Reducing Fraud and Waste in

Income Security Programs

in Canada

 

C. A. MacDonald & Associates


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ACKNOWLEDGEMENTS

C. A. MacDonald & Associates would like to acknowledge the assistance of a wide variety of individuals in putting together this report as part of the Fraser Institute 1995 Waste in Government competition. In particular, senior officials in most Canadian provinces and territories were extremely helpful in identifying issues and solutions at work within the various jurisdictions.

In the United States, the assistance of the executive and members of the United Council on Welfare Fraud (UCOWF), as well as many state and local officials were also of great assistance. This project could not have been completed without their help.

C. A. (Tina) MacDonald                                                                                     Sheila Blair

Duncan F. MacDonald



TABLE OF CONTENTS

ACKNOWLEDGEMENTS

TABLE OF CONTENTS

EXECUTIVE SUMMARY

INCOME SECURITY FRAUD IN CANADA
        The Canadian Context
        The Issue of Client Overpayment
        The Magnitude of the Problem
        Current Solutions
        The Missing Pieces

LEADERSHIP - THE CRITICAL COMPONENT
        The Federal Role
        Leadership Components
        Implementation Strategies
        Implementation Costs
        Issues

CLIENT IDENTIFICATION
        Identifying Clients
        The Current Situation
        The Wages of SIN
        Social Insurance Number Administration
        Direct Benefits
        Implementation Strategies
        Implementation Costs
        Issues

DATA-MATCHING
        Description of Problem
        The American Experience
        Current Canadian Strategies
        Description of Initiative
        Direct Benefits
        Implementation Strategies
        Implementation Costs
        Issues

TAX RECOVERY PROGRAMS
        Description of Problem
        Current Strategies
        Tax Refund Intercept Programs
        Direct Benefits
        Implementation Strategies
        Implementation Costs
        Issues

ADMINISTRATIVE DISQUALIFICATION
        Description of Problem
        Current Strategies
         American Administrative Disqualification Programs
        Direct Benefits
        Implementation Strategies
        Implementation Costs
        Issues

EARLY PREVENTION AND DETECTION
        Description of Problem
        Current Strategies
        Description of Initiative
        Direct Benefits
        Implementation Strategies
        Implementation Costs
        Issues

OVERALL STRATEGIES AND TIMING
        Putting It Together
        Implementation Considerations and Strategies
        Possible Timing of Activities
        Conclusion


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EXECUTIVE SUMMARY

There are several critical types of fraud in the various income support systems which are difficult to identify and prevent because of current federal legislation. The following types of fraud account for the majority of inappropriate expenditures, overpayments and waste:

  1. Undeclared Income - Clients in all of the income support programs are required to declare their income. Various program regulations define how this income is handled, ranging from income exemptions, through benefit reductions or complete disentitlement. Undeclared income results in significant overexpenditures and unacceptable drains on publicly funded programs.

  2.  
  3. Multiple program claims - Clients are often eligible for more than one income support program. When income from other programs is reported by the client, various regulations clarify how that income affects benefit levels and eligibility. However, when this income is not reported, overpayments result.

  4.  
  5. Cross-jurisdictional claims - Clients who are willing to travel can establish eligibility in similar programs offered by several jurisdictions (eg. two or more provincial welfare programs plus municipal welfare benefits). This results in overpayments, particularly at the provincial level, but these overpayments may have been cost-shared at 50% by the federal government.
The approach proposed in this concept paper would allow these types of fraud to be more readily controlled.

In the United States, the federal government has taken leadership in the area of fraud control through legislation requiring states delivering the federal programs of Food Stamps, Aid to Families with Dependent Children (AFDC) and Social Security to implement fraud control programs. These fraud control programs are also cost shared by the federal government. Other federal legislation around security and privacy supports these initiatives.

In Canada, not only is there no leadership in this area, current legislation actively works against detection and prevention of fraud and abuse in the various income support programs. The following main thrusts would establish a strong federal leadership role and a climate for appropriate fraud and abuse control in all Canadian income support programs.

  1. Establish a priority for fraud prevention and detection - Through the development of new legislation and/or adapting current legislation (eg. CAP legislation), identify a requirement for federal and provincial income support programs to actively prevent and detect fraud and abuse. Requirements for reduction of administrative and client error could also be included. (Only a few provinces are currently active in fraud prevention).

  2.  
  3. Require the use of a common client identifier - The Social Insurance Number (SIN) is the obvious choice for a client identifier. However, current legislation on the use of the SIN prevents some programs (most noticeably provincial income support programs) from requiring applicants and spouses to disclose or obtain a SIN number as a condition of eligibility. Cross-program and jurisdictional comparisons cannot occur without a common identifier.

  4.  
  5. Improve access to federal tax information - The confidentiality provisions in the current income tax system prevent income support programs from accessing data to identify current income sources and amounts except in individual cases. Routine data matching is required to ensure early detection and prevention rather than the current system of using the income tax information in specific cases to confirm the existence of fraud found through other methods.

  6.  
  7. Facilitate routine cross-program and cross-jurisdictional data matching - As the federal government embarks on a major program to redesign the Income Security computer systems, a key objective should be to ensure the feasibility of determining from which other programs an applicant or current client is receiving assistance. In effect, this means the creation of a client index for all federal programs (including federally funded natives receiving assistance on reserves) which could also be accessed by provincial and municipal administrations.

  8.  
  9. Allow administrative disqualification for assistance - In Canada, enforced by CAP legislation, benefits are based on need only, and past or current fraudulent behaviour has no impact on current and future eligibility. In the United States, one identified instance of fraud or program abuse can result in a six-month disqualification, two instances can result in one year of disqualification, and more than two instances of fraud can result in a lifetime disqualification. If this were implemented in Canada, information on fraud and abuse disqualifications should be shared between programs and jurisdictions.

  10.  
  11. Expand the use of the tax system to recover income support overpayments - Currently, the record on recovering overpayments in provincial income security programs, particularly on closed files, is dismal. The tax system is regularly used to recover UIC overpayments. Expanding the use of the tax system to include overpayments in other federal and provincial and municipal income support programs would result in millions of dollars being recouped annually. This is referred to as a "tax-intercept program" in the United States.

  12.  
  13. Encourage the establishment of early fraud detection and prevention systems - Over 30 American states, at the direction of the federal government, have established early detection systems which intercept probable cases of fraud before assistance is granted by integrating fraud prevention and detection into the intake system. Cases are referred for investigation if certain criteria are met (such as lack of or forged identification, needs consistently exceeding income, etc.). In Florida, California, and Texas, for example, approximately 70% of the cases result in assistance being denied or benefits reduced.

  14.  
The seven themes identified in this proposal combine to form a unified and comprehensive fraud strategy for income security programs in Canada. Although almost all of the investigations suggested here require changes at the federal level, provinces, territories and municipalities will share in the gains.

As the details in each chapter explain, it is often difficult to estimate a specific cost-benefit for many of the initiatives. However, the American experience clearly demonstrates that all these proposals offer a positive, and sometimes very high, return on dollars invested. Canadian Income Security programs cost over $85 billion, $39.2 billion of this expenditure supports programs considered to be at high risk of fraud and client error. A conservative estimate of the amount of fraud in these programs is 4%, and client error is estimated at 5%. Therefore, the magnitude of the fraud and error "problem" in income security programs in Canada is approximately $3.5 billion dollars, spread across federal, provincial, territorial, and municipal programs. If it is assumed that the initiatives proposed in this document offer the potential to reduce the level of fraud and client error by one quarter to one-third, this would result in a total savings to these Canadian income security programs of something between $875 to $1,155 million annually when fully implemented.

This is an ambitious proposal with many facets. However, it offers significant savings at a time when the country needs deficit reduction strategies. The mood of the electorate also makes this a timely proposal. It is clear that taxpayers want to see expenditures reduced rather than taxes raised. However, they also do not want to see their social programs decimated. This proposal allows managed reductions at all levels of government without affecting the benefits available to those who truly need assistance.


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INCOME SECURITY FRAUD IN CANADA

The Canadian Context

Successful deficit reduction in Canada hinges on the Canadian social programs, as the recent 1995-96 Canadian budget demonstrates. Announced as part of the budget package, the virtual elimination of the Canada Assistance plan cost-sharing program, replaced by a block grant combined with health and education funding, will successfully limit federal exposure to ever-growing welfare caseloads. The comments of various federal officials in recent media articles has indicated that in future years, seniors programs, UIC and Canada Pension Plan benefits will increasingly be looked to as potential sources of badly needed expenditure reduction possibilities. Fraud and error control in income security programs can play a major role in reducing the deficits faced by all levels of government in Canada. One area which has not been pursued in any major way is a concerted effort to ensure that current programs, or new programs being designed, are expending tax dollars only on valid clients. Although the majority of Canadians dependent on government income support programs are eligible for that support, the "politically correct" level of fraud that most jurisdictions will admit to is 3% to 5% of total expenditures. In addition, most Canadian jurisdictions will admit that the inclusion of what is classified as "client error" at least triples the amount of overpayments attributable to fraud and client error to between 9% - 15% of total expenditures. In 1994, overpayments accounted for between $3.5 and $5.8 billion of the total expenditure of $39.2 billion (detailed on page 6) on the various income security programs offered by the federal, provincial, territorial and municipal governments in Canada.

A national effort, involving all levels of federal, provincial, territorial, and municipal governments, to control this costly leakage from the overall income security system in Canada would engender wide-spread support from all Canadian provinces and the vast majority of Canadian taxpayers since it demonstrates an active concern for reducing government waste. This is consistent with current proposals to reduce "cheating" in the Canadian tax system.

The Canadian income security system is a complex mix of federal, provincial, and municipal programs, including the following:

Using data from the last few years, it is clear that approximately 80% of the total expenditures on income support programs are federal (illustrated on page 6). This increases to 90% if the historical cost-sharing of provincial and municipal programs under the Canada Assistance Plan (CAP) is included. As indicated in the recent budget, the CAP funding mechanism will change significantly, from the traditional cost-sharing process to a block funding mechanism. It is not clear at this point whether the remaining 10% of expenditures, which is currently controlled through federal legislation even though the programs are delivered at the provincial and municipal level, will be affected by this change to block funding. It is quite possible that a set of national standards or principles (as is the case in the Canada Health Act) will be developed to control provincial income security programs. In fact, the provinces have recently been asked to work with the federal government to develop a consistent set of national principles. Thus, even provinces that are actively pursuing the area of fraud and abuse control may continue to be limited in how far they can go by various federal statutes, even if the current control exercised through CAP is relaxed.

The Issue of Client Overpayment

Two main types of error can be identified on client files in the delivery of income security programs: financial and non-financial. Financial errors result in an overpayment or underpayment to the client. Non-financial errors, on the other hand, cannot be directly demonstrated to result in an overpayment or underpayment. For example, an issue of a benefit for which the client is not eligible is a financial error - it results directly in an overpayment. If, however, the file does not contain verification for the client's rent, then a non-financial error may have occurred. If the client is misreporting his rent, intentionally or not, this error also results in an overpayment. But, it may also be that the rent verification validates the benefit issued, so no overpayment results. Non-financial errors are characterized by a need for additional follow-up to further define whether a financial error results or, while policy and procedures are not followed, an overpayment or underpayment does not occur. When examining overpayments, the two main categorizing variables are the person(s) responsible for the overpayment and whether or not the person(s) intended to create an overpayment. The person(s) who may be responsible for an overpayment are the client, the staff member(s) responsible for the file, and external vendors of goods and services who receive payment directly from the jurisdiction on behalf of the client. The following schematic demonstrates the associated types of fraud and error.
 
Responsibility for Overpayment
Intentional Overpayment
Unintentional Overpayment
Client Client Fraud Client error
Vendor Vendor Fraud Administrative Error
Staff Staff Fraud
There is no clear-cut delineations of fraud and error in the sense that the dividing line, where error crosses into fraud, is based on the psychological construct of intent. And fraud is a legal term which applies when intent can be proven in a court of law. There are many cases investigated in which the investigator is sure that fraud occurred, however, the strict rules of evidence may prevent the case being proven in court. This category could be referred to as "program abuse". In this concept proposal, the techniques put forward would address program abuse as well as fraud and error.

All of the categories of error and fraud overlap, and it is often a matter of convenience or legal requirements which determine how a particular case is labelled. Generally, the overall caseload profile may be characterized as shown in the accompanying graphic.

