Select Committee on Public Accounts Twenty-Fourth Report


TWENTY-FOURTH REPORT


The Committee of Public Accounts has agreed to the following Report:

MINISTRY OF DEFENCE: THE RISK OF FRAUD IN PROPERTY MANAGEMENT

INTRODUCTION AND LIST OF CONCLUSIONS AND RECOMMENDATIONS

1. The Ministry of Defence (the Department) spend some £900 million a year on property management on the defence estate in the United Kingdom, including maintenance work on buildings and low cost construction work. The Department is one of the largest single purchasers of maintenance work in the public sector.[1]

2. The Department's estate is diverse and includes more than 45,000 buildings on over 2,500 sites. There are over 200 Property Managers, supported by Establishment Works Consultants who provide technical support and advice, and by Works Services Managers who engage and monitor sub-contractors to carry out necessary works. The risk of fraud and corruption in property management is intrinsically high.[2]

3. On the basis of a Report by the Comptroller and Auditor General (C&AG),[3] the Committee examined:

    (a)  the Department's approach to managing the risks of fraud (including corruption);

    (b)  the controls the Department has in place to minimise the risk of fraud in property management;

    (c)  how the Department detects and investigates frauds; and

    (d)  how well the Department draws out lessons from its experience of fraud.

4. Our main conclusions are:

  (i)  Poor practices and weak oversight have left the Department open to an unacceptable risk of fraud.

At a conservative estimate, the value of property management expenditure at risk of fraud has been £135 million annually (15 per cent of the total). Essential controls over work and spending were not properly implemented and the Department allowed these weaknesses go uncorrected.

  (ii)  Although the Department's policy is that fraud will not be tolerated, it lacks a formal strategy for managing the risks of fraud.

In order to establish such a strategy, the Department should build upon the fraud risk model used by the National Audit Office to inform the C&AG's Report. The Department must press ahead with this work and ensure that fraud risk assessments are completed in respect of all key activities.

  (iii)  The Department's plans for a system of prime contracting for property management must not be permitted to weaken its approach to fraud.

At the time of the C&AG's Report, the Department had not communicated its fraud policy to contractors employed by them. The Department subsequently disseminated a statement of its fraud policy to all its contractors and now requires each contractor to articulate a fraud policy and fraud response plan as a condition of continued employment by the Department. The Department needs to ensure that this practice continues on the appointment of all new contractors, large and small. It will need to ensure that the new prime contractors appointed by the Department adopt robust, risk-based, controls over fraud.

  (iv)  The Department's stated policy of 'zero tolerance' of fraud is hard to reconcile with its long record of having taken no disciplinary action, and few prosecutions.

Since 1994, the Department has successfully prosecuted only 3 cases of fraud in property management. In the same period there have been no cases of disciplinary action against staff for control or management failings in this area.

5. Our more specific conclusions and recommendations are set out below.

On managing the risks of fraud

  (i)  Following the C&AG's Report, the Department drew up a project management plan and introduced a range of initiatives aimed at increasing fraud awareness amongst its property management staff and at driving down the risk of fraud. The threat of fraud in property management is intrinsically high and ever present. The Department should give appropriate guidance and training to its staff to maintain a high level of fraud awareness (paragraph 16).

  (ii)  In line with best practice, in 1998 the Department's Top Level Budget Holders established a Fraud Focal Point to co-ordinate anti-fraud activities. While the Department has provided assurances about the work of these focal points, their terms of reference had still to be established some four years later, and are long overdue (paragraph 17).

On minimising fraud in property management

  (iii)  The Department recognises that physical inspections of property management work are key to the prevention and detection of fraud. Yet few inspections had been carried out at the time of the C&AG's Report. The Department has subsequently introduced improved training for Property Managers and intends to issue best practice guidance on this point. The Department should ensure that neither its own staff nor its consultants neglect such physical inspections (paragraph 35).

