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Lord Campbell of Croy: My Lords, on the question of identity fraud, I tabled a Question a few months ago asking whether former senior members of MI5 were being brought in to help detect fraud. Will the noble Baroness confirm that that is still the situation? Is MI5 itself now being brought in?

Baroness Hollis of Heigham: My Lords, it is certainly the case that we have been using specialist advice from MI5 to train our own professional investigators. However, as the noble Lord will understand, at the end of the day, the investigation has to be carried out by people who know the social security rules and some of the techniques for evasion.

I return to housing benefit fraud where we are losing through local authorities something like 600 million a year of taxpayers' money. The Audit Commission

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reported a case where someone who worked for a local authority for a number of years claimed income support and housing benefit from an adjacent authority. That resulted in an overpayment of 50,000. Further investigation revealed tenancy fraud as the person was no longer living in the council house for which he received rebate, leaving an unauthorised tenant in occupation. The unauthorised tenant was also committing housing benefit fraud. So it goes on. Fraud corrupts the system. I repeat that we are not talking about the innocent, the ignorant, the illiterate or people who have difficulty with languages stumbling into error. In all of the cases I have mentioned we are talking about knowing and deliberate fraud in which people are working and claiming or have undeclared capital or income which they knowingly and wilfully refuse to declare. This is for the most part, or can be, organised, continuous and systematic fraud that corrupts the system and destroys people's confidence in the integrity of our welfare state.

We estimate that the amount lost to fraud--the figure bears repetition--is at least 2 billion. I hope that I have demonstrated that this fraud is not small time and is not a victimless crime. It is often planned, calculated and costly. It can be widespread and pervasive and it can corrupt. No one in this House would argue that the kind of fraud that I have mentioned would and should be tolerated. However, to cut fraud, we must have the means to do so; hence the Bill.

For every fraud case that we end--the cases I have mentioned are the fraud cases that have come to light and which we have been able to follow up--there are half a dozen others where we lack the powers to determine that fraud has occurred because we lack the powers to collect the appropriate information.

I give just one example of highly likely fraud which we could not determine because we lack the powers until--I hope with your Lordships' consent--this Bill becomes law. We suspected that a claimant was working in the building industry, as he had done frequently in the past. But despite numerous visits scattered between 8.30 in the morning and five o'clock at night, he was never at home. When we finally caught up with him he said that he was vaguely looking for work but could not account for the fact that he was not in on the occasion of a dozen or so visits. No information was given to us as to where he had been that we could check. When we asked to see his bank statements, we saw that there were regular and substantial cheques deposited which the claimant said were there because he was doing a favour for a friend who did not have a bank account. When we asked, however, if he would allow us to check with his bank to confirm the story--if it were true, there should be no problem in checking--he refused. Had we had the powers under the Bill, we might have been able to stop what I think most of us would be pretty sure was fraud. As it was, we could do nothing and he went on his merry way.

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The powers we seek in this Bill help us to reduce that loss through prevention and earlier detection, using the powers to acquire data from the private sector and to secure deterrence, through the powers to remove benefit from persistent benefit offenders and the swift, effective punishment of collusive employers.

Turning now to measures proposed by this Bill, one of the key recommendations in the report of my noble friend Lord Grabiner on the informal economy was a power to take benefits away from people who persistently abused the benefit system. For the vast majority of benefit cheats, their first conviction is their last because the whole process of being interviewed under caution, appearing in court, being sentenced and perhaps finding themselves in their local paper is salutary. However, there are some who continue to offend. They must be made to realise that they cannot abuse the benefit system with impunity.

This Bill provides that those convicted of benefit fraud by the courts will be warned that a further conviction by the courts within three years would mean that they could lose benefits for a period of 13 weeks. This would happen when they defraud virtually any social security benefit. These are known as disqualifying benefits. But the sanction itself will apply to a smaller range, the sanctionable benefits. We will not apply the sanction to benefits which are specifically for children (child benefit and guardian's allowance) nor to those which meet the extra costs of disability (DLA or attendance allowance). Nor will we sanction retirement pension, as research has shown this benefit to be virtually free of fraud by retirement pensioners.

The measures are intended to be tough but, as with other sanctions in the social security system, they include fall-back provisions, and rightly so, to protect the vulnerable and those dependent on them, in particular the families of those who rely on income-related benefits. They will be able to apply for help under a hardship scheme if their other resources are insufficient to prevent hardship. They will be paid at a rate which reduces the offender's personal allowance by 40 per cent--or 20 per cent for cases of particular risk; for example, where a member of the household is seriously ill. Benefit levels for the rest of the household would be unaffected. For people on income support, access to such a scheme would be automatic. Housing benefit would remain in payment, as would access to other benefits such as milk tokens and free school meals.

The scheme is a close reflection of the hardship scheme which already operates for labour market sanctions, which has been tried and tested. We believe this scheme is fair, in that it strikes the right balance between, on the one hand, a punishment which brings home the point that fraud will not be tolerated, and on the other, ensures that offenders, and their families in particular, do not suffer unduly.

I should stress that the main aim of this measure is deterrence. We do not want to see it applied to large numbers of people; indeed, quite the reverse. The fewer people who are subject to the sanction, the better because that means it is working.

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Over and beyond the deterrent sentence, a second key to cracking benefit fraud identified by my noble friend's report is the need for access to independent information about a claimant's financial and other circumstances. Fraud is committed by people deliberately telling lies or concealing the facts about their circumstances. If we are to succeed in rooting fraud out of the system, we need to be able to check with third parties what people tell us. I referred to the man who said that the money in his bank account was there on behalf of a friend. We could not check that out. If we suspect that a person is claiming benefit and is concealing his earnings from work, cross-checking that information with banks would help to establish the fraud.

