“Corruption in the public sector is inevitable” Critically assess this statement with reference to public sector organisations and its potential for corruption in any country of your choice.
This question requires the term ‘corruption within the public sector is inevitable’ to be defined and also how corruption is a potential issue to the public organisation within a designated country.
Jones (2004, p23) has defined public sector as ‘communally provided goods and services paid by taxation or other revenues raised by law’. Within the public sector organisations individuals believe that they often do not have the required funding or available resources available to them like their counterparts within the private sector when it comes to dealing with fraud and corruption. It can be seen that within many organisations of the public sector they appear to suffer from higher levels (reported) fraud however they do not actively consider the levels of unreported fraud when they assign any of the available resources that they have at their disposal to deal with this incident. Because of the lack of funding and resources used to prevent the fraudulent and corrupt practises within the public sector it has caused a detrimental effect.
Each year in the UK, fraud costs public services an estimated £21 billion. Benefit and tax credit fraud was at a lost to the value of £1.5 billion in 2011. Her Majesty’s Revenue and Customs (HMRC) estimated that there is at least £15 billion each year not paid to the Exchequer due to tax evasion. The National Fraud Authority (NFA) estimates £2.4 billion is lost to procurement fraud and £515m is lost to grant fraud. Department for Work and Pensions (DWP) lose more than £1 billion each year to benefit fraud. Local government loses £2.1 billion pounds each year to fraud, that means 3 pence of every pound spent by the Government goes to people who should not have it.
What is fraud? Prior to the Fraud Act 2006 which came into force on 15 January 2007, it was difficult to define fraud because of the variation of both legal and analytical/survey definitions. The National Economic research Associates (NERA) in 2000 defined fraud as “the issue of defining which activities constitute fraud is the subject of considerable debate’”. Since the implementation of the legislation fraud is now defined as a statutory offence by which a person is guilty of fraud if they:
• knowingly make a false representing,
• or failing to properly disclose information when required,
• or misusing a position of trust for personal benefit or causing losses to another party. (Office of Public Sector Information, 2007).
Fraud was also defined by Cromer (2003:4) as ‘any dishonestly through which one person intends to gain an advantage over another’. Cromer (2003:4) also defines corruption as ‘corruption is the payment or receipt of unauthorised benefit … for doing or not doing anything…’ “Like fraud, corruption relates to the abuse or misuse of a ‘normal’ relationship, whether genuine or contrived, by either or both parties… both are seen as economic or financial crimes and, as such, are investigated by fraud squads…” Diog (2006: 116-117). Corruption is also described as ‘…the abuse of entrusted power for private gain’ (Transparency International, 2010). Within the public sector fraud and corruption are sometimes referred to as ‘occupational fraud and abuse’. It is not uncommon for fraud and corruption to occur within both the private and public sectors the only difference is the types of fraud and victims. This has determined the different approaches, tools and measurements required to adequately address the problem.
The current legislation to deal with corruption was derived from the Victorian reforms which were developed to protect the public, employers and others during the 1800’s. Corruption is closely linked with fraud as perpetrators also commit fraud against organisations through corrupt practices. Albrecht (2003 p 23) defines how corruption is ‘dishonesty that involve the following schemes: (1) bribery, (2) Conflicts of interest, (3) economic extortion, and (4) as illegal gratuities’. Maduna (1999) explains how corruption is regarded as one of the greatest challenges that the world faces in the third millennium. More effort, resources and funding is required to tackle this issue as corruption ‘compromises security, threatens internal order and stability and slows down economic growth and sustainability’ (Balogun, 2003 p130).
Within the public sector corruption will always be deemed not only as acceptable but also inevitable because it faces many unique difficulties in relation to reducing the amount of fraud and corruption that has been committed by both internal and external factors. The amount of effort and resources used to tackle corruption and fraud in the public sector has also been questioned in 2002 by Ken Ferrow, Head of Economic Crime Unit, City of London Police that ‘fraud doesn’t feature on government priorities’ and that their appears to be a more focused approach being placed on investigating and catching fraudsters ‘even though low prosecution levels exist’, with less emphasis being placed upon the deterrence and prevention of fraud. It has been established that a greater proportional effort is placed upon detection, investigation and prosecution of fraud that has already been committed within the public sector (National Fraud Authority, 2010 p4). It was also noted by the author that within this sector a limited number of deterrence measures were being utilised. Some measures identified included employee background checks, integrity testing and data-sharing all of which are not fully utilised, as many employees don’t understand the implications of using personal data, within the realms of the public sector.