  (iv)  The National Audit Office found poor standards of control over cost estimating — professional costing advice was obtained for only 35 per cent of high value jobs, and over 40 per cent of these estimates were more than 50 per cent different from the prices actually paid for the work. The Department now requires consultants to provide estimates more fully than before, but also needs to establish whether the expected improvement in contractors' performance is achieved (paragraph 36).

  (v)  The Department has taken particular steps to ensure that the risk of fraud occurring in property management at the three establishments visited by the National Audit Office is now relatively low. For example, proper checks of contractors' invoices before payment have now been instituted there. But there remain over 200 other establishments incurring property management expenditure. The Department must broaden its unannounced inspections and new works reviews to drive down fraud risks in these locations as well (paragraph 37).

  (vi)  The Department's arrangements for property management are moving towards prime contracting, which gives a single contractor financial responsibility for delivering works services, including major construction work, in one geographical region. There is a risk that the increased delegation of day-to-day management inherent in these arrangements will increase the scope for fraud by contractors. The Department will need to agree appropriate performance measures with each prime contractor from the outset and ensure that open book accounting is achieved throughout the supply chain, with appropriate access for the C&AG, to enhance its ability to detect and prevent fraudulent activity (paragraph 38).

  (vii)  The Department has not been successful in estimating the costs of property management work, or monitoring the prices charged. Control over these activities will assume even greater importance under prime contracting where contracts will inevitably be more complex and the sums involved will be far greater. The Department should work with the National Audit Office throughout the implementation of prime contracting to obtain independent assurance that the new procedures contain adequate safeguards against fraud (paragraph 39).

  (viii)  In developing arrangements for property management, the Department has benchmarked its procedures against other central government departments. The Department should also benchmark its activities against local authorities and other organisations, such as large private sector companies (paragraph 40).

On reporting and investigating fraud and disseminating the lessons learned

  (ix)  The Department has a Fraud Hotline by which staff may report actual or suspected fraudulent activity. The current hotline has been in existence since February 1999 and has been activated on 22 occasions, which appears low for an organisation of the Department's size. The Department should explore the reasons for this low usage, perhaps through further comparisons with other organisations (paragraph 50).

  (x)  All departments have a property management function to a greater or lesser degree. The Treasury should disseminate more widely the lessons learned from the C&AG's Report and encourage the more widespread use of the fraud risk model developed by the National Audit Office and adopted by the Department. In this respect, we note the reference to the fraud model in the last two Annual Fraud Reports and endorse the Treasury's decision to hold a seminar for all departments on the lessons learned from this Report (paragraph 51).

MANAGING THE RISKS OF FRAUD

6. Best practice indicates that an organisation should state its intentions on fraud in a publicly available fraud policy statement, to which all staff subscribe. Organisations that perform most effectively in fighting fraud are likely to have a formal strategy, including a statement of "where we are now", "where we want to be" and a plan of action for getting there.[4]

7. The C&AG's Report noted that the Department had a fraud policy statement, which was set out in an internal publication and made available to all service and civilian employees. The statement made clear that fraud would not be tolerated, that staff were expected to act in an ethical manner and that the Department would prosecute or take disciplinary action against those committing fraud in all cases. In recent years, the Department had increased its use of contractors in many areas of activity, including property management. Contractors did not have sight of the Department's fraud policy statement and were not expected to sign up to a specific commitment to prevent and detect fraud.[5]

8. The Department had a number of practices designed to afford a degree of protection from the risk of fraud, such as the recruitment of staff by open competition, the rotation of staff through posts, the separation of duties between those authorising and paying for work and well-established procedures for contracting for services and products. There was however no formal strategy for managing the risks of fraud, either for the organisation as a whole or for specific areas of activity. Nor was there a structured Departmental fraud risk assessment.[6]

