The Gama Foundation v Chief Executive of the Ministry of Social Development
[2023] NZHC 3098
•3 November 2023
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2021-485-334
[2023] NZHC 3098
UNDER the Judicial Review Procedure Act 2016 IN THE MATTER OF
an application for judicial review of decisions of the Ministry of Social Development
BETWEEN
THE GAMA FOUNDATION
Applicant
AND
THE CHIEF EXECUTIVE OF THE MINISTRY OF SOCIAL DEVELOPMENT
First Respondent
THE ATTORNEY-GENERAL OF NEW ZEALAND
Second Respondent
Hearing: 8 May 2023 Counsel:
T Mijatov and J S Trevella for Applicants
S P R Conway and H J Eom for Respondents
Judgment:
3 November 2023
JUDGMENT OF McQUEEN J
Table of Contents
Para Nos
Introduction [1]
Factual background [5]
The wage subsidy scheme [7]
MSD’s integrity response [17]
The Deloitte report [36]
The Auditor-General’s report [38]
THE GAMA FOUNDATION v THE CHIEF EXECUTIVE OF THE MINISTRY OF SOCIAL DEVELOPMENT [2023] NZHC 3098 [3 November 2023]
MSD’s reporting and responses throughout the development of its integrity response [49]
Updated statistics as to MSD integrity response [61]
MSD practice or policy not to prosecute? [64]
Evidence filed by Gama [66]
Gama’s application [71]
MSD’s response [78]
The issues [80]
Positions of the parties [82]
Gama [82]
MSD [88]
Analysis [94]
Judicial review of prosecutorial discretion [94]
Did the practice not to prosecute alleged by Gama exist? [102]
Did MSD adopt an unduly narrow definition of fraud? [123]
Did MSD unlawfully fetter its prosecutorial discretion? [145]
Relief [151]
Result [152]
Costs and confidentiality matters [153]
Introduction
[1] The applicant in this proceeding, The Gama Foundation (Gama) is a philanthropic organisation concerned with good governance, wealth inequality, and the responsible spending of public money. Gama has brought an application for judicial review, alleging that Te Manatū Whakahiato Ora | the Ministry of Social Development (MSD) unlawfully managed certain aspects of the COVID-19 wage subsidy scheme (the wage subsidy scheme), of which there were several iterations.
[2] Gama says that in its administration of the wage subsidy scheme, MSD conducted itself with a “pay and walk away” approach. Gama asserts that recipients of the wage subsidy were not prosecuted other than in very limited circumstances, notwithstanding material in the public domain indicating that the scheme was being abused. Gama’s focus is on MSD’s practice in relation to prosecution, which it says was unlawful. Gama is concerned that a significant portion of the approximately
$18.8 billion paid across all iterations of the wage subsidy has been paid out to ineligible persons and businesses who will not be held to account.
[3] MSD opposes Gama’s application, saying that it did not have an ‘unwritten unlawful practice’ only to prosecute in a limited class of circumstances, and that this is shown by its policies, procedures, and evidence from a public servant in this proceeding. MSD says that Gama is simply unhappy with the way in which resources were allocated in the investigation and prosecution of criminal offending, which is not a matter amenable to review, or is only reviewable in exceptional circumstances that do not arise here.
[4] For the reasons below, I consider that Gama’s application for review should be dismissed.
Factual background
[5] There have been several procedural applications in this proceeding.1 It is not necessary to traverse these save to say that limited discovery has been given, MSD was directed to file an affidavit addressing the wage subsidy scheme and its operation, and non-publication and confidentiality orders have been made in relation to information concerning the ongoing investigation and prosecution of potential wage subsidy fraud.2
[6] I now set out the factual background, which draws primarily on the two affidavits from Ms Kime, National Manager—Client Service Integrity at MSD. Ms Kime’s second affidavit updates aspects of her first affidavit. I also summarise the evidence provided by Gama.
1 The Gama Foundation v Chief Executive of the Ministry of Social Development [2021] NZHC 2321; The Gama Foundation v Chief Executive of the Ministry of Social Development [2021] NZHC 3146; The Gama Foundation v Chief Executive of the Ministry of Social Development HC Wellington CIV-2021-485-334, 8 March 2022 (Minute of Cooke J); and The Gama Foundation v Chief Executive of the Ministry of Social Development [2022] NZHC 2509.
2 Non-publication and confidentiality orders were made by Cooke J by way of a Minute dated 8 March 2022 in relation to certain information provided by Ms Kime in her evidence relating to the ongoing investigation and potential prosecution of wage subsidy fraud. Cooke J also ordered that the Court file will not be searched without leave of a Judge. These orders were made on an interim basis pending the substantive hearing, with leave reserved to apply to discharge them. No application has yet been made to discharge these orders and accordingly while the information subject to those orders has been read by the Court, it is not referred to in this judgment.
The wage subsidy scheme
[7] The wage subsidy scheme formed part of the government’s economic response to COVID-19. On 9 March 2020, Cabinet directed officials to develop targeted support options including a wage subsidy scheme for workers in the most adversely affected sectors (including possible financial support for leave requested by employees as a result of public health directions). The first wage subsidy scheme was then approved by Cabinet on 16 March 2020.
[8] The Cabinet paper of that date records that the purpose of the wage subsidy scheme was to help affected employees and business to adjust to the impact of COVID-19, not to support business for the duration of that impact. Cabinet agreed to several qualifying criteria, including that the wage subsidy would apply to employers that had suffered a revenue loss of at least 30 per cent, where that revenue loss was attributable to the COVID-19 outbreak (by comparison with revenue from an equivalent period a year earlier), and had taken active steps to mitigate the impact of COVID-19.
[9] Cabinet noted how MSD would administer the wage subsidy scheme, including requiring declarations from employers that they met the eligibility criteria and that they would repay any amount to which they were not entitled, and that MSD would not verify information in applications before paying the subsidy. However, MSD would have the ability to later audit applications, verify information with other agencies and refer possible instances of fraud for investigation, with standard justice processes available to respond to any cases of fraudulent declarations.
[10] On 17 March 2020, the government publicly announced $5.1 billion in wage subsidies for affected businesses in all sectors and regions. MSD began accepting applications that day. The wage subsidies were available to all businesses, including self-employed persons, contractors, sole traders, registered charities, incorporated societies, and post-settlement governance entities that were adversely affected by COVID-19. A week later at 11:59 pm on 25 March 2020, New Zealand moved to Alert Level 4, and into the first COVID-19 lockdown.
[11] Parliament did not create a statutory framework for the wage subsidy scheme. All the iterations of the wage subsidy scheme were established by Cabinet decision and sat outside the Social Security Act 2018. This had implications for the powers MSD could use in the administration of the schemes, as it could not use its powers under the Social Security Act to obtain information from persons or businesses who applied for the subsidy.
[12] The wage subsidy scheme was initially established in an extremely short period of time. Its establishment, together with MSD’s other work to support the COVID-19 response, required the diversion of significant resources from MSD’s ‘core services’, such as the administration of the welfare system, including investigation of benefit fraud. The same can be said for each further iteration of the scheme. Development of MSD’s integrity response commenced in parallel with administration of the scheme. While MSD had well-established systems for preventing, detecting, investigating and prosecuting benefit fraud, those systems had to be adapted and rebuilt to work for the wage subsidy schemes. Ms Kime explains that MSD’s wage subsidy integrity response, process and guideline documentation was developed quickly and involved changes being implemented over time, and thus differs from the documentation in more established areas of MSD’s work.
[13] It was noted by officials in a joint report to relevant Ministers dated 17 April 2020 that a “high-trust” approach, although permitting efficient payments, inherently contained fiscal and integrity risks, and that “officials have developed the audit and assurance processes which will be continuously checked, tested and strengthened with the assistance of internal and external experts.”
[14] As part of the application process for the wage subsidy, applicants were required to make certain declarations as to their eligibility. Rather than providing information to MSD to prove their eligibility, the applicants were declaring that they met the eligibility criteria. These criteria were refined over time, some in ways designed to reduce the risk of fraudulent behaviour and to improve the MSD’s ability to investigate and prosecute fraud. Generally speaking, applicants were required to declare that:
(a)they met the eligibility criteria, being that:
(i)the recipient’s business was registered and operating in New Zealand;
(ii)the employees named in the recipient's application were legally employed in New Zealand;
(iii)the recipient's business had experienced a minimum 30 per cent decline in actual or predicted revenue, attributable to COVID-19, over the period of any month from January 2020 to the end of the scheme when compared to the same month the previous year or a reasonably equivalent month for any business operating less than a year;3 and
(iv)the recipient had taken active steps to mitigate the financial impact of COVID-19 on their business activities, including engaging with their bank;4
(b)they would, using best endeavours, retain the employees named in the application in employment on at least 80 per cent of their regular income for the period of the subsidy,5 and had discussed the application with employees and obtained their consent, in writing if practicable, to share information with MSD;
(c)they agreed to notify MSD if anything changed that affected their eligibility or entitlement to the subsidy;6
3 This requirement was amended throughout the various iterations of the wage subsidy scheme, relevant to the specific time period. It is not necessary for this proceeding to list all the variations.
4 This was amended from 27 March 2020 to also include drawing on cash reserves and making an insurance claim.
5 This was amended from 27 March 2020 to require employers to use their “best endeavours” to pay employees at least 80 per cent of their pre-COVID-19 income, or to pass on at least the whole value of the wage subsidy.
6 This was amended from 27 March 2020 to require employers to notify MSD within five working dates if anything changed that affected their eligibility.
(d)they would provide information to the extent required by MSD to audit and review any subsidy that was granted;
(e)they consented to MSD sharing information provided in the application with other agencies to the extent necessary to audit and review any subsidy that was granted;7
(f)they would repay any subsidy if they were not entitled to the subsidy or if they stopped being entitled to it;8
(g)they consented to publication of their business name and details of the subsidy they received being published online; and
(h)they acknowledged that they may be subject to civil proceedings for the recovery of any amount they receive that they were not entitled to as well as prosecution for offences under the Crimes Act 1961, including for the provision of false or misleading information.
