Fraud in the Australian context
In the Budget reply speech delivered by the Hon Joe Hockey MP on 22 May 2013, it was announced that a Coalition government will introduce a policy whereby all small businesses that provide services to government will get the benefit of a 'pay on time or pay interest' approach to their invoices, regardless of whether formal contracts are in place or not. This "prompt payment" policy expands on Labor's policy about invoicing. Notwithstanding the obvious benefit to business, such a policy increases fraud risk with consequences for agencies from the perspective of proper financial management and use of public money.
Additional focus on fraud by the new Coalition government is critical. The introduction of the Public Interest Disclosure Act 2013 (Cth) this year by Labor was an important step for public sector fraud, however it is apparent that an even more holistic view needs to be taken by the Coalition of the effect of fraud, especially where it is being committed by private sector organisations who regularly contract with government – and particularly in light of the roll-out of the Coalition's approach to the payment of invoices.
The Coalition's "pay no time" policy
The reasoning behind the Coalition's expansion of the former Labor policy is clear. Unlike big business, it can be very difficult for small and medium enterprises (SMEs) to absorb running costs when bills are not paid on time. Too many delayed payments can be fatal to an SMEs business which in turn has a negative effect on the economy as a whole.
Such a policy, however, has the potential to greatly increase fraud risks. This has consequences for government from the perspective of proper financial management and use of public money. On the one hand, timely payment of invoices reduces the amount of time between when an invoice is received and when it is paid, but on the other it increases the risk that claims are not properly tested before being settled. This is particularly so where a large volume of services are being procured and paid for in any given month. This also creates a vulnerability to fraudulent claims as well as increasing the margin for honest error – and that risk is significantly magnified where claims do not need to be submitted under a formal written agreement, as is proposed by the Coalition.
A new focus for fraud detection
On the last sitting day of Parliament this year, the Public Governance Performance and Accountability Act 2013 (Cth) passed into law. It comes into effect on 1 July 2014. Over time, it is intended to replace the Financial Management and Accountability Act 1997 (Cth) and the Commonwealth Authorities and Companies Act 1997 (Cth), both of which provide guidelines for the financial management of Commonwealth government agencies.
This new Act sets an overarching framework that promotes even higher standards of governance, performance and accountability for Commonwealth entities. It is not prescriptive but instead sets a comprehensive framework to assist agencies to meet their obligations.
While this new Act does not prescribe the control of fraud and waste specifically (such responsibility squarely sits with an agency), it will likely provide an opportunity for the Coalition to redraft the current Commonwealth Fraud Control Guidelines issued under the regulations to the Financial Management and Accountability Act 1997 (Cth).
The current Guidelines articulate the Government's expectations for effective fraud control for all departments and agencies, their employees and (importantly in the context of a "prompt payment" policy) their contractors. The current Guidelines require all employees and contractors to take into account the need to prevent and detect fraud as part of their normal responsibilities and recommends that agencies implement a rolling program of regular fraud awareness raising and prevention training for all employees and contractors. It is difficult to predict with certainty what the new Guidelines will include, however given the increased focus on fraud at the Commonwealth level, it is likely that they will further prescribe how agencies should deal with fraud in the public sector, especially when it contracts with the private sector.
"Prompt payments" in the United States
The United States provides an interesting case study about how the Coalition's "prompt payment" policy might work in practice. There, legislation enshrining such a policy was introduced in 1998 as the Prompt Payment Act (31 USC 39).
Under that Act, federal government agencies must make payments within 30 days of receipt of an invoice in accordance with the Act or by the date specified within the contract, whichever is later, and interest accrues on late payments. Different to the Australian situation, the operation of the Prompt Payment Act is not restricted to SMEs and the Act only applies to formal contracts.
In the context of the Coalition's "prompt payment" policy in Australia, introduction of complementary legislation such as a United States style "False Claims Act" will be key. This could have the effect of offsetting the increased risks of fraud by making it easier for government agencies to recoup losses from fraudulent claims. Clearly, the time is ripe for such change.
An Australian "False Claims Act"
Legislation like a United States style "False Claims Act" would complement the new Public Interest Disclosure Act 2013 as well as the Coalition's "prompt payment" policy – not to mention any new Commonwealth Fraud Control Guidelines – and promote an open culture and discourage misuse of public funds. There has been rising interest, both amongst agencies and commentators, about the possible introduction of a "False Claims Act" in Australia. While it remains to be seen exactly when this will be introduced, its introduction now appears all but an inevitability if the Coalition wants to be seen as tough on protecting public funds.
The possible introduction of such legislation could see recovery of funds due to external fraud rise significantly, with individuals able to bring claims against private organisations on behalf of the Australian Government and claim a percentage of the overall amount recovered.
Such legislation 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 Commonwealth Criminal Code, 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 (up to 30% in some cases) of the overall amount recovered if successful – in effect, a reward for whistleblowing.
According to statistics on litigation under the Act from October 1987 to September 2012 published by the US Department of Justice, over $35 billion has been recovered through the legislative scheme in the last 25 years. Of that, almost $24 billion was recovered through qui tam claims.
What all this means for the new Government
The Coalition's "prompt payment" policy risks an increase in fraudulent claims. However, the Coalition can and should do much more to recover public money lost to external fraud. The strong recovery trends of fraudulently obtained funds in the United States are in large part because of the False Claims Act and the existence of qui tam claims. Such legislation has the potential for much more money to be recovered in Australia each year that is currently being lost through fraudulent activity and the introduction of such legislation here will do much to better protect public funds.
At a general level, it seems that a qui tam system for whistleblower actions could be introduced in Australia without the need for any major legislative or cultural change. We already have an established no win, no fee culture amongst plaintiff law firms that can be utilised for the purpose of a qui tam relator, litigation funding for major plaintiff actions, and a default position of costs being awarded to the successful party. There has also been a drive over the past few years towards stronger whistleblower protection and encouragement, evident from the 2008 Dreyfus Committee Report and the new Public Interest Disclosure Act 2013. Whether the new Government chooses to take a stronger stance on fraud when Parliament resumes remains to be seen.
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