Australia: Protecting public money from procurement and funding fraud through rewarding whistleblowing

Introduction

As published in The Canberra Times Public Sector Informant on 7 May, 2013

Whistleblowers could save taxpayers hundreds of millions of dollars by the early identification of fraudulent claims made against the government. Whistleblowers could also receive a share of the funds recovered as a result of their claims, if a US type of 'False Claims Act' is introduced.

Results from a survey conducted by the Australian Institute of Criminology (AIC) show that $495,534,658 was lost to external fraud (that is, fraud committed by a third party) against the Australian Government in 2009-2010. Approximately $196 million, significantly less than half of that amount was recovered, of which $87 million related to "entitlements" fraud (such as social security and Medicare fraud).

For many reasons, it now appears that these figures grossly underestimate the true extent of such external fraud. The Association of Certified Fraud Examiners has noted that on average organisations and governments lose 5% of revenue or expenditure to fraud. If this figure is applied to Australian Government expenditure of $378 billion, it could equate to a loss of up to $19 billion. In particular, the lessons of the United States in responding to instances of "non-entitlements" external fraud by large multi-nationals suggest that its occurrence in Australia is significantly higher than currently reported and that losses arising from contract procurement and funding fraud are costing the Australian Government many, many more millions each year.

Recovery of fraud losses from third parties

Whenever the Australian Government contracts with a third party, the potential for fraud exists: for example, by that third party submitting invoices for work not actually undertaken or producing inferior goods to that contracted for. While the actual amount the Australian Government loses to external fraud in a given year likely exceeds by far the already considerable amount reported in current AIC surveys, the question remains: why are these losses not identified or recovered, and what can be done about it?

Measures to detect, prevent and identify fraud, especially in procurement and funding, are critical if embarrassing historical frauds such as those committed under the home insulation scheme and the school buildings program are lessons to be learned. Having someone "blow the whistle" on the third party is by far the easiest means of detection.

In the past few years the Australian Government has taken significant steps to strengthen whistleblower protection both within and outside the public service, which is encouraging. There is, however, still much more that could be done to encourage a culture of whistleblowing, especially in the area of external fraud.

Introduction of a False Claims Bill?

The possible introduction in Australia of legislation akin to the False Claims Act in the United States could see recovery of funds due to external fraud skyrocket, with individuals able to bring claims against private organisations on behalf of the Australian Government and claim a percentage of the overall amount recovered - in effect, "incentivising", compensating or rewarding whistleblowers. How such legislation will work in practice in Australia remains to be seen.

Since 2010, the Australian Federal Police Association has been calling for such legislation, which would create civil actions for recovery of money obtained by means of false claims to the Australian Government (or a government contractor, if the cost is ultimately passed on to the government). This action, a civil equivalent to the criminal offences currently contained in Part 7.3 of the Criminal Code (contained in the schedule to the Criminal Code Act 1995 (Cth)), may in itself assist Australian Government agencies to recover money lost to external fraud by giving another legal alternative to proceeds of crime legislation or contractual enforcement.

However, the more significant aspect of the United States legislation is its qui tam provisions, which allow a private individual (the "relator") to bring a claim on behalf of the government and claim a percentage of the overall amount recovered if successful – in effect, the reward for whistleblowing. With growing support for this kind of legislation and empirical evidence such as the AIC survey justifying its potential, it seems likely that the introduction of a Bill is an inevitability.

So if qui tam claims are the future for Australian Government procurement and grants-related fraud control, what could an Australian False Claims Act mean for agencies?

The future for Australian qui tam claims

In the United States, the False Claims Act, also known as the "Lincoln Law", was introduced by President Lincoln in 1863 during the American Civil War to combat the defence contractor fraud that was rife in both the Union North and Confederate South and, thanks to some major amendments in 1986, has been given a new lease on life.

Contained in § 3729-2733 of the US Code, the Act establishes liability when any person or entity improperly receives payment from or avoids payment to the US Government (other than via tax fraud). A qui tam claim is established by section 3730, and allows the relator to recover 15-25% of a successful claim where the government regulator decides to join the claim, or 25-30% where the regulator chooses not to be involved.

According to statistics published by the US Department of Justice on litigation under the False Claims Act from October 1987 to September 2012, over $40 billion has been recovered through the legislation in the last 25 years. Of that, almost $24 billion was recovered through qui tam claims, with the figures showing a steady upward trend in the number of qui tam claims over the years – in 2012, there were 647 qui tam claims brought compared to only 135 non-qui tam claims. Commentators generally agree that qui tam claims also act as a deterrent to committing fraud in the first place, as higher recovery rates translate into a higher chance of getting caught.

Obviously the United States is a much larger country than Australia in terms of population and government expenditure and, in practica terms, similar legislation here would recover much lower figures. Nevertheless, the United States experience demonstrates huge potential to decrease the amount of public money lost through fraud every year.

In 2009-10, during the same period the subject of the AIC survey, the US government recovered over $5 billion through litigation under the False Claims Act. Taking into account that entitlements fraud would generally not be large-scale enough to fall within the scope of a False Claims Act claim, this can be contrasted with the $109 million recovered in Australia through non-entitlements fraud in the same period – representing only about 2 per cent of the funds recovered in the United States.

Put simply, Australia can do much more to recover money lost to external fraud. The strong recovery trends in the United States are in large part because of the False Claims Act and the existence of qui tam claims. Such legislation has potential to recover a significant part of the funds lost each year through fraud.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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