9. The Department accepted that there was no risk-based strategy in place to combat fraud. The approach was previously based on ensuring that all of the processes involved in property management were checked over time. The key element which was missing was the risk model the National Audit Office had developed and which the Department was taking forward. The Department was moving to a risk-based strategy focussed on areas identified as being of most concern. Consideration of such factors as high value transactions, high volumes of low value activity, and the length of time which specific contractors had worked with particular property managers would allow the Department to differentiate according to risk. The Department intended to issue a formal strategy document in the autumn of 2001, though they have yet to do so.[7]

10. The Department confirmed that the co-operation of the National Audit Office had helped to identify and analyse fraud risks faced by them in property management. Of 63 actions included in the project management plan, 54 had resulted from the C&AG's Report.[8] The Department had developed a major programme of action, the project management plan, which essentially covered all of the elements of the strategy which was to be pursued in the coming years.[9]

11. Our predecessor Committee asked the Department how it expected to deter would-be fraudsters when contractors were unaware of the Department's policy towards fraud. In the past, the Department had focussed primarily on its own staff's awareness and had given insufficient attention to contractors. In June 2000, the Department had informed 21 major companies it employed of the fraud policy and had sought details of their own strategies for combating fraud. There had been some very positive responses to that initiative.[10]

12. The Department subsequently wrote to all its contractors within the construction industry. The letters clearly set out the Department's policy on fraud and theft, and what was required of contractors, in line with the requirements placed on their own employees. For example, contractors had to have a statement of ethical behaviour, a fraud policy statement applicable throughout their organisation, and a fraud response plan detailing the actions to be taken in rooting out evidence of fraud where this was suspected. Only suppliers able to demonstrate that they had embraced wholeheartedly the Department's policy on fraud would be considered for future business.[11]

13. The C&AG's Report noted that, within the Department's decentralised structure, responsibility for safeguarding public funds had been delegated from the Accounting Officer through each of 13 (now 11) Top Level Budget Holders to lower levels of management, including the Property Manager at each establishment. In line with best practice, the Department's Top Level Budget Holders each appointed a Fraud Focal Point in 1998 to co-ordinate responses to fraud. The Focal Points were expected to liaise with each other and with the central bodies responsible for fraud. The Department had not defined terms of reference for focal points, however, who had met as a group to discuss fraud issues on three occasions since they were created.[12]

14. Our predecessor Committee asked whether the apparent lack of activity on the part of Fraud Focal Points and the absence of terms of reference some three years after their creation indicated a lack of priority given to fraud within the Department. The Department said that the fact that the group had met three times was not indicative of the work that it did. Fraud Focal Points met much more regularly in different contexts. They were at the centre of the Department's fraud prevention strategy. They met in the context of the Fraud Prevention Steering Group, chaired by the Chief Executive of the Defence Estates Agency, and they held regular meetings with the Defence Fraud Analysis Unit, the Defence Estates Agency and with the Ministry of Defence Police Fraud Squad. The Focal Points played an active role in disseminating information to staff, particularly from the Defence Fraud Analysis Unit, and had been very effective in raising awareness within individual budget areas and in training staff.[13]

15. The Department said that, despite the absence of any terms of reference at the time of the C&AG's Report, the Fraud Focal Points understood that they were required to spread best practice and to spread awareness. Terms of reference had been for each of the Top Level Budget Holders to specify. These need not necessarily have been identical since it would depend on what the Top Level Budget Holder wanted in terms of each business area. Nevertheless, the Department were to develop terms of reference for Focal Points which would reflect their role in carrying forward the Department's fraud strategy that was to be issued in autumn 2001.[14]

Conclusions

16. Following the C&AG's Report, the Department drew up a project management plan and introduced a range of initiatives aimed at increasing fraud awareness amongst its property management staff and at driving down the risk of fraud. The threat of fraud in property management is intrinsically high and ever present. The Department should give appropriate guidance and training to its staff to maintain a high level of fraud awareness.