A key question for many jurisdictions is the total amount of fraud and error which actually exists in the income security system. Obtaining a definitive answer to this question is difficult, if not impossible, since empirical studies and published data are rare, and unfortunately the data that are available is often a reflection of the degree of emphasis that the jurisdiction has placed on uncovering fraud rather than an absolute measure of the amount of fraud. A high level of reported fraud is usually indicative of an active fraud detection and prevention system and a low level of reported fraud often demonstrates nothing more than a state of blissful ignorance. This is a difficult concept for politicians, the public and the media to grasp. However, in our experience, after surveying many Canadian and American jurisdictions, this clearly appears to be the case. One of the few Canadian jurisdictions which has attempted to answer the question of the level of fraud and error in income security programs in an empirical way is the province of Alberta. Through a process known as Eligibility and Benefit Verification, a random sample of active welfare cases was examined in depth every month for several years. This process included a complete administrative file review, re-interviewing of the client in their home and re-establishment of eligibility, often involving contact with landlords, employers, banks, etc.

The most recent public data available(1)

is for the 1988-89 fiscal year when this process resulted in 22% of cases being recommended for closure due to an inability to verify continued eligibility. These closures were recommended because:

Of the more than 15,000 cases which were reviewed during the year, the data demonstrated the following: On the basis of these findings, it is tempting to conclude that the total amount of fraud is 4%, a level which is similar to the levels most jurisdictions will admit to in public. However, several factors lead us to believe that this is only the tip of the iceberg. First, "client error" is often the administrator's way of saying that intent to defraud could not be easily proven in court. Second, it is likely that some proportion of the "unverifiable" 22% would have resulted in a finding of fraud if they had been followed up on to determine whether fraud existed before the case was closed.

For purposes of any overall typology of fraud and error control programs, both legal fraud and program abuse are handled under the category "fraud", since the mechanisms and procedures used to identify the incident are identical. Non-financial errors, which are more of a case management issue, are not addressed directly in this document. However, once a non-financial error has been reviewed and clarified as having a financial impact, it may then be classified as administrative or client error.

There are a number of mechanisms which income security clients typically use if their intent is to defraud the government out of additional funds. These techniques include:

Several of these critical types of fraud in the various income support systems are difficult to identify and prevent because of current federal legislation. The following types of fraud account for the majority of inappropriate expenditures, overpayments and waste:
  1. Undeclared Income - Clients in all of the income support programs are required to declare their income. Various program regulations define how this income is handled, ranging from income exemptions, through benefit reductions or complete disentitlement. Undeclared income results in significant overexpenditures and unacceptable drains on publicly funded programs.

  2.  
  3. Multiple program claims - Clients are often eligible for more than one income support program. When income from other programs is reported by the client, various regulations clarify how that income affects benefit levels and eligibility. However, when this income is not reported, overpayments result.

  4.  
  5. Cross-jurisdictional claims - Clients who are willing to travel can establish eligibility in similar programs offered by several jurisdictions (eg. two or more provincial welfare programs plus municipal welfare benefits). This results in overpayments, particularly at the provincial level, but these overpayments may have been cost-shared at 50% by the federal government.
The approaches proposed in this concept paper would allow these types of fraud to be more readily detected and prevented, resulting in substantial savings of public funds.

The Magnitude of the Problem

As indicated above, estimating the total amount of fraud in the Canadian income security programs is problematic at best. Very few Canadian provinces or the federal government even attempt to seriously measure the magnitude. However, the following table identifies the program expenditures and thus, the potential amount of dollars at risk of fraud and error overpayments in Canada.
 
In millions of $'s
1985-86
1989-90
1993-94
 
Canada Pension Plan
$5,349
$10,199
$14,197
Quebec Pension Plan
$2,073
$3,169
$4,164
Old Age Security
$12,525
$16,154
$20,207
Canada Assistance Plan
$4,573
$5,612
$7,638
Provincial/Municipal "Welfare"
$4,573
$5,612
$7,638
Veteran's Affairs Benefits
$1,518
$1,686
$2,099
Unemployment Insurance
$10,340
$11,772
$19,481
Worker's Compensation
$2,675
$3,706
$3,865
Child Benefit
$2,501
$2,658
$5,089
DIAND Social Assistance
$390
$430
$600
TOTAL
$46,517
$60,998
$84,998
TOTAL IN CONSTANT 1994 $'s
$60,797
$66,715
$84,998
As the table indicates, the overall increase in income security payments across all programs, in constant 1994 dollars, has grown from $60.8 billion in 1985-86, to $85 billion in 1993-94, an increase of 39.8%. However, the proportion of this total expenditure which is paid inappropriately to clients is difficult to estimate. Generally, Canadian jurisdictions, both federal and provincial, do not have any clear estimates of the amount of fraud and error in these programs. For the purposes of this report, only funds expended on the Canada Assistance Plan, Provincial/Municipal "Welfare", Unemployment Insurance, Workers Compensation and the Department of Indian Affairs and Northern Development (DIAND) Social Assistance are included in financial calculations ($39.2 billion in 1994) as these are the programs which would be most affected by the proposed administrative changes outlined in this paper. This is not to say that the other programs are fraud and error free. Canadian federal income security programs, such as OAS/GIS, which have no positive detection and prevention programs in place, reported only a $1 million loss to fraud and client error out of a $20 billion program. This finding is not consistent with experiences in other jurisdictions.

One American state which has provided information to assist people to understand the difficulty of estimating the amount of fraud is California. Although the California Strategic Plan(2)
does not specifically state the amount of fraud in California's Aids to Families with Dependent Children (AFDC) program, it does present a variety of project results which estimated the amount of fraud in the AFDC program. These results are presented below. It should be noted that the methodologies of these reported studies are quite different, and the results from each project are not directly comparable. However, the information does indicate that the amount of fraud detected, depending on how fraud is defined and the methodology used, is extremely variable, ranging from 4% to 100%. This supports the conclusion that the more you look, the more you find. The more "pointed" the investigation, the more fraud can be found in income security files.
 
 
Bringing Integrity to Welfare in California
A Strategic Plan for Eliminating Fraud, Waste and Abuse - January, 1994
What is the Extent of Fraud in AFDC?

 
  • 4 percent of cases randomly selected for Quality Control review in 1992-93 were estimated to involve fraud. (Because state QC reviewers lack many of the tools that investigators use to detect fraud, this QC- based figure should be regarded as a low estimate.)
  • 10-13 percent of all cases and 5-6 percent of all payments: 1977 Conputer-Aided Techniques Against Public Assistance Fraud prepared by the MITRE Corporation for the US Department of Justice.
  • 15.8 percent of all cases and 10 percent of all payments: 1970 Recipient Fraud Incidence Study conducted by the Fraud Review Panel for the California State Department of Social Welfare (now Social Services)
  • 62 percent of a sample of 215 cases subjected to a fraud investigation: 1993 Child-Only Fraud Pilot Project prepared by the Orange County Social Services Agency for the California Department of Social Services.
  • "AFDC Fraud is a billion dollar problem: 1987 State Investigation of Fraud in the Aid to Families with Dependent Children prepared by the Department of Health and Human Services, Office of the Inspector General.
  • 100 percent of a sample of 25 cases subjected to in-depth study had unreported income: 1990 The Real Welfare Problem prepared by the Centre for Urban Affairs and Policy Research, Northwestern University.

  • Taken from California's Fraud Strategic Plan, June, 1994

Even at the lowest fraud estimate, the loss to California is staggering.

Another way of looking at the amount of fraud is to examine public information provided by the American federal office responsible for the Food Stamp program (which provides benefits to over 25 million Americans). The following table demonstrates the variability of reported fraud and error rates, depending on the fraud and error control programs in place in the particular jurisdiction. The average known fraud rate in the United States is 4.4% of total program disbursements. However, this ranges from a high of 13.62% in Massachussets, to a low of 1.07% in Washington.
 
FRAUD AND ERROR  RATES - 1992
UNITED STATES FOOD STAMP PROGRAM
 
Fraud Claims 
as % of total $
Client Error Claims 
as % of total $
Agency Error Claims 
as % of total $
Alabama
6.24
6.04
2.28
Alaska
3.20
2.51
2.87
Arizona
1.43
4.51
4.61
Arkansas
4.86
4.97
1.16
California
2.63
9.44
5.60
Colorado
7.93
6.10
3.05
Connecticut
4.17
1.54
0.22
Delaware
5.44
4.40
1.64
District of Columbia
4.48
8.20
0.83
Florida
1.70
3.37
2.92
Georgia
7.95
3.82
6.77
Hawaii
6.86
9.02
2.57
Idaho
4.30
2.60
3.43
Illinois
6.13
31.43
4.44
Indiana
2.95
7.17
1.91
Iowa
2.82
8.78
2.71
Kansas
4.22
6.32
2.40
Kentucky
2.93
1.53
1.29
Lousiana
2.59
3.98
0.91
Maine
2.03
4.03
1.08
Maryland
1.20
7.91
1.20
Massachusetts
13.62
7.96
1.70
Michigan
9.20
7.67
2.40
Minnesota
6.64
20.75
6.85
Mississippi
6.14
2.86
2.46
Missouri
5.79
6.81
2.10
Montana
2.30
2.72
0.24
Nebraska
2.84
10.35
3.69
Nevada
2.68
4.11
0.68
New Jersey
10.47
27.30
1.86
New York
2.08
10.77
1.44
New Hampshire
5.66
7.75
3.05
New Mexico
1.73
4.95
10.63
North Carolina
3.40
2.11
1.21
North Dakota
2.37
5.55
1.91
Ohio
7.75
7.07
2.43
Oklahoma
3.21
7.04
6.08
Oregon
4.00
12.10
2.53
Pennsylvania
5.59
24.17
2.25
Rhode Island
2.33
2.40
0.30
South Dakota
1.98
3.45
0.59
South Carolina
5.21
6.72
2.76
Tennessee
5.62
3.08
2.91
Texas
3.11
6.26
1.93
Utah
3.77
8.52
1.31
Vermont
3.37
2.63
2.50
Virginia
2.63
3.90
1.73
Washington
1.07
10.10
2.33
West Virginia
2.80
3.90
5.50
Wisconsin
2.10
15.20
3.69
Wyoming
 5.59
 11.78
1.97 
UNITED STATES
 4.40
9.50
2.85 

There are some anomalies in the data on client error. Four states (Illinois, Minnesota, New Jersey and Pennsylvania) show very high rates of client error, above 20%. It is possible that the methodology used in these states for measurement purposes is more comparable to an eligibility review process method than a file review mechanism. Even including these very high results, the average error across all states is 9.5%, ranging from a low of 1.53% in Kentucky to 31.43% in Illinois. The average agency error rate in the United States Food Stamp Program is 2.85%.

These data raise a wealth of questions about both interpretation of the data and the mix of programs in each state which contribute to the absolute magnitude of the rates. It is beyond the scope of this proposal to provide that level of detail for all 51 states. Although the American programs are not directly comparable to the variety of Canadian programs, it is likely that the Canadian experience falls somewhere within this range, although it is possible that Canadian rates are actually higher, since the American programs generally have more detection and prevention programs in place.

For the purposes of estimating the cost-benefits attributable to this proposal, the value of overpayments attributable to fraud in Canadian income security programs is estimated to be 4%, and the value of overpayments attributable to client errors is estimated to be 5%. This implies that the magnitude of the fraud/error "problem" can be calculated, as a percentage of total expenditures, of $39.2 billion, on income security programs in Canada, as approximately $3.53 billion.

However, until Canadian jurisdictions get serious about measuring the amount of fraud and error, the question of the total amount of fraud in the system will likely remain unanswered in any definitive way. Experience, in other jurisdictions, clearly demonstrates that the more you look for fraud, the more fraud you find. The public and the media, unfortunately, often treat high levels of uncovered fraud as a public scandal rather than as a demonstration of active fiscal management of the public purse. Continued public education may be the only solution to this dilemma.
 

Current Solutions

In order to fully understand where Canadian income security fraud and error control programs are less effective than they could be, a full description of possible control programs is critical. Programs which are designed to identify, reduce and control levels of fraud and error, and the contingent overpayments and underpayments, fall into five categories:
  1. DETERRENCE - Deterrence activities and controls are intended to cause clients, staff or vendors to choose not to commit fraud or to desire to minimize errors. Given that only the individual "deterred" has any knowledge of whether a certain activity caused them to choose the desired course, this area is practically impossible to quantify. Field practitioners vouch for the efficacy of deterrence activities, but they do not lend themselves to any form of cost-benefit analysis. An example is the fingerprint imaging process, as implemented in some counties in California and New York, which deters clients from applying twice under different names.