A better angle to tackle fraud is to establish the reasons why people commit fraud and corruption. It would be necessary to implement a fully robust and accurate measurement of fraud focusing not only on the reported but also on the unreported fraud. During the Fraud Review 2006 it stated ‘without better information about the scale and nature of fraud it will be impossible to develop a sensible national strategy for dealing with fraud’. Corruption in the public sector is inevitable however by gaining a clear understanding of the reasons why fraud and corruption takes place alongside sector wide isomorphic learning this should improve the impact of corruption on public sector.
General consensus of the public sector is that it is ‘rife with corruption’. This opinion has been established because there are many flaws within departmental policies that allow for a high level of fraud to occur. One of these departments was identified as the Department for Education and Skills (DfES) ILA programme where over 60% of all applications for funding for training was said to be fraudulent. (£110 Million of fraudulent payments). The programme was ‘spoilt by a minority of unscrupulous learning providers who acted against the ethos of the programme’ (Doig 2006 p66). The NFA estimates that fraud alone costs the public sector around £21 billion a year. That is 55% of the nation’s total fraud loss. This total includes fraud against the tax and benefits system but also some of it is against the procurement fraud and grant fraud (Cabinet Office 2011)
It has been identified that corruption is being committed by individuals who are in the position to have the opportunity to commit corrupt acts. The evidence from research identified that frauds committed within an organisation highlighted that 58% were conducted by employees and around 30% by managers. “Many public sectors departments must tackle corruption and fraud from within, as a large proportion is caused from its own employees. Corruption is a serious issue for public sector organisations, which does not only take place throughout the lower echelons of the organisations” (Albrecht, 2003 p 430).
Within the public sector there is established title of ‘white collar crime’, this is conducted by ‘persons of the upper socio-economic class who engage in criminal behaviour, that this criminal behaviour differs from the criminal behaviour of the lower socio-economic class’ (Sutherland, 1949 p9). It has been annotated that the majority of the fraudsters see that the rewards available outweigh the potential risks because they are often able to face less questioning regarding decisions they make, have less oversight than junior members and can often adjust figures in order to appear ‘legitimate’. The application of using false accounting to cover or manipulate the accounts is predominantly the main method used. It has been identified that white collar criminals are predominantly older, male with family responsibilities and do not have the same pressures as many of lower management or staff. They are often regarded as professional with no previous criminal record and often predominantly commit high value fraud and corruption, with up to two thirds of all primary perpetrators of all frauds were from top management. This makes detection of corruption difficult and increases the inevitability that white collar crime will always remain present, within the public sector (Button, 2008 p61).
It has since been established that the actual detection are rates are poor and is often referred to by Hollinger and Davis (2008, p28) as the ‘blue-white collar crime’ and as ‘the proportion of convicted offenders that are drawn from the social elite and business networks are very high.’
Any avenue of concern is known as the ‘Risk versus Reward’ concept that aids and places pressure onto potential corruptors into the crime arena. This area is often debated and raised interesting questions in relation to the ability of either preventing or reducing corruption within the public sector. The risks of a prison sentence associated with fraud are low because the average sentence for a fraud up to the value of £1million is 3 years imprisonment (Fraud Review 2006 p12). It is worthy to note that sentencing has now been increased by 9.5% since 2007 (2003-2007) with the value of reported fraudulent activity over the same period increasing to a value to £411,000,000, an increase in 153%. These facts highlight that the effect of a prison sentencing if caught within the public sector does nothing to deter would be fraudsters from committing offences and ‘sends out a message that stealing money through deception is somehow more acceptable than stealing in other ways’ (Fraud Review 2006 p12).
Thus highlighting that the chance of a successful prosecution on appearance seems low, therefore any individual would consider that the risk is worth taking. Croall (2001 p30) describes how HMRC’s low prosecution rate has caused a decrease in the adherence to laws, and how they must ‘prevent failure’ in order to ‘enable compliance’. The HMRC’s figures show that 41% of all HMRC corruption and fraud cases were abandoned with only 10% resulting in a prosecution.