17. In line with best practice, in 1998 the Department's Top Level Budget Holders established a Fraud Focal Point to co-ordinate anti-fraud activities. While the Department has provided assurances about the work of these focal points, their terms of reference had still to be established some four years later, and are long overdue.

MINIMISING FRAUD IN PROPERTY MANAGEMENT

18. The C&AG's Report noted that Treasury guidance on the risk of fraud, issued in 1997, advised government departments to "identify risk areas" and to "assess the scale of the risk". Since the Department had not conducted a risk assessment in line with this guidance, the National Audit Office created a fraud risk model based around six key stages in progressing property management work.[15]

19. The National Audit Office's risk modelling work showed that the amount which could be lost to fraud in property management at a typical establishment each year was around £580,000. Given the levels of control then operating, at a conservative estimate the Department could be losing £135 million overall, 15 per cent of its total annual expenditure on property management, to fraud. The Department's own broad estimates had suggested that property management expenditure of up to £180 million a year (20 per cent of the total) could have been at risk of fraud.[16]

20. The Department was unable to say what level of expenditure was currently at risk of fraud since more cases needed to be processed through the risk model that they were continuing to develop. The Department did not dispute the National Audit Office's assessment, but emphasised that the results did not show that £135 million was being lost to fraud. Rather, they indicated an 80 to 85 per cent level of assurance that the Department's processes were working properly. The Department was confident that that situation had now improved further, given the number of initiatives introduced since the C&AG's Report was produced. The Department had also conducted two successive rounds of inspections at the three establishments visited by the National Audit Office, which had shown that procedures at those places were now fully satisfactory.[17]

21. Our predecessor Committee nevertheless found it unsatisfactory that 15 per cent of the Department's property management expenditure, or between £675 million and £900 million over the last five years, should be at risk of fraud.[18] The Department accepted that the situation was serious and that its job was to manage the risks inherent in procurement in a responsible manner. It always had a fairly extensive set of rules, regulations and guidelines in this area but established procedures had not been fully and properly implemented by those responsible for doing so.[19]

22. The Department said that actual losses were difficult to establish. It was currently investigating seven cases of property management fraud with a total value of £2.5 million. The Department acknowledged, however, that the amount of money at risk was far too high and for this reason a major risk reduction strategy had been introduced.[20]

23. The C&AG's Report referred to the importance of physical inspections carried out by the Property Manager at each establishment, or by the Establishment Works Consultant on his behalf, in preventing fraud at various stages of the works cycle—for example, before approving work to be carried out or to verify the execution and completion of work. Guidance issued by the Department to Property Managers stressed that they should "regularly and frequently walk their estate, since there is no substitute for actually seeing what is happening, first hand".[21]

24. Our predecessor Committee noted that very few physical inspections were carried out at any stage of the work cycle, and asked what had been done to improve this unacceptable situation. The Department said that training to raise staff's awareness had been improved. A series of 16 best practice guides was also planned, of which four had so far been produced. These were available both to the Department's staff and to their contractors. In addition, the Department said that unannounced inspections had brought about a change in attitude by contractors, who were now aware that they could be inspected without warning.[22]

25. The C&AG's Report noted that the Works Services Manager was responsible for arranging for work to be carried out within financial limits set by the Property Manager and that estimating accurately the likely cost of maintenance work could be a skilled task requiring professional expertise. In technically complex cases of high value, the Property Manager could ask the Establishment Works Consultant to provide an assessment of the likely cost.[23] Establishment Works Consultants had however provided estimates for only 35 per cent of the high value transactions examined by the National Audit Office. In 88 per cent of all cases where they had provided estimates, there was no evidence that they had based them on site inspections. In addition, some 40 per cent of the estimates provided for high value transactions were more than 50 per cent different from the price actually paid. There were also failures to secure appropriate estimates on lower value work, leading to the risk of overcharging by contractors.[24]

