12. Annual Fraud Report

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Manchester City Council Item 12Audit Committee 2 J une 2011

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Manchester City CouncilReport for Information

Report to: Audit Committee - 2 J une 2011

Subject: Internal Audit Annual Fraud Report 2010/11

Report of: City Treasurer / Head of Internal Audit and Risk Management

Summary

Like any organisation of significant size and complexity Manchester City Council isinherently vulnerable to risks of fraud and corruption. In response to these risks theCouncil has a range of mitigating controls including the Fraud Investigation Groupwithin Revenues and Benefits, enforcement officers in other services and dedicatedanti-fraud and corruption resources within Internal Audit

This report provides a summary on the outcome of proactive and reactive anti-fraudand investigation work during 2010/11, with a particular focus on the work deliveredby Internal Audit. It outlines some of the areas of emerging fraud risk and theCouncils strategic and operational arrangements for managing these risks.

Recommendations

Members are requested to consider the Internal Audit Annual Fraud Report for2010/11.

Wards Affected:

None

Contact Officers:

Richard Paver City Treasurer 234 3564 [email protected]

Tom Powell Head of Internal Audit and Risk Management 234 [email protected]

Background documents (available for publ ic inspection):

Internal Audit Plan 2010/11Internal Audit Plan 2011/12


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1. Introduction

1.1. As a major employer, continually seeking to change and transform how itdelivers services and that is engaged in a range of partnerships and activitiesthe Council is inherently vulnerable to acts of fraud and corruption committed

both from within and outside the Council. Nationally, fraud is recognised as agrowing area of risk, particularly in the current economic climate, and theCouncil is not immune to these increased levels of risk.

1.2. This is our second Internal Audit annual fraud report. The purpose of thereport is to provide a summary on the outcome of proactive and reactive workundertaken during 2010/11 to investigate referrals of fraud and other potentialirregularities. It sets out the context for fraud risks in the Council and theresponse to these risks. It provides a summary of the work delivered byInternal Audit in the year and areas identified for further development during2011/12.

2. Key issues and drivers

2.1. The Audit Commission report entitled Protecting the Public Purse publishedin October 2010 reflected the cost of fraud losses annually in the UK to be 30billion, which means 620 is lost to fraud for each adult in the country.However, within local government, detected fraud losses were low comparedwith total council spending of 160 billion. Detected fraud cases for 2009/10amounted to 119,000 cases worth 135 million.

2.2. The National Fraud Authority (NFA) reported that, nationally, too many fraudswere not detected or being prevented and there was a gap between the levelof reported frauds and those pursued through the criminal justice system.

2.3. The work of the Counter Fraud Strategy Forum set up by the NFA in 2010 isdesigned to help tackle fraud in central and local government. This isunderpinned by a new strategy being developed to tackle fraud in localgovernment under the heading of fighting fraud locally. This strategy issupported by the Audit Commission, CIPFA, CLG and other bodies previouslyengaged in providing support in the fight against fraud. As part of this strategy,a new ten point counter fraud blueprint was recently published by the

Communities and Local Government Secretary, a copy of which is attached tothis report (Appendix 1).

2.4. Greater focus is now being placed on local government and Manchester hascontributed to the development of this strategy through discussions at regionalworkshops and events to help understand the changing fraud landscape andidentification of fraud risks.

2.5. In the current economic climate there is a perceived increased risk of frauddue to a tightening of available credit and borrowing. This is certainly true inlocal government, where budgetary pressures, large spending cuts and

difficult decisions over priorities may weaken controls and increase thelikelihood of fraud.


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2.6. To safeguard public funds and ensure these funds are used for their intendedpurpose the Council has a zero tolerance approach supported by a strongpolicy statement and commitment to tackling fraud and corruption. This isbacked up by various policies, procedures and codes linked to the Anti-Fraudand Corruption Strategy. This is to help ensure that the people of Manchester

and stakeholders can have complete confidence that the affairs of the Councilare conducted in accordance with the highest standards of probity andaccountability and that Members and officers demonstrate the higheststandards of honesty and integrity.

