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Methodology

Quantifying the extent of public sector fraud is complicated owing to perceived differences in what is defined as fraud and what is defined as a breach of regulatory procedures and rules. It is likely that any estimates of fraud incidents will underestimate the true number and cost as there is often a discrepancy between what agencies define as actual fraud compared with other breaches of procedures and laws. The definition of fraud in the Guidelines is broad and includes both minor and suspected incidents of dishonesty.

The 2002 Guidelines define fraud as ‘dishonestly obtaining a benefit by deception or other means’. The definition used in the Guidelines encompasses, but is not limited to:

  • theft;
  • obtaining property, a financial advantage or any other means by deception;
  • causing a loss, or avoiding or creating a liability by deception;
  • providing false or misleading information to the Commonwealth, or failing to provide information where there is an obligation to do so;
  • bribery corruption or abuse of office;
  • unlawful use of Commonwealth computers, vehicles, telephones and other property or services;
  • relevant bankruptcy offences; and
  • any offences of a like nature to those above.

The reference to some of these offences, such as theft and corruption, are open to differing interpretations by agencies in determining the extent to which matters reported involve dishonesty as opposed to other acquisitive property crime.

To mitigate the risk of fraud, some larger agencies run periodic computerised or manual checks to ensure that fraud and other compliance-related activities are identified. As such some of these matters may be defined and treated as regulatory non-compliance rather than criminal fraud and may be excluded from their responses to the annual fraud questionnaire. Centrelink, in particular, faces a high rate of what may be referred to as ‘error or regulatory non-compliance’. Some of the challenges faced by Centrelink and its fraud reporting are described in Box 3.

Box 3: Centrelink fraud reporting

Centrelink is one of Australia’s largest public sector agencies, serving a sizable customer base of 7.02 million people. In 2009–10 it provided $84.2b in payments to Australians. As such, Centrelink may be seen as an attractive target for those seeking to defraud the Australian Government. In response, Centrelink has a number of measures in place to manage the risk of fraud, including:

  • identity checks;
  • data-matching information held by Centrelink with information from other agencies or organisations;
  • public tip-offs;
  • inter-agency compliance activities;
  • data analysis and data mining; and
  • customer reviews based on their circumstances, duration of payments or a specific event.

Centrelink maintains a relationship with key investigation agencies, the Australian Crime Commission and the Australian Federal Police and applies an intelligence-led model by assessing cases against criteria to determine the relative seriousness and priority of potential investigations. This results in improved targeting of cases for investigation and review. Centrelink also links in with other agencies and builds on existing relationships to improve intelligence-led investigations and outcomes. These relationships also facilitate data matching between key customer service-based agencies. Centrelink can detect incorrect payments by matching data with a number of other agencies, such as the Australian Taxation Office, Department of Veterans’ Affairs, Department of Immigration and Citizenship, Department of Corrective Services and the Registrar-General’s Office.

In 2009–10, Centrelink undertook 3.5 million eligibility and entitlement reviews, which that resulted in 613,498 payments being cancelled or reduced and generated customer debts totalling $486m. These reviews represent the total number of incidents of customer non-compliance identified by Centrelink for the year, a proportion of which entail criminal acts of dishonesty.

Centrelink also makes use of the Australian Government Services Fraud Tip-off Line, which receives reports of suspected fraud against Centrelink, Medicare, the Pharmaceutical Benefits Scheme or the Child Support Program. In 2009–10, based on tip-offs alone, Centrelink conducted 43,726 customer entitlement reviews, which resulted in $101.8 million in debts and savings.

In relation to incidents of serious non-compliance or fraud in 2009–10, Centrelink reviewed and investigated 24,517 suspected incidents of fraud worth approximately $76m. Of these, 4,608 cases of serious non-compliance or fraud were referred to the Commonwealth Director of Public Prosecutions for consideration for prosecution in 2009–10. Of these, 3,461 Centrelink cases were prosecuted, with a successful conviction rate of 99.3 percent and only 25 acquittals.

The current Fraud against the Commonwealth 2009–10 annual report to government incorporates data on the 613,498 customer payments examined by Centrelink during the year, rather than only the 24,517 incidents for the organisation of suspected fraud actually investigated. A large proportion of the Centrelink matters included in this annual report have, following investigation, been found not to entail acts of criminal fraud. They are, however, included in this report to provide an indication of how potential acts of dishonesty are dealt with by the Australian Government.

Source: Centrelink (2010: 72).