  2.  
  3. PREVENTION - Prevention activities and controls are designed to ensure that, even if an individual intends to commit fraud, the individual would be unable to follow through on their intentions because of some intervening circumstance. Fraud and error prevention occurs when computer systems, procedures or individual knowledge intervenes in the payment process to correct or prevent the fraud or error before an overpayment actually occurs.

  4.  
  5. ACTIVE DETECTION - Active detection programs are predicated on a jurisdiction's belief that fraud and error are an expensive reality. These programs, through an assessment of ways that an individual could make an error or commit a fraud, involve a conscious effort on the part of the jurisdiction to "go out looking" for incidences of overpayment. These are often referred to as "early detection" or "front-end" programs. Public awareness of these programs also has both deterrent and preventive effects.

  6.  
  7. PASSIVE DETECTION - Passive detection programs depend on regular internal controls or on someone or something outside the organization to identify a potential case of overpayment. Once that identification of potential fraud or error has been made, however, post-fraud investigation is required to confirm and correct the overpayment.

  8.  
  9. COLLECTION - These processes and activities relate to "righting the wrong", and may involve "outsiders" to the program, such as police, courts, personnel or finance departments.
The Typology of Fraud and Error Control (found elsewhere on this site outlines a full analysis of the types of programs which can be put into place to control various forms of client fraud and error. Most Canadian jurisdictions have, at the very least, passive detection and collection processes in place. However, only a relatively small proportion of jurisdictions proceed beyond this level into deterrence, prevention, and active detection programs. There is a very clear division between these two types of jurisdictions. Only those who have made an active attempt to measure the degree, cause, and dollar value of overpayments have implemented control programs beyond the minimal programs of passive detection and collection. In several provinces, and in many federal programs, the only fraud control program is investigation of complaints.

There are a surprisingly large number of jurisdictions, including the federal government programs who make no attempt to measure the degree of error or fraud that they have within their programs. In these cases, neither the program department itself, nor the related Auditor-General's department, have identified the potential of cost-control through reduction in fraud and error levels as a priority. These jurisdictions also invariably have few, if any, programs for controlling or reducing the level of fraud and error. It is highly unlikely that these jurisdictions are operating an error-free or fraud-free program. However, if fraud and error levels are not routinely measured and identified, there is no public or internal pressure to "solve the problem".

The public sensitivity towards levels of fraud and error in Income Security programs, coupled with an ever tightening fiscal environment, make it critical that jurisdictions be able to demonstrate internally and publicly the integrity of their income security programs. Therefore, a typology of fraud and error control programs was designed (C. A. MacDonald & Associates. Typology of Fraud and Error Programs. August, 1993) to assist jurisdictions which recognize the need and are attempting to improve their levels of fraud and error in their income security programs.

The concepts presented in this proposal have been selected from this typology and are those which hold promise of a high cost-benefit ratio, and have not been implemented to any degree in Canada.

The Missing Pieces

In the United States, the federal government has taken leadership in the area of fraud control through legislation requiring states delivering the federal programs of Food Stamps, Aid to Families with Dependent Children (AFDC) and Social Security to implement fraud control programs. These fraud control programs are also cost-shared by the federal government. Other federal legislation around security and privacy supports these initiatives.

In Canada, not only is there little apparent leadership in this area, current federal legislation actively works against detection and prevention of fraud and abuse in the various income support programs. The following main themes would establish a strong federal leadership role and a climate for appropriate fraud and abuse control in all Canadian income support programs.

  1. Establish a priority for fraud prevention and detection - Through the development of new legislation and/or adapting current legislation as well as other techniques, identify a requirement for federal and provincial income support programs to actively prevent and detect fraud and abuse. Requirements for measurement and reduction of administrative and client error could also be included. (Only a few provinces, Revenue Canada and the UI benefits administration are currently active in fraud prevention).

  2.  
  3. Require the use of a common client identifier - The Social Insurance Number (SIN) is the obvious choice for a client identifier. However, current legislation on the use of the SIN prevents some programs (most noticeably provincial income support programs) from requiring applicants and spouses to disclose or obtain a SIN number as a condition of eligibility. Cross-program and jurisdictional comparisons of the client base cannot occur efficiently and with accuracy without a common identifier.
  1. Improve access to federal tax information - The confidentiality provisions in the current income tax system prevent income support programs from accessing data to identify current income sources and amounts except in individual cases and normally only under court order or with the express permission of the client. Routine data matching is required to ensure early detection and prevention rather than the current system of using the income tax information in specific cases to confirm the existence of fraud found through other methods.

  2.  
  3. Facilitate routine cross-program and cross-jurisdictional data matching - As the federal government continues work on a major program to redesign the Income Security information systems, a key objective should be to ensure the feasibility of determining from which other programs an applicant or current client is receiving assistance. In effect, this means the creation of a client index for all federal programs (including federally funded assistance programs for natives on reserve) which could also be accessed by provincial and municipal administrations.

  4.  
  5. Allow administrative disqualification for assistance - In Canada, under current CAP legislation, benefits are based on need only, and past or current fraudulent behaviour has no impact on current and future eligibility. In the United States, one identified instance of fraud or program abuse can result in a six-month disqualification, two instances can result in one year of disqualification, and more than two instances of fraud can result in a lifetime disqualification from receiving program benefits. If this were implemented in Canada, information on fraud and abuse disqualifications should be shared between programs and jurisdictions.

  6.  
  7. Expand the use of the tax system to recover income support overpayments - Currently, the record on recovering overpayments in provincial income security programs, particularly on closed files, is dismal. By redirecting funds to the program to which funds are owing, the tax system is used to recover UIC overpayments from refunds that would otherwise go to the client. Expanding the use of the tax system to include overpayments in other federal, provincial and municipal income support programs would result in millions of dollars being recouped annually. The process is referred to a "tax-intercept program" in the United States and is federally mandated and widely used.

  8.  
  9. Encourage the establishment of early fraud detection and prevention systems - Over 30 American states, at the direction of the federal government, have established early detection systems which identify probable cases of fraud before assistance is granted by integrating fraud detection and prevention into the intake process. Cases are referred for investigation if certain criteria are met (such as lack of or forged identification, needs consistently exceeding income, etc.). In Florida, California, and Texas, approximately 70% of the cases referred for investigation result in assistance being denied or assistance being granted at a reduced rate.
Each of these major components are outlined in detail in the following chapters.


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LEADERSHIP - THE CRITICAL COMPONENT

The Federal Role

Unlike the Canadian federal government, the federal government of the United States is actively involved in facilitating and pursuing fraud and error control both within its own programs and by those programs controlled and administered by the state and county income security systems. In 1991, the AFDC program alone paid $20.7 billion in federal and state funds to 12.5 million people. It is estimated that at least one billion of those funds were inappropriate payments. The techniques that the US federal government uses to influence the state and county focus on reducing fraud and error include: In Canada, not only does the federal government not provide this type of leadership for fraud control, income security programs delivered directly by the federal government have only a minimum of fraud and error control strategies implemented, other than investigation of complaints. Thus, not only is the federal government losing significant funds to client fraud and error, but they are not as supportive as they could be of the provinces' attempts to control fraud.

Without a strong federal presence, and a national priority placed on fraud detection and prevention, Canada will continue to lose billions of dollars to client fraud and error.

Leadership Components

Federal leadership in this area is contingent upon convincing the federal government to place a high priority on fraud and error control in income security programs in Canada. And, in today's context of the mounting debt, this will not occur unless it can be clearly demonstrated that there are significant savings to be obtained from focusing on fraud and error control. The implementation plans for each of the initiatives in this proposal allow for cost-benefit data to be obtained at a fairly early stage, and prior to any large expenditure of developmental funds in order to demonstrate the cost-savings which can be achieved.

There are a number of components to federal leadership in this area, each of which will be discussed separately below.

Legislative Framework

With the imminent demise of the Canada Assistance Plan, the federal government will very rapidly be developing legislation to replace this act and to support the block funding approach to social services with the provinces. It is probable that this legislation will contain some form of national standards, similar to the Canada Health Act. Discussion with federal officials would indicate that the federal government will continue to require that assistance be granted without regard to residency requirements in the province of issue. This will support the free flow of income security clients across the country, enabling clients to move to where opportunities for employment are, without artificial barriers to movement.

A standard which is currently in place in the Canada Assistance Plan is that need is the only determinant of eligibility. This means that provinces cannot place conditions on individuals receiving benefits, or implement certain forms of penalties on clients who have defrauded the system of money. It is critical that this standard be removed, and replaced with a more general standard which makes explicit that the receipt of income security benefits in Canada is a privilege, not a right, and that appropriate behaviour and certain responsibilities are expected of recipients in return, both in terms of honesty and movement towards independence as rapidly as possible. Then, if clients do not live up to these responsibilities, certain penalties can be applied by the provinces or municipalities, which may involve reduction in, termination of, and disqualification for future benefits. This would be equally effective in encouraging clients to move towards employment and as retribution for illegal activity.

There should be a clear requirement in the new legislation for provinces and municipalities delivering income security programs to measure the degree of fraud and error in those programs and to implement programs which would reduce the level of overpayment attributable to client fraud and error. There are some provinces who freely admit off the record that measurement is not occurring because if the public knew the amount of overpayments, it would become a public political scandal in the province. In fact, one provincial income security manager typified this approach as "living in a state of blissful ignorance".

In at least two provinces, British Columbia and Alberta, the result of the public becoming aware of the magnitude of the fraud and error problem has been the on-going development and implementation of two of strongest fraud and error control programs in the country. In Alberta, the Auditor-General blew the whistle in 1988-89 identifying $35 million in overpayments in the previous year. In British Columbia, in 1993, a confidential report identifying problems with internal controls was leaked to the public. In both cases, the public outcry resulted in a serious attack on fraud and error. Few other provinces even approach the kind of comprehensive programs which are now in place in these two jurisdictions. It is unfortunate that sometimes the only way to change government priorities is to have such a public outcry! Certainly, the $3.53 billion estimated earlier on page 8 would seem to be sufficient cause for taxpayers to insist on a more effective approach to controlling this waste of both federal and provincial government resources especially in light of recently announced cutbacks in most other program areas..

New legislation should allow for the Minister of Human Resources Development Canada to mandate fraud and error control programs, establish effective initiatives for the provinces to implement in order to retain federal funding for programs. This is similar to the approach taken by the United States federal government in suggesting all other states implement the "Orange County" approach to fraud control. This approach is described in Chapter 8, Early Detection and Prevention.

Lastly, any new legislation should contain a statement about confidentiality and privacy with regard to client information. In the legislation, trained and regulated investigators should be given the same rights and powers as law enforcement officials in terms of access to information, regardless of privacy legislation. This is the approach taken in Ontario in their privacy legislation, where fraud investigators are considered to be law enforcement officials.

Establishment of Principles

Such new legislation may also be an appropriate mechanism for establishing a set of principles for controlling fraud and error. These principles should contain at least the following elements:

UNOBTRUSIVE       Fraud and error control programs should be as unobtrusive as possible to
                                    individual clients unless strong suspicion or specific evidence of wrong-doing
                                    has been established.

TARGETED              Fraud and error control programs should be targeted towards that segment
                                    of the client population which are determined to present the highest risk of
                                    committing fraud or error.

CONFIDENTIAL     Information which comes to light during an investigation of an individual must
                                    remain confidential until or unless it is used in a court of law or a
                                    quasi-judicial setting such as an appeal hearing.

BENEFIT OF DOUBT Any individual under investigation for potential wrong-doing shall be given
                                    the benefit of the doubt in any circumstance for which the evidence is
                                    questionable.

PRESUMPTION OF Any individual client shall be presumed to be honest unless
HONESTY                 specific evidence exists which demonstrates that this is untrue. In other
                                    words, income security programs should be designed on the belief that the
                                    vast majority of client are honest.

Other principles may also be required to set the appropriate "tone" for a national focus on fraud and error, but these at least are critical to establish the intent of the fraud and error control initiatives.

Facilitation of Fraud Control

For any individual provincial, municipal or territorial jurisdiction in Canada, the number of specialized fraud staff is very small as a proportion of the overall staff delivering income security. As a result, there is little specialized training for these individuals, and in fact, because of these small numbers, these individuals tend to get ignored as part of the overall organization. Often they are seen as a nasty, unwelcome reminder that not all clients are honest, and tensions often exist between these staff and front-line workers.