The Bill includes measures to allow authorised officers in the DSS and local authorities to require information from specified private and public sector organisations, including banks, building societies and credit reference agencies where we have reasonable grounds. It does not provide powers to pry carte blanche into people's bank accounts and go on fishing trips. The Bill is clear on this point, and the point will also be made clearly in a publicly available code of practice--discussions on that begin next week--which will set out how the powers will be used for all to see.

I should like to make clear to your Lordships what is meant by the phrase "reasonable grounds for suspicion"; otherwise I imagine that noble Lords will seek to press me on that. First, it is important to say that what constitutes reasonable grounds will vary and it is not appropriate to put specific conditions into legislation. But there would be reasonable grounds for suspicion where there were cogent reasons to believe that a person was receiving or claiming benefit fraudulently. Staff authorised to use these powers will need to analyse and record their grounds for the suspicion and they will always consider whether there could be an innocent explanation for any circumstances. We might take into account tip-offs from members of the public, suspicious behaviour on the part of a claimant, or unsatisfactory identity documents.

Objective statistical evidence that a person was disproportionately likely to be fraudulent would also provide reasonable grounds. We know that people who have committed benefit fraud before are more likely to be fraudulent. I stress that the evidence would need to be objective and that it would not be lawful to use these powers to discriminate on grounds such as race or sex.

I appreciate that some of your Lordships may have concerns on the extent to which these new powers would give the department access to what in the normal course of events is confidential information. These powers would not be unique in Europe--indeed, Sweden has wider powers in its legislation. Many other countries do not have the same difficulty because they have national ID cards. One of our difficulties is precisely because we do not.

The department estimates that it loses up to a quarter of a billion pounds each year through housing benefit being paid on empty properties. In some cases

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this will be a calculated fraud in that the address is being used to support a claim, for example, to income support or jobseeker's allowance under a false identity--known in the trade as a "giro drop"; in other words, the fraud is committed by the landlord who does not tell the local authority that the tenant has moved out but continues to collect the giro. In other instances the tenant simply abandons the property without bothering to tell the landlord or local authority. For that kind of fraud, it will help us if we can obtain information from the utility companies about abnormal levels of consumption which may indicate benefit fraud. If, for example, there is no consumption but the giro cheque is being sent out, one could have reasonable grounds for believing that the house is unoccupied and, therefore, that the person has no right to a housing benefit giro.

The social security system is also subject to attack from overseas where people fraudulently claim benefit in more than one country at a time or use false, borrowed or stolen foreign identities to claim benefit fraudulently in the UK. I gave an example earlier of 171 identities hijacked by one gang. In order to combat the growth of transnational benefit fraud, we need to have more routine exchange of information with overseas social security administrations. That will be of mutual assistance. Those powers in the Bill would allow the DSS to supply information to other countries and, where another country had a similar power, would allow exchange back to us. We would establish arrangements to exchange information with other countries only where we are content that the country in question has adequate safeguards in place against the improper use of any information disclosed.

As I have said, people working and claiming benefit--including housing benefit--to which they are not entitled cost the department, we estimate, up to half a billion pounds a year. We have looked beyond the problem itself to one of its major facilitators: too often employers are more than happy to have the state subsidise their wage and national insurance bills by colluding with their employees in committing this type of benefit fraud. They are taking advantage of their workforce by denying them proper terms of employment and they gain unfair advantage in the market place by paying low wages. This is unfair competition against honest employers.

The prosecution of employers who have colluded in benefit fraud can be lengthy and costly and is not always the most effective way of tackling this problem. Obviously we will continue to prosecute the more serious cases, but for the less serious cases the Bill for the first time allows the application of a swift civil penalty that will bring home the message that operating in the informal economy by the employer carries a high price and will not be tolerated. The Bill will strengthen our ability to reach out to employers who collude with employees in such fraud.

The measures provide that an administrative penalty of between 1,000 and 5,000 would be offered to a colluding employer as an alternative to prosecution. The penalty would be subject to the same

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safeguards as currently apply to administrative penalties for claimants. The employer will have the option of having the court decide the case; if an employer accepts the penalty as an alternative to going to court, he will have up to 28 days to change his mind but he may prefer the fine to the court prosecution; and it would be quicker and more efficacious from the department's point of view.

A great deal of fraud, estimated as up to 70 per cent, occurs not at the start of a claim but afterwards when changes of circumstance--the claimant has gone back to work or "repartnered"--which affect benefit entitlement go unreported. Current legislation fails to impose a watertight duty on claimants to report changes and is therefore inadequate. We are reforming those powers to ensure that they are effective, and to make it clear that there is a duty on the part of claimants to report such major changes of circumstance.

Finally, the Bill contains three tidying-up measures. First, it will clarify the legislation which enables prosecution when claimants deliberately fail to report changes of circumstance. Secondly, it enables the DSS and local authorities to act together in offering administrative penalties in place of prosecution in cases involving housing benefit and council tax benefit as well as a DSS administered benefit. Thirdly, the Bill will strengthen arrangements for the supply of information by local authorities to the DSS by specifying in directions rather than regulations what information is required from local authorities. It will also bring Scottish legislation on the timing of prosecutions into line with that for England and Wales.

Those are important measures. They are not directed against the innocent, the erroneous or people who could reasonably not have understood that some change in their circumstances makes them open to fraud. We are talking about serious, persistent, knowing, collusive fraud, so certified by magistrates in court. If such a person repeats the offence after that, the benefit penalty will kick in.

I am sure that your Lordships agree that it is not unreasonable that someone who defrauds the system not just once, but twice, as established by law, should not continue to receive benefit. I therefore hope for the support of your Lordships.

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