3. Structure and roles

3.1. Internal Audit acts on behalf of the City Treasurer in ensuring the Council hasappropriate arrangements to deter, detect and investigate fraud. This roleincludes the following:

Driving the continual development of a framework of anti-fraud policies andprocedures.

Raising awareness of fraud risks and developing mechanisms to maximisethe opportunities for fraud risk reporting.

Responding to whistleblowing allegations, referrals and other concernsincluding those received under the Councils Money Laundering Policy.

Investigation of reports of financial or other irregularity. Liaising with Greater Manchester Police to support criminal prosecutions.

Delivering a programme of proactive anti-fraud reviews. Providing advice and support to managers across the Council and within

schools in their own investigation of irregularities. Providing advice and recommendations to managers on appropriate

controls to help prevent and detect fraud and corruption. Monitoring anti-fraud activity across the Council.

3.2. In discharging this wide range of roles Internal Audit has a Lead Auditor foranti-fraud. This post was created in 2009/10 to support the Council in furtherdeveloping its strategic and coordinated approach to combating fraud. Thisofficer is supported by auditors and investigators within the Internal AuditSection and across the team there are three officers qualified in the CIPFACertificate in Investigative Practice.

3.3. The Councils approach to fraud risk management extends beyond InternalAudit. These include the Fraud Investigation Group in the Revenues andBenefits Unit which deal with Housing Benefit and claimant fraud, the BlueBadge Enforcement Team, Trading Standards and officers in the HR/ODService. All of these teams have a vital role to play in the deterrence,detection and investigation of fraud.

3.4. In 2010/11 Internal Audit budgeted for 435 days on proactive and reactiveanti-fraud and corruption work compared to 340 days spent the previous year.

The majority of this was spent on reactive investigation work.


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4. Reactive fraud cases

4.1. During 2010/11 Internal Audit received formal notification of 56 reported casesof fraud theft or irregularity. Of these, 21 were whistleblowing referrals handledunder the Councils whistleblowing procedures.

4.2. The nature, scale and complexity of the referrals have been varied andincluded suspicions of financial irregularity, financial abuse, mismanagement,identity fraud, staff behaviour and conduct issues, grant funding misuse andcorruption. Some of these take a long time to investigate and often requirevarious reports to be produced to management, Members, whistleblowers andthe police. They also involve time spent in dealing with any subsequentdisciplinary process or working with the police to pursue criminal action.

4.3. Internal Audit have both conducted and supported investigation work carriedout in response to all these referrals.

4.4. It is important to acknowledge that investigations are conducted independentlyand without prejudice. This is reflected in the number of cases whereinvestigations have resulted in the exoneration of individuals against whomallegations have been made. There are other cases where the investigationhas resulted in disciplinary action or criminal action based on the evidenceobtained, however in some cases and despite strong suspicion, a lack ofevidence has meant we were unable to prove wrongdoing.

4.5. The Council remains focussed in its commitment to take all necessary actionto investigate fraud and take appropriate disciplinary or legal action.

4.6. The key areas of focus and examples of cases investigated during the yearincluded the following;

Financial Abuse in Residential Care Homes

4.7. We have provided support in the investigation of five cases of suspectedfinancial abuse of vulnerable service users in the indirect care of theDirectorate for Adults. The cases involved allegations made against care staff

employed by privately run service providers. The cases involved someManchester funded residents and were handled by the respectivesafeguarding team under the safeguarding procedures and investigated byGMP. Four of the cases are still ongoing, whilst one found no evidence tosubstantiate allegations made.

4.8. We are working with management in the Directorate for Adults and FinancialManagement as well as other councils and GMP to investigate theseallegations.

Theft of Cash and Assets


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4.9. During 2010/11 there have been a number of reported incidents involvingthefts of cash and assets from Council buildings and schools. The value ofclaims made to the Councils insurance team in respect of theft was over190,000. Thefts of assets mainly involved computer equipment or attractiveportable items. A significant amount of computer equipment valued at 55,000

was taken from one secondary school in particular during three separatebreak-ins. These incidents were reported to GMP and a number of casesremain under investigation.