The definition of fraud was changed in the 2011 edition of the Guidelines to make future data collection more accurate and consistent across agencies. It defines fraud against the Commonwealth as ‘dishonestly obtaining a benefit, or causing a loss, by deception or other means’. The 2010–11 fraud against the Commonwealth questionnaire will make a clear distinction between fraud and non-compliance allowing agencies to disaggregate alleged and actual fraud from other operational regulatory compliance activities.

Previous fraud surveys and results

Australian National Audit Office

The Australian National Audit Office has conducted three surveys (ANAO 2010, 2004, 2000) of Australian public sector agencies to determine the nature of their fraud control arrangements. Surveys were sent to 150 agencies in 1999, 160 agencies in 2002 and 173 agencies in 2009. Responses were received from 114 agencies in the 1999 survey (76%), 158 agencies (99%) in the 2002 survey and 160 agencies (92%) in the 2009 survey—although only 155 were included in the analysis in 2009. For the purpose of the 2009 ANAO report, the ANAO also made use of data collected by the AIC for the 2007–08 Fraud against the Commonwealth report, to avoid the time and cost required in duplicating responses.

Australian Government agencies are responsible for investigating routine or minor instances of fraud against them or their programs, and all agency investigations must be conducted according to the Commonwealth Fraud Investigation Standards Package. For serious or complex fraud and larger scale matters, the Guidelines assign responsibility for investigation to the AFP and provide criteria for matters to be referred to the AFP, although there is an increasing trend in underreporting fraud incidents to authorities detected internally by Australian Government agencies.

Statistics have been included in ANAO reports to determine the extent to which allegations of fraud were investigated and referred for prosecution by the AFP, the CDPP and other investigation agencies. In 2001–02, 762 cases were referred to police or other agencies, 4,270 cases were referred to the CDPP, 3,282 cases were prosecuted by the CDPP and 3,195 cases that were prosecuted were proved (ANAO 2004). To gauge the methods of detecting fraud in its 2009 survey, the ANAO asked agencies whether they had implemented mechanisms to deal with fraud allegations made by members of the public, to which 69 agencies (45%) responded positively (ANAO 2010). To determine the extent to which allegations of fraud were investigated, in the 2009 survey the ANAO asked whether agencies had established procedures and guidelines to conduct fraud investigations in line with the Australian Government Investigation Standards (AGIS), to which 94 percent of FMA Act agencies and 75 percent of CAC Act agencies responded positively (ANAO 2010).

In relation to fraud prosecution, the ANAO asked agencies whether they had documented the reasons for not referring a brief of evidence to the CDPP, to which 88 percent of FMA Act agencies and 77 percent of CAC Act agencies responded positively (ANAO 2010). Between 2002 and 2009, the ANAO found a general level of improvement in agencies’ compliance with fraud prevention activities, including the use of policy statements, risk assessments and control plans (ANAO 2010). Despite this improvement, the ANAO found that of the 54 percent (n=155) of respondent agencies that indicated that they had conducted an evaluation into the effectiveness of their fraud prevention or detection strategies, evidence of these evaluations was only received from 12 percent of agencies (ANAO 2010).

The ANAO echoed the AIC’s findings that an ongoing issue in collecting comparable fraud data is the inconsistent use of fraud definitions:‘The integrity of such trend information is contingent upon common definitions for fraud’ (ANAO 2010: 14).

The ANAO found that 97 percent of respondent agencies reported that they used the definition of fraud as specified in the Guidelines (ANAO 2010). This represents a marked improvement since 2002, when the ANAO reported that only 50 percent of agencies were defining fraud as specified in the Guidelines (ANAO 2010). However, the ANAO did not investigate how agencies categorised various dishonest practices as falling or not falling within the guidelines’ definition of fraud. This, of course, is the critical question in determining whether agencies are acting uniformly in reporting the same kinds of incidents of dishonesty when responding to the survey.

Based on the trends reported in the three ANAO reports, it is apparent that Commonwealth agencies reported experiencing a greater incidence of both internal and external fraud, generating an increased financial loss over time. The current Fraud against the Commonwealth report and AIC reports for the preceding two years, however, show an overall decline in the incidence and cost of fraud against the Commonwealth. Based on the findings of the 2009 ANAO Fraud control in Australian Government agencies report, the ANAO recommended that:

  1. The Attorney-General’s Department, in its review of the Commonwealth Fraud Control Guidelines, should take the opportunity to:
    • consult with the AIC and consider approaches, including a more precise definition of fraud that will allow the AIC to collect, analyse and disseminate fraud trend data on a consistent basis;
    • continue to work with the Department of Finance and Deregulation to clarify which CAC Act bodies are subject to the Guidelines; and
    • consider the merits of establishing an approach for the provision of fraud control advice and information to Australian Government agencies, particularly to smaller sized agencies, that facilitates the provision and exchange of practical fraud control advice (ANAO 2010: 26–27).
  2. Agencies should reassess their fraud risks and, where appropriate, the effectiveness of existing fraud control strategies, when undergoing significant change in role, structure or function, or when implementing a substantially new program or service delivery arrangements.