The federal government should support the setting up of a Canadian branch of the American United Council on Welfare Fraud (UCOWF) and should encourage provincial and territorial jurisdictions to purchase memberships ($25 per year per membership) for all fraud and eligibility investigators and other staff interested in the area of fraud and error control. This would provide an extremely cost-effective mechanism to obtain access to national and regional fraud conferences, information sharing and exchange with southern colleagues, a certificate program for training fraud investigators, and access to a wealth of training materials. Some Canadian investigators are already members of the UCOWF organization, but Canada is not identified as a separate region, with a Canadian Director on the Executive Board. Although many fraud related issues and investigative techniques are the same in both countries, Canadian programs are different, and this would be recognized and reflected if a formal Canadian branch of the organization were established. Then, individual jurisdictions could depend on the availability of fraud and error control staff training without incurring major additional costs. Selected Canadian members of UCOWF have been approached to attend a meeting in Atlanta, Georgia, at the next annual UCOWF national convention to discuss the establishment of a Canadian branch or region of UCOWF.

Funding for Fraud Control

Although not specifically required by the Canada Assistance Plan, fraud and error control programs are cost-shareable. In addition, any savings achieved by the provinces is also shared between the province and the federal government. However, it was up to an individual province or municipality to decide what and how much was expended in fraud control programs. Under the new block funding scheme, the incentive to save money through fraud and error control is even higher than under the previous cost-sharing arrangement. For example, if a province implements a $1 million program, which saves $4 million, under CAP the province would have only paid $500,000 of the cost and would have retained $2 million of the savings, leaving the province with a net gain of $1,500,000. Under the block funding scheme, for the same program, the province would pay the full $1,000,000 cost, but would retain all the savings, giving a $3,000,000 net gain, so for an extra $500,000 expenditure, an additional $1,500,000 would be gained. The relative cost-benefit remains the same but the absolute cost savings increases significantly.

For provinces without any significant resources in fraud and error control, a new federal mandate that provinces must enter into fraud control programs would result in additional costs to the province. However, this is not a true cost, since all evidence points to the fact that whatever the cost, the savings will be significantly higher.

Establishment of a National Office of Fraud and Error Control Initiatives

The fraud and error control programs proposed in this document all require significant federal-provincial and inter-provincial cooperation, involving all provinces and territories and at least two federal departments (several divisions of Human Resources Development Canada plus Revenue Canada). This inter-jurisdictional cooperation would be facilitated if a national office of fraud and error control were to be established.

The Terms of Reference for this office would include: drafting of those sections of the new legislation supporting the fraud strategies: overseeing development of compatible information systems; working with national poverty lobby groups to foster commitment and understanding of fraud and error control programs; coordinating the development of federal-provincial data sharing agreements; evaluating new approaches to fraud and error control; and establishing and maintaining a national income security client index (see Early Detection and Prevention).

Implementation Strategies

The first implementation issue is establishing fraud and error control as a high national priority. Steps that could be taken to achieve this end would include:
  1. Establishing fraud control as a key item on the next First Ministers Conference, followed by a joint communique identifying the priority of, and action plan for, a concerted national thrust for attacking fraud and error in Canadian income security programs.

  2.  
  3. Ensuring that the area of fraud and error control is an agenda item for the next federal-provincial-territorial meetings of the Ministers of Social Services, the Deputy Ministers of Social Services, and the Ministers and Deputy Ministers of Finance.

  4.  
  5. Establishing a special meeting of federal-provincial-territorial Directors of Income Security to discuss cooperative approaches to dealing with fraud and error.
  1. Establish the National Office of Fraud and Error control

  2.  
  3. In consultation with provinces and municipalities, develop a national workplan for implementation of the various initiatives.

  4.  
In addition, the theme of fraud and error control would have to be incorporated into major federal activities such as the review of social programs and the development of the new computer system for federal income security programs.

Implementation Costs

At the federal level, the only real cost is the establishment of an National Office of Fraud and Error Control Initiatives within Human Resources Development Canada. This is envisaged as a small office, consisting of no more than 5 or 6 individuals, headed by an Executive Director level position, reporting to an Assistant Deputy Minister within Human Resources Development Canada. The cost of this office would be approximately $400,000 per year in staff costs. In addition, the office would require some contract and other administrative funds. In total, the National Office would cost approximately $600,000 per year. This would quickly be recouped by the savings facilitated by the existence of the office.

The majority of the other costs would be less direct - legislation will be required whether or nor fraud and error control sections are incorporated, senior intergovernmental meetings will occur whether or not fraud is on the agenda. A special meeting of Executive Directors would cost approximately $2,000 per provincial delegate.

These costs are negligible compared to the immense benefits which a national attack on fraud and error would engender, including increased public support for income security programs and increased public confidence in program administration.

Issues

The major outstanding issue in the area of establishing federal leadership is primarily political. In order to explain why a major initiative on fraud and error was being undertaken, politicians would have to admit that there had been a lot of money wasted for many years, with little or no attention paid to it. A government that has been in power for some time could see this as an admittance of lack of fiscal stewardship, and would be loathe to make this a public initiative. A new government, however, such as the current Liberal leadership, can turn this into a positive strategy.

Because of the lack of measurement of fraud and error rates and losses in Canadian income security programs, the area of fraud and error control has not been seen as a high priority. And, in fact, politicians do not like reporting high levels of fraud and error in their programs. However, a well-designed communications strategy which focuses on the positives of high reported fraud rates (demonstrating active detection, prevention, and prosecution of fraud) can as equally well demonstrate fiscal stewardship as fiscal malfeasance.

If such an initiative were announced, without a doubt there would be concerns raised by client advocacy groups that this represented "picking on" the poor, who could not defend themselves. The fact that fraud and error is probably higher in the income tax system might even be used as a rationale for not addressing fraud in income security programs. Advocacy groups can be invited to participate in the planning and design of programs as a way of engendering understanding of the magnitude of the problem and the need to protect programs for the truly needy. A communications strategy which emphasized that fraud is committed by a very small proportion of the overall caseload, and that this small group gives a "bad name" to all clients of the system may ameliorate this back-lash. However, the "silent majority" will be strongly in support of the initiative. Not only does everybody know someone who is supported by a Canadian income security program, most people know of someone who is cheating the system! The public is far more willing to concede the magnitude of the problem than are politicians.

These issues can primarily be addressed by publicizing the amount of money which could be saved through fraud and error control initiatives. For every dollar saved by not overpaying clients of income security programs, one less dollar will have to be cut from the federal and provincial budgets in another area to address the deficit. Clearly, the communications strategy should be to tout these fiscally responsive initiatives as directly addressing the reduction of the deficit and the protection of income security programs for the needy.


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CLIENT IDENTIFICATION

Identifying Clients

The issue of fraudulent access to government services has recently become a public issue, as has the theft of personal identity generally. Cases of individuals with forged, false or multiple sets of identification often are brought to light, and public speculation regarding the amount of "double-dipping" is becoming a serious matter. The existence of this problem is often a result of a general inability on the part of federal, provincial/territorial and municipal government departments to confirm the identity of the individual applying for income security benefits. Similarly, it is extremely difficult to ensure that an individual is not inappropriately accessing several similar programs with the same set of identification.

A different, but related, problem occurs when the identification material (cards, documents, etc.) is absolutely valid, but is being carried by a person other than the one to whom the identification belongs. This could occur for several reasons:

When an individual applies for income security benefits from any one of the myriad of programs in Canada, each individual program first matches the client identification against clients who are already receiving benefits or who were a recipient at one time. There are three related problems at this point: Cases of multiple identity are among the most difficult types of fraud to detect, as are loaned, stolen or purchased cards being used by ineligible individuals. However, implementation of a common identifier across programs and jurisdictions would permit effective data linkages across programs and jurisdictions.

Each jurisdiction facing these issues could address the problem independently, developing improved client identification mechanisms. If several provinces and territories or individual federal income security programs began to independently develop and implement various solutions to the question of fraudulent identification, the various levels of government run the risk of significant additional costs resulting from duplication of administration and development costs. In addition, although the resulting potentially incompatible systems may solve each jurisdiction's problem, inter-jurisdictional issues may not be addressed. The problem of fraud resulting from inadequate client identification is an inter-jurisdictional issue, requiring consistent solutions and cooperation between the federal provincial and municipal governments to gain maximum results from efforts to minimize duplication and unnecessary costs.

The Current Situation

Jurisdictions which have implemented programs involving data matching across programs or with other similar jurisdictions have had significant success in preventing large overpayments due to unreported income. These successes would be increased even further if a common client identifier was required from all clients applying for income security benefits.

In the United States, all clients must present their Social Security Number in order to apply for or receive any income security benefits. In Canada, however, even though a comparable unique identifying number exists, the Social Insurance Number (SIN), federal legislation restricts the use of this number to specific labour related situations. This is very much a "Catch-22" for provincial governments. Revenue Canada requires provinces to produce a T-4 slip for all clients who receive benefits from income security programs, linked to the client's social insurance number. Yet, provincial income security programs can request, but cannot insist on a client producing a SIN number, since the use of the number is legally restricted.

Most federal income security program require the use of a SIN number when applying for assistance. Some provinces, such as Newfoundland, insist on the production of a SIN card in spite of the restrictive legislation on use of the SIN. Ontario, faced with a recent appeal by a client who did not wish to produce his SIN number, is much less insistent (the client won the appeal and did not produce his SIN card). In addition, the current "need is the only basis for eligibility" standard in the current CAP legislation means that benefits cannot be denied on the grounds of not producing or obtaining a SIN number.

Several provinces and municipalities, including British Columbia and Metro Toronto are attempting to strengthen their client identification requirements. However, without federal leadership through changing the SIN legislation to allow income security programs to require the SIN number as client identification for all clients (head-of household, spouse and teenage children), these initiatives may solve each jurisdiction's problems, but will not assist in resolving the inter-jurisdictional and inter-program issues related to data matching mentioned earlier.

Again, federal leadership is required to sanction and facilitate the use of a common client identifier which all income security programs can use. This common identifier is a necessary underpinning for the remaining initiatives in this proposal.

The Wages of SIN

There are several reasons why an individual might not be able to produce, or may wish not to produce a Social Insurance Number: he/she has had the SIN card stolen; the card is lost; he/she is an illegal immigrant; he/she has never worked outside the home/farm for income; he/she has earned income only in the underground or illegal economy; or he/she is embarking on a course of fraud. Ideally, an individual would not be eligible for continued income security benefits without a Social Insurance Number. Only temporary, short-term assistance would be available without this identification. However, in most legitimate cases, an individual can obtain a SIN number easily and rapidly, so benefits would not be unduly delayed.

Two changes at the federal level are required:

  1. Revising the section of the legislation on the use of the Social Insurance Number to extend use of the SIN to include provincial/territorial/municipal income security programs; and

  2.  
  3. In any new set of national standards governing provincial/territorial/municipal income security programs, ensure that lack of a SIN number (or production of a SIN within a reasonable time) for all working-age dependents in the household is valid grounds for denying benefits.
If provinces are restricted to continued use of name/birthdate data matching, many matches will be missed or inaccurate. For example, Mrs. Susan Quinella-Jones may be on file in a particular jurisdiction as S. Q. Jones, and be registered in other programs as Sue Jones, Suzy-Q Jones, S. Quinella Jones, Suzanne Quinella, or many other variations on the basic legal name. Each potential match would have to be visually confirmed by a case-worker or another individual, resulting in a major increase in workload. In addition, Mrs. Jones may also be retaining all of her identification from her pre-marital status as Miss Quinella. Many matches on the basis of name would therefore be missed, or a perfectly innocent Susan Jones who is no relation to Susan Quinella-Jones may be identified as being on more than one program incorrectly. Use of a single common identifier such as SIN across all programs would minimize this problem.

Once all clients and other working-age recipients were identified by a Social Insurance Number, access to all federal income-related files would be more effective. This would of course not help in the area of discovering non-reported sources of income such as income earned in the underground economy, through illegal pursuits such as prostitution, gambling or drug-dealing, or from many forms of self-employment income. However, over 70% of all income in Canada is in the form of wages and salaries, where the employer is deducting both income tax and, often, UIC premiums at source. In addition, significant portions of the remaining 30% are reported to Revenue Canada directly by tax-filers. This information is all accessible via linkage through the Social Insurance Number.

Social Insurance Number Administration

If the Social Insurance Number were to become the lynch-pin of fraud detection and prevention through data matching systems, some significant changes to the rules, regulations and administrative processes would also be required. Improvements in the following areas would be necessary in order to maximize the effectiveness of national use of the Social Insurance Number.
  1. Linkage between temporary SIN numbers for new immigrants and a later "permanent" number. Metro Toronto Social Services is currently pursuing this issue with the federal government on a pilot basis.