4.10. Internal Audit were informed of four Future J obs Fund staff (FJ F) working at aCouncil park to act as Leisure Attendants who were alleged to have stolencash collected from car parking receipts. One of their roles was to issuetickets and take payment for car parking. A member of Council staff raised hissuspicions with a manager that he suspected one or more of the staff were notissuing all tickets and were misappropriating income. The value of the theftwas estimated at 2,000 and following an investigation conducted by LeisureServices all four of the staff were prevented from further work with the Council.

4.11. Other cases involving employees in the theft of cash, assets or otherirregularity have been investigated by management with advice and supportprovided by Internal Audit. Appropriate disciplinary action has been takenagainst staff involved in these cases.

Chequebooks

4.12. There have again this year been several reported frauds involving the

interception, alteration or use of counterfeit cheques from schools and Councilestablishments. The value of these is lower than in previous years and eachwould appear to have been perpetrated externally. Cheque fraud cases aregenerally investigated by the banks themselves and the Council are usuallyreimbursed for these losses. The Councils positive pay process and controlswhich cover the Councils main payment systems have helped to preventseveral high value attempted frauds, but this does not extend to schools andsome other establishments who operate cheque book imprest accounts.

Procurement and payments

4.13. Internal Audit were asked to assist in the recovery of misdirected payments of168,000 made in error to the wrong vendor. The error was a result of anoversight during the payment process which culminated in payments beingmade to an organisation who shared a similar name to the one that wasactually due the payment. Internal Audit recovered the full value of theoverpayment, but in doing so, the investigation highlighted anomalies over theuse of the funding and a potential conflict of interest. We reported ourconcerns to management and supported them in reviewing thesearrangements.

4.14. The recovery of an overpayment of 68,000 in respect of a deceased service

user is in progress. A substantial amount of the overpayment has beenrecovered following client visits undertaken by a District Manager and


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arrangements to recover the balance of 33,000 are continuing through theCouncils Legal Debt Recovery team.

4.15. An anonymous tip off and controls within the Councils payment processprevented an attempted fraud against the Council involving a bogus CHAPSpayment of 42,000. Details were reported to GMP and the Serious

Organised Crime Agency (SOCA).

4.16. Internal Audit investigated a series of whistleblowing allegations fromcontractors raising concerns over aspects of unfairness in the Councilsprocurement process within a particular service area. We have investigatedthese, made a series of recommendations to management and are providingongoing support to improve existing processes.

Financial Irregularities

4.17. We were involved in the conduct of several investigations into suspectedfinancial irregularities at schools and external grant funded organisationslinked with the Council. Our investigations highlighted serious issues of poorpractice around the management of finances, lack of compliance with financialprocedures, value for money and potential misuse of funds. These casesincluded the following.

4.18. An investigation into suspected theft of dinner money and misappropriation offinancial records by a member of the finance staff at a school. The caseagainst the individual was unproven and no disciplinary action was taken asGovernors accepted a request for retirement. The individual was interviewed

by the police, but it was decided it was not in the public interest to take thecase forward.

4.19. We spent a significant amount of time investigating an allegation of grossfinancial management at a school relating to the procurement of works and theuse of a sole contractor. The result of this was a report to ManagementSupport to support them in the disciplinary process. The outcome of thisresulted in two members of staff leaving the school on compromiseagreements prior to a formal disciplinary investigation.

4.20. Allegations made against an external grant funded organisation raised specific

concerns over the financial stability of the organisation and the potentialmisuse of grant funding. From the work undertaken, we were unable toprovide assurance over the organisations management of its finances, itscapacity to deliver existing projects, or use of funding for its intended purpose.In conjunction with Corporate Procurement team we supported projectmanagers in their continued monitoring role and work with the organisation toresolve the issues. The increasing number of allegations concerning voluntarysector groups has led to a broader review on issues arising from theseinvestigations.

4.21. Another voluntary sector-based investigation involved groups in receipt of

grant funding who worked closely with staff in Childrens Services. This casehighlighted concerns over the financial management arrangements including


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issues over roles and responsibilities of staff working for partners and theCouncil and acting in contravention of Financial Regulations. After a longinvestigation involving detailed reviews of financial records we have aidedmanagement in their recovery of funds and the agreement of actions toprevent a reoccurrence. This is a good example of a case that on initial review

appeared to be relatively straightforward but as investigations continued wasfound to be complex and time consuming to properly resolve.