[15] MSD considers that the declarations contained in the application process constitute an agreement between MSD and the recipients of the wage subsidies, with the effect of those agreements granting MSD powers of investigation and enforcement. The declarations were the process by which an applicant verified their eligibility and entered into an agreement which could form the basis of a prosecution in the event that an applicant’s declarations were false upon application, or subsequently became false.
[16] There were a number of iterations of the wage subsidy scheme. The first three iterations were available between 17 March 2020 and 27 March 2020, 27 March 2020
7 This was amended from 17 March 2020 to require employers to consent to other agencies sharing information with MSD and from 8 March 2021 to require employers to consent to MSD using information it holds about the applicant or their business for other purposes being used by MSD and its auditors to audit and review any subsidy that was granted.
8 This was amended from 21 August 2020, to require employers to declare that they would repay any subsidy if they were not or stopped being entitled to the subsidy including where any predicted decline in revenue over the relevant period was not realised. This was further amended from 4 March 2021 to require applicants to declare they would repay any subsidy in circumstances where they predicted they would meet the revenue decline test but, as a result of their actual revenue, did not.
and 28 March 2020, and 28 March and 9 June 2020. The wage subsidy across these three periods (known as the initial or original wage subsidy) was, however, paid as a twelve week lump sum. The next iteration, known as the wage subsidy extension, was available from 10 June 2020 to 1 September 2020. Another, known as the resurgence wage subsidy, was available from 21 August 2020 to 3 September 2020. Finally, there were further iterations from 8 March 2021 to 21 March 2021, and from 20 August 2021 to 9 December 2021. Over the course of the various iterations of the wage subsidy scheme, approximately 700,600 applications were made.
MSD’s integrity response
[17] MSD’s wage subsidy integrity response was implemented by Client Service Integrity (CSI), which is a part of MSD’s Service Delivery workstream. CSI is also responsible for managing the MSD’s response to benefit fraud. CSI has around 100 staff who have been trained to investigate fraud. It is for this reason that CSI was tasked with designing and administering MSD’s wage subsidy integrity response.
[18] As noted, MSD’s integrity response was designed and implemented at the same time it was administering the wage subsidy scheme and making payments. Ms Kime says in her affidavit that:
From March 2020 through 2021 most of MSD’s Client Service Integrity resources have been focused on assessing the legitimacy of Wage Subsidy applications, including, from July 2020 investigating and preparing cases for civil recovery and/or prosecution. These resources would otherwise have been focused on benefit fraud. Between May 2020 and September 2020 the team was also supported by up to 25 Department of Inland Revenue (Inland Revenue) compliance specialists and up to 11 staff from the Department of Internal Affairs.
(footnotes omitted, emphasis in original)
[19] Broadly, MSD’s integrity response used the same ‘graduated’ model as in respect of benefit fraud, with a focus of prevention and early intervention, before progressing through to investigation and potentially prosecution. In practice, MSD’s integrity response included:
(a)Pre-payment checks to prevent and identify fraudulent behaviour including: that information provided by an applicant business matched
information held by the Inland Revenue Department (Inland Revenue), that there were no duplicate/additional applications, and using email and mobile communications.
(b)Random and targeted post-payment checks of information provided in applications involving: random audits to identify cases that may require investigation, and targeted audits based on data mining of other information.9
(c)A cross-agency complaints process with the Ministry of Business, Innovation, and Employment (MBIE) and Inland Revenue for receiving allegations about wage subsidy misuse.
(d)Large employer checks, which involved having a conversation with the employer prior to any grant where they had 80 or more employees, to make sure employers are aware of the eligibility criteria and their obligations.
(e)Publishing the names of recipients on a website, ensuring transparency and enabling interested parties to raise concerns.
(f)The commissioning of an external audit report, to be completed by Deloitte, involving an “an end to end fraud, corruption, waste and error risk assessment review”.
(g)Investigation of cases for potential wage subsidy misuse conducted by CSI staff trained to detect fraudulent behaviour, leading either to voluntary repayment, closing of an investigation or referral to the Recovery and Response Panel, which was established in February 2021.
(h)Enforcement decisions by the Recovery and Response Panel to:
9 The types of information which MSD data mines and uses to identify cases for investigation and/or targeted auditing are subject to the confidentiality/non-publication orders made by Cooke J and referred to above.
(i)refer for prosecution or restraint or forfeiture under the Criminal Proceeds (Recovery) Act 2009;
(ii)seek recovery through a civil claim;
(iii)refer for further investigation; or
(iv)take no further action.
[20] Ms Kime says that consistent with Cabinet’s directions, MSD always contemplated prosecuting for wage subsidy fraud. She says this is also reflected in an applicant’s acknowledgement when applying for the subsidy that they may be subject to civil or criminal proceedings. Ms Kime says that in terms of pre-payment checks, MSD checked with Inland Revenue to ensure that an applicant was a genuine business operating in New Zealand, applying for genuine employees. MSD also conducted pre- payment checks:
(a)as noted above, for an application claiming a subsidy for more than 80 employees;10 and
(b)from 10 June 2020, for “integrity exceptions”—being applications with particular characteristics that could be an indicator of fraudulent behaviour, such as:
(i)an applicant that had made a full repayment of a previous subsidy;
(ii)an applicant subject to an allegation of fraud;
(iii)an applicant who has been investigated or is under investigation for fraud; and
10 From March 2021, MSD asked an applicant of this kind for documentary verification.
another category of applicants.11
[21] These checks were refined over time and included CSI staff contacting applicants to discuss their applications, and information verification from other sources, including Inland Revenue. As a result of information gleaned through pre- payment checks, MSD would either approve in part or full, decline, or refer the application for investigation.
[22] Post-payment checks followed the same steps as pre-payment checks, for large employers and integrity exceptions. They were both random and targeted. If a CSI staff member, following post-payment checks, considered that further investigation was required, they referred the applicant for investigation by entering them into MSD’s Investigation Management System. For example, this might occur where:
(a)the employer is not able to establish the business is legitimate and was trading before the application was made;
(b)the employer may have deliberately claimed a wage subsidy for an employee who was not in current employment;
(c)enquiries indicate misuse of a third party’s Inland Revenue number or collusion between parties; or
(d)staff are unable to contact the employer.
[23] As to the complaints mechanism, the operation of which was split between Inland Revenue, MSD and MBIE, this involved:
(a)the receipt of allegations of misuse and/or fraud;
(b)contacting the relevant applicant subject to an allegation and asking them to respond; and
11 The nature of this category of applicants is subject to the confidentiality/non-publication orders made by Cooke J and referred to above.
(c)contacting the relevant applicant to conduct a post-payment integrity check, and then requesting repayment or referring the applicant for investigation.
[24] In some cases, typically the more serious ones, an applicant would be referred directly to investigation, rather than being contacted for a post-payment check. Ms Kime says that when an applicant is referred for investigation, CSI staff will look for any unlawful and/or fraudulent behaviour, such as:
80.1Dishonest use of a document,12 such as:
80.1.1where an applicant has submitted an application knowing that the application form contains material inaccuracies and knowing that this would induce MSD to make a subsidy payment that the applicant would not be entitled to; or
80.1.2where an employer has deliberately misrepresented their number of employees or deliberately misrepresented that their business had experienced at least a 30 per cent decline in actual or predicted revenue.
80.2Obtaining by deception,13 such as:
80.2.1where an applicant made false representations orally to MSD in order to obtain payments; or
80.2.2where an applicant has deceived a third party to obtain details such as employee data which were then used as the basis for a fraudulent wage subsidy application.
80.3Theft in a personal relationship, where an applicant acted genuinely at the time of submitted their wage subsidy application but at a later stage dishonestly retained or otherwise misappropriated the funds.14
80.4Receiving, where a person (not necessarily the applicant) has received funds that were dishonestly obtained.15
[25] Ms Kime explains that MSD’s investigation approach for wage subsidy fraud is the same in principle as for benefit fraud. She outlines the stages of an investigation, including by reference to MSD’s wage subsidy investigation process flowchart and an example investigation plan.
12 Crimes Act 1961, s 228(1)(a).
13 Section 240.
14 Section 220(1) and 223(a).
15 Section 246.
[26] Ms Kime also discusses the differences between the information gathering powers used by CSI in the investigation of wage subsidy fraud as opposed to in respect of benefit fraud. Because the wage subsidy scheme was established by Cabinet direction, rather than under the Social Security Act, CSI staff could not use the powers contained in that Act to obtain information about wage subsidy compliance. Their information gathering powers were therefore more limited in comparison to the investigation of benefit fraud. Ms Kime says this required staff to retrain on how to gather information outside that legislative framework.
[27] Broadly, MSD was required to obtain information by consent, either from an applicant themselves, disclosure by third parties pursuant to privacy principle 11(e) of the Privacy Act 2020, or through memoranda of understanding with other government agencies. MSD could also collaborate with the Police to seek production orders under ss 71 to 74 of the Search and Surveillance Act 2012. This is a mechanism that MSD used starting in December 2020.
[28] Following the completion of an investigation, a CSI staff member can recommend that:
(a)no further action should be taken (this decision must follow receipt of legal advice from MSD’s legal team and there must be no further line of enquiry as to criminal intent available);
(b)the matter should be referred for debt collection for repayment, in the event where the person has agreed to repay the money, and there is no further line of enquiry as to criminal intent available; or
(c)the matter should be referred to the Recovery and Response Panel for enforcement action (acknowledging the Panel was only established in February 2021).
[29] Ms Kime says that the Recovery and Response Panel was convened from 22 February 2021. The Recovery and Response Panel can make decisions on enforcement, including prosecution, if it determines that the public interest and
evidential sufficiency tests are satisfied, as required by the Solicitor-General’s Prosecution Guidelines. When a matter is referred to the Recovery and Response Panel, a report is provided by an investigator, outlining the factual background, the recommended enforcement response, legal advice on the prosecution tests, and any other factors relevant to a decision. The Recovery and Response Panel is to comprise persons “who, together, have the skills, knowledge and ability to fulfil the Panel’s purpose and objectives and properly discharge its roles and responsibilities”.