Both these recommendations have been examined by AGD in its review of the Fraud Control Policy in 2011 and have led to a revision of the AIC’s survey instruments for 2011.

Attorney-General’s Department Commonwealth Fraud Control Guidelines annual report

Pursuant to paragraph 8.13 of the 2002 Guidelines, all Australian Government agencies governed by the Financial Management and Accountability Act 1997 (FMA Act) and those governed by the Commonwealth Authorities and Companies Act 1997 (CAC Act) that receive at least 50 percent of funding from the Australian Government or an Australian Government agency are required to report on fraud and fraud control.

Australian Government agencies that do not fall within these criteria are not required to report but are encouraged to do so and to comply with all aspects of the Guidelines. Each year, the number of agencies invited to participate differs slightly from the number that respond due to new agencies being created and others being removed or amalgamated. Each year a small number of agencies also choose not to participate for various reasons, including interests of national security. Of the agencies that respond, some are excluded from the analysis because they do not fall under the FMA Act or CAC Act eligibility criteria.

The AIC took over responsibility from the Attorney-General’s Department (AGD) for collecting fraud information from Australian Government agencies in 2006–07. In 2005–06, the last year in which AGD had responsibility for reporting, responses were received from 128 Australian Government agencies reporting 113,704 alleged incidents of fraud. Overwhelmingly, just three agencies reported the majority of incidents, accounting for 104,055 allegations (92%). There was a discrepancy in the estimates of the value and number of frauds from the agencies and the AFP. Agencies reported an initial estimated value of fraud at $121,500,322, while the AFP estimated the value of the 422 cases they investigated at $454,183,271. Recoveries amounting to $28,732,736 were reported by 30 agencies.

These figures differed somewhat from the statistics provided in AFP and CDPP annual reports for 2005–06. The reason for these differences lies in the categories of fraud and economic crime used and the counting rules adopted by each agency.

AIC 2006–07 survey

The AIC prepared the annual fraud report for the first time in 2007, which included incidents dealt with in the 2006–07 financial year. The online survey had a 92 percent response rate, which equated to 158 agencies. This was the highest response rate since the annual fraud report began.

Of the contributing agencies, 36 percent indicated they had experienced at least one type of fraud in 2006–07, meaning that almost two-thirds of agencies did not report any fraud incidents. In total, there were 124,908 alleged incidents of fraud reported in the survey, with the most common fraud type identified as ‘obtaining property, financial advantage or any other benefit by deception’ (44%, n=55,576). Similar to the findings of AGD in 2005–06, it was found that the majority of fraud incidents were experienced by only a small number of agencies. Just two agencies accounted for 87 percent (n=108,974) of the suspected incidents. The agency with the most incidents identified 86,204 (69%) incidents, followed by an agency with 22,770 (18%) incidents.

Another key finding was that the majority of incidents were committed by offenders external to the agency. For incidents in which the offender was known, an external person accounted for 65 percent of offenders.

Agencies calculated the loss from fraud at $34,338,866 for all incidents where a figure could be quantified (n=2,594 incidents). Of this, external offenders were estimated to be responsible for 95 percent ($32,502,755) of reported losses. The amount recovered by agencies was significantly lower than the amount lost. Agencies reported that $8,188,749 had been recovered from those alleged to have committed fraud against the Commonwealth.

AIC 2007–08 survey

In 2008, after consultation with the Fraud Liaison Forum Steering Committee and participating Australian Government agencies, the AIC made major changes to its online survey to assist agencies with reporting requirements. Respondents were able to complete the survey online during August and September 2008, with each agency receiving an individual logon and password to ensure confidentiality of responses. Agencies were also given the option of responding via a paper version of the survey from which the data were then transferred to the electronic version by the researchers.

In 2007–08, 139 agencies responded out of the 170 invited to participate in the survey. Of these, 97 were FMA Act agencies and 42 were CAC Act bodies receiving at least 50 percent funding from the Government.