4.22. The number of investigations into issues surrounding voluntary sector groupsfunded by the Council has grown significantly. Internal Audit investigatedseveral allegations made against grant funded organisations, the nature ofthese being poor financial practices, financial losses and potential theft andmisuse of funding and lack of management control over funding. Ourinvestigation work did not prove fraud but found expenditure unaccounted for,poor financial management and governance arrangements and ineffectivemonitoring arrangements over grant funded expenditure. In response webriefed the appropriate Executive Members and management on the issuesarising and are pleased that a wider plan of action is being progressed by theThird Sector team that should strengthen controls in these areas.

4.23. We investigated serious allegations of bullying, corruption and fraud madeagainst individuals in one service area. Following detailed interviews with alarge number of staff we were able to substantiate some of the allegations, buthad insufficient evidence to prove others. Management have agreed aproposal for action in response to our report.

4.24. We investigated allegations of incorrect charging made against a debtcollection company used by the Council. Our investigation confirmed thatincorrect charging had taken place and we are working with management toagree a way forward.

4.25. We received sensitive allegations against an employee applying for voluntaryearly retirement, which cast doubt over their age and subsequent eligibility toretire. Our work with external agencies meant it was possible to exonerate theindividual and for the application to retire to progress as planned.

4.26. We were involved in investigating allegations made against staff and

managers in the Council as well as allegations against staff and Governors ata School. These related to the conduct of various officers in their handling ofgrievance matters. Intenal Audit supported the Head of Management Supportin investigating the issues raised, but found no evidence to substantiate theclaims. We notified the whistleblower about the outcome of our investigationand the Head of Management Support for Schools informed them that theother five matters should be taken up with the Schools Governing Body. Thewhistleblower was not satisified with these outcomes and has escalated theirconcerns to the Councils external auditor Grant Thornton for theirconsideration who confimed that they concurred with our conclusions anddecision on this case.


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5. Proactive Anti -fraud work

5.1. Our plan this year was to build on the fraud prevention and detection workwhich we introduced last year. We have continued to develop the required skillsets amongst audit staff to assist in the development of data mining and data

analysis routines designed to identify fraud and error and support auditassurance work. We invested a substantial amount of available auditresource into anti-fraud work, a significant proportion of which goes towarddealing with the reactive caseload which has impacted on the delivery ofproactive work.

5.2. Our time spent on developing proactive work has produced some positiveresults and we will continue to look at further opportunities to develop ourapproach. Work conducted this year included the following.

5.3. Work led by Internal Audit designed to identify duplicate creditor payments tovendors found 144,607 of duplicate payments which required action torecover overpaid amounts. There is clearly a financial benefit in continuing toundertake these type of exercises and in our report we made a proposal toretain a proportion of the recovered funds to invest in similar exercisesregularly in 2011/12. We will also work with colleagues across the Council todetermine how controls can be developed to avoid duplicate payments as partof standard business processes.

5.4. We completed two proactive fraud detection exercises in the Directorate forAdults relating to cash handling on behalf of customers and use of individual

budgets. Whilst our testing of customer payments in these areas did notidentify fraud or theft, it does remain an inherently high risk area for potentialfraud and this opinion is supported by the increase in the number of reportedcases of suspected financial abuse and a previous high profile case in thisarea. We have worked with management to improve controls over cashhandling and the introduction of other compliance checks designed to reducethe opportunity for fraud.

5.5. Another area of pro-active fraud review was the weekly fees payroll which wasdesigned to process one-off payments to individuals who were not Councilemployees. Whilst we did not identify any fraudulent payments we were

concerned over the effectiveness of existing controls and that the systemprovided an environment in which unnecessary and/or fraudulent paymentscould be made. Following our recommendations, transactions processedthrough the fees payroll process have been significantly reduced and work hascontinued with the Shared Service Centre to seek assurance over the ongoingpayments made through this system.

5.6. We have considered the impact of the new Bribery Act which comes into forcethis year and provided a briefing note to the City Treasurer. There are arange of existing controls in this area and we will be working with CorporateProcurement, Finance, Capital Programmes and Legal Services over the next

few months to consider how best to ensure that the Council can demonstrate it


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has adequate procedures to detect and prevent Bribery in accordance withthis new Act.