26. The Department accepted that this situation was unacceptable and said that procedures had been changed to make clear that consultants had to provide estimates to the level required of them. In addition, the Department was revisiting work and remeasuring work to ensure that the jobs had been done properly. In the case of the lower value transactions, the Works Services Managers had failed to fulfil their responsibilities.[25]

27. The Department's new works reviews had identified evidence of overcharging by more than 100 per cent of the true cost of materials and labour. The Department said that it had changed contractors in these cases, and had also abolished the system whereby contractors were notified of the limits within which they were required to bid, since this encouraged companies to bid up to the specified limit. All contractors now provided detailed estimates of the cost of work required, which the Department's consultants checked before the contracts were let.[26]

28. The C&AG's Report noted inadequacies in the checking of invoices at the three establishments visited by the National Audit Office, including the acceptance of photocopies and the failure to cancel original copies.[27] The Department said that procedures at these three establishments were now fully compliant. More generally, a best practice guide on this subject was planned, although it had yet to be published. The Department's inspections and new works reviews were also designed to ensure that both the Department's staff and its contractors operated proper processes, for example to prevent the submission of invoices twice and to ensure that subcontractors' discounts were passed on to the Department. The latter was now a contractual requirement.[28]

29. The Department said that it had done a great deal to raise awareness since the C&AG's Report was published, improving processes and taking action to convey its policies both within the Department and to industry. Amongst the actions taken, the Department had produced a project management plan, had carried out around a dozen inspections of establishments and had introduced new works reviews, of which it planned to carry out 27 in the course of the year. This was a risk-targeted approach which focussed closely on individual transactions and increased the possibility of finding fraud and malpractice. In addition, the Department had provided fraud awareness training to 1,450 staff, including Property Managers, at a series of 44 seminars in 20 locations; was introducing best practice guides; had set up a Fraud Analysis Unit of 12 people and held fraud alert road shows. To address the shortage of experience and skills among Property Managers the Department had defined the functional competencies required of these staff and had produced clear job specifications which would be used during their recruitment and in measuring their performance.[29]

30. The C&AG's Report noted that the Department had been considering possible changes to its arrangements for property management, along the lines of prime contracting. Financial responsibility for delivering works services in one geographical area, including major construction work, would be passed to a single contractor.[30] Asked what progress they had made with this initiative and what they were doing to encourage all contractors to prevent, detect and report fraudulent practices,[31] the Department confirmed that a system of prime contracting would be a better and more robust arrangement than was available at present. Currently there were separate arrangements with around 90 different Works Services Managers and 90 different Establishment Works Consultants. Under the new arrangements these would be grouped together, regionally, in possibly as few as five prime contracts which would be managed using modern methods analogous to best practice in the private sector. Each contract would run for between seven and ten years. The new arrangements would enable the Department to transfer much of the risk it currently bore to the contractors. Companies would not qualify to work with the Department unless they could demonstrate their commitment to root out fraud and that they had effective processes to ensure that they would succeed. The Defence Estates Agency would be responsible, on behalf of the Department, for ensuring that the new arrangements worked properly.[32]

31. Under the prime contracting arrangements, clear performance measures and targets would be agreed with the winning bidder from the outset, against which the contract would be carried out. Through open book accounting, the Department would be able to see costs and have access to documentation throughout the supply chain. The contracts would also provide for reward sharing as an incentive against fraud. The Department's prime contracting initiative was at the forefront of what the Government were doing to reform the construction industry.[33]

32. Given its poor record of securing cost estimates under current property management arrangements, the Department was asked whether it would be able to incorporate fully, in advance, the estimated costs of work required under prime contracting. The Department recognised that it was unlikely to be able to get everything precisely right and said that it would be possible under the contracts to revise costs. Open book accounting would ensure that any cost revisions were on the basis of agreed requirements. The principle of gain sharing would mean that contractors were incentivised to drive down their costs. And the scope for overcharging for work that existed under current arrangements would be removed with prime contracting because the whole cost of the contract would be built up on agreed prices and agreed with the Department at the outset. Any subsequent cost overrun would, essentially, take profit away from the contractor.[34]

