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The Nature, Extent and Economic Impact of Fraud in the UK Tobacco, £0.832 bn; and hydrocarbon oils, £0.350 bn. (HMRC 2006b, 2006c). 48 Customs’ estimate of spirits fraud in 2001-02 ranged between £330 million and £1,080 million; Scotch Whisky Association estimates ranged between £10m and £260 million, though Goddard and Compton (2005) pointed to an error in its analysis of underlying data which could affect the validity of this estimate. The National Audit Office (2006c) concluded that the underlying data used and the modelling undertaken by both Customs and the Scotch Whisky Association in estimating spirits fraud were defensible in their own terms, and Goddard and Compton (2005) stated that closer judgment was not yet appropriate. 6. Frauds relating to vehicle excise duty. (Driver and Vehicle Licensing Agency, 2005, 2006): In the June 2005 survey, the evasion rate was 3.6%, equating to a revenue loss of £0.147 bn. 49 7. TV licence evasion. (TV Licensing, 2004): In 2004/05, £2.94 bn. was collected and the evasion rate was an estimated 5%, with estimated losses totalling £0.145 bn. 50 8. NHS Fraud. (Fraud Review, 2006; National Health Service, 2006, 2007): In total, it is estimated that £76m (£0.076 bn.) was lost to patient fraud in 2005-06. 51 In more detail, it is estimated that: 5 £47m was lost to pharmaceutical patient fraud in 2005-06, compared to £117m in 1998-99. 5 £21.1m was lost to dental patient fraud, compared to £40.3m in 1998-99. 5 £8.2m was lost to optical patient fraud, compared to £13.2m in 1998-99. Against these fraud costs, in 2004-05, the amount of money recovered by the NHS CFSMS was £26.9m (up from £7.1m the previous year, largely due to successful civil actions against pharmaceutical companies for breach of duty.) It is also estimated that the NHS spends £22.2m (based on 2004/05 costs) on countering fraud, which is 0.028% of expenditure (Fraud Review, 2006); of this, £8,412,021 was spent on local counter-fraud work in 2005-06, a million more than the previous year (NHS, 2007). 9. EU fraud. (European Court of Auditors, 2006, National Audit Office, 2006d; Rural Payments Agency, 2006; DARDNI, 2006; OLAF, 2006): There are no readily deducible plausible estimates either of the scale of fraud against the financial interests of the EU or of the economic impact of this upon the UK. In terms of frauds investigated by UK agencies, DARDNI (2006) data for Northern Ireland indicate that in 2005-6, the counter-fraud unit dealt with £84,000 of internal fraud that was agriculture-related and 42 cases of external fraud and irregularity costed at £370,000, totalling £454,000. No equivalent data are published for England and Wales, nor are resource costs of dealing with fraud and irregularities published separately. During 2004, the United Kingdom reported to the European Commission’s antifraud body OLAF 841 cases of irregularities (including fraud), representing some €48 million (£33 million), a drop of six per cent compared to 2003. There is no separate figure available for the level of possible or proven fraud. 52 48 These losses for 2003-04 were estimated to be: for Spirits, £250m; for Cigarettes and Hand-Rolled Tobacco £2.9bn; and for Hydrocarbon Oils, £0.6 bn. 49 In 2004, 3.4% of vehicles were not licensed, equating to a loss in revenue of £0.129 bn. 50 In 2003/04, £2.798 bn. was collected in licence revenue, and the evasion rate was an estimated 5.7%. 51 This compared to £170.5m in 1998-99. 33
The Nature, Extent and Economic Impact of Fraud in the UK Summary Frauds against the public sector can fluctuate wildly, depending on the state of internal controls and offenders’ capacities. Departmental annual reports may conceal large variations within any year and be only a modest guide to fraud levels in the previous or in the next year. Some major initiatives – such as Individual Learning Accounts – have had to be closed down altogether partly because of fraud levels and are too old to be included here; others, such as tax credits and VAT/MTIC, have had to be drastically altered in their service delivery as a response to the (late) identification of, and/or response to, fraud risks. So because of the dynamics of fraud and the elapsed time to official awareness, forecasting of fraud costs (and of demand for policing, whether or not involving ‘the police’) is hazardous. The main findings in relation to the data on fraud against central government are summarised in the table below. A number of sources of data have been reviewed (detailed in Annex 5, Tables 5.4 and 5.5). These studies are those that are both contemporary and enable some tentative conclusions to be drawn as to the cost of fraud across a number of public sector bodies. In summary: 5 Data are available on fraud from a range of government departments and NDPBs; 5 The data are not however comprehensive, especially in relation to income tax evasion and some of the difficult-to-determine boundary between legitimate corporate tax avoidance and evasion; 5 The data are not routinely collected annually; 5 The sources use a range of different methods to assess the frequency and cost of fraud; 5 Many of the figures are based around 95% confidence levels and are thus broad estimates; 5 In the field of benefit fraud, it is often difficult for people other than the claimants themselves to determine in any one instance what is fraud and what is error (for example on ‘failure’ to notify ‘change of circumstances’); 5 There is a general absence of data both on the resource costs of responding to fraud and on the externalities generated by these responses (e.g. controls on VAT registrations and VAT reimbursement, taken in order to reduce the direct costs to taxpayers of MTIC fraud). 52 Reviewing data on the EU as a whole, during 2004, the 25 Member States reported to OLAF 9,475 irregularities, including possible fraud, with a value of €983 million (£667 million). Excluding those reported by the ten new Member States, the total was £664 million, five per cent by value up on 2003. There was a decrease in reported fraud costs in the categories Traditional Own Resources and the Common Agricultural Policy. However, there was a 40 per cent rise in the value of cases of irregularities reported for Structural Measures, in part due to more reports from Italy and Greece. It is not possible to infer whether this represented a real rise or merely a rise in awareness and/or willingness to take action. In its report for 2004, OLAF assessed the effect of fraud on the Community budget based on estimates provided by Member States and its own analyses. OLAF estimated that, for agriculture, suspected fraud amounted to some €11 million (£7 million) and for Structural Measures to some €118 million (£80 million). During 2004, therefore, the estimated value of reported fraud in these areas was at least €129 million (£87 million), spread between the member states. In reporting these figures, OLAF noted that it was difficult to attribute specific fraud levels to specific years when projects are spread over several years. OLAF (2006) asserts that one can only attribute losses to ‘fraud’ at the end of legal proceedings: on this logic, the fewer the prosecutions (especially in large, expensive cases), the lower the fraud. As regards own resources, suspicions of fraud account for approximately 20% of the cases of irregularities notified in 2005 and involve an amount of some €95.2 million. For agricultural expenditure, suspicions of fraud account for approximately 13% of the cases of irregularities notified, involving an amount of some €21.5 million, equivalent to 0.05% of the total EAGGF Guarantee Section appropriations. For the Structural Funds, approximately 15% of the irregularities notified and involving an amount of €205 million were attributed to fraud and accounted for some 0.53% of the total appropriations for the Structural Funds and the Cohesion Fund. For pre-accession funds, fraud accounted for approximately 18% of the irregularities notified and involving an amount of some €1.77 million, equivalent to 0.06% of the total appropriations under the PHARE, SAPARD and ISPA funds. This estimate is based on the information reported by the Member States, but must be treated with caution. Divided by the number of member states and taking into account complex funding formulae, it will be appreciated that these sums represent quite modest totals for the UK’s share of EU fraud. Given the haphazard ways in which the data were generated and the difficulty of finding an appropriate formula, this study excludes the EU fraud data from the total. 34
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