[30] Ms Kime deposes that the Recovery and Response Panel was established to ensure that enforcement decisions were made in a consistent fashion and in accordance with the Solicitor-General’s Prosecution Guidelines. The Recovery and Response Panel’s policies and procedures are set out in its Terms of Reference, which provide that:
The purpose of the Panel is to determine and make recommendations about the appropriate response(s) in order to recover wage subsidy funds from those who should not have received and/or retained the wage subsidy in whole or in part. The appropriate responses will likely be one or a combination of the following:
(a)Prosecution;
(b)Recovery of wage subsidy funds through a civil claim;
(c)Restraint and/or forfeiture [proceedings] pursuant to the [Criminal] Proceeds [(Recovery)] Act;
(d)Adjourn the meeting to enable Integrity to obtain further information that the Panel requires before making a decision; or
(e) No further action (together, the wage subsidy responses). (emphases in original, footnotes omitted).
[31] The Recovery and Response Panel is also to have regard to the following principles and objectives in its decision making:
(a)Recovery in the public interest: Recovery promotes MSD’s responsibilities for efficient and economical delivery of the wage subsidy scheme and to responsibly manage assets of the Crown. It helps ensure that taxpayer money is going where it is intended to go, to support the economy. It maintains public confidence in the wage subsidy scheme.
(b)Deterrence: The necessity of a high trust model and the cost of the delivery of the scheme mean that abuse should be met with action. Denunciation of offenders will also promote wider recovery.
(c)Fairness and balance: While there may be actions available to MSD, for instance, civil recovery or criminal prosecution, those actions will not always be appropriate or in the public interest. Lesser actions, such as ongoing communication about repayment obligations and options, may at times be more appropriate. MSD’s approach will always consider and balance the interests of the community at large.
(d)Consistency: The Panel will have regard to the importance of consistency when making decisions across a high volume of varying cases.
(emphases in original)
[32] Appendix A to the Recovery and Response Panel’s Terms of Reference (the wage subsidy recovery decision making factors) records that prosecution is likely to be appropriate when:
·Evidential sufficiency for criminal charges has been confirmed by legal (if there is not a reasonable prospect that criminal conduct can be proven beyond a reasonable doubt on the basis of the evidence obtained, consider the appropriateness of civil recovery or proceeds of crime recovery).
·Dishonest conduct is present. There are lots of ways dishonesty can be evidenced. For example, the use of false names; using the names of employees who have already ceased employment; setting up companies for the purpose of claiming the wage subsidy, etc.
·Linked to the above, there is no entitlement to wage subsidy funds and
no basis to believe they were entitled.
·There has been no engagement with MSD, or there has been no genuine engagement about whether and/or how to repay.
·Public interest criteria are met.
·The public interest test will have regard to the value of the fraud. MSD’s expectation is that most frauds will involve at least $7,029.60 due to a single payment for one full-time employee being $7,029.60.
·There is a need to deter similar future conduct in respect of the wage subsidy.
·There is a need to prompt voluntary repayment by others who are not entitled to retain all or part of the wage subsidy payment(s) they have received.
(emphasis in original and footnotes omitted)
[33] Appendix B to the Terms of Reference provides additional guidance on the application of the ‘Public Interest’ test contained in the Solicitor-General’s Prosecution Guidelines. The Guidelines are to be applied by the Recovery and Response Panel in full. The Appendix records that the factors most relevant to MSD prosecutions are:
(a)the magnitude of the fraud;
(b)the nature of the fraud;
(c)any element of sophistication, premeditation or planning;
(d)whether the offending involved multiple persons;
(e)the background of the offender;
(f)whether anything about the case specifically requires denunciation;
(g)whether there was an element of abuse of trust;
(h)whether MSD has acted in a way which might lessen the offender’s culpability;
(i)whether a prosecution would have wider consequences that might make a prosecution disproportionately harsh; and
(j)cost as part of the overall assessment of public interest.
[34]The Appendix also records that:
The Solicitor-General’s Guidelines provide that “relevant considerations will include an agency’s…enforcement priorities”.
A principal goal of MSD’s wage subsidy enforcement response is the recovery of funds. Where funds have already been recovered, particularly where the offender has repaid the funds voluntarily and without prompting by MSD, there may be less public interest in prosecution. However, in cases of clear
criminal conduct, the fact that recovery has already occurred, in and of itself, will not be determinative.
(emphasis in original)
[35] Ms Kime emphasises that against this background, the Recovery and Response Panel makes a careful and individualised determination of each case before it. As will be discussed below, it is apparent from the evidence, and indeed MSD accepted in its amended statement of defence, that no decisions on enforcement action were made until after the Recovery and Response Panel had been established.
The Deloitte report
[36] MSD commissioned an external review to conduct a fraud, corruption, waste and error risk assessment of the wage subsidy scheme. An interim report was provided by Deloitte on 30 April 2020 (the Deloitte report). This report made a number of recommendations, (most of which were implemented) including that MSD should:
(a)group multiple related applications together to be assessed by no more than one MSD employee at any given point to reduce the risk of multiple payments being made to an employer incorrectly and/or inappropriately;
(b)limit employers’ ability to change bank account details on applications and/or change employee numbers or status;
(c)require applicants to include more bank account information as part of their application, and also cell phone numbers;
(d)consider using an independently sourced telephone number to call the employer (e.g. not the telephone number provided on the application);
(e)consider how best to communicate with recipients to remind them of their obligations and to maximise the potential of early voluntary refunds; and
(f)complete a review of the planned and in progress integrity-focused analytics testing, involving an assessment of MSD’s overall estimate of fraud and error (e.g. through population segmentation to target the scarce resources at maximum recovery opportunities) and reviewing the system(s) in place to robustly manage the various types of concerns through to conclusion.
[37]The Deloitte report also identified several fraud risks, including:
(a)employers not meeting the revenue reduction criteria threshold;
(b)employers/individuals setting up a business in order to make an application;
(c)employers or sole traders that are no longer trading or have no intention to continue trading being paid the wage subsidy;
(d)duplicate applications;
(e)employers inflating the number of their employees or lying about whether their employees are full or part time, or including ex- employees;
(f)applicants leveraging access to information at their employer to submit a false application with third party bank details for an employer that has not claimed the subsidy; and
(g)MSD staff manipulation of application data in large employer CSV files to benefit personally or collude with a third party, or to approve ineligible applications.
The Auditor-General’s report
[38] The Auditor-General released a report in May 2021, entitled Management of the Wage Subsidy Scheme, which was a ‘performance audit’ of the scheme (the
Auditor-General’s report). The Auditor-General describes the origins and design of the wage subsidy scheme, how it implemented Cabinet decisions, and its drain on the resources of the agencies involved. There had been no prosecutions as at the time the Auditor-General’s report was published, nor had there been any decisions to pursue prosecution, although work had begun on developing the systems to support this.
[39]Specifically, the Auditor-General noted:
2.36Implementing the Scheme stretched the Ministry of Social Development’s resources. At the beginning of the Scheme, any staff member who had a laptop who was not delivering another essential service became involved in processing applications.
2.37We were told that, on a busy day, the Ministry of Social Development had more than 800 staff processing applications. In total, 1809 Ministry staff were given system access to process applications.
2.38Supporting the Scheme also placed large demands on the Ministry of Social Development’s call centre. On its busiest day, the Ministry had
183 staff available to answer calls about the Scheme. Between 17 March and 21 October 2020, the Ministry received 146,136 calls about the Scheme and managed to answer 124,685 of those.
2.39About 100 additional Ministry of Social Development full-time equivalent staff have been working on targeted reviews of applications, following up allegations and complaints, and carrying out investigations. It is likely that between 40 and 50 Ministry staff who usually work on benefit fraud will be working on subsidy investigations for another 12 to 18 months.
[40]And also:
2.45 Inland Revenue also used its staff to support work on the Scheme. At one point, Inland Revenue had nearly 200 of its staff members working on the Scheme. Some were paired with a Ministry of Social Development employee to support them in reviewing applications, and others answered phone calls from Ministry staff to check applicant details. Inland Revenue staff were involved in confirming employer status and employee numbers and determining the legitimacy of applicants who were seeking a change to self-employed status to obtain subsidy payments.
[41] The Auditor-General noted the lack of clarity in some of the eligibility requirements, specifically referring to media coverage and public interest in some private organisations receiving a subsidy payment. These featured cases in which,
despite experiencing or projecting a reduction in revenue, the businesses paid a dividend to shareholders or otherwise demonstrated financial robustness.16
[42] The Auditor-General recorded that MSD resources would continue to be diverted from investigating benefit fraud for many months. He said that while he could understand the desire to return to core services, this raised a concern that this would disincentivise continued efforts on post-payment integrity work, such work being important to assure Parliament and the public that reasonable steps are being taken to ensure that the significant public money associated with the wage subsidy scheme had been spent appropriately.
[43] As to the appropriateness of some of the eligibility criteria and whether they were met, the Auditor-General stated:
Some eligibility criteria might not have been met
3.17The requirement for applicants to have taken active steps to mitigate the impact of Covid-19 on their business was not clearly defined. Some examples were provided – for example, engaging with their bank or drawing on cash reserves. However, these examples were limited, and employers were not required to make a statement about any active steps they had taken to mitigate the impact of Covid-19 on their business.
3.18This requirement is important. It tests whether an applicant needs taxpayer funded assistance. There is a risk that some applicants who did not meet this requirement received payment.
3.19However, this cannot be determined with any certainty because:
· the definition of the requirement is unclear;
· applicants did not have to provide corroborative evidence at the time of application; and
· we could not identify records that described any actions taken to conclusively verify whether this requirement was met.
3.20In our view, if the Ministry of Social Development had required applicants to make a statement about what steps they had taken, they might have been more likely to comply with this requirement. As a result, there would have been information that could have been verified in any assurance work carried out after payment was made.