The poor accuracy in the measurement of fraud and corruption within the public sector has restricted resources being positioned efficiently and effectively. These facts highlights that if the sector does not have a full clear un-obstructive views of where fraud takes place it can be argued that they cannot begin to place countermeasures to resolve these issues. It was discovered that many organisations appear to ‘turn a blind eye’ to fraud and corruption activities taking place as ‘reckless participation of the business (including its agents) would constitute a significant component of reputational risk’ (Levi 2006 p261). By utilising this ethos the number of reported cases of corruption are low because organisations appear to prefer to keep matters ‘in-house’ in order to avoid any bad or negative publicity. Accurate fraud measurements are required within the public sector in order for organisations to target areas of significant losses.
The National Audit Office stated that ‘an estimate highlights the scope for potential saving, which can then help to determine the relative priority that should be given to tackling fraud in the context of all other calls on an organisations resources.’ (National Audit Office, 2003, p12).
To prevent a culture surrounding unlawful acts from reoccurring or occurring the public sector would need to develop a ‘zero tolerance’ approach and introduce a facility to allow disgruntled employees or concerned individuals to report incidents with the possibility of a reward. This is known as ‘whistle-blowers’, which is a significant way of reducing corruption in a cost effective manner. The organisations would need to ensure that this utilised in a suitable and comprehensive system is in place, if the reporting of fraud and corruption is to occur. It is also worthy to note that the organisations would need to ensure safeguarding of ‘whistle-blowers’ identity to prevent the persecuting and alienating of those who come forward which would result in a reduction of people reporting suspicious activity and allowing the culture of corruption to manifest within their department. It was also discovered that over academics have stated that by having an anonymous line of communication for the reporting of fraud and corruption it can reduce the overall effectiveness and reliability because these lines are perceived to be of a low credibility of the accusation, Hunton and Rose (2011 p75).
Public sector fraud cannot be totally eradicated but it can be investigated to establish what drives employees trust, first time offenders a senior management to commit corrupt acts, will allow resources to counter corruption to be used effectively and reduce the impact this has on the public sector. Albrecht introduced the ‘fire triangle’ that illustrates the reasons and pressures that force ‘potential fraudsters’ to commit fraud (Albrecht 2003 p27). During research it can be identified that many fraudsters are able to justify their rational thinking that corruption is an acceptable way to ‘make extra money’ or gain ‘extra benefits’, with many believing that they receive this ‘extra money as part of their role’. This point can be identified by utilising the 2009 ‘Parliamentary Expenses Scandal’ during which three Members of Parliament were found guilty, convicted and jailed for utilising public monies to pay for work that was being conducted on their own personal properties and fund their lavish lifestyles that they were not legally entitled to. Each of the individuals was under the opinion that the monies were a ‘perk’ of the job and that their actions had not committed any crime. Fraud and corruption are not seen in ‘the same light’ as thievery and other crimes that deprive people of their own property or monies, as many perceive fraud and corruption as a ‘victimless crime’.
Within the public sector many individuals do not receive the same incentives as their counterparts within the private sector. Lower salaries, poor or no bonus schemes and with certain departments dealing with the public over contentious issues are components in reducing the ‘morale’ of employees ‘. This coupled with the pressures of the current economic climate, the rise in cost of living and with the public sector ‘freezing’ salaries could increase the financial pressures on staff. Dean and Melorse (1996 p9) state that ‘deprivation and hardship; dependency and dispowerment; risk and vulnerability; justified and disobedience’ were the key themes that placed pressures on would be offenders. These pressures were often the ‘tipping point’ for many long serving honest employees who committed fraud and corruption. Within the public sector the main concerns within are such organisations as DWP and the NHS, who deal with customers living below the ‘breadline’, where fraud and corruption may be a way of survival. A family who relies solely on benefits may decide the pressure and economic restraints placed upon them, justifies their corrupt actions. Pressures may also come in many forms, such as dependencies on alcohol and drugs, gambling, extra marital activities and lavish lifestyles.
Recently it has been suggested, in contradiction, by various scholars that ‘employees who reported of having economic problems were no more theft-prone than those who did not’ (Hollinger and Davis 2008 p208) and that other issues such as ‘time, capability and information available in order to carry out the crime, are as important as the need to provide and financial issues.