33. The Department told us in evidence that it had not benchmarked its arrangements for property management specifically against local government but had tended to compare its practices with other central government departments. There were, however, a number of bodies which crossed the private sector, central government and local government which were seeking to build a joint approach towards improving processes in the construction industry, including the Confederation of Construction Clients, of which the Department was a founder member. The Department was also working closely with NHS Estates to benchmark and compare approaches.[35]

34. Asked how it judged whether particular anti-fraud activities were likely to be cost-effective, in the light of proved fraud of £2.5 million a year against a sum at risk of £135 million, the Department agreed that it needed to consider how much cost and effort should be invested in tightening up procedures. At present, the procedural changes being implemented were seen as absolutely essential and had not yet reached the point where they had become too expensive. The key task was to ensure that risks had been correctly prioritised and that the Department had the right risk management tool. The answer was to move to a simpler system of prime contracting rather than to continue trying to perfect the existing system.[36]

Conclusions

35. The Department recognises that physical inspections of property management work are key to the prevention and detection of fraud. Yet few inspections had been carried out at the time of the C&AG's Report. The Department has subsequently introduced improved training for Property Managers and intends to issue best practice guidance on this point. The Department should ensure that neither its own staff nor its consultants neglect such physical inspections.

36. The National Audit Office found poor standards of control over cost estimating - professional costing advice was obtained for only 35 per cent of high value jobs, and over 40 per cent of these estimates were more than 50 per cent different from the prices actually paid for the work. The Department now requires consultants to provide estimates more fully than before, but also needs to establish whether the expected improvement in contractors' performance is achieved.

37. The Department has taken particular steps to ensure that the risk of fraud occurring in property management at the three establishments visited by the National Audit Office is now relatively low. For example, proper checks of contractors' invoices before payment have now been instituted there. But there remain over 200 other establishments incurring property management expenditure. The Department must broaden its unannounced inspections and new works reviews to drive down fraud risks in these locations as well.

38. The Department's arrangements for property management are moving towards prime contracting, which gives a single contractor financial responsibility for delivering works services, including major construction work, in one geographical region. There is a risk that the increased delegation of day-to-day management inherent in these arrangements will increase the scope for fraud by contractors. The Department will need to agree appropriate performance measures with each prime contractor from the outset and ensure that open book accounting is achieved throughout the supply chain, with appropriate access for the C&AG, to enhance its ability to detect and prevent fraudulent activity.

39. The Department has not been successful in estimating the costs of property management work, or monitoring the prices charged. Control over these activities will assume even greater importance under prime contracting where contracts will inevitably be more complex and the sums involved will be far greater. The Department should work with the National Audit Office throughout the implementation of prime contracting to obtain independent assurance that the new procedures contain adequate safeguards against fraud.

40. In developing arrangements for property management, the Department has benchmarked its procedures against other central government departments. The Department should also benchmark its activities against local authorities and other organisations, such as large private sector companies.

REPORTING AND INVESTIGATING FRAUD AND DISSEMINATING THE LESSONS LEARNED

41. One of the key elements in the effectiveness of fraud investigation is to ensure that staff know to whom they should report their suspicions. The Department's arrangements for reporting had been complicated, with several potential reportees, the relevance of whom varied with the nature of the suspected fraud.[37] Asked what had been done to simplify these arrangements,[38] the Department said that the recommended focal point for all fraud activity was the Defence Fraud Analysis Unit, comprising 12 people. The Unit had been formed following the integration of previously separate fraud investigation units within the procurement area and the rest of the Department. Staff were able to contact the Unit directly or through their line management or the police, both of whom would then report to the Unit. The Unit therefore held the Department's central records on reported frauds across all their activities, including property management.[39]

