House of Commons - Management and Administration of Contracted Employment Programmes

Management and Administration of Contracted Employment Programmes - Work and Pensions Committee Contents

2 Prevention of Fraud

Scale of Fraud

8. This inquiry was triggered, in part, by press reports of fraud in contracted employment programmes. However, submissions we received stressed that, while any fraud was unacceptable, current levels of fraud were low. The Employment Related Services Association (ERSA) cautioned against over-reaction to media reports, because it:

Would not see the cases recently reported in the press as grounds for judging that the current safeguards have failed. However, fraud on any level is intolerable: these cases are a salient reminder of why safeguards are necessary and serve as a prompt to learn lessons and build these into continuous improvement.[7]

9. The Association of Learning Providers also told us that the level of fraud was low. It pointed out that there was little evidence that there was a significant level of undetected fraud:

Looking at the messages posted by disaffected employees on websites such as Indus Delta does often give the impression that many are the result of individual grievances and prejudices rather than evidence of any material or significant institutional wrongdoing. It must also be borne in mind that despite the sector being the subject of repeated, extensive (and often duplicatory) audits by a variety of bodies, the instances of fraud are still relatively speaking extremely low.[8]

10. In written evidence the Department quantified the level of detected fraud. It said that between 1st April 2006 and 31st August 2009 it had launched 78 investigations; 72 investigations had been completed and:

in 14 cases the investigation discovered evidence that documentation included, or might include deliberate false representations, typically in relation to client signatures or details of the service provided;[9] and
in another 16 cases, irregularities were considered to be issues of contract compliance (e.g. invalid documentation to support claim or full conditions not met to warrant claim), with no clear intention of making an unwarranted gain or causing a loss to DWP.[10]

11. Five cases had been referred to the police (in other cases the amounts involved were too small or the culprit could not be identified). The Department said that in none of the cases was the provider engaged in systematic fraud. Instead it found "a combination of illicit behaviour by individuals and inadequate management oversight and controls on the part of providers."[11]

12. The Department supplied us with a table showing which programmes had been affected by "deliberate false representations":[12]

New Deal overall
comprising
New Deal for Young People 3
New Deal 25 plus 3
New Deal for Disabled People 1
New Deal Prime Contractor 1[13]
9

Progress to Work 1

Workstep 1

European Social Fund 2

Employment Zones 1

Ethnic Minority Outreach 1

Action Teams 1

13. By contrast, ERSA highlighted that as well as cases of fraud, there were also cases of underpayment, where it had not been possible for providers to prove job outcomes to the Department's satisfaction. It told us that the existing anti-fraud measures were making it hard for providers to claim for genuine outcomes, and any reaction to recent frauds needed to be proportionate. It contrasted two recent situations:

A once-only "off-benefit check", to pay Pathways providers for hundreds of 'backlog' job outcomes they had achieved but could not prove through lack of paper evidence, resulted in DWP paying out many hundred[s of] thousand[s of[ pounds to providers. This occurred 'under the radar' and there are no plans to repeat it;
The recently reported fraudulent claims (where the sum repaid by providers was considerably less than the sum paid by DWP for previously unclaimable Pathways outcomes) provided no evidence of systematic fraud, though the story attracted sustained press attention and triggered various policy responses.[14]

14. They went on to caution against an over-reaction:

[...] we would urge Parliament and DWP to guard against responding to these cases with measures that, in practice, have little impact in further eliminating fraud but create significant extra cost and other downsides for effective delivery.[15]

15. Most of the submissions we received were from providers or industry bodies, as well as the Department, and all said levels of fraud are low. We have not conducted a forensic inquiry into contracted employment programmes and are unable to verify these claims.

16. Levels of detected fraud in contracted employment programmes are low. We were also told that there is little evidence that there is a problem with undetected fraud. However the frauds uncovered to date have highlighted the extent of the risk that weaknesses in the system could be exploited. The Department must ensure that processes for the detection of fraud are rigorous and robust.