16 This critique is also emphasised by Gama.
[44] On MSD’s integrity response, the Auditor-General noted that some pre- payment steps were taken to reduce the risks of fraud. He considered that the risk factors used by MSD for pre-payment and post-payment checks were appropriate to target, but also stated that:
4.21 The pre-payment review involved a phone conversation to confirm, based on criteria and obligations, that the employer was eligible for the subsidy payment. Staff were prompted to ask applicants about other steps they had taken to mitigate the effects of Covid-19 on their business. However, staff did not have detailed guidance about this and did not consistently record the information they were given in relation to the application. The Ministry of Social Development told us that it intended to strengthen processes for integrity reviews carried out for the March 2021 stage of the Scheme. Our appointed auditor will be following up on this as part of our 2021/22 annual audit of the Ministry. The Ministry has now updated the declaration to include a requirement that applicants must prepare and retain information as part of the application process.
…
4.26 Aside from checking applicants’ information against Inland Revenue’s information and other publicly available information, the pre-payment review largely involved calling applicants by phone to discuss the application. In most cases, this involved limited or no documentary checks on supporting information.
[45] The Auditor-General considered in respect of post-payment checks the terms ‘reviews’ and ‘review work’ were more appropriate descriptors than ‘auditing’ or ‘audits’, because:
4.64…the work that was carried out did not routinely involve substantiation of information against a secondary source, such as requesting and reviewing documents to verify information provided verbally.
4.65In our view, it is possible that the post-payment work is less than what Cabinet would have expected when it noted the possibility of the Ministry of Social Development doing post-payment audit work. Similarly, the Ministry’s use of the term “audit” to describe its review work could be misleading. As we were completing this report, the Ministry confirmed that it has changed its terminology and now refers to the work as integrity checks or reviews.
…
4.70The reviews did not involve substantive review of documentary evidence, such as financial accounts. Most organisations prepare some form of financial statements. These, or similar supporting information, could have been asked for when an application for the
subsidy payment was made (we understand that this was done by the Australian Government for its JobKeeper wage subsidy) or as part of the post-payment review activity.
4.71Not requesting this type of information before or after payment means that there has been no objective validation of an applicant’s compliance with the revenue reduction requirement. In our view, an audit should, as a minimum, include verifying the main eligibility criteria against relevant documentary evidence. This should have been done for a sample of applications. Given the significant amount of public money paid and the fact that audit work could be carried out after payment, this is an appropriate step to take.
[46] The Auditor-General was not satisfied that the review work done by MSD provided enough confidence that all applications meriting further investigation had been identified. The Auditor-General considered that effective prosecutions where there is evidence of fraud or abuse were critically important to maintaining trust and confidence in the scheme. He considered that such work needed to be adequately resourced and prioritised.
[47]Overall, the Auditor-General’s recommendations were that:
(a)when public organisations are developing and implementing crisis- support initiatives that approve payments based on “high-trust”, they should:
(i)ensure that criteria are sufficiently clear and complete to allow applicant information to be adequately verified; and
(ii)put in place robust post-payment verification measures, including risk-based audits against source documentation, to mitigate the risks of using a high-trust approach.
(b)MSD should:
(i)test the reliability of a sample of the post-payment assurance work it carried out against documentary evidence held by applicants;
(ii)prioritise remaining enforcement work, including:
1. seeking written confirmation from applicants (which could be targeted towards larger or risk-indicated applicants) of compliance with the eligibility criteria and the obligations of receiving the subsidy; and
2. pursuing prosecutions to recover funds and/or to hold businesses to account for potentially unlawful behaviour.
(c)MSD, MBIE, Inland Revenue, and the Treasury should carry out timely evaluation of the development, operation, and impact of the Wage Subsidy Scheme and use the findings to inform preparation for future crisis-support schemes.
[48] Gama relies heavily on the Auditor-General’s report as evidence of what it says are the deficiencies in MSD’s integrity response, particularly given that it is an official report from an independent parliamentary officer, rather than Gama’s own opinion. Gama says that it is clear from the Auditor-General’s report that prosecution was an area in which more work was expected to be done.
MSD’s reporting and responses throughout the development of its integrity response
[49] MSD regularly provided reports to Ministers regarding the development and administration of its integrity response. On 24 April 2020, officials recorded that in addition to pre-payment checks, they had “commenced a programme of post-grant audit work”, and were “developing a strategy to help guide what types of cases we will target for enforcement and investigation (the 24 April 2020 report). Officials requested the Minister agree to quarterly reporting on audits and complaints work, with ad hoc reporting available on request. That report noted that:
25The scale of the money being paid out in subsidies presents a challenge as MSD moves to consider what cases to take enforcement action on and begin investigations.
26MSD are developing a strategy to help guide what cases we will target for enforcement and investigation.
27Any criminal prosecutions relating to the payment of the subsidies will be led by MSD in collaboration with other agencies.
28Insights from audits completed to date indicate that the vast majority of applicants have applied correctly, but in a small number of cases MSD have requested applicants refund subsidy payments where the audit has determined they don’t qualify. A number of applicants have voluntarily refunded subsidy payments where they have applied in error or their situation changed from when they applied.
[50] However, an Appendix to the 24 April 2020 report also notes that as at 22 April 2020, MSD had already referred 186 applications for further investigation.
[51] A quarterly report was presented to the Minister on 15 July 2020, providing an update on the assurance and audit processes in place for the wage subsidy scheme (the 15 July 2020 Report). This report also noted that ‘enhancements’ had been made which were informed by Deloitte report (discussed above). Another quarterly report was presented to the Minister on 2 December 2020 (the 2 December 2020 Report). It recorded that as at that date, the majority of MSD’s fraud intervention resources were focused on wage subsidy integrity work. It described MSD’s post-payment checks as follows:
21 These are not considered full technical or financial audits, and included:
·desk-based reviews of open source public information – to determine the business is real, is operating in New Zealand and [was] operating prior to the event
·contacting the applicant to discuss their application – to discuss any identified discrepancies or complaints, checking they meet the eligibility criteria, checking that they are a real business and is/was operating, understanding the nature of their business and their revenue drop, reconciling employee numbers, confirming the subsidy has been passed on to the employees applied for, and confirming that they are meeting their obligations. Where required additional information may be requested
·contacting other agencies to confirm information – to verify any relevant details pertaining to the Wage Subsidy application with IR, MBIE, DIA and Corrections.
[52] The 2 December 2020 Report presented the view that “the majority of businesses have done the right thing”, because at that time, across auditing, allegation and investigation workstreams, only 18 per cent of higher risk applications required a partial or full repayment. This report also discussed enforcement mechanisms, noting
that MSD was developing an enforcement and recovery decision-making framework. The report recorded that:
(a)fraud investigations were likely to continue for 12 to 18 months given their complexity;
(b)MSD’s information gathering powers were limited compared to investigations under the Social Security Act;
(c)MSD officials were working with Police to gain production orders or search warrants; and
(d)MSD had not commenced either civil recovery proceedings or criminal prosecutions as their approach to either recovery method was still being developed, and a decision making framework being prepared.
[53] The next quarterly report was provided to the Minister on 10 February 2021 (the 10 February 2021 report). It highlighted that a majority of “identified [wage subsidy scheme] integrity checks” had been completed, that officials were transferring some resources back to regular integrity response work (investigating benefit fraud), and that the enforcement and recovery framework had been developed. The enforcement and recovery framework was attached to the report, and is recorded as including:
· upskilling FIS staff to progress investigations within a different legislative framework i.e. the Crimes Act 1961, the Criminal Proceeds (Recovery) Act 2009
· working with Police to gather evidence using Production Orders under the Search and Surveillance Act 2012
· finalising our enforcement and recovery decision-making framework to outline where criminal or civil enforcement and recovery actions are appropriate, and ensure these decisions are made robustly and consistently
· developing guidance and processes for staff to support their work within the framework
· establishing a WSS Recovery and Response Panel to apply the Public Interest Test (as per the Solicitor-General Guidelines) on cases
recommended for criminal prosecution, and to make decisions on civil enforcement and recovery responses where appropriate.
[54] The 10 February 2021 report recorded also that the framework would be reviewed and updated as enforcement and recovery activity progressed, and that the “[t]he WSS Recovery and Response Panel will convene on 22 February 2021 to consider the first cases recommended for enforcement and/or civil recovery.” (emphasis added).
[55] The next quarterly report was provided on 2 June 2021 (the 2 June 2021 report). The 2 June 2021 report followed the publication of the Auditor-General’s report, and the reactivation of the wage subsidy in March 2021. MSD had changed some of its practices in response to the Auditor-General’s report, and this included:
(a)updating the eligibility declarations to require applicants to prepare and retain evidence to support their application (although Ms Kime confirms that this was already done prior to the publication of the report); and
(b)testing the reliability of a sample of its post-payment checks against documentary evidence held by applicants.
[56]Ms Kime deposes in respect of the testing of post-payment checks:
In late July 2021 MSD responded by identifying a sample of 339 early Wage Subsidy recipients (representing 486 applications) who had been subject to a random post-payment check. MSD contacted this sample group to discuss their eligibility and to provide documentary evidence to confirm their entitlement. As at 4 February 2022, 334 of the 339 recipients have provided documentary verification to support their entitlement with 89 per cent of these requiring no further action and 9 per cent requiring a partial or full refund. Four recipients have been referred for investigation.
[57] However, the applicants that made up this sample were not required (at that time) to provide documentary or other supporting evidence of their eligibility. Gama therefore questions the efficacy and validity of these responses by MSD, as well as the suggestion that MSD was constantly updating and improving its response. They say also that MSD did not take further action on the basis that the results indicated that significant fraud had occurred. The 2 June 2021 report also noted that the reactivation
of the wage subsidy and increased integrity measures had impacted MSD officials’ ability to transition resources back to benefit integrity work. As to the ongoing work of the Recovery and Response Panel, the 2 June 2021 report states:
27The WSS Recovery and Response Panel was convened from 22 February 2021. The Panel has so far considered seven cases for civil recovery where MSD has confirmed to the Wage Subsidy applicant (though multiple communications) that repayment is required but this has not been forthcoming. No cases recommended for prosecution have been considered by the panel to date, and further decisions will be made in the coming weeks and months.