Forty-five percent of agencies reported experiencing at least one incident during 2007–08, which represented an increase of around nine percent from 2006–07. The total number of fraud incidents reported by agencies in 2007–08 was 873,401. Of these, 3,239 were internal fraud incidents and 870,162 were external fraud incidents. Further, 25 percent of responding agencies experienced both internal and external incidents in 2007–08. The reason for the large increase in the number of incidents between 2006–07 and 2007–08 was the changed definition of fraud that agencies were asked to use. In particular, large agencies reported more incidents of external fraud than in the past.

Of the 139 agencies, 47 quantified a loss from either internal or external fraud. Of these, 30 identified internal fraud and 34 identified external fraud. These frauds reportedly resulted in a total financial loss of $446,715,351, which represents $444,733,676 lost to external fraud and $1,981,675 lost to internal fraud. These large increases from the preceding year were again due to the different definition of fraud used by respondents.

The AIC online survey 2008–09

Few revisions were made to the 2008–09 survey from that used in 2007–08, so the data reported could be used for comparative trend analysis. The survey had the highest number of participating agencies recorded—84% of the 177 agencies surveyed with 166 completed responses. Seventeen responses were discarded because they were either incomplete or the agency did not meet the 50 percent funding requirement for CAC Act agencies. This left 149 agencies’ responses subject to analysis—101 (68%) FMA Act agencies and 48 (32%) CAC Act bodies.

Of the 149 agencies in the final sample, 39 percent (n=58) reported that they had experienced at least one incident of fraud between 1 July 2008 and 30 June 2009. Of these, 32 percent (n=48) reported having experienced at least one incident of internal fraud, while 30 percent (n=45) experienced at least one incident of external fraud and 23 percent (n=35) experienced both internal and external fraud. There was a total of 800,698 reported incidents of fraud for 2008–09. Of these, however, 90% (n=720,000) were reported by one large agency. These frauds consisted of 3,371 internal frauds and 797,327 external frauds. Only 10 agencies (7%) reported incidents involving collusion between internal and external individuals.

In 2008–09, 23 agencies that experienced internal or external fraud reported suffering a financial loss from these incidents (39%). The total loss for the reporting period was close to $600m, mostly attributable to losses from external fraud, which was reportedly almost $489m. These Commonwealth funds were primarily lost through the category of ‘financial benefits’ in both external and internal fraud. Of the total amount lost, in 2008–09 only 10 percent of internal frauds lost and 12 percent of external frauds could be recovered. Although the total number of fraud incidents declined by eight percent compared to 2007–08, the reported losses increased by 1.4 percent. Almost all of the increased losses were due to external fraud.

The AIC online survey 2009–10

The AIC sent an invitation to complete the 2009–10 questionnaire to 191 Australian Government agencies and received completed responses from 175 agencies. This was reduced to 152 after removing those agencies not covered by the FMA Act or CAC Act criteria of eligibility. The revised total number of respondents included in the analysis (n=152) represented 80 percent of those invited to participate. Of these, 103 (68%) were FMA Act agencies and 49 (32%) were CAC Act bodies. The proportion of agencies governed by these two Acts was the same in 2008–09 and 2009–10 (FMA Act=68% in both years and CAC Act= 32% in both years).

The summary statistics concerning the participating agencies for 2008–09 and 2009–10 are shown in Table 1.

Table 1: Participating agencies in 2008–09 and 2009–10 surveys
2009–10 survey 2008–09 survey
n % n %
Invited to participate 191 100 177 100
Responded 175 91.6 166 93.8
Included in analysis 152 79.6 149 84.2
FMA Act agencies 103 53.9 101 57.1
CAC Act agencies 49 25.7 48 27.1

Note: Percentages are of those invited to participate

Source: Commonwealth fraud surveys 2008–09 and 2009–10 data [AIC computer file]

In 2009–10, of the 152 agencies whose responses were analysed, the responses of 139 (89%) agencies were also analysed in 2008–09. The 16 agencies whose responses were analysed in 2009–10 but which were not included in the 2008–09 census included only four who reported a total of 70 instances of fraud in 2009–10 (37 incidents from one agency, 30 from another, two from another and one from another agency). In making comparisons between the two years, therefore, it is apparent that the vast majority of responses came from the same agencies each year.

Minor changes were present between the 2008–09 and 2009–10 versions of the survey, although it was possible to make comparisons for most of the questions asked. The 2008–09 questionnaire is included in Appendix 1, although formatting changes differ somewhat from the online version agencies completed.