IDENTIFICATION OF FRAUD

17. In oral evidence the Department told us that of the 78 cases they had investigated 66 had come to light though the Department's own processes,[16] and 12 had come from external sources (including "whistle blowing" by provider staff or former provider staff).[17] Only one had been brought to the Department's attention by the provider.[18] However the Department then told us that 33 cases were recorded as coming to light during the financial appraisal and contract management process, and that this could include the provider alerting the contract manager. It also noted that of the 74 cases which had been concluded only 16 were actually found to be cases of possible or actual document falsification. The Department did not break down how these 16 were identified.

18. The Department was not able to tell us how many fraud cases to date had come to light as a result of the provider notifying the Department. Until now it seems that the majority have been identified either by whistleblowers or through the Department's own processes. The Department needs to issue clear guidance to providers about what problems can be dealt with internally and when it must be informed. The Department must also keep records of when providers notify it of suspected fraud.

19. It is a matter of concern to us that the Department is moving towards a system based on providers detecting fraud themselves and notifying the Department. On past performance this would seem highly optimistic. If the Department is to continue down this route it must work with providers to develop a system which is rigorous and transparent.

DWP Standards

20. In the Department's written submission it did not identify any change to its standards or procedures that had been made specifically in response to frauds which had been uncovered. However, it said it had reviewed its strategy over the past year and was in the process of applying four key principles to all contracted out employment programmes. These are:

There must be a "whistleblowers charter" in place, enabling supplier staff to report inappropriate behaviour by colleagues in respect of performance claims.
Performance management systems within the organisation must not generate perverse incentives among individual employees to falsely claim performance achievement.
There must be segregation of duties within the supplier's operations between those achieving performance and those reporting it to DWP: between claim and validation.
An internal audit regime must be in place which provides for periodic checks of the performance reporting regime.[19]

21. In oral evidence the Department went into more detail about these "key principles". They told us that prime contractors must put these measures in contracts with subcontractors.[20] They also said that whistleblowers were free to contact the Department direct and have done so in the past.[21]

22. In written evidence A4e said that it had abolished individual bonuses and moved to a system of group bonuses because it has "found that individual performance incentives, whilst effective in delivering short-term results, may have been a driver for individual malpractice".[22] However, the Department told us that the ban on "perverse incentives" was not a ban on individual bonuses, but that its Provider Assurance Team would look at any bonus system.[23]

23. In oral evidence, the Minister, told us that most of the changes were planned before the frauds were identified:

There were some changes that were coming through anyway. In terms of the new assurance division, that was set up last year. It came into effect in October, I think. All the work necessary to get that established was underway before any of the media stories that happened over the summer.[24]

24. We welcome the Department's four key principles for employment programmes. They provide a good minimum standard for providers to work from. However we are concerned that there is not an outright ban on individual bonuses linked to job outcomes. These have played a role in at least some of the past frauds, and could do so again in future.

Job outcome verification

RULES

25. In the past providers were paid for providing a specified service for customers. The Department is in the process of moving to a system whereby, rather than being paid a flat fee, providers are paid for job outcomes. Providers have to provide paperwork to verify that the customer has been in work for the required time before they receive payment. For example, New Deal for Disabled People require two forms to be completed:

(a) E1 form which is completed by the client, accompanied by either a contract of employment which must state the job is 'expected to last at least 13 weeks' or wage slips covering the 13 week period.

(b) E2 form which is completed by an employer, stating the job is "expected to last for at least 13 weeks" with relevant details of the post.

26. Most programmes use a similar system, and require similar evidence, although some require evidence that the job "has lasted 13 weeks" rather than "is expected to last". Most programmes require the job to be at least 16 hours a week, although Pathways only requires it to be eight. ERSA drew attention to other rules which make it difficult for their members to prove job outcomes:

[...] the employer representative who signed the first document may not be available to sign the second one and the signatures must match; some businesses, such as a fish and chip shop, may not always have print material such as headed note paper to hand;

A six week tracking period (within which providers can claim job outcomes once a customer leaves provision) being tight when recruitment processes take time, e.g. in the public sector.[25]

27. Some larger companies had realised how dependent providers were on having job outcome forms completed and were now charging for them.[26] The Shaw Trust said there were "numerous times" when it had not been able to claim for legitimate job outcomes, and that it had had claims rejected because of the colour of the ink used.[27] Suppliers felt strongly that this paperwork added nothing. The Shaw Trust said:

the extra workload and inefficiency caused by this bureaucratic process does not necessarily provide any additional safeguard against determined fraudulent claims. It certainly does not provide any additional security to the alternative of using Jobcentre Plus's own records. If anything, paper-based systems are less secure and therefore, more vulnerable to fraudulent practice.[28]