42. The Defence Fraud Analysis Unit operated a telephone hotline (the Fraud Hotline: 0207 807 8043) for staff to report their suspicions. It had been set up in February 1999 and had been contacted on 22 occasions in the 18 months prior to the Committee hearing, eight of which related to works services cases. The number of calls received within recent months had increased as a result of heightened awareness following the programme of fraud awareness training, and the Unit had received six allegations of fraud from people who would not have contacted them previously. The Department could not say what number or value of investigations arose from reports received on the Fraud Hotline. The value was unlikely to be high, however, given that the total value of all frauds currently under investigation was £2.5 million.[40]

43. Our predecessor Committee was surprised at the low number of calls received on the Fraud Hotline, given the size of the Department, and asked whether the Department had made comparisons with other organisations where perhaps financial incentives to report fraud might have led to greater success. The Department said that its policy was that all civilian and service members of staff had a duty to report any suspicion of fraud, and that it would be reluctant to reward someone for doing something which was already part of their duties. The National Health Service took a similar view and neither it nor Boots the Chemist, both of whom the Department had consulted, offered rewards or financial inducements to callers.[41]

44. The Fraud Hotline was only one way for staff to contact the Defence Fraud Analysis Unit. During the period when the Unit had received 22 calls on the hotline, it had received some 90 approaches overall. It was difficult to compare the performance of different hotlines as each was unique. The Department of Social Security hotline received many thousands of calls largely comprising allegations of fraud by members of the public. At the time of this report, no figures were available in respect of the National Health Service Fraud and Corruption Reporting Line as it had only been established in February 2001. Boots the Chemist employed some 50,000 staff and received around 12 calls each month. These reduced to between seven and 10 calls each month when issues other than fraud and theft were excluded.[42]

45. The C&AG's Report noted that, within the previous five years, the Department had not prosecuted any fraud cases relating to property management, nor had internal disciplinary action resulted from any of the investigations that they had undertaken.[43] In evidence, the Department said that while its policy was always to prosecute, it was not always easy to achieve the results that it wanted. Property management was an area where it was very difficult to get sufficient evidence to secure convictions. The Department, together with the Crown Prosecution Service, therefore looked carefully at the prospect of securing convictions, and at other ways of recovering the money where criminal prosecution was unlikely to work. Of around 25 cases investigated each year, between seven and 12 were in the property management area. The Department had secured three successful prosecutions with one acquittal since the C&AG's Report was produced. The Department was currently looking to secure recoveries totalling £2.5 million, possibly without resorting to prosecution.[44]

46. The Department added that it was often very difficult to obtain evidence to support prosecutions in this area because of the mass of papers, statistics and other data that needed to be examined. It was easy for people to argue that they had made simple errors or had misunderstood, and it was difficult to prove criminal intent. The requirement for open book accounting under prime contracting would allow the Department automatic access to contractors' documentation which they had not previously had and might lead to either more prosecutions or better compliance by individuals. Better IT systems also provided the opportunity for the Department to employ data mining techniques to look, for example, for unusual patterns and relationships between contractors and others.[45]

47. Our predecessor Committee asked why the Department had not taken disciplinary action against any of the staff concerned in failures to obtain appropriate estimates for work, in view of its stated policy that dishonest and illegal activity would not be tolerated. The Department said that, although staff had not followed established guidance and procedures, they had not necessarily acted irresponsibly. It was for Top Level Budget Holders to decide how they should carry out their work and it was a matter of judgement how often estimates should be required. The C&AG's Report had been undertaken to establish best practice rather than to amass evidence of fraud or to investigate the behaviour of staff for disciplinary and prosecution purposes. The Department had used the Report to improve procedures and practices and had done so at the three establishments visited by the National Audit Office.[46]