5.7. Council Tax single person discount (SPD) fraud is seen as a high risk area.Work carried out by the Councils Fraud Investigation Group and Revenues

and Benefits staff to review SPD entitlement led to the cancellation of over1,200 SPD claims with a value of over 190,000. Further work is underway toreview other discounts and exemptions.

5.8. Work conducted during 2010/11 by officers responsible for the crack down onmisuse of disabled parking permits reported 85 prosecutions with a total valueof over 43,000.

National Fraud Initiative 2009/10

5.9. Internal Audit coordinates the Councils involvement in the National FraudInitiative (NFI), which is the Audit Commissions biennial data matchingexercise designed to pick up fraud and error across the public sector. Thisyear we have completed our preparation work and commenced checks on thedata match reports which were released in February 2011. We anticipate theresults of this work will be available in late 2011.

6. Developing an anti-fraud culture

6.1. The Council has a zero tolerance approach to dealing with fraud andcorruption and this commitment is positively and publicly endorsed by

Members and the Senior Management Team.

6.2. Internal Audit continues to promote the anti-fraud culture across the Councilthrough our policy development work and proactive anti fraud programme. Ourreactive investigation work and our commitment to take seriously any reportedallegations of suspected wrongdoing positively seek to discourage potentialfraudsters.

6.3. A dedicated anti-fraud and corruption page on the Councils intranet hasbrought together various Council policies, procedures and codes relating toanti-fraud. This has helped further clarify how to report concerns to Internal

Audit

6.4. We have also introduced a new online whistleblowing webpage and reportingform to encourage individuals to report their suspicions of fraud, financialirregularity or wrongdoing. The whistleblowing contact details have also beenincluded in the A-Z of Council Services for the firs time. These provide animproved method for reporting concerns and sit alongside existing fraudreporting channels such as the Councils Whistleblowing Hotline and e-mailaddress.

6.5. Other areas of activity which are still ongoing at the year end include the

development of a fraud risk register which will sit along side existing risk


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management processes and work to detect possible housing tenancysubletting using data matching techniques.

7. Key priori ties 2011/12

7.1. The need to respond quickly and comprehensively to allegations of fraud andcorruption has impacted on the ability to deliver as much development andproactive anti-fraud work. We will work with managers to help improvecapacity for investigating referrals particularly lower risk referrals. We haveallocated 538 chargeable days for reactive and proactive fraud work in2011/12.

7.2. Our proposed areas of coverage for anti fraud are contained in the 2011/12Internal Audit plan. The plan includes new areas of fraud prevention anddetection type work but also looks to consolidate what we consider to be thefundamental areas of any successful anti fraud strategy. This includes

Raising awareness - Supporting the Council to improve levels ofawareness of fraud risks amongst managers, staff and partners.

Communication - improvements to the effective communication of Councilpolicy, procedures and codes relating to anti-fraud.

Fraud risk assessment - Finalisation of fraud risk assessments and afraud risk register to focus resources on potential vulnerabilities.

External liaison - Building on the strong links with the police over casehandling and arrest.

Proactive work - Continuation of a strong proactive anti-fraud programme

to deter, prevent and detect potential fraudulent activity. The 2011/12 planincludes six specific reviews where work will be focused on the detection ofpotential fraud.

Co-ordination - Working with colleagues, particular in personnel and theFraud Investigation Group to share expertise and maximise the efficiencyand effectiveness of anti-fraud activity across the Council.

Fraud monitoring - Maintaining intelligence and oversight of fraud casesand outcomes to support decision making.

8. Conclusions

8.1. Members are asked to note the 2011/12 Internal Audit Annual Fraud Report.


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Appendix 1

Communi ties and Local Government Secretary Statement: Ten ways to tacklecouncil fraud and recover 2bn a year

(full text as reproduced from the Communities and Local Government website)

A new ten point counter-fraud blueprint for tackling criminals and dishonest peoplewho are costing the country billions of pounds in fraudulent local government claimswas published today by Communities and Local Government Secretary Eric Pickles.