[58] Then, there were further updating reports from MSD officials to the Minister dated 27 August 2021, 25 October 2021, and 26 January 2022. These reports provided further information as to the ongoing investigation and enforcement response. The report of 25 October 2021 made additional comments regarding the reactivation of the wage subsidy in August 2021. As at that date, the Recovery and Response Panel had agreed to take civil recovery action in eight cases and pursue prosecution in two cases. It noted also that 10 medium or high complexity investigation cases had been accepted by the Serious Fraud Office. No further prosecution decisions had been made as of 26 January 2022.
[59] The final quarterly reports put in evidence (in Ms Kime’s second affidavit dated 28 February 2023) are dated 14 April 2022, 22 July 2022, 26 October 2022, and 8 February 2023. The July 2022 report notes that 11 cases were being investigated by the Serious Fraud Office with the October 2022 report recording that the SFO had laid charges in relation to one of those cases. Ms Kime deposes that MSD agreed to an amended enforcement and recovery framework in July 2022. This framework includes an addendum entitled the COVID-19 Economic Supports Debt Recovery Approach.
[60]As at 26 October 2022, MSD had:
(a)made 44 decisions to take further enforcement action being civil recovery in 18 cases, and prosecution in 25 cases;
(b)completed 15,243 pre-payment and post-payment integrity checks, being targeted checks based on risk;
(c)resolved 6,269 allegations of misuse, and 582 investigations;
(d)a slight majority of CSI staff working on the benefit integrity response as compared to the wage subsidy integrity response; and
(e)received an assessment from Deloitte regarding its implementation of recommendations from the Auditor-General.17
Updated statistics as to MSD integrity response
[61] Ms Kime provided updated statistics as to MSD’s integrity response in her second affidavit dated 28 February 2023. She says that as at 30 December 2022, MSD had conducted:
(a)3,074 pre-payment checks of applications involving more than 80 employees;
(b)4,967 pre-payment checks on integrity exceptions; and
(c)7,235 post-payment checks (random and targeted).
[62]As at that date MSD had also:
(a)received 7,511 complaints (6,465 of which have been resolved, with the remainder waiting to be assessed);18
(b)referred 1,464 cases for investigation (599 of which have been resolved);
(c)made 136 production order applications pursuant to the Search and Surveillance Act 2012 (95 of which have been filed in Court by Police
17 I note that this second Deloitte assessment has not appeared in evidence before me, and no reference was made to it by counsel.
18 I note that this figure relates to the total number of complaints received/directed to MSD specifically under the cross-agency complaints mechanism/regime. The total number of complaints received collectively by MSD, MBIE and Inland Revenue is at least 18,295.
and executed) while 41 production order applications are in preparation stage.
[63] As to decisions made by the Recovery and Response Panel, Ms Kime notes that as at 10 February 2023, the Panel had referred 24 cases for civil recovery action and 32 cases involving 39 individuals for prosecution action. Ms Kime explains that MSD was continuing to follow up its random sample of 1000 wage subsidy recipients to confirm their eligibility and compliance with obligations for the subsidy received. Ms Kime also confirms that MSD continues to shift resources between benefit fraud and wage subsidy fraud as required. I note that the report dated 8 February 2023 records almost twice as many CSI investigators were working on the benefit fraud investigations compared to those working on the wage subsidy integrity response.
MSD practice or policy not to prosecute?
[64] Ms Kime expressly states in her affidavit that MSD does not have a policy or practice not to prosecute certain categories of cases. She says:
MSD is committed to investigating and taking enforcement action in relation to the wage subsidy, in line with the policies and procedures I have outlined in my two affidavits.
[65] Ms Kime also says that since it was tasked with administering the wage subsidy scheme, MSD has continuously reflected on and enhanced its processes and will continue to do so, including with the assistance of an audit partner.
Evidence filed by Gama
[66] Gama filed two affidavits in support of its claim for review. The first affidavit is from Mr Grant Nelson, a trustee and founder (with his wife Mrs Marilyn Nelson) of Gama. Mr Nelson deposes that he has conducted a significant amount of research regarding the wage subsidy scheme, reflecting his and therefore Gama’s interest in responsible public expenditure. Much of the material annexed to Mr Nelson’s affidavit is available in the public domain, including public media reporting on the wage subsidy scheme, and responses to Official Information Act 1982 requests made by Mr Nelson.
[67] Mr Nelson expresses his view that the eligibility criteria and declaratory approach used by MSD failed to ensure that some of the main objectives of the wage subsidy scheme were addressed. He takes issue with the fact that most applicants were not required or asked to verify their eligibility with documentary evidence. He considers that many businesses and professional firms wrongly obtained or retained all or part of the wage subsidy they received, because they were able to work almost normally through COVID-19 and suffered no genuine decline in revenue. He is frustrated at what he sees as MSD ignoring valid criticism made in the public domain, and he maintains that MSD failed to properly investigate and prosecute anyone for over a year—in stark contrast to the way in which MSD typically investigates and prosecutes fraud by beneficiaries. Mr Nelson says that his main concern relates to the original wage subsidy and the wage subsidy extension, as these were paid in twelve and eight week lump sums respectively. He acknowledges that the later subsidies were paid for just two weeks and that MSD had made some improvements to the scheme at those times.
[68] The second affidavit was provided by Emeritus Professor Mr Jilnaught Wong.19 Professor Wong conducted research with some of his colleagues into NZX companies who received the wage subsidy.20 His conclusion was that some of those companies were receiving the wage subsidy, not suffering the requisite revenue decline, and then paying dividends to shareholders, resulting in a wealth transfer from taxpayers to shareholders of the recipient companies. Professor Wong’s thesis was:
…that a company that has the reserves and cash resources, thereby would have had the ability to “draw on cash reserves”, to pay dividends does not need the wage subsidy. Hence, there is a question whether these companies qualified for the wage subsidy. In my published paper I then explored a further question: even if one were to argue that all the eligibility criteria were met, there was, nevertheless, a normative question of whether such companies ought to have taken the wage subsidy if they had the ability to pay dividends to shareholders.
(emphasis in original)
19 The Crown suggested in written submissions that Professor Wong’s evidence should be ruled inadmissible pursuant to s 25(2) of the Evidence Act 2006. However, in argument Mr Conway did not appear to pursue this challenge, and instead merely suggested that Professor Wong’s affidavit was subject to factual errors in terms of its description of MSD’s integrity response and should accordingly be treated with caution. I consider Professor Wong’s evidence to be admissible, but as will be seen below, of limited assistance in determining Gama’s application.
20 See Jilnaught Wong and Norman Wong “The economics and accounting for COVID-19 wage subsidy and other government grants” (2020) 33 Pacific Accounting Review 199.
[69] As to the revenue criteria, Professor Wong concludes, following a macro- indicator analysis, that:
In summary, during the First Wage Subsidy period between 17 March 2020 and 9 June 2020, none of the months from January 2020 experienced the 30% decline in actual revenues; during the Wage Subsidy Extension and Wage Resurgence periods between June 2020 and September, none of the months experienced the 40% decline in actual revenues. The observations apply to domestic revenues, export revenues, and total revenues. In conclusion, the revenue numbers for the New Zealand economy indicate that revenues did not decline by the 30% and 40% benchmarks, respectively, to be eligible for the wage subsidy. While this assessment is based on total revenues in the economy, some companies (claimants/recipients) would have experienced the 30% and 40% declines in revenues to qualify for the wage subsidy, whereas others would not have. Hence, the need to investigate and audit recipient companies’ financial statements to substantiate their receipt of the wage subsidy based on objective and verifiable evidence.
[70] Professor Wong says that paying dividends to shareholders is prima facie evidence that a recipient company has reserves and cash resources, evidence itself that cash reserves were available for a company to draw from for their business activities. His view is that a dividend payment does not reflect a cash strapped position and would be at odds with the eligibility for the wage subsidy. Professor Wong also says that MSD’s audit work:
…involved “typically asking the applicant about” (emphasis added) the decline in revenue, whether it was attributable to COVID-19, and mitigation steps, as well as “asking” (emphasis added) about engaging with banks, drawing on cash reserves, making an insurance claim, and seeking loans. There is no evidence that the MSD investigators carried out substantive tests in all or even most instances to gather evidence that the responses to the “asking” provided reasonable assurance on the validity and correctness of the responses.
…the macro statistics on revenue decline…and the macro statistics on cash reserves…would suggest that the wage subsidy criteria may not have been met. However, as I have indicated previously, the macro picture does not preclude the possibility that some companies (that is, individual claimants/recipients) would have met the criteria.
Gama’s application
[71] Gama’s second amended statement of claim contains a single ground of review, being that “MSD has failed to properly exercise its discretion as to prosecution by adopting an unlawful policy and/or practice not to prosecute certain classes of cases”. However, at the hearing, Mr Mijatov clarified that Gama’s case is solely focused on
what it asserts is MSD’s ‘practice’ of not prosecuting. Gama does not criticise MSD’s written policies. Accordingly, in my summary of its application below, I focus on the alleged practice rather than referring to policies.
[72] Gama says that MSD had a practice not to refer for prosecution and/or not to prosecute wage subsidy recipients in the following four categories:21
(a)recipients who claimed a wage subsidy based on a decline in predicted revenue which did not eventuate;
(b)recipients who failed to take active steps to mitigate the financial impact of COVID-19;
(c)recipients whose actual or predicted decline in revenue was not related to COVID-19; and
(d)recipients against whom MSD considered it did not have sufficient evidence to prosecute, where that lack of evidential sufficiency was as a result of MSD’s failings or shortcomings in respect of evidence gathering.
[73] Gama alleges that MSD’s failings or shortcomings in respect of evidence gathering comprise:
(a)failing to require recipients to provide information, namely documentary and other supporting evidence of their eligibility; and/or
(b)failing to require recipients to notify MSD within five working days if anything changed that may affect their eligibility or entitlement to the subsidy; and/or
(c)failing to apply to the Police for production orders; and/or
21 Gama accepts however that there were very limited exceptions to the alleged practice, referring to the nine cases in respect of which the Recovery and Response Panel has agreed to proceed with prosecution, from on or about 26 July 2021 until on or about 22 March 2022.