  2.  
  3. Improved federal record keeping and control-oriented processes for replacement of lost and stolen cards. Currently, the process seems to be a simple re-issue of a new card with the original SIN number, possibly resulting in two individuals with access to the same number--the original owner, and the person who fraudulently obtained a replacement card or stole or found the original card.

  4.  
  5. Linkage of SIN numbers to the proposed National Death registry, currently being explored by Statistics Canada in conjunction with provincial Vital Statistics departments. SIN numbers belonging to deceased individuals must be permanently retired and not re-issued. Individuals using SINs belonging to deceased persons would only be doing so for illegal purposes.
It would become absolutely critical that the administration of the Social Insurance Number system be as effective and efficient as possible in order to minimize duplicate issue of the same number. A truly effective control will not be possible until some form of "hard" identification such as fingerprint, retinal scan, palm print, etc. is consistently used across Canada to ensure that an individual is not registered more than once, under different identities, with two or more valid Social Insurance Numbers.

In the United States, a commercial computer program is available, to income security administrations for approximately $30, which "unscrambles" any individual Social Security Number, and identifies the date and place of issuance. The Canadian SIN for any individual also identifies where and when the card was issued. With this information available through a simple computer program to front-line intake workers in federal, provincial or municipal income security offices, the intake worker would have a major new tool to assist in identifying stolen or forged cards. For example, if a 40-year old male, reporting 20 years of employment history applies for assistance using a SIN which was issued two years ago, a whole new line of exploration regarding the individual's eligibility for assistance is uncovered.

Direct Benefits

Requiring a Social Insurance Number as a condition of on-going eligibility for income security benefits would result in a deterrent effect (almost impossible to measure and quantify without careful research), in that individuals who were registered in one income security program would no longer be tempted to apply for assistance in another jurisdiction or program without also disclosing the amount already received. Then the normal myriad of rules about different types of income and the various ways that income is "counted" by the income assistance programs would come into effect.

One side-effect of improved administration of the Social Insurance Number with regard to lost and stolen SINs would be the general benefits to all Canadians by affording some additional protection from theft of identity with all of the ensuing tax problems, and criminal record problems presently caused by having the activities and behaviour of the individual who has stolen an identity attributed to the wrong person.

Implementation Strategies

The primary implementation strategy would be the requisite legislative change to the Social Insurance Number legislation to enable SINs to be required as a condition of eligibility by provincial and municipal income security programs. This could occur at the same time (as a consequential amendment) as the passage of the new legislation supporting the move to block funding, eliminating the "need is the only requirement" clause in the current CAP legislation, and establishing a new focus on fraud and error control.

The passage of the legislation would require federal, provincial and municipal income security agencies to contact all clients (and other working-age adults such as spouses, teenage children) who did not have SIN numbers on file. Depending on the province or municipality, this could range from 0% to 15% of the total caseload. Clients would be informed of the legislative change, the reason for requiring a SIN (to link data files with other programs and jurisdictions), and given a specific time period in which the SIN would have to be reported. Clients who still refused to provide, or obtain, a SIN would be terminated from assistance. This refusal to provide a SIN would be considered prima facie evidence of fraud or abuse and may warrant a fraud investigation to determine if overpayments had been occurring and could be recovered, or whether prosecution was warranted.

Implementation Costs

The legislative changes required to implement this initiative are relatively cost-free at the federal level. However, at the provincial and municipal level, there would be workload impacts in following up with clients to obtain SIN numbers. Whether or not actual additional costs would be incurred, or whether this impact could be absorbed within the regular workload would be a function of the size of caseload which workers were handling, and the proportion of each worker's cases which did not have the requisite SIN on file. This could vary dramatically by province and by worker. The cost-saving attributable to case closures for individuals who refused to divulge or obtain a SIN would most likely more than make up for any temporary increase in workload.

The cost of improving administration of the Social Insurance Number system is somewhat peripheral to the proposal outlined in this document, and has not been addressed directly, but may include the costs of establishing new processes and installation of new computer systems.

Issues

The main reason for the legislative restrictions on the use of the Social Insurance Number when the system was first established was to protect the privacy of individuals who were concerned about the government being able to link information through the use of the SIN. And, this is exactly why the extension of the use of the SIN is being proposed--to enable such linkages of pertinent data relating to individuals. However, with the modern data matching technologies, only individuals who were receiving funds from two or more programs would be identified--all other individuals would not be affected. Of those receiving money from more than one source, those who are honest are already reporting that income information to the program administrators so their privacy would not be further invaded. Although the intake process for an income security program may be considered by some to be an invasion of privacy, it has already happened long before any data match occurs.

It is only those who had neglected to report income from another program or jurisdiction or from earned or unearned income sources who would suffer from an "invasion of privacy". And, since these individuals are clearly breaking the law, it is strongly suggested that these cases of "invasion of privacy" would be supported by politicians and the general public.


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DATA-MATCHING

Description of Problem

Information gathering and record-keeping by both public and private organizations throughout the country, including federal, provincial and municipal programs is inexorable and ever increasing. And these files, the majority of which are now computerized with various degrees of sophistication, contain massive amounts of information about individuals in Canada. Much of this information is relevant to the question of eligibility for the federal, provincial and municipal income security programs.

When the question of establishing data matches is raised, the immediate public response is that "Big Brother" is watching, and that with developments in computer technology, privacy and confidentiality require stringent legal protection. The fact of the matter is, "Big Brother" has been watching for some time. through a variety of mechanisms. There are several other types of data linkage which already occur in government income security programs. The following listing identifies these types of current data exchanges.

  1. Downloading of basic client data from a central data base - most federal income security programs, and provinces/municipalities have established a central data base of client data which can be accessed when a client reopens his/her application for assistance. The main data base will download to the remote terminal the basic client data on the data base, including the name, birth date, names of dependents, and other relevant information on client eligibility. This reduces administrative workload attributable to the re-entry of client data; it prevents clerical errors (such as the misspelling of the individual's name); and allows for updating of variable information on the main data base, such as address, change of name (through marriage for example), or adding dependents to a case file.

  2.  
  3. Identity cross-checking for initial registrations - Some provincial and federal programs have automated internal cross-checking of client data against other registrants on the file. For example, some provinces check current client addresses against the addresses of other registrants to identify whether there are other recipients listed at the same address. Similarly, checks for duplicate name/birthdays, SIN, or duplicate registration of dependents are also performed.

  4.  
  5. Legislatively required data linkage - There are information links which are identified by government policy or legislation (for example, the free provision of health care services to income security clients is common across Canada). In these cases, the data linkage is often one-directional, with the "base" program, income assistance, automatically registering the individual for services on the health care data base. These linkages minimize administrative duplication, expedite service to individuals, and minimize intrusion into the lives of individuals.
  1. Access to information required by program legislation - Some programs require personal or financial information in order to ensure eligibility for benefits. For example, eligibility for the Alberta seniors benefit is tied to eligibility for the Guaranteed Income Supplement. Federal data tapes are transmitted to Alberta to allow calculation of eligibility for the provincial program. In addition, most provincial income security programs require information on assets owned by individuals applying for assistance. In Alberta, for example, on-line access to Vehicle Registration files to confirm assets owned by individuals has been established as part of the Eligibility and Benefit Verification process referenced earlier (page 4). Again, this linkage is one-directional - Income Security can access Vehicle Registration, Vehicle Registration cannot access Income Security files. The rationale for this type of linkage is based on the eligibility requirements of each program.

  2.  
  3. Improvement in Individual Service - The Pharmacare Network project in British Columbia is an excellent example of data linkage which improves service to individuals. With the linking of prescription records across the province, individuals can be assured that their prescriptions, possibly obtained from several doctors and pharmacies, are safe if taken in combination. This system is also linked to the Pharmacare billing system to clarify in a non-judgemental or non-stigmatizing way what proportion of the cost of the prescription is payable by the individual. From the perspective of the individual pharmacist, this system increases the privacy of individuals. Since the pharmacist cannot access billing information directly, the pharmacist has no way of knowing which government program is covering the cost of the prescription, whether the individual is receiving a seniors discount, has reached the deductible cost of pharmaceutical, or is receiving Income Security.

  4.  
  5. Improvement in Vendor Service - Data linkage can also improve payment of government accounts to individual vendors. Again, the BC Pharmacare Network Project enables payments to be made to pharmacists within a week of the prescription being filled, a major improvement in speed of payment.

  6.  
  7. Identification of Fraud - Data linkages already occur which assist programs in identifying fraudulent access to programs. An example is the recent interprovincial agreement between British Columbia, Alberta, and Saskatchewan, with other provinces exploring joining the network, to identify individuals receiving assistance in more than one province, using the SIN number as the primary identifier where available, and name/birthdate where it is not. Similarly, several provinces, including Alberta, Ontario, and New Brunswick are experimenting with on-line linkage to UIC files, to ensure that new applicants are not already receiving undeclared UIC payments. These data-matching processes do not identify any individual unless there are strong grounds to suspect that illegal activity is occurring.

  8.  
The existence of a common client identifier such as the Social Insurance Number will ensure the accuracy of and streamline these existing linkages between programs as outlined above. However, it will also facilitate many other forms of linkage which do not currently occur.

Current methods of linking data between programs include transmission of paper documentation (forms), one-way transmission of electronic data, case-by-case requests for information, tape-to-tape data matches and on-line access. The effectiveness of these mechanisms suffer from several drawbacks:

  1. Lack of a common identifier - current data linkages often occur on the basis of a combination of SIN and name/birth date/address matching. The lack of any consistent common identifier means that these matches are very difficult and result in having to sort through large numbers of potential duplicate registrations due to an inability to easily confirm an actual match of client files.

  2.  
  3. Incompatible file formats - Using name/address/birth date matching is only possible if the electronic file formats are similar. Unless this is the case, each individual file match would require a lot of systems work to rewrite the files to put them in compatible formats. This degree of data manipulation makes these matches an expensive, time consuming and inexact process.

  4.  
  5. Too much information is shared - A department requesting case-by-case access to another program's files often receives additional extraneous information which was not required or allowed by their legislation. This compromises the privacy of individuals.

  6.  
  7. Dependent on clerical accuracy - The accuracy of data linkage can often be compromised, either by matching an individual with the wrong file, or not finding a match at all due to clerical errors in entering the name or birth date.

  8.  
  9. Administratively time consuming - Obtaining information on a client-by-client basis can be administratively time consuming and is such an inefficient use of time that it is often not done by harried caseworkers.
Careful implementation of data linkages, using a common client identifier such as the SIN, with judicious selection of automated file linkage would be more accurate, would restrict data exchange to only that data permitted by program legislation and policy, would remove the possibility of error in linking files, and should be far more efficient and cost-beneficial.

Technology exists which would use the new common client identifier to build on existing program automated file structures to link information where supported by legislation and policy. The rapidly developing field of local and wide area PC networks, applications of CD-ROM technology for storage of and rapid access to huge amounts of information, and Windows-based SQL inquiry processes, to name but a few of the new technical developments, ensures that the technology exists to do anything that is required from a practical perspective. Computer security features, using password and access code control provides a far more secure environment for individual information than the current systems which are still largely paper-based. However, the detailed technical aspects of mechanisms to link files are beyond the scope of this proposal.

The real issues are not of a technical nature.

The American Experience

There has been a long history in the American Welfare System of computer data matching to detect improper Welfare, Food Stamp and Medicaid payments:

Congress implemented Project Match, a federal project to match Aid to Families with Dependent Children (AFDC) and Medicaid files.

1979- Congress passed a law requiring State agencies to use income information (wage matching) in determining eligibility for AFDC. In 1983, Congress added that requirement for the Food Stamp program as well.

Congress introduced the Family Assistance Management Information System (FAMIS) to promote computerized information systems for the States.

Congress passed the Agriculture and Food Act and the Omnibus Reconciliation Act, requiring the States to match social security numbers of Food Stamp recipients with computerized wage data.

These initiatives led towards a far more encompassing data matching undertaking, the Income and Eligibility Verification System.

The Income and Eligibility Verification System (IEVS) was established by Congress under the 1984 Deficit Reduction Act to reduce errors in determining eligibility and benefit levels in the Food Stamp, Aid to Families with Dependent Children (AFDC) and Medicaid programs.

Implementing regulations require State welfare agencies to compare income reported by program applicants and recipients with income from several data sources:

  1. Internal Revenue Service (IRS) data on interest, dividends, and other types of unearned income;

  2.  
  3. Social Security Administration data for Retirement, Survivors, and Disability Insurance benefits, Supplemental Security Insurance benefits, and annual earnings; and

  4.  
  5. State quarterly wage reports and unemployment insurance benefits.
States are required to follow up within 45 days on at least 80 percent of all IEVS information received on applicants and information targeted for review on applicants.

