaning that on average at least 1100 people a year had their lives subjected to often intrusive inquiries with no fraud established.

Victoria University of Wellington professor of taxation Lisa Marriott’s research has highlighted the punitive approach to benefit fraud compared with tax fraud. She has also drawn attention to the issue of whether we may have seen the problem of benefit fraud as more pervasive than it was. Prof Marriott pointed out that in 2015-16 detected welfare fraud was $24million, but that amount was around one-tenth of one percent of the total spending on benefits.

She has described the change in the MSD approach as "much-needed". The current rate of MSD prosecutions was now more similar to Inland Revenue where there were 58 prosecutions in 2019-20.

If the new approach means those who may have made genuine mistakes are being treated with empathy and not subjected to improper scrutiny which breaches their privacy, and people are less fearful about reporting any overpayments, it is hard to see the downside in that.

Those promoting the "going soft" argument might also reflect on Prof Marriott’s point there is little evidence that increased compliance results from more prosecutions.


I have to admit to being a little perplexed at some of the editorial comments in this piece. For Instance, why would scrupulous taxpayers feel resentful at an apparent change in priorities over the approach to benefit fraud? As a scrupulous taxpayer myself I hold no such resentment. Simply because the economics of benefit fraud activity do not add up. To me, a far greater drain on our economy is tax fraud. The money currently spent on benefit fraud investigation would give a far greater return to the taxpayer if it were diverted to tax fraud. The number of contractors who are only too pleased to do jobs for cash tells me that tax fraud is a far greater cost to NZ than benefit fraud. Whenever I have need of a contractor I will happily accept his offer of a job for cash and then immediately dob the fraudster into the IRD. I have no idea how many have been followed up as IRD as are a bit slack on providing feedback, but I feel good about doing my bit to bring these fraudsters to justice.
It's time the media gave beneficiaries a break and focused their attention on where the real drain on the NZ economy lies, and that's with tax dodgers.

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