(d)the failings and shortcomings referred to in the Deloitte report; and/or
(e)the failings and shortcomings referred to in the Auditor-General’s report; and/or
(f)when contacting a sample of 1000 wage subsidy recipients following a recommendation in the Auditor-General’s report, by failing to request that those recipients provide documentary or other supporting evidence of their eligibility and compliance with the obligations.
[74] Gama says that had MSD exercised or properly exercised its discretion, it should have concluded that the evidential test for prosecution of alleged offences could be met where those recipients of the wage subsidies who no longer met the eligibility criteria for one or more of the wage subsidies did not repay part or all of the subsidy dishonestly or with an intention to deceive. Gama says that prosecution should have been instituted for offences under ss 228 and 240 of the Crimes Act 1961.
[75]Gama alleges two errors of law on MSD’s part, being that:
(a)MSD’s failure to prosecute recipients in the above categories arose because of its unduly narrow interpretation of the scope of ss 228 and 240 of the Crimes Act; and
(b)MSD’s practice not to refer for prosecution and/or not to prosecute wage subsidy recipients in all but very narrow instances represented an unlawful fettering of its prosecutorial discretion.
[76]As to relief, Gama seeks:
(a)a declaration that MSD’s practice not to refer for prosecution and/or prosecute any recipients of any of the wage subsidies other than in very limited circumstances is unlawful; and
(b)an order directing MSD to consider or reconsider whether to refer for prosecution or prosecute any recipients of any of the wage subsidies who benefitted from MSD’s unlawful practice.
[77] In argument, counsel for Gama focused on its pleaded errors of law, and how those errors of law resulted in an unlawful practice not to prosecute. One of the significant threads of Gama’s case was the need for effective prosecutions where there is evidence of fraud or abuse, so as to maintain trust and confidence in the wage subsidy scheme, particularly given what Gama says was and is the strong public impetus for enforcement. I note this at the outset given the emphasis placed by the Crown on the way in which Gama’s pleadings had evolved throughout the proceeding. Gama addressed its case in argument with a clear focus on its pleaded errors of law, and I consider that it would be inappropriate to address their case on any other basis than the second amended statement of claim and as counsel advanced the case at the hearing.
MSD’s response
[78]Broadly, MSD says that Gama’s claim is fundamentally flawed because:
(a)Gama has not identified a ‘policy’ or ‘decision’ under challenge – there is no established or accepted practice not to prosecute before the Court.
(b)Gama’s construction of an unwritten practice is misconceived, as judicial review is not an audit exercise, and MSD has already provided sworn evidence of its actual policies and practices.
(c)Any challenge to resource allocation decisions in the investigation and prosecution of criminal offending is not justiciable and/or is only reviewable in exceptional circumstances that do not arise in the present case. Rather, Gama simply does not agree with the way in which resources were allocated in the administration of the wage subsidy schemes, and this is not a reviewable error.
[79] MSD says that the first three of Gama’s categories of cases are simply eligibility criteria for the wage subsidy scheme while the fourth category is a catch all category that purports to capture any case that did not proceed to prosecution as a result of MSD’s alleged evidence gathering failures.
The issues
[80]I therefore consider the issues in this proceeding to be:
(a)whether Gama’s application for review is justiciable, or, in other words, whether it would be appropriate for the Court to enter into the kind of analysis proposed;
(b)if the application for review is justiciable, whether the evidence is sufficient to show that the practice alleged by Gama existed; and
(c)if there is such a practice that can be challenged, was that practice unlawful in the manner alleged by Gama, in that it:
(i)adopted an unduly narrow definition of fraud; and/or
(ii)unlawfully fettered MSD’s prosecutorial discretion; and
(d)what relief, if any, is appropriate.
[81] For the reasons discussed below, I conclude that Gama’s application to review is justiciable, but that Gama has not established either that the pleaded practice or errors of law exist or existed.
Positions of the parties
Gama
[82] Mr Mijatov submits that MSD has adopted an unlawful practice not to prosecute cases in the categories discussed above. He highlights the role of prosecutorial accountability as a key component of the rule of law. Mr Mijatov submits
that Gama’s case is focused on its two pleaded errors of law, and does not challenge resource allocation.
[83] Mr Mijatov addressed each category of case in which MSD is alleged to have failed to prosecute. Mr Mijatov submits that Professor Wong’s evidence indicates that there is likely to have been a wide range of recipients and sectors who are unlikely to have experienced the required revenue decline, but there has not been a high number of prosecutions. As to the criterion that revenue decline be attributable to COVID-19, Mr Mijatov emphasises that no verification was required to be provided during an application, and no documentary evidence was requested during a post-payment integrity check.
[84] In respect of the requirement to take active steps to mitigate the financial impact of COVID-19, Mr Mijatov highlights the Auditor-General’s concern in his report that employers were not required to make a statement about such steps. Mr Mijatov notes also Professor Wong’s findings, and publicly available information regarding the paying of dividends by companies during 2020. Mr Mijatov says that it is clear from information in the public domain that recipients of the wage subsidy did not comply with this requirement, and that MSD did not change its approach once it was aware of this, and also that this approach was a result of MSD only doing pre- payment checks on large employers with particular characteristics which could be an indicator of fraudulent behaviour.
[85] As to the allegation of MSD’s failure to collect relevant information, Mr Mijatov submits that in the documents that have been provided to Gama, it is apparent that in many cases MSD found it was unable to prosecute because of evidential insufficiency. Gama’s challenge to this asserts that any evidential insufficiency was of MSD’s own making, in that MSD created a situation where there has been no objective validation of an applicant’s compliance with the requirements in the declarations. Again, Mr Mijatov relies on Professor Wong’s evidence, outlining the steps that could have been taken to obtain evidence. Mr Mijatov says that these considerations ought to preclude MSD from relying on evidential insufficiency in a decision not to prosecute, given the methods that were, on MSD’s own evidence,
available to it for gathering information. He says that this is notwithstanding the unavailability of information-gathering powers under the Social Security Act.
[86] Mr Mijatov describes Ms Kime’s assertion that “MSD always contemplated prosecuting for wage subsidy fraud” as a post-facto justification.22 Mr Mijatov submits that the record shows that MSD did not always contemplate prosecuting for wage subsidy fraud, and that in fact, for the first 18 months, MSD took no prosecution action at all. He emphasises that the Recovery and Response Panel was not established until February 2021, indicating that prosecution had only begun to be contemplated in earnest by officials at that time. Mr Mijatov highlights that had MSD always been contemplating prosecution, it is unlikely that the Auditor-General would have felt compelled in May 2021 to note that prosecution work was critically important to maintaining trust and confidence, and that it needed to be prioritised. He says that the Auditor-General’s report forced MSD to address its complacency and even then, the first charges were not laid until September 2021.
[87] Mr Mijatov also addressed the interrelation between MSD’s pandemic related workstreams, and “core services”. He highlights the Auditor-General’s view that a desire on MSD’s part to return to core services would disincentivise continued efforts on wage subsidy fraud investigations and that this desire cannot excuse a failure to properly prosecute wage subsidy fraud where MSD had sufficient capacity. Mr Mijatov submits that the relatively high proportion of prosecutions, relative to the number of people receiving a benefit compared to the wage subsidy, highlights that MSD has an unduly narrow approach to fraud in the context of the wage subsidy.
MSD
[88] Mr Conway submits that Gama has incorrectly asserted that MSD did not take prosecuting wage subsidy fraud seriously, and that Ms Kime’s evidence should not be taken to be a ‘post-facto justification’. He says that MSD’s quarterly reports along with Ms Kime’s evidence show that the identification, investigation and prosecution of wage subsidy fraud was treated as a significant priority by MSD from the outset.
22 Taylor v Chief Executive of the Department of Corrections [2015] NZCA 477, [2015] NZAR 1648 at [33].
He says that Professor Wong’s evidence does no more than suggest what MSD already knows—that some fraud has occurred.
[89] Mr Conway submits that the existence of an unlawful practice cannot be inferred by the Court on the basis of the material relied upon by Gama, and contrary to MSD’s actual policies and procedures and the sworn evidence of a senior public servant. He refers to the case of Blackburn, submitting that in that case there was a stated policy in question which the Court was able to assess in terms of its legality.23 Mr Conway says that in the present case, the situation is different, as it is well- established that evidence of how a policy is applied in practice cannot be used to “reverse engineer” a challenge to the policy.24 Rather, a Court should rather confine its attention to the implementation of a policy in individual cases.25 Mr Conway says that if the Court does not find that there is a practice in place, then the pleaded errors of law fall away.
[90] Mr Conway submits that Gama is in reality asking the Court to conduct an ‘audit-like’ inquiry into a policy and/or practice that does not exist, and that the relief sought is therefore fundamentally flawed. Mr Conway submits that the analysis Gama asks the Court to undertake is essentially a factual analysis into the sufficiency of MSD’s integrity response, and that this is inappropriate in judicial review proceedings.26
[91] Mr Conway says that the individual Recovery and Response Panel decisions provided (on a without prejudice basis as to relevance) likewise do not provide a basis upon which to infer the alleged practice— as the redactions from those decisions mean that it is not possible for Gama to assert that MSD had sufficient evidence to prosecute in any particular case.
23 R v Commissioner of Police of the Metropolis, ex parte Blackburn [1968] 2 QB 118 (CA); and Royal Forest and Bird Protection Society of New Zealand Inc v Canterbury Regional Council [2019] NZHC 2223, [2019] NZRMA 556.
24 Attorney-General v Refugee Council [2003] 2 NZLR 577 (CA) at [30].
25 At [30]–[32]: cited in Smith v Attorney-General (Temporary Release) [2019] NZHC 835, [2019] NZAR 767 at [85].
26 See Maxberry v National Rifle Association [2015] NZHC 3340, [2016] NZAR 127 at [97].
[92] In that respect Mr Conway notes that Gama had made a discovery application for all Recovery and Response Panel decisions on individual cases but this was declined on the basis that the material sought was not relevant or proportionate.27 He highlights that part of the Court’s decision on that application was that MSD had already provided evidence outlining its actual policies and procedures.28 When questioned in argument how then Gama could hold the Crown to account in this context, Mr Conway said that the position would be different if MSD’s policies actually provided a sound basis from which to infer an unlawful practice.