Since the federal legislation mandating computer matches was passed in 1984, individual States have made various degrees of progress towards implementation of the full range of data matching. As well, some States are conducting matches in addition to those mandated and some States are requesting access to additional Federal data banks such as Veterans Administration benefits, Federal employee salaries and pensions, U.S. Savings Bond holdings, and State death records maintained by the Social Security Administration.

There are two aspects to IEVS:

  1. Applicant System - client identifying information, i.e., name, SSN, sex, DOB, is submitted via computer by eligibility or intake workers once an application for benefits is completed. Information from the data sources listed above is usually available within 3 - 5 working days for those States with this system, and can be used to confirm eligibility or to deny benefits as appropriate. However, Counties cannot unduly delay initial assistance while awaiting match results. As well, prior to submitting client identifying information for data matching, Counties must inform clients, in writing that the match will be conducted.

  2.  
  3. Recipient System - this system provides information from the matching of active clients with a variety of other systems at various times of the year, depending on the match type. Various threshold levels are used to ensure that only information that could impact eligibility or benefit levels is sent to the worker for follow up.
California, as an example, has the following matches in place: An October, 1994 study of the status of IEVS by the Office of Inspector General, Department of Health and Human Services, made numerous recommendations for improvements and adjustments to the system, especially with respect to the need to improve the data-matching processes so that more of the information is available up-front; i.e., at the time of application for benefit. The study found that while many concerns were identified, the states are making significant progress in implementing IEVS and there is increasing recognition of the advantage gained from front-end or preventative matching processes.

The Office of the Inspector General study found that:

  1. 88% of the IEVS computer matching systems are used by the Food Stamp and AFDC programs,

  2.  
  3. 69% are used by the Food Stamp and Medicaid programs, and

  4.  
  5. 26% are used by the Food Stamp, AFDC and Medicaid programs.
About half the states limit their matching to the primary sources of data (unemployment insurance, wage, Social Security Administration and files internal to the Welfare/Food Stamp agency); the other half also match against some other external databases (e.g., Department of Motor Vehicles, banks, local tax agencies).

The state agencies responsible for administering assistance programs have been developing increasingly sophisticated computer systems to support program operations, particularly for using computer matching activities to corroborate client information or to detect discrepancies in information. Federal funding incentives encourage the development of new systems and concerns about initial client eligibility have prompted agencies to examine the increased use of up-front matching processes as a preventative cost-avoidance measure.

Applicant matching (up-front matching) has been shown to improve the morale of eligibility workers by helping them establish the integrity of case determination. As well, the availability of information about individual applicants was seen to improve the delivery of services to clients. The information allows eligibility workers to more easily meet case disposition deadlines and documentation requirements. The computerized databases can be a way to save applicant's time by relieving the client of the need to locate the required documentation/verification themselves.

Overall, increasing concern for the detection and prevention of fraud, waste, abuse and error in Government programs has stimulated the development of techniques using information technology to detect and prevent these problems.

Current Canadian Strategies

For the purposes of this proposal, a brief survey of most Canadian provinces (Nova Scotia, Quebec and the Yukon were not contacted) was undertaken to determine who was sharing data with whom, and which federal files were being accessed by the provinces. Although most provinces have access on a case-by-case basis with federal files, this analysis focuses on actual data sharing agreements which are total caseload to total caseload tape, electronic, or on-line matches. The table on the following page illustrates the results of this information gathering exercise.

Provincial data links with other provincial programs focus on links to Workers' Compensation Boards, Maintenance Enforcement data bases, Land Titles, Motor Vehicles and Student Finance Boards. Newfoundland has also established links with the public service payroll files and public service pension plans. An interesting linkage which Metro Toronto is pursuing is with the Insurance Crime Prevention Bureau to purchase client information on income received from insurance companies to recompense individual who lose regular employment income due to being off work as a result of a motor vehicle accident.

(X=data sharing agreement in place; P=On-line pilot underway; E=Exploring/negotiating an agreement):
  U.I.C.  OAS/GIS  C.P.P.  Revenue 
Canada
Immigration
Canada
Inter-provincial
Matches
Provincial 
Program
Matches
British Columbia
X
       
X
X
Alberta
X (P)
X
E
E
 
X
X
Saskatchewan
X
 
E
E
 
X
X
Manitoba
X
       
X
 
Ontario (provincial)
X
 
E
 
X
E
X
Metro Toronto
X (P)
     
X
X
 
New Brunswick
X (P)
E
 
E
 
E
X
Prince Edward Island
X
X
X
     
X
Newfoundland
X
         
X
North West Territories
X
           
Yukon              
In all cases of federal-provincial agreement except the UIC on-line pilot, these matches are tape-to-tape matches. In addition, even without a formal data sharing agreement, provinces have access to most federal files on a case-by-case basis. That is, after a province has determined that an individual has committed fraud, information to confirm that fraud can be obtained from the relevant federal file, usually via court order. However, this method does not assist in identifying, or preventing at an early stage, new cases of fraud, which a tape-to-tape match of caseloads would do.

In the case of every province that was contacted, the initiative to establish the data link came from the provincial/municipal level, and each agreement is unique. Even in the case of UIC/Income Security agreements, which every province has in place, the amount and type of data obtained differs for each province. This perhaps unintentional "divide and conquer" strategy of the federal government has resulted in different provinces obtaining different data. For example, Prince Edward Island has a data agreement in place, but cannot pursue the on-line linkage feature being pilot tested by Alberta, Ontario and New Brunswick, since the on-line linkage allows access to more data than is allowed by the specific PEI/Canada agreement. The agreement will have to be renegotiated before on-line access will be a possibility. The primary reason for different agreements across the country is that agreements are negotiated by each individual UIC Regional Office, with no obvious central coordination.

Description of Initiative

Most importantly, the federal government should take leadership in the area of developing data matches with the provinces, in order to significantly reduce the duplication of effort that is currently occurring both within Human Resources Development Canada and the provinces in establishing unique agreements for each program with each province.

It is apparent that the federal government has already created linkages among some of its own programs, at least through Revenue Canada for purposes of clawback and overpayment recovery. There are several recommended themes for the federal government to follow in the area of data matches:

  1. Ensure that appropriate linkages occur between all federal programs to ensure that fraud and error within the federal system is minimized.

  2.  
  3. Establish a consistent data sharing mechanism for on-line access to CPP and OAS/GIS information to which all provinces can link.

  4.  
  5. Provide access, either as an on-line system or as a periodic tape-to-tape match, to information on current UIC contributions and income-tax withholding data in Revenue Canada files to provide the most up-to-date information on income.

  6.  
  7. Provide access on an annual basis (June of each year) to previous year's income tax data for those current clients who were also on assistance for the previous year to aid in determining whether all income and assets were reported. This will require careful programming to restrict the amount of information available to the provinces to only that data which is required for program administration. Particular care must be given to only providing information for the period of time during which the individual was actually receiving assistance and the month prior. This turns the current one-way flow of information (of provinces providing T4s for clients) into a two-way link.

  8.  
  9. The federal government should work with native bands to establish a registry of natives receiving income security benefits through the Department of Indian and Northern Development which can be made available to provinces. In return, provinces should allow access to native bands to provincial client index data to assist native communities in determining whether an applicant is already receiving assistance elsewhere.

  10.  
  11. The federal government should monitor and evaluate the cost-effectiveness of each of these linkages to determine which are the most beneficial, and to estimate the true magnitude of "double-dipping".

  12.  

Direct Benefits

The federal government is already well aware of the effectiveness of data matches and has monitored in a limited way their comparative effectiveness against other techniques. The accompanying table demonstrates that in Revenue Canada, data matching offers by far the highest cost benefit. No other investigative technique used by Revenue Canada in attempting to uncover unreported income is even half as effective as data matching.
 
Activity                                            Average
                                                           Additional Tax
                                                           Assessed per
                                                           Man-Year

Audits                                                $350 Thousand
Office Examination                           $226
Post Assessing                                $216
Data Matching                                 $938
Delinquent Actions                         $322
Special Investigations                    $156

Auditor General of Canada

Similarly, information available on the effectiveness of the IEVS system in the United States offers comparable evaluative evidence on the effectiveness of this approach.

Lastly, the interprovincial matches that were started by British Columbia and Alberta, and have slowly moved east to include Saskatchewan and Manitoba, with other eastern and northern jurisdictions soon to join, have identified hundreds of cases of "double-dipping" since their inception. These hundreds of cases translate into hundreds of thousands of dollars saved each month. These matches are of individuals registered under the same name in more than one province, and do not include individuals using different identities in different provinces. The first match is invariably the largest as all the cases with undeclared income come to light, with subsequent months settling down to a smaller amount, as the match becomes more of a deterrent for those clients who are aware of the matching process.

Implementation Strategies

In 1990-91, Australia announced that it was embarking on a major fraud initiative, including significant data matching between government files at the federal and state levels. The most interesting component of this plan was the announcement of a six-week "amnesty" period. As the sidebar indicates, just the announcement alone created nearly $50million in savings. Australia and Canada are quite similar in population composition and characteristics. Thus, there is no reason to believe that similar savings would not be achieved through a comparable communication strategy in Canada. Clearly, an announced amnesty period should be a major component of the Canadian strategy.

Given the potential impact of increasing tape-to-tape, electronic or on-line matching between provinces and the federal government, and the amount of follow-up that individual caseworkers would be required to do to follow-up on each "match" , a staggered implementation is suggested. It is proposed that a series of pilot sites be established between the federal government and individual provinces, each site focusing on linkage with one federal data source, such as CPP or Revenue Canada. Careful monitoring and evaluation of the results of each pilot would help quantify the actual savings attributable to each source of information.

Implementation Costs

Based on information obtained from provinces who have established data matching either between provinces or with on-line UIC links, for each province/municipality, the following costs would be incurred for each new data source added to the data matching system:

Policy/program design specialist, including drafting agreements 1 month            $5,000
Systems analyst to establish initial match 1.5 months                                         $9,000
System analyst, testing system, setting up procedures 1 month                          $6,000
On-going computer costs (storage time, CPU time) Per month                         $1,300
Cost to add additional province to system 1 week                                            $1,500
Hardware/network installation Per Office                                                         $5,000

In addition, the costs of caseworker staff training (for 1 day) are equivalent to one day's salary for the workers in the office. Local computer costs average about $500 per office, per month.

The federal government is currently redesigning the supporting information systems for federal income security programs. It is probable that these costs can be absorbed within the overall $127 million budget (not including any potential over-runs which may occur) which has been identified for the project, providing decisions were made very quickly.

Issues

Again, the key issues here are confidentiality and privacy. However, every client who applies for income security benefits in any federal, provincial or municipal program must, as part of the intake process, sign a release authorizing the program to access relevant financial data about the individual, much like taking out a loan from a bank. So, although privacy issues do not in fact change, protections are still necessary.

The federal government in the United States has clearly specified the protections with which the data involved in the IEVS matches will be ensured. Federal and State law and regulations provide that agencies receiving IEVS information or information provided by other agencies through IEVS, must protect the confidentiality of the information from unauthorized access or disclosure.

In addition, the regulations provide for clear disclosure rules to applicants of AFDC and Food Stamp. In this case, "applicant" includes all individuals seeking assistance, including persons being added to an existing case, and any other individuals whose income and resources are considered in determining the amount of benefits.

Section 1137 of the Social Security Act (PL 98-339) mandates that, during the application process, all applicants be informed that:

It is recommended that Canada establish a similar set of protections to ensure that only information which is legitimately required by the program is made available.


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TAX RECOVERY PROGRAMS

Description of Problem

The theory of the "economic man" would dictate that clients would choose the most advantageous position regarding their access to income security benefits. In other words, if clients can arrange to be overpaid, then pay back that overpayment very slowly, it might be a sound economic choice, particulary if the overpayment is unlikely to be repaid in full. There are three ways that clients can temporarily receive benefits higher than the normal rates:
  1. Some provinces "advance" money to clients for one-time-only purchases, and then take a repayment agreement to allow the client to repay the debt. This is often the case for items such as security deposits on accommodations. There is absolutely no wrong-doing or error on the part of the client as this agreement is freely entered into jointly by the provincial government and the client.

  2.  
  3. The client makes an honest error in reporting, with no intent to defraud, but it results in an overpayment. For example, a single parent may renegotiate custody with her husband, resulting in her children moving from living full-time with her to living with her ex-spouse, and she retains visiting rights on alternate weekends. She does not understand that this arrangement may affect her benefit level.