48. Asked how much it cost to run its anti-fraud activities overall, the Department said that the annual cost was estimated to be some £4.2 million. This figure comprised some £3 million for the Ministry of Defence Police Fraud Squad of around 30 officers, £0.4 million for the Defence Fraud Analysis Unit, £0.3 million for Defence Estates Agency activities and £0.5 million for the cost of forensic investigations by consultants. The Fraud Hotline incurred no separate costs. Activities covered by this expenditure included not only fraud investigations but also the creation of an effective anti-fraud culture, for example through awareness training. Against these costs, Ministry of Defence Police investigations had resulted in the recovery of £2.4 million in 2000-01. The Department was continuing to gather statistics on these activities to try to ensure that they remained cost effective and properly focussed.[47]

49. Since most government departments had a property management function, our predecessor Committee asked the Treasury whether they were disseminating lessons arising from the C&AG's Report to other departments and whether departments might benefit from applying a risk modelling approach. The Treasury said that their recent Annual Fraud Report had included an appendix written by the National Audit Office discussing the risk model used in this case. In addition, they planned to hold a seminar for all government departments, together with the National Audit Office and the Department, which would discuss the lessons learned through the C&AG's Report and how the Department was dealing with them.[48]

Conclusions

50. The Department has a Fraud Hotline by which staff may report actual or suspected fraudulent activity. The current hotline has been in existence since February 1999 and has been activated on 22 occasions, which appears low for an organisation of the Department's size. The Department should explore the reasons for this low usage, perhaps through further comparisons with other organisations.

51. All departments have a property management function to a greater or lesser degree. The Treasury should disseminate more widely the lessons learned from the C&AG's Report and encourage the more widespread use of the fraud risk model developed by the National Audit Office and adopted by the Department. In this respect, we note the reference to the fraud model in the last two Annual Fraud Reports and endorse the Treasury's decision to hold a seminar for all departments on the lessons learned from this Report.


1   C&AG's Report, para 1.1 Back

2   ibid, para 1 Back

3   C&AG's Report, The Risk of Fraud in Property Management (HC 469, Session 1999-2000) Back

4   C&AG's Report, paras 2.2, 2.7 Back

5   ibid, paras 2.3-2.5 Back

6   ibid, paras 2.8-2.9, 2.11 Back

7   Qs 1, 41, 100 Back

8   Qs 102, 105 Back

9   Q1 Back

10   3, 96 Back

11   Qs 96, 99 Back

12   C&AG's Report, paras 2.14-2.16; Ev, p1  Back

13   Qs 23-24, 28 Back

14   Qs 24-28 Back

15   C&AG's Report, paras 3.1-3.2 Back

16   ibid, paras 1.1, 3.5-3.6 Back

17   Qs 3-4, 94 Back

18   Qs 11-12, 17, 33-34 Back

19   Qs 13, 18 Back

20   Qs 34, 37 Back

21   C&AG's Report, paras 3.11, 3.43 Back

22   Q7 Back

23   C&AG's Report, paras 3.18, 3.21 Back

24   Qs 30-31, 132-133  Back

25   ibid Back

26   Qs 5-6 Back

27   C&AG's Report, para 3.56 Back

28   Qs 83-84 Back

29   Qs 3, 9, 40, 83, 99, 141 Back

30   C&AG's Report, para 3 Back

31   Q2 Back

32   Qs 2, 54, 95, 99, 131 Back

33   Qs 74, 101, 159, 201 Back

34   Qs 5, 199 Back

35   Q162 Back

36   Q142 Back

37   C&AG's Report, para 12 Back

38   Qs 49, 51, 97  Back

39   Q97 Back

40   Qs 42-50, 147 Back

41   Qs 143, 150-151; Ev, Appendix 1, p25  Back

42   Q147; Ev, Appendix 1, p25 Back

43   C&AG's Report, para 4.18 and Figure 18 Back

44   Qs 10, 92 Back

45   Qs 72, 74-75, 77 Back

46   Qs 141, 166, 172, 177, 180, 194 Back

47   Qs 52-53; Ev, Appendix 1, p25 Back

48   Q202 Back


 
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