‘Humans are considered inherently rational and hedonistic beings who logically calculate the potential costs and benefits of a given act’ (Hollinger and Davis 2008, p208 cited Beccaria, 1764). ‘The development of rationalisations have enabled offenders to see their conduct as acceptable’ (Levi, 2008, p263 cited Simpson and Piquero 2002). A culture has developed allowing many fraudsters to feel comfortable, as they see corruption as a lesser crime than theft, as they ‘de-value civic responsibility in a rush for personal gain’ (Levi 2008 p276). The low detection and prosecution rates coupled with the opportunity to improve their ‘personal benefit’ allow fraud to be rationalised, which will increase the amount of corruption that takes place. A denial of responsibility, denial of victim and defence of necessity allow the fraudster to commit the crime in a rational manner.
‘Opportunity’ plays a large part in the number of fraud cases and the increase in corruption in the public sector. Certain areas within the public sector allow for more opportunities than other. For example: the DWP ‘customer’ may be able to collect a pension of a recently deceased relative, and choose not to inform the DWP of the change in circumstance, as it will reduce their income. They may fail to disclose this information for an extended period of time, and the lack of checks and oversight restricts employees of DWP to detect this crime. The opportunity is present, therefore the ‘customer’ many decide the risk is worth taking.
It was noted during the research poor accountability breeds corruption, as the opportunity presents itself to employees, and when faced with pressures, coupled with the rationalisation of corruption, completes the fraud triangle; allowing the corruption to take place. Individual’s ethos also believed that corruption can actually be a ‘positive for the public sector and countries as a whole. In Malaya (1948-1963) the government were operating in an “economic free market” where the departments of the government were providing a better service because bribes were paid which ‘induced bureaucrats to put out extra effort’ (Tilman 1970, p63). It has also been argued that it by allowing corruption to take place in ‘developing countries, such as Afghanistan can reduce bureaucratic ‘red-tape’ allowing time critical functions to take place. Huntington argues that ‘corruption could strengthen political parties, reduce revolutionary pressure, and enhance stability’ which would benefit countries during the development stages or during a modernisation process (Huntington 2002 p57).
One of the main areas in the public sector corruption is kickbacks; however some have seen examples where ‘kickbacks’ are positive for public sector. Tilman states that this can result in an increase in investments and that the ‘corruption can improve the quality of public servants’ (Tilman 1970 p528). Although corruption can have positive effects under specific circumstances, ultimately it will ‘induce bureaucrats and politicians alike to manipulate and facilitate their own personal drive for self-indulgence and will be counter-intuitive for the regions that they represent. Myrdal (1968, cited by Johnson 2004 p8) assessed that ‘the more deeply embedded and egregious the level of corruption, the more severe the levels of economic underdevelopment and poverty’.
During conducting research the author identified that there are many areas where the public sector could implement new ideologies that will assist in the reduction of corruption and could increase in productivity and efficiency in the sector. The main undeveloped and poorly utilised resource that is not being used to his full potential by the public sector is prior vetting and screening. This would consist of a full background check to be conducted that will include criminal, employment checks and drugs testing. By utilising this arena it would reduce the amount of risk certain public sector organisation take and reduce the amount of fraud and corruption they face. ‘An ounce of prevention is worth a pound of cure’ (Fraud Review, p8). This area has shown some immediate results because the DWP saved over £212,000 by using credit references to cross-check council and benefits records against information held by the credit agencies.
In 2003 The National Audit Office (2003, p9) designed a strategic approach as counter fraud measure. This approach would require further development for individual organisations if it was to be utilised, however it offers a ‘workable’ model that overtime would reduce the amount of corruption in the workplace. With this model it is correct to say that with the advancement of further development to this model it would become a robust approach to combating fraud and corruption in the public sector.
It is evitable that there will always be an element of corruption and fraud associated with the public sector. This ideology is founded upon the limited resources available with a severe lack of incentives and lack of clear punishments or prosecutions available to the sector. Due to this there will always remain a ‘breeding ground’ for corruption. The hierarchy within the public sector should utilise the available resources to each of their departments and as a whole to the sector to introduce and implement a model that will combat fraud and corruption. This however will not succeed on its own it would need to be supplemented by a education programme to be offered to all of the staff members informing them of the consequences of their actions and also highlight the main areas identified of where fraud and corruption takes place. Within this programme a ‘zero tolerance’ policy should be implemented which includes details of successful prosecutions. By this it would increase the deterrence on ‘would-be corruptors’. Finally, a more inclusive measurement of fraud is also required. You cannot tackle an issue; if you cannot identify the root of the problem. By changing the culture within the sector, developing new models and policies, it is possible to greatly reduce corruption; but corruption will always be present, to some extent, within multiple areas and departments of the public sector.
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