  4.  
  5. The client chooses to falsely report circumstances, but it is impossible to prove intent in court. For example, a man with a history of mental illness reports that his cheque is missing, and the province replaces the cheque. After forensic examination, it is proven that he cashed the cheque himself. He denies any knowledge of cashing the cheque. Did he intend to defraud? Or was it a lapse of memory? No fraud investigator or public prosecutor would be willing to take this case to court--so an overpayment is filed against the client.
If clients were on assistance long enough to repay the overissue, without incurring another overpayment before the first one was paid off, or if provinces had a way of effectively recovering the money after the case were closed, this would not be a problem. However, most clients who incur an overpayment leave the income security caseload before the overpayment has been recovered. And, although the outstanding overpayment is normally turned over to Crown Debt Collection agencies, recovery rates are dismal.

Generally, overpayments filed as a result of repayment agreements or client error are relatively small. Overpayments as a result of fraud tend to be much larger. In 1992, the Ontario Auditor General reported that the outstanding debt due to overpayments for clients who are or were on Ontario provincial income security programs was $80 million. Based on a confidential survey of Canadian provinces(3) , overpayments average about 3 to 4% of the total budget for income security at the provincial level. Thus, at any given time, approximately $230 million is outstanding in recoverable debts from clients to provincial governments.

Current Strategies

In order to collect these overpayments, provinces generally reduce the level of benefits by some small amount, usually not over 5% of the total benefits, or some small benefit is eliminated, such as a personal allowance (approximately $20 per month). Because of the requirements of the Canada Assistance Plan, clients can appeal even these small reductions on the grounds of hardship.

This means that even a small repayment (such as a $600 damage deposit) would take over two years to repay, assuming the client did not win a hardship appeal. And, it is not uncommon for a client to incur another overpayment long before the first is paid off. Added to this, the majority of clients leave the caseload long before their overpayments are recovered through benefit reduction.

After a case is closed, even in cases where a repayment agreement has been signed by the client, provinces generally make very half-hearted efforts to recover outstanding overpayments. Every year, provincial Treasury, Finance or Crown Debt Collection departments "write off" millions of dollars in unrecoverable overpayments. These funds are written off with no lasting effect on a client's credit rating or any other long-term impact.

When a client has been prosecuted for, and found guilty of, fraud, the court can order seizure of assets, court-ordered restitution, legally defined repayment schedules, or at the very least, legally establish the existence of the overpayment. If the client does not repay as ordered, jail sentences and other penalties as well as civil recovery action can ensue. However, for general repayments, there are no penalties to speak of, since provinces do not take action to establish these debts for civil recovery or refer these debts to commercial credit bureaus.

Tax Refund Intercept Programs

Several U.S. states, including California, Michigan, North Carolina and Alabama, have instituted procedures whereby tax rebates and government lottery winning are intercepted before they are paid to the clients who have outstanding overpayments on AFDC or Food Stamp files. There is federal supporting legislation allowing federal tax refund intercept for Food Stamp program overpayments. In 1993, $27 million was collected from federal tax refunds to repay Food Stamp debts. North Carolina collected $300,000 in the first month after instituting the program. Some states are implementing state tax refund intercept programs for AFDC as well.

This is similar in nature to the use of the Canadian tax system to intercept income tax rebates before they are issued if the tax-filer has been overpaid by UIC, or is in arrears with student loan payments. These debts are "netted" against the income tax rebate owing to the tax-filer and returned to the federal government before monies are paid to the individual.

Individual provinces, which are "writing off" millions of dollars in outstanding overpayments every year on closed cases, where the individual or family is no longer receiving government income security benefits, have no ability to access the national tax system to recoup these outstanding debts.

In the Canadian context, a decision would have to be made at the federal level whether this could be considered as taxes owing, whether only tax rebates would be affected by this strategy or whether child tax benefits and GST rebates would also be affected. Some states have also had success intercepting larger lottery winnings in order to repay overpayments against state income security programs.

Direct Benefits

Given that there are approximately $230 million in outstanding overpayments in provincial jurisdictions across Canada, any effort to recoup these payments will improve the fiscal position of the provinces. Tax and lottery recovery programs will not only recoup monies for the provinces, it will directly prove to individuals who have an outstanding debt to the provinces that there is no "free lunch" and that these funds are a debt no different than a VISA bill, an outstanding mortgage or a department store credit card, and in fact may be more serious in that the debt is owed to the Canadian taxpayer. If this additional money obtained by the client were not, in effect, an interest free loan, the monthly payments allowed by most provincial legislation would barely cover interest charges, with the principle debt amount never being repaid. Even without interest being added, considering a $5,000 overpayment, at a repayment rate of $20 per month, the debt would be not be retired for 21 years, assuming the client does not incur a second or third overpayment. And once the client leaves the system, very little of the money owing is recovered after that time.

It is difficult to estimate, without a careful evaluation of a pilot test, the amount of monies which may be recouped through tax and lottery intercept programs. However, it is likely that at least 10% to 20% of the outstanding overpayments could be recovered each year through this mechanism. This would translate into $23-$46 million a year of additional revenues returned to the provinces which they were unable to obtain before.

Implementation Strategies

Strategies to implement this option would include:
  1. Establishing, through federal and provincial legislation, that overpayments would be recouped through the tax system.

  2.  
  3. Establishment of a national data base of outstanding overpayments for closed cases. It would be quite possible for an individual to have overpayments registered against several jurisdictions (federal, provincial, municipal, and first nations).

  4.  
  5. Federal/provincial bilateral agreements that the federal government would intercept tax and other rebates in order to collect monies on behalf of the provinces and would remit same to the provinces.

  6.  
  7. Establishment of a pilot test to develop procedures and quickly estimate the amount of money which could be recovered.

  8.  
  9. Develop a public/client information campaign to inform individuals of the new process.
This would entail a federal-provincial cooperation process involving the various provincial and municipal finance departments as well as Revenue Canada.

Implementation Costs

The primary costs associated with this aspect of the strategy involve the initial establishment of a national registry of overpayments (registered by SIN), administered by Revenue Canada, and the provincial administrative costs of regular up-dating of the registry. This registry would have to be sensitive to the re-opening of cases, when normal recovery procedures (deductions from regular benefits) occurs.

Although this cost of establishing a national registry could be estimated at approximately $1.5 million, the recoveries of funds to the provinces should far exceed this amount. It may be unreasonable, in today's fiscal climate, that the federal government would agree to this kind of expenditure with no return. A federal provincial cost-sharing arrangement, perhaps dependent on the proportion of tax points for each province, might be an incentive for the federal government to cooperate. Alternatively, the provinces might fund the development of the program.

Issues

It is absolutely essential that clients be informed, both on intake, and when an overpayment is established, that any possible tax rebates or lottery winnings will be intercepted to recover the monies owing while the case is open and after the case is closed.

As long as the intercept is focused purely on a rebate of overpayment of income tax or lottery winnings, public reaction will probably be positive, however, if child tax benefit and GST rebates are also recovered, there will probably be a public outcry that "the deficit is being carried on the backs of the poor".

Very generally, the public is unaware of the sheer amount of the monies owing by past or present income security clients which is written off as bad debts. Much of this negative reaction could be dealt with through a proactive communication and media campaign.


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ADMINISTRATIVE DISQUALIFICATION

Description of Problem

As the previous chapters indicates, there is no real penalty for incurring an overpayment or committing program abuse: as long as intent is not "provable", it can not be prosecuted in court. Any incurring of an overpayment, whether accidental or intentional, is "punished" by the same approaches: a minor reduction in benefits occurs. But, ongoing benefits continue.

Current Strategies

This lack of penalties is primarily a result of federal legislation ensconced in the Canada Assistance Plan, regarding "need is the only determinant of eligibility". If a client is clearly defrauding the programs, whether federal or provincial, there is no way under current legislation that the clients can be "punished" for defrauding or attempting to defraud federal, provincial or municipal income security programs, other than any penalties imposed by the courts, assuming the case is suitable for prosecution. Taking the criminal prosecution route on cases where the overpayment is relatively small is very costly--to both program administration and the courts. Certainly, under current legislation, that client cannot be discriminated against on the grounds that they have admitted, or have been found to have attempted to defraud the particular income security program.

There is nothing more demoralizing to a front-line worker than being forced by policy and legislation to continue to support an individual who has been charged and convicted of fraud, or who has admitted culpability in obtaining an overpayment. They know very clearly that the probability of recouping the funds is very slight.

Generally. there is no recourse in Canada for a federal, municipal or provincial program but to reinstate an individual who has been convicted of fraud or who has admitted to fraud as long as qualifying conditions are met. Only in Prince Edward Island, where provincial legislation allows recovery of an established overpayment through deduction of the entire amount of the individual's benefit, can the overpayment be quickly recovered.
 

American Administrative Disqualification Programs

There has been an Administrative Disqualification process in the Food Stamp Program, which is administered by the Food and Nutrition Administration, Department of Agriculture, since 1977. Under the Food Stamp Act, all States are responsible for investigating cases of alleged intentional program violations and ensuring that cases are acted upon either through Administrative Disqualification Hearings or through the criminal court system.

Individuals found to have committed intentional program violations are notified in writing of the specifics of the overpayment, and for cases where criminal prosecution is not to be undertaken, the client can choose to request an Administrative Disqualification Hearing (ADH) or to sign a waiver of right to a hearing.

Hearings are held at the state level, in some cases by telephone conference, and afford clients the opportunity to explain why they believe they did not commit a violation. Some states find that providing an "evidence packet" which outline the evidence supporting the violation in advance of the ADH is quite successful in convincing clients to sign the hearing waiver at that time.

On the basis of a signed hearing waiver, an Administrative Disqualification Hearing which confirms the violation, or a successfully prosecuted criminal case, the overpayment is established and the client becomes ineligible for further benefits as follows:

If the disqualified individual is not eligible for program benefits at the time the disqualification period is to begin, the period is postponed until the client applies again and is determined to be eligible for benefits. The disqualified individual's household is responsible for repayment of the over-issuance which results in the disqualification, regardless of household's eligibility for program benefits.

States are required to report, to the federal Food and Nutrition Administration, information on each individual disqualified. A national registry is maintained for access by state welfare agencies. In 1991, federal legislation was passed allowing states to extend the Administrative Disqualification process to the Aids to Families with Dependent Children program.

Direct Benefits

It is difficult to establish the cost-benefit of a comprehensive Administrative Disqualification process as much of the benefit is in the deterrence effect - client who know they may be disqualified would be much more reluctant to break the rules in the future. It is hoped there would also be a concern on the part of an adult with children that the entire family is to some degree penalized by the reduction in benefits as a result of disqualification. In addition, there is the cost-saving attributable to the fact that benefits are not being paid to an individual who would otherwise be eligible for the program for a period of six months or a year.

Implementation Strategies

Implementation strategies for Administrative Disqualification would entail:
  1. Assessment of what will be the new or revised Canada legislation in place of CAP and the removal of restrictions provincial and municipal authorities now face on refusing benefits to clients who can show they are "in need". Once this has been done, provincial and municipal authorities may require amendments in some cases to their own legislation.

  2.  
  3. A process would have to be developed to allow clients relatively fast access to Administrative Disqualification Hearings - this may be an additional role for already existing Appeal Committees in each jurisdiction, or other systems would have to be established. Some American states have found ways of streamlining this process that could be considered for implementation here.

  4.  
  5. A national registry would have to be established with an effective and efficient system for jurisdictions to register information on each disqualified person, assuming disqualification in one jurisdiction would apply across the country. This may be a task for the National Office of Fraud and Error Control Initiatives.

  6.  
  7. An intensive public campaign would be required to ensure all clients and potential clients were made aware of the consequences of abusing the program.

  8.  
  9. A few pilot test sites in several provinces or municipalities may be desirable to determine the impact of such a process.

  10.  

Implementation Costs

The costs of implementation would include legislative development, establishing hearing processes (or expanding the mandates of Appeal Committees), the development of the national registry and the cost of a public information campaign. These costs would be offset, in the long-term by the benefits derived from the program, and the reduction in costs required for criminal investigation and prosecution.

Issues

Clients must be informed very clearly about consequences of potentially fraudulent actions. An outstanding issue is how individuals support themselves if they have no access to social security benefits for a period of time. It must be remembered that at the time of disqualification the client was not eligible, often because of excess income or assets. Thus, the client may have resources to depend on, at least in the immediate future.

There will be a concern raised that, by denying benefits to one household member, the system is, in effect, penalizing all household members, especially children, for the transgression of one. However, the argument of personal responsibility would say the offending client very deliberately made the decision to abuse the system, knowing the potential consequences.

It should be noted that when Colorado implemented the Administrative Disqualification process, a class action suit was launched challenging the constitutionality of the initiative. This suit was ultimately unsuccessful in the courts.


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EARLY PREVENTION AND DETECTION

Description of Problem

It was pointed out in the last chapter that Canadian provinces do not have effective mechanisms for recouping overpayments due to fraud or error once the client has obtained the funds. Thus, it is far more cost-effective to prevent the fraud or error from occurring in the first place than to attempt to recover the funds after the fact.

Current Strategies

British Columbia is the only province which has taken a direct approach to fraud prevention as opposed to detection of fraud and following-up on complaints. In 1994, a special branch, called Prevention, Compliance and Investigation was established within Social Services, headed by a Director. The province is currently exploring alternate ways to prevent fraud from occurring in the first place. Alberta has also implemented a number of pilot or short term projects to detect fraud at an early stage, but these programs are not truly preventive in nature, since most of the programs do not focus on detecting problems before any benefits are issued.

Description of Initiative

Supported by the federal government, over 30 US states have implemented programs for early detection and prevention of fraud. These programs integrate fraud control into the intake process, through the establishment of a series of indicators of fraud risk, such as lack of, or suspicious, identification, expenses consistently higher than income, etc. Clients who apply for assistance who score high on these indicators are referred for fraud investigation before eligibility is confirmed and benefits are issued. In most programs, the investigator has 48 hours to let the worker know if the information provided by the client is confirmed or whether additional investigation is required. Within a week, a final report confirming or denying the accuracy of the information presented by the client is returned to the intake worker for decision on eligibility. The American experience with these programs have been very successful in reducing program losses due to welfare fraud.

As part of the state efforts to utilize federal funding for fraud detection and prevention programs, many U. S. states have embarked on early fraud prevention programs (specific information was obtained from many states, including Washington, California, Texas, Florida, and Ohio), in addition to their active post-benefit investigations. A comparison of the benefits of these activities follows:
 
 
Table 1 - Cases Reviewed with Savings (1991-92)

                                                               FLORIDA                              TEXAS

                                                                           Cases               Savings                    Cases              Savings 

Post Fraud Referrals (after                             18,549              $5,843,803                   12,852             $15,800,000 
benefits were paid) 

Fraud Prevention Referrals                             4,081             $7,236,443                    4,880            $12,900,000 
(before benefits were paid) 

TOTAL                                                             22,630            $13,080,246                   17,732             $28,700,000 
 

The fraud prevention program savings are calculated on the basis of the amount of benefits that the eligibility specialist would have awarded without benefit of the additional information gathered by the investigator, minus the amount of benefits awarded, if any, after the investigation. Two observations can be made about this data. First, the savings identified from Post Fraud investigative activities are speculative at best - the state is often unable to recover the monies owed. Secondly, fraud prevention savings are cost-avoidance, but are fully realized.

For those states undertaking any type of pre-benefit issuance investigation, fraud prevention has been integrated into the intake process, through the detailed training of intake workers in recognizing probable fraud, and referral for investigation prior to benefit issuance rather than depending only on post-fraud investigation, as was the case prior to the introduction of the front-end program. Specific referral criteria have been developed in each state. If these criteria are met, then the case is referred for investigation prior to eligibility being approved. Depending on the state and the program in question (Food Stamps, Aids to Families with Dependent Children, Medicaid), between 4% (Florida) and 21% (Orange County, California) of intakes are referred for investigation prior to benefits being granted. These programs, since they are preventative in nature, result in cost-avoidance rather than identified overpayments. They also reduce the necessity for post-benefit investigations, costly criminal prosecutions, and attempts to recover the benefits that were fraudulently received. Combined data from the fraud prevention investigations in the Food Stamp and AFDC programs in Florida during the period July 1, 1991 to June 30, 1992 show the following results:
 
 
Table 2 - Action Taken
                                                                                                                                  Cases                % OF TOTAL

Cases Approved without Benefit Adjustment                                                    1,234                          30.8%

Cases Approved with Benefit Reduction                                                                541                          13.5% 

Cases Denied Benefits                                                                                            1,973                           49.2%

Cases where the Application was Voluntarily Withdrawn                                   261                            6.5%

TOTAL CASES DISPOSED OF IN FY 91-92                                                        4,009                        100.0%

                                               PROGRAM SAVINGS 

Food Stamp Program                                                                                       $3,915,232

AFDC Program                                                                                                $3,321,211

TOTAL SAVINGS IN FY 91-92                                                                      $7,236,443
 

Similar results were found in Orange County, California. Out of 10,192 cases referred from the Food Stamp and AFDC programs, 6,854 (67%) were denied benefits. Based on the assumption that clients would have received benefits for 24 months, a savings of $70,928,214 has been estimated with a savings of $33 for every dollar spent. In the county-operated General Assistance program (which would include all single clients), 5,398 clients were denied benefits out of a total of 5,987 referrals (90% denial of benefits). In 1992 in Ohio, 6,005 referrals resulted in 2,814 cases where cost-savings resulted, for a projected saving of $4,849,559.

In 1988, the federal government passed legislation recommending that every county nation-wide establish Early Detection Units using the Orange county model. A recent survey by the United Council on Welfare Fraud reported that 22 of the 30 states included in the survey had implemented a front-end prevention system. In the first six months of FY 1991, these 22 states had completed 48,663 investigations, with a total cost avoidance of $68,700,000.

On the basis of interviews with Canadian provinces and territories, there is no Canadian jurisdiction which has undertaken a front-end fraud prevention program. From a review of the detailed program documentation provided by the U.S. states contacted, there does not seem to be any specific legislative or other barrier to their implementation in Canada. In addition, despite significant differences between the American Food Stamp and AFDC programs and the Canadian provincial social assistance programs, there is no reason not to anticipate a similar level of cost-effectiveness when this process is applied to Canadian programs.

American program directors indicate that these programs work particularly well in conjunction with extensive data matching and administrative disqualification processes.

Direct Benefits

In all states contacted which had implemented these early fraud prevention programs, the effectiveness of these programs was confirmed. A summary of the overall impacts of front-end fraud prevention was identified by Billy Davis of Florida, an acknowledged expert in fraud prevention, in a presentation at the National Eligibility Worker's Association Conference, held in Bismarck, North Dakota, August 19-21, 1992: However, he went on to say: "...FPI (Fraud Prevention Investigation) and any other single front-end verification process will not solve all your problems. However, FPI, along with the proper use of computer matching, improved training for eligibility workers, recruitment of conscientious staff, good supervision, increased training in interviewing skills, a commitment to proper use of computer matching, improved training for eligibility workers, recruitment of conscientious staff, good supervision, increased training in interviewing skills, a committment to quality, etc. will go a long way towards reducing your error rates. These enhancements have to be a total commitment and there is no single effort that will provide you with a quick fix to heal your ills."
 

Implementation Strategies

In the United States, these programs were implemented using a pilot approach. The pilot phase is necessary to ensure that the list of referral criteria is appropriate for the office in question, to ensure that processes and protocols between investigators and intake workers are working smoothly, to fine-tune the training strategies for the front-line staff, and to gain commitment from the intake workers to make quality referrals. Generally, it took each state about two years to have the program implemented in every office (some states only implemented the program in the larger centres where an investigator could be fully employed).

In Canada, federal support is not necessary to implement these programs, although federal assistance with facilitation of a comprehensive data matching program would certainly improve the cost-effectiveness of the programs.

Implementation Costs

There are two types of costs involved in implementing a fraud early detection and prevention program: staff training and additional investigative staff. In the California's "Bringing Integrity to Welfare in California: A Strategic Plan for Eliminating Fraud, Waste and Abuse", 1994, the state has established a staffing standard for investigators in the early prevention program of one investigator for every 300 applicants.

In Canada, the turnover rate in provincial income security programs is approximately 10% per month, that is, there is roughly 1 new or re-opening applicant for every 10 on-going cases on a monthly basis. And, there are over 1,000,000 active welfare files at the provincial and municipal levels. Thus, on a monthly basis, there are approximately 100,000 new applicant/cases. This means that Canada-wide, approximately 330 new investigators would be required across all ten provinces, at an annual cost of approximately $60,000 per investigator (includes salary, benefits, and some administrative support), for a total of nearly $20 million. If the cost-benefit ratio, based on the US experience, is conservatively calculated at approximately 3 to 1, this $20 million investment will return $60 million in savings.

Issues

In an era of government downsizing, the addition of over 300 positions in 10 provinces across the country would not be well accepted by elected officials of any political stripe. It would be unfortunate if the potential for significant savings as offered by this program was not achieved because these staff could not be hired. After all, public opinion would likely place reducing the deficit and accumulated debt far higher than down-sizing government.


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OVERALL STRATEGIES AND TIMING

Putting It Together

The seven themes identified in this proposal combine to form a unified and comprehensive fraud strategy for income security programs in Canada. Although almost all of the changes suggested here require changes at the federal level, provinces, territories and municipalities will share in the gains.

As each chapter has identified, it is often difficult to estimate a specific cost-benefit for many of the initiatives. However, American experience clearly demonstrates that all these proposals offer a positive, and sometimes very high, return on dollars invested. To reiterate, Canadian income security programs cost over $85 billion annually, $39.2 billion of which support programs which are considered to be at high risk of fraud and client error. A conservative estimate of the amount of fraud in these programs is estimated to be 4%, and client error is estimated at 5%. Therefore, the magnitude of the fraud and error "problem" in income security programs in Canada is approximately $3.5 billion dollars, spread across federal, provincial, territorial, and municipal programs. If it is assumed that the programs proposed in this document offer the potential to reduce the level of fraud and client error by one quarter to one-third, this would result in a total savings to these Canadian income security programs of something between $875 to $1,155 million annually when fully implemented.

Implementation Considerations and Strategies

There are a series of implementation obstacles which will have be overcome in order to implement these programs. These include: The commitment of politicians and senior officials at all three levels of government, across all 13 jurisdictions, is needed for full implementation. However, as long as the federal government implements the strategies outlined here, the provinces, territories and municipalities can choose to take advantage of a number of the initiatives.

On the positive side, the imminent demise of the Canada Assistance Plan leaves a vacuum which will enable many of these proposals to be implemented far more easily than if CAP were still firmly in place.
 

Possible Timing of Activities

Due to the complexity and comprehensiveness of this proposal, and the need for political agreement across many jurisdictions, a finely detailed implementation plan is an impossibility. However, over the next five years, a rough outline of activities might look as follows:

1995-96       Establish federal leadership and establish the National Office of Fraud and Error
                    Control Initiatives.

                    Extend current agreements to all provinces (eg. province-to-province data matches,
                    on-line UIC and CPP links).

                    Develop Revenue Canada on-line linkage software.

1996-97       Implement pilot programs in provinces/territories/municipalities (tax intercept,
                    administrative disqualification, early prevention, on-line access to Revenue Canada
                    data).

                    Federal establishment of a national client index and national overpayment collection
                    information system.

                    New data sharing agreements with Revenue Canada established.

1997-98      Pilot project evaluations

1998-99      Full implementation begins.

2000           Implementation complete.

This is an ambitious schedule, especially since many provinces, and the federal government will be facing elections midway through implementation. However, it is an achievable target for implementation with senior political commitment.

Conclusion

This is an ambitious proposal with many facets. However, it offers significant savings at a time when the country needs deficit reduction strategies. The mood of the electorate also makes this a timely proposal. It is clear that taxpayers want to see expenditures reduced rather than taxes raised. However, they also do not want to see their social programs decimated. This proposal allows managed reductions at all levels of government without affecting the benefits available to the truly needy.
 
 
For additional information, contact:
                       Fazil Mihlar                           C. A. (Tina) MacDonald
 Program Coordinator, Fraser Institute    C. A. MacDonald & Associates
                   626 Bute Street                               15407-75 Avenue
          Vancouver, B. C., V6E 3M1               Edmonton, Alberta T5R 2Y9
              Phone: (604) 688-0221                     Phone: (403) 487-8943
                 Fax: (604) 688-8539                        Fax: (403) 481-0923
                                                         E-mail: tina@camacdonald.com

1. 0 Alberta Family and Social Services. Income Support Branch. Report on the Eligibility and Benefit Verification Project and Related Initiatives, October, 1989.

2. 0 California. Office of the Governor. California's Fraud Strategic Plan. June, 1994.

3. 0 C. A. MacDonald & Associates, 1993.
 

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