[93] The final plank of Mr Conway’s submissions concerned the issue of resource allocation. Mr Conway submits that to the extent Gama’s challenge relates to MSD’s resource allocation decisions about how to investigate wage subsidy fraud, such decisions are not justiciable or should only be reviewed in exceptional circumstances that do not arise here.29 He says that this is not a case where the MSD has ordered its staff not to investigate wage subsidy fraud (or certain types of wage subsidy fraud) but rather that MSD’s integrity response is simply not what Gama thinks it should be, which is a matter on which a Court cannot give direction.30
Analysis
Judicial review of prosecutorial discretion
[94] The parties are agreed that a decision not to prosecute because of an unlawful general policy is reviewable.31 I agree with this conclusion. I do not propose to consider in detail the Courts’ jurisdiction to inquire into the exercise of prosecutorial discretion. Mr Conway clarified in argument that the Crown’s position was not that judicial review was unavailable in respect of a decision not to prosecute, but rather in the present case, Gama had identified no specific decision under challenge, and that the Court could not infer the alleged practice.
27 The Gama Foundation v Chief Executive of the Ministry of Social Development [2022] NZHC 2509 at [22] and [24].
28 At [23].
29 Evers v Attorney-General [2000] NZAR 372 (HC) at [5]–[6] and [11]; and Blackburn, above n 23, at 136; cited in Hallett v Attorney-General [1989] 2 NZLR 87 at 92.
30 Evers, above n 29, at [8].
31 Blackburn, above n 23.
[95] The primary authority relied on by Gama was the Court of Appeal’s judgment in Osborne v WorkSafe New Zealand.32 The Osborne proceedings concerned an application for judicial review of the decision by WorkSafe New Zealand (WorkSafe) not to offer evidence against Pike River Coal Limited’s Chief Executive, Mr Peter Whittall, because he had undertaken to make a voluntary payment of $3.41 million to the victims’ families. The Court of Appeal considered whether the prosecutor’s decision to offer no evidence in support of the charges against Mr Whittall was amenable to review.33 The Court considered that it was.34 While in the subsequent appeal the Supreme Court was not required to make findings on this issue, given that WorkSafe accepted the Court of Appeal’s findings on this point, it did not express disagreement with the Court of Appeal’s reasoning as to amenability.35
[96] The Court of Appeal noted that there are good reasons for the exercise of judicial restraint in the review of prosecutorial discretion.36 The Court said also that it was important not to confuse the issue of judicial restraint with the issue of justiciability.37 Because of these considerations, the Court held that:38
Absent abdication of discretion, relief…is likely on review only in exceptional cases. But a prosecutorial decision will generally be justiciable, albeit the intensity of review and remedial response may be restricted.
[97] In coming to that conclusion, the Court relied on R v Director of Public Prosecutions, ex parte Manning.39 Ex parte Manning concerned the judicial review of a decision not to prosecute a prison officer who had caused the death of a prisoner by
32 Osborne v WorkSafe New Zealand [2017] NZCA 11, [2017] 2 NZLR 513 [Osborne CA]; see also Phillip Joseph “Review - Prosecutorial Discretion and Judicial Review” [2018] NZ L Rev 755 at 766-769.
33 At [26].
34 At [53].
35 Osborne v WorkSafe New Zealand [2017] NZSC 175, [2018] 1 NZLR 447 at [24]–[25]. The matters in issue before the Supreme Court were instead related to the correctness of the Court of Appeal’s view that the conditional arrangement made by Mr Whittall to pay the reparations ordered against Pike River Coal was not an agreement to prevent the prosecution but an offer of voluntary payment which WorkSafe was entitled to take into account in making its decision about prosecution.
36 Osborne CA, above n 32, at [34]; citing Polynesian Spa Ltd v Osborne [2005] NZAR 408 (HC) at [62]; R (on the application of Corner House Research) v Director of the Serious Fraud Office [2008] UKHL 60, [2009] 1 AC 756 at [31]; Fox v Attorney General [2002] 3 NZLR 62 (CA) at [28]–[31]; and Matalulu v Director of Public Prosecutions (Fiji) [2004] NZAR 193 (Fiji SC) at 215.
37 Osborne CA, above n 32, at [35].
38 At [35]; Polynesian Spa Ltd v Osborne [2005] NZAR 408 (HC) at [69].
39 R v Director of Public Prosecutions, ex parte Manning [2001] QB 330 (DC).
way of asphyxia, while restraining that prisoner. The Divisional Court considered that it was clear that a decision not to prosecute is susceptible to judicial review, but that it was a power to be sparingly exercised.40 In coming to this decision, Lord Bingham and Morison J stated:41
In most cases the decision will turn not on an analysis of the relevant legal principles but on the exercise of an informed judgment of how a case against a particular defendant, if brought, would be likely to fare in the context of a criminal trial before (in a serious case such as this) a jury. This exercise of judgment involves an assessment of the strength, by end of the trial, of the evidence against the defendant and of the likely defences. It will often be impossible to stigmatise a judgment on such matters as wrong even if one disagrees with it. So the courts will not easily find that a decision not to prosecute is bad in law, on which basis alone the court is entitled to interfere. At the same time, the standard of review should not be set too high, since judicial review is the only means by which the citizen can seek redress against a decision not to prosecute and if the test were too exacting an effective remedy would be denied.
[98] The Court of Appeal in Osborne agreed with the conclusion of the Privy Council in Marshall v Director of Public Prosecutions that the threshold for review may be “to some extent lower” for decisions not to prosecute, so far as it relates to intensity of review and remedial response.42 The Court noted that a decision not to prosecute because of an unlawful general policy, effectively an abdication of discretion, is reviewable and likely to result in relief.43 A material error of law in the exercise of prosecutorial discretion will also be reviewable.44 As will a failure to accord with the applicable code for the conduct of prosecutions.45
[99] These propositions have been confirmed more recently as good law in New Zealand. Ellis J in Wallace v Attorney-General noted that the authorities are clear that a decision not to prosecute may be the subject of judicial review.46 Her Honour also noted that the Court of Appeal’s view was that:47
40 Manning, above n 39, at 343; citing R v Director of Public Prosecutions, ex parte C [1995] I Cr App R I36.
41 At 344.
42 Osborne CA, above n 32, at [38]; citing Marshall v Director of Public Prosecutions [2007] UKPC 4, [2007] 4 LRC at [18].
43 At [39]; citing Blackburn, above n 23.
44 At [48]; citing R (on the application of Corner House Research) v Director of the Serious Fraud Office [2008] UKHL 60, [2009] 1 AC 756 at [32].
45 At [49].
46 Wallace v Attorney-General [2021] NZHC 1963 at [582].
47 At [591].
…in appropriate circumstances, all the standard bases for review (abdication of discretion, failure to follow established guidelines, taking into account irrelevant considerations, failure to take into account relevant ones, unlawfulness and unreasonableness) might be available.
[100] An impugned decision may be justiciable, however, the circumstances will dictate the grounds of review.48 Ellis J has also noted elsewhere that the exercise of prosecutorial discretion in a way that is unlawful is by definition justiciable.49
[101] I conclude that Gama’s application for review is justiciable. The sole ground advanced by Gama in the present case is error of law. Gama does not rely on a particular decision in any specific case, but rather says that MSD has broadly acted in error of law through the alleged practice not to prosecute. On the basis of the authorities discussed above, I consider that it is established that review of an error of law in a decision not to prosecute is justiciable.
Did the practice not to prosecute alleged by Gama exist?
[102] As already noted, Gama accepts that there is no policy on MSD’s part not to prosecute. Rather, as Mr Conway submits, Gama is asking the Court to infer the existence of an unwritten practice not to prosecute certain classes of wage subsidy recipients. I do not consider that such a practice is established on the evidence.
[103] Evidentially, Gama has faced difficulties throughout this proceeding. That will commonly be the case where a respondent in judicial review is in possession of information relevant to a challenge that is not in the public domain. I record that I am satisfied that MSD has complied with its duty of candour as a decision maker, and as the respondent in this proceeding. Detailed evidence has been provided from MSD, at the direction of the Court. There is no suggestion from Gama of bad faith on the part of MSD or Ms Kime. While Gama pursued a pre-trial application for information regarding individual cases, discovery of information beyond that which was provided by Ms Kime was held to be neither relevant nor proportionate to the issues raised in Gama’s application for review.
48 Wallace, above n 46, at [581]; citing Osborne CA, above n 32, at [51]–[52].
49 Fitzgerald v Attorney-General [2022] NZHC 2465, (2022) 13 HRNZ 704 at [76].
[104] The focus of judicial review is the assessment of the exercise, failure to exercise, proposed exercise, or purported exercise of a statutory power.50 It is intended to be a relatively simple, untechnical and prompt procedure.51 What Gama is seeking is more akin to an audit-like procedure, a process which is not suitable for judicial review. It seeks to review and assess MSD’s decisions on prosecution in an environment materially different from the environment in which the wage subsidy schemes were developed and administered.
[105] Gendall J’s conclusion on Gama’s second application for discovery speaks to the limitations on the scope of judicial review proceedings.52 While Mr Mijatov submitted that the information asymmetry did not mean that Gama’s claim could not be successful, the position is that the Court can only assess the review on the evidence before it.53 I turn to that task now.
[106] The first point to note is that on the evidential material provided to this Court, there is nothing to suggest that MSD has adopted a practice not to prosecute in all but a few limited circumstances. While Gama may point to the number of prosecutions that have or have not occurred, the reality is that MSD has in place policies and practices for investigating and referring cases of potential fraud to a decision-making panel for the purpose of determining whether prosecution should occur. No doubt that is why Gama abandoned the argument that MSD had a policy not to prosecute and instead alleged that a practice not to prosecute could be inferred.