BURDEN ON EMPLOYERS

28. The Shaw Trust complained that small businesses found the system of job verification burdensome.[29] Reed in Partnership questioned whether more onerous checks might lead to a reluctance by employers to hire people from employment programmes.[30]

29. However in oral evidence, Mr Davies from BASE told us that for employers taking on supported employment customers the job outcome forms made up only a small amount of the total paperwork:

I certainly hear feedback from employers about the level of paperwork that is involved around placing somebody into sustainable jobs being quite heavy. Interestingly most of that is probably around health and safety and risk assessment and some of the individual development planning but I have never come across an employer who is not willing to complete the paperwork around the job outcome which is the least of the paperwork in a way.[31]

He added that "when we think about customers, we need to be thinking about employers as customers in these processes as well".[32]

OFF-BENEFIT CHECKS

30. The Department has committed to moving to off-benefit checks (using computers to check that the person is no longer claiming benefits) to verify job outcomes. This approach has been introduced for Pathways to Work[33] and is the method for evidencing Flexible New Deal (FND) outcomes. The Department confirmed in oral evidence that there would be a three stage check:

an off-benefit check;
a check of 10% of the provider's documentation of job-outcomes;
Spot checks with the customer, asking them to confirm that they are in work.[34]

31. ERSA welcomed this but said that it did not go far enough, particularly as providers would still be required to collect all the paperwork. They called for:

a clear policy of using 'off-benefit' checks wherever they can technically prove job outcomes; continued joint work by DWP and ERSA to review the value of the other types of evidence still required to sit alongside 'off benefit' checks; and further review of the evidence ground rules and processes for those scenarios where 'off-benefit' checks will not work technically.[35]

32. Several other submissions suggested that greater use should be made of off-benefit checks.[36] However in 2004 the Department surveyed people who had stopped claiming benefits to identify their reasons for doing so.[37] The survey showed that only 50% of Jobseekers Allowance claimants who stopped claiming did so because they had started a job of over 16 hours a week (the definition used for outcome payments on FND). Of the other 50%, 10% had had their benefit stopped, 8% moved to a different benefit, 6% started training, 6% had a problem with their claim, and 10% were "other" or "don't know". Two per cent had started work for less than 16 hours a week. In oral evidence it was suggested that the figures might be different for those who have been on JSA for at least 12 months (potential FND customers) but there was no evidence to support this.[38] In oral evidence the Department said that because they did not yet have any FND outcomes they did not know how accurate off-benefit checks were for this group.[39]

33. We have heard that the current paper based system for verifying job outcomes is bureaucratic and unpopular. We are worried by reports that some employers are charging providers for the paperwork they have to complete. The Department must ensure that the burden of paperwork does not discourage employers from hiring people on employment programmes.

34. There is not yet any clear evidence as to how effective off-benefit checks are for verifying that Flexible New Deal customers are in work. Were they to prove reasonably accurate, we could see the potential benefits to the Department, providers and employers, of relying more on off-benefit checks combined with random checks, as the Department proposes. However, we believe any move to a less bureaucratic system, with savings for both providers and the Department, should be balanced by severe penalties for any provider which has fraud taking place in its organization, systematic or otherwise. A system of deterrent could be as effective, and cheaper, than the current system of paper-based verification.

Service fee

35. The payment structure for FND includes a service fee and outcome fees (when the customer moves into work, or remains in work for the required time). Originally the service fee was 20% of the total fee, but it has temporarily been increased to 40% to help providers cope with the economic downturn. As we have seen, a lot of effort goes into ensuring that outcome fees are paid correctly. However, we heard that there is much less checking of what the service fee is spent on, and whether that service is delivered.

36. The Department has largely adopted a "black box" approach for FND. This means that rather than prescribing what help providers offer customers, it allows the provider to design their own programmes (the "black box"), then pays them by results. However, there are still a number of mandatory elements to the programme which providers have to supply. The "Invitation to Tender" for phase 2 of FND specifies that providers must:

conduct an initial in-depth assessment of the customer's barriers and needs;
agree and regularly review a work-focused action plan, which is tailored to the individual;
ensure that within the core twelve months of Flexible New Deal, all customers undertake a minimum of four weeks of continuous full-time employment or continuous full-time work-related activity;
pay the customers' travel costs, and, where applicable, their childcare costs;
offer labour market advice and support. For example:
- providing better off (in work) calculations;
- promoting in work benefits; and
- assisting with tax credit applications.[40]

The document goes on to set out in detail what each of these elements must comprise: there is a two-page description of the four weeks of full-time activity.[41] The document then goes on to explain the purpose of the service fee:

The service fee is intended to provide bidders with a guaranteed monthly payment by way of a contribution towards the delivery of the contract service. […] Bidders should note that the service fee is intended to cover provision of the service across the life of the contract. Bidders will therefore need to be aware of the relevant clauses within the (draft) Terms and Conditions regarding early termination of the contract.[42]

37. ERSA told us that it thought the service fee was to enable providers to cover up-front costs. Mr Murdoch, Chair, ERSA and Executive Director, A4e, speaking on behalf of ERSA told us:

In relation to the 20 per cent level, in many ways for example Flexible New Deal is a commitment of anticipation of volumes from the Department for Work and Pensions so it can allow the provider to make sure that they invest in these services and anticipate those volumes coming through that contract.[43]

38. Mr Lester, Vice Chair, ERSA and Director of Operations, the Papworth Trust, told us that there were no checks on how the service fee was spent "because the concept of Flexible New Deal is a black box approach [...] within reason".[44]

39. In oral evidence, Mr Cave, Delivery Director, Employment Group, DWP took an almost identical line. He told us that the service fee is for "the cost of establishing infrastructure and the service provision which is going to be provided to those customers.[45]" When pressed he said that this involved setting up the compliance processes required by the contract[46] and that the Department "is very deliberately moving away from a prescriptive description of what each provider should do in terms of processes and activities with the customers towards a focus more on outcomes".[47]

40. The Minister told us that the service fee should be seen, and was being monitored as part of the entirety of the contract:

The reward system, which includes a proportion of service fee and a proportion of payment by results, is the entirety of the reward fee, and the ratios of service fee to the other elements is to some extent about risk more than it is about which elements of the contract are covered by the service fee and which are covered by payment by results. In my own mind, that is not how it works. It is about where you park the risk.[48]

41. The Department needs to be clear about the purpose of the service fee. FND has several mandatory parts, which include an initial assessment, a work focused action plan, and four weeks full-time work related activity. If the service fee is a fee for services rendered, then the Department needs to check that these activities take place, and demand a refund of the service fee if they do not. If the service fee is actually an up-front payment for set-up costs it should be renamed to avoid confusion. Whichever is the case, the Department needs to ensure that there is monitoring of the mandatory parts of FND, and that providers are clear that the Department expects them to be delivered.

Punishments and deterrents

42. The providers involved in fraud uncovered by the Department paid back any overpayments resulting from that fraud, but did not suffer additional financial penalties. Companies who are under investigation by the Department are also still able to tender for contracts.

43. The Shaw Trust said that:

We also believe that the greatest disincentive to fraudulent activity would be for DWP to impose financial penalties upon providers who submit such claims, and to remove their contracts.[49]

44. The Department said in written evidence that contracts also contain a clause entitling the Department to terminate the contract in the event of any act of fraud committed by the provider.[50] However this has not happened in any of the cases uncovered to date. The Minister told us that he thought that the penalties providers had suffered as a result of the frauds uncovered to date were harsh enough because:

We have no evidence of systematic fraud, systematic abuse of the system by any of our contractors. If any such evidence were to be found, then I would have an expectation of very robust action from us and want to ensure that that would happen against those contractors in a punitive way.[51]

45. He went on to say that the frauds had been committed by "one or two rogue elements" within providers.[52] He admitted that one provider had had problems in five different offices but said that with some prime contractors employing a thousand people "there would be instances [of fraud]".[53] However in written evidence the Department said that it had found "a combination of illicit behaviour by individuals and inadequate management oversight and controls on the part of providers."[54]

46. Anyone involved in fraud risks criminal sanction. However, at the moment companies where fraud is found which is not systematic face no penalty beyond repayment. This is not acceptable. Where the Department has identified "inadequate management oversight and controls on the part of providers" allowing fraud to take place, providers should be penalised. The Department can terminate contracts in the most serious cases, but in all cases there must be financial penalties beyond the repayment of fraudulently claimed outcome fees.

47. The Department is moving to a system where providers are taking more responsibility for detecting fraud through their own internal procedures, while the Department carries out less auditing itself. The Department should combine this model with stringent financial penalties as one way to ensure providers are focused on preventing fraud.

RISK ASSURANCE DIVISION REPORTS

48. The Department's own Risk Assurance Division (RAD) investigates fraud allegations. As discussed above, those allegations can come from DWP sources or from whistleblowers. The reports of their investigations are not published. The Department told us that:

Risk Assurance Division investigations staff are professionally qualified investigators who assess the quality of evidence in the allegation and investigate where there are sufficient grounds to proceed. This typically involves site visits, interviewing people (sometimes under caution) and examining evidence.

Minor irregularities and findings of non-compliance are reported back to contract management and addressed internally. Where investigators suspect reasonable grounds that a serious criminal offence has been committed, Risk Assurance Division will refer the matter to the police, where there is sufficient evidence.[55]

49. A4e were asked in oral evidence about the RAD reports that had been written after wrongdoing was found at a small number of their offices. Mr Murdoch said "I would urge that those reports are fully published and transparent to the public to see what happened in any of those instances. I would welcome that".[56]

50. In oral evidence the Minister told us that RAD reports were not published for three main reasons:

The reports may contain personal data and witness statements that we do not think it is appropriate to publish. Clearly we could redact them, […] but then also you have issues around premature exposure potentially prejudicing or damaging DWP or police investigations. If the allegations are found to be unfounded, you then have the risk of litigation against the department from the provider who is found to have no problem and no case to answer.[57]

51. However Mr Cave did say that the Department was looking for ways to ensure that the lessons learned from RAD reports were placed in the public domain.[58]

52. Many providers have contracts for other Government Departments, particularly around learning and skills. In Glasgow we heard that other sources of funding there included the European Social Fund, the Inspire Scotland Fund (made up of philanthropists and the Scottish Government) and the City Strategy. The Learning and Skills Council and Local Authorities also have contracts with some providers. Many of these organizations carry out their own inspections and audits. The Minister told us of the circumstances under which the Department would share the results of a RAD investigation:

If this is something where we are sharing the provision with another provider and another government department, then obviously we would share the information and disclose that. Otherwise, we do not generally pass around the work of the RAD to other government departments willy-nilly. [59]

53. He went on to say that there had not yet been a case of a "serious fraud" but that if there were they would want that information to be in the public domain.

54. We welcome the Department's commitment to publish the lessons learned from Risk Assurance Division (RAD) reports but we believe this does not go far enough. We also welcome the fact that A4e were in favour of RAD reports on the company being published. We agree with the Minister that in cases where there is no case to answer RAD reports should not be published. However where wrong doing is found they should be published, with redactions where necessary. If this would prejudice an on-going investigation the report should be published after such investigations are finished. We believe that seeing the detail of the report will provide valuable lessons for other providers, and that publication will also provide another form of deterrent.

55. We were surprised that the Department does not routinely share the results of investigations with other Government departments, non-departmental public bodies or local authorities. It should do so, and also ensure it is notified of investigations by other bodies. While the Department has not identified any "systematic fraud" it has identified cases of "inadequate management oversight and controls", something which must be shared with other bodies who have contracts with those companies.

7 Ev 81 Back

8 Ev 75 Back

9 By 20 November 2009 this had increased to 16 Ev 97 Back

10 Ev 89; in oral evidence in December we were updated with the information that 74 cases had been concluded and 16 found evidence of deliberate false representation. Back

11 Ev 89 Back

12 Ev 97 Back

13 The abuse was across a range of New Deal programmes being delivered by a single New Deal Prime Contractor and is separate from the other eight incidents. Back

14 Ev 79 Back

15 Ev 81 Back

16 Q62 Back

17 Q63 Back

18 Q63 Back