According to the National Fraud Authority Annual Fraud Indicator, Local governmentcould be saving taxpayers 2.1 billion a year by cracking down on fraud in housingtenancy; procurement; pay, pensions and recruitment; council tax; grant; and bluebadge schemes. Money currently lost to fraud and error costs every household inEngland almost 100 a year.

The ten point checklist was compiled, at the request of Mr Pickles, by experts in theNational Fraud Authority. The recommendations include councils using credit ratingagencies to stop tax evasion and benefit fraud; staff background checks to preventfraudsters and organised criminals infiltrating key posts.

The Government's Counter Fraud Task Force was launched last year to develop anew strategic approach to tackling fraud across the public sector with a focus onprevention. It will report in May.

Many councils and housing associations are already tackling fraud and error inhousing tenancy claims with the departments help. 19 million has been committedto 51 councils to help recover unlawfully occupied homes. Last year they recoverednearly 1,600 properties worth around 240 million.

Eric Pickles said:

"It's time to get tough and take on the fraud cons. At a time when we need to cut thenational deficit and government waste, cleaning up fraud could save the taxpayerover 2 billion in recovered cash currently being fraudulently stolen or lost to taxcheats.

"Better prevention, detection and recovery of fraud will help reduce the financialpressure on councils and help protect frontline services. Today I am publishing thetop ten plays for cracking down on council finance fraud.

"Councils should carry out better credit checks through credit rating agencies beforegiving over discounts or benefits. They should properly vet staff in key positions andput stricter controls on who can use the council credit card."

Mike Haley, Director of Public Sector Fraud, National Fraud Authority said:

"At a time when councils are attempting to protect front line services, fraud can nolonger be tolerated. Substantial savings can be made, as demonstrated by the best


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local authorities, and reducing fraud can make a significant difference to localgovernment finances. This ten-point plan, based on local authority best practice, is astarting point in helping councils get a grip on fraud."

Top ten tips for tackling local authority fraud:

1. Measure exposure to fraud risk;2. More aggressively pursue a preventative strategy;3. Make better use of data analytics and credit reference agency checks toprevent fraud;4. Adopt tried and tested methods for tackling fraud in risk areas - such as bluebadge scheme misuse;5. Follow best practice to drive down Housing Tenancy and Single PersonDiscount fraud;6. Pay particular attention to high risk areas such as procurement and grantawards;7. Work in partnership with service providers to tackle organised fraud acrosslocal services;8. Maintain specialist fraud investigative teams;9. Vet staff to a high standard to stop organised criminals infiltrating keydepartments;10. Implement national counter fraud standards developed by the CharteredInstitute of Public Finance and Accountancy.

Estimates indicate that over 400,000 people could be wrongly claiming for singleperson discount at a cost of 100 million a year to councils in lost council tax.

Birmingham City Council has identified 6.8 million worth of fraudulent and incorrectclaims for single person council tax discounts.

Some councils are already seeing the benefits of using credit rating agencies.Cheshire East Council found nearly 2000 people had wrongly claimed using Experiancredit data. It cost 80,000 but will recover half a million pounds in new income.

Kent County Council is pioneering a contract framework for credit rating agencieswhich all councils can buy into. This will keep costs down and tackle those that arewrongly claiming services. Mr Pickles believes other councils should take advantageof Kent's example and sign up to it.

Local Government employs around 2 million permanent, temporary and agency staff.Ealing found that 6 per cent failed proper vetting checks but that the figure washigher for temporary staff at 13 per cent.

One council found an agency worker put in charge of a large budget had set up afictitious company and made false claims totalling 110,000. The person had used afalse CV and was later sentenced to two years in prison. The insurance companyrefused to pay compensation.

London councils have been targeted by a group of sophisticated and organised false

identity fraudsters using fake passports to falsely claim 700,000 of services. OxfordCouncil hired a dedicated fraud officer last year and recovered 25 properties in the


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first six months. In 15 of these cases the unlawfully sub-letting tenant was stillclaiming housing benefit, the total cost of which was 1500 per week.

The Department for Communities and Local Government has committed 19 millionto helping 51 councils tackle social housing fraud.

Published on CLG Websi te 11 May 2011

12. Annual Fraud Report

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