[107] Gama pointed to the evidence of individual cases provided by MSD and said that they were sufficient to establish that such a practice existed. In response, Mr Conway made the point that Gama’s claim was not pleaded in reliance on individual cases. Ultimately, and in any case, I am not satisfied that the practice alleged has been established in either a specific or general sense. Rather, the individual cases appear to show that MSD has applied its policies and practices in the manner intended.
50 Judicial Review Procedure Act 2016, s 3(1).
51 Minister of Energy v Petrocorp Exploration Ltd [1989] 1 NZLR 348 at 353.
52 The Gama Foundation v Chief Executive of the Ministry of Social Development [2022] NZHC 2509.
53 Belhaj v Director of Public Prosecutions [2018] UKSC 33, [2018] 3 WLR 435.
They show also that, where justified in the minds of the decision-makers, enforcement action has indeed been considered and taken.
[108] Mr Mijatov nevertheless focused on individual cases in which civil recovery was recommended, in respect of which he said prosecution was justified. Gama is entitled to take a different view. That, in and of itself, does not make the exercise of the discretion unlawful. Something more is required, particularly in circumstances in which I accept that the Recovery and Response Panel appears to have considered all the relevant information before coming to a conclusion.
[109] I accept Mr Conway’s submission that the further material supplied by Gama sourced from the public domain does no more than establish that some wage subsidy fraud occurred, a fact of which MSD is undoubtedly aware. It does not establish that MSD’s approach is unlawful. For example, while Professor Wong’s conclusions provide interesting background context, they do not provide sufficient information to enable inferences as to the practices employed by MSD. In addition, Mr Nelson’s compilation of information through numerous requests under the Official Information Act adds little to the direct evidence provided by Ms Kime in this proceeding.
[110] I also bear in mind that policy decisions made by Cabinet in the construction of the wage subsidy schemes contributed to some of the shortcomings in MSD’s processes. I say this particularly so in respect of MSD’s information gathering powers under the Social Security Act as compared to the powers it has in investigating wage subsidy fraud. Then there is also the criticism that MSD’s failure to prosecute fraud was a result of an undue desire to shift resources back to its core services. Neither of these are matters provide a basis for a conclusion that a practice of refusing to prosecute existed. The resource allocation decisions here are matters which this Court should not, constitutionally speaking, inquire into.54
[111] The reality in the present case is that the situation with which MSD was presented was unprecedented. MSD was given approximately a week to prepare a wage-subsidy scheme at the outset of a global pandemic that did not abate for some
54 Evers, above n 29 at [5]–[6] and [8]; and Blackburn, above n 23, at 136; cited in Hallett, above n 29, at 92.
three years. The context within which the wage subsidy scheme was developed, and particularly the fact that it was not developed or administered pursuant to primary legislation, goes some way to explain the delay in decisions being made on prosecution. Nevertheless, MSD did put in place policies which are in fact entirely unobjectionable.
[112] In addition, I am satisfied that enforcement action, and eventually prosecution, was within MSD’s contemplation from the outset. That is apparent from the Cabinet Minute of 16 March 2020, which recorded that Cabinet had noted that although the scheme would be administered “at pace using a high trust model”, “standard justice processes are available to respond to any cases of fraudulent declarations that may be identified”. Ms Kime’s evidence was that MSD always contemplated prosecuting for wage subsidy fraud, and this is reinforced by the quarterly reports put in evidence.
[113] The approach taken by Gama in urging the Court to infer a practice by MSD not to prosecute is not novel, but counsel did not bring to my attention previous circumstances in which such a practice has been inferred in quite the same manner. To illustrate this point I refer to the authorities relied upon by counsel. Gama relied heavily on R v Warwickshire County Council, ex parte Collymore in support of its submission that notwithstanding MSD’s written policies, it was in fact operating a practice not to prosecute.55 Gama also referred to the statement that:56
A course of conduct involving the consistent rejection of applications belonging to a particular class may justify an interference that the competent authority has adopted an avowed rule to refuse all.
[114] Warwickshire County Council concerned a local education authority’s power to award scholarships to persons seeking to pursue further education. The applicant in that case had applied for a discretionary award to help her fund her studies, and like many other applicants, was refused on the basis that the authority’s policy was to not offer any awards except in exceptional circumstances across a period of three years. She appealed, and was again refused, the authority repeating that its general policy was to refuse applications for discretionary awards in all but extraordinary
55 R v Warwickshire City Council Ex p Collymore [1995] ELR 217.
56 At 227; citing De Smith’s Judicial Review (8th ed, Sweet and Maxwell, United Kingdom, 2018) at [0-017].
circumstances. The authority had previously made generous provisions for grants of awards. In fact, no students who appealed against an original refusal for the 1993/94 academic year had been granted an award, nor had any of approximately 300 appeals been successful.
[115] As submitted by Mr Mijatov, the Judge in Warwickshire County Council distinguished between the authority’s policy to award discretionary grants in exceptional circumstances, and the practice which it had actually applied. The Judge concluded that in practice the policy had been implemented far too rigidly and that therefore the individual circumstances of each applicant’s case had not been properly considered. The application for review was allowed.
[116] Mr Mijatov sought to apply Warwickshire County Council to the present case, stating:
Applied in this context, the consistent failure of MSD to prosecute cases of fraud justifies the inference that it has an unlawful practice to only prosecute in a small number of exceptionally clear cases. The fact that just 0.0017% of complaints received have resulted in prosecutions also supports the existence of a practice, and in combination with the factors outlined above, is sufficient evidence for this Court to draw the inference that MSD has exercised its prosecutorial discretion unlawfully.
(footnotes omitted)
[117] There are several issues with this submission. In particular, equating a complaint regarding the wage subsidy schemes with an application for a discretionary scholarship award is not an apt comparison. It is not the case that MSD was faced with an application to commence a prosecution and demonstrated an intent to refuse all but a few of those applications. Rather, MSD as the responsible agency was tasked with the administration of a scheme at exceptionally short notice, developed in isolation from primary legislation, and was also responsible for the investigation and prosecution of any abuse of the scheme. In contrast, in Warwickshire County Council, the applications were made and then refused in a fashion which justified the making of an inference of a practice.
[118] In addition, there is no evidence before this Court as to the content or validity of any the complaints about the wage subsidy scheme which were received. There is
no way of telling whether any proportion of those complaints provided sufficient information to justify instituting a prosecution. Even if a complaint did provide sufficient information, there is no evidence to show the pathway that evidence took through investigation and consideration of individual circumstances and whether it would justify a finding of an unlawful practice not to prosecute. Further, the existence of prosecutorial discretion presupposes that even where there is evidential sufficiency, it may not be in the public interest to commence a prosecution. Typically the Courts do not intervene in such circumstances, absent illegality.
[119] As described by Mr Conway, the figures used by Mr Mijatov are calculated by reference to the total number of complaints received by MSD, MBIE, and Inland Revenue, rather than the total number of complaints referred to MSD specifically. Neither MBIE or Inland Revenue are parties to this proceeding. In any event, a bare comparison of complaints to prosecutions does not provide a basis for inferring an unlawful practice not to prosecute.
[120] In essence, Gama asks the Court to draw an inference from an absence of evidence. I am not satisfied that such an inference can be drawn. The present circumstances are different from those in which a Court could make an inference from an identifiable set of decisions made in accordance with an avowed practice.
[121] The present circumstances are also different from those in which a prosecuting agency has outright refused or failed to apply the criminal law. Those were the circumstances in Blackburn, in which as a result of a policy decision, the Commissioner of Police did not attempt to enforce a prohibition on illegal gambling.57 While the Commissioner had a discretion as to the allocation of resources, and could make policy decisions and give effect to them, those decisions could not be contrary to the duty to enforce the criminal law. No such policy decision or direction exists in this case. To the extent that a decision or direction did exist, it would have to amount to an outright refusal to enforce the law.58
57 Blackburn, above n 23.
58 See Evers, above n 29, at [9] citing Hill v Chief Constable of West Yorkshire [1988] 2 All ER 238 at 240.
[122] Having concluded that no practice not to prosecute has been established, it is not strictly necessary to address the errors of law alleged by Gama. Nonetheless, in case I am wrong in this finding, I go on to consider these allegations.
Did MSD adopt an unduly narrow definition of fraud?
[123] Gama argues that MSD took an unduly narrow interpretation of the scope of the offences set out in s 228 (dishonestly using a document) and s 240 (obtaining by deception) of the Crimes Act 1961. Mr Mijatov refers particularly to the following passage in Ms Kime’s second affidavit, which states:
Evidential sufficiency for criminal prosecution is a high threshold. By way of illustration, for a prospective case, MSD needs to show that, at the time the application was made, the applicant did not think they would meet the revenue decline threshold. This requires MSD to prove, beyond reasonable doubt, that the applicant had dishonest intent. However, a defendant may be able to provide several reasons why they expected a revenue decline to occur, and it can be very hard to prove otherwise. For example, where a person says they were misunderstood or confused at the time of their application, it can be very challenging to prove dishonest intent.
[124]Mr Mijatov alleges that there are two errors with this approach, being:
(a)it does not take into account that s 228 and 240 are continuing offences; and;
(b)its focus on the mental state of the applicant at the time an application was made is at odds with MSD’s own requirements that an applicant would notify MSD if anything changed that affected their eligibility or entitlement.
[125]Mr Mijatov says the effect of this approach is that:
…MSD was looking only for certain cases of what it considered could ever constitute fraudulent behaviour before it decided to prosecute, which appeared to be blatant or very obvious cases of fraud. However, in doing so, it plainly was not looking for cases that ought to have been referred for prosecution that met the elements of the relevant offences, but which did not fit MSD’s incorrect understanding of fraud.
[126] Mr Mijatov then again referred to decisions made by the Recovery and Response Panel where civil recovery was recommended instead of prosecution. He says that in all of those cases, prosecution appears to have been justified, but that civil recovery was chosen with little to no supporting evidence. He says that had ss 228 and/or 240 been properly understood and applied in those cases, MSD would have had sufficient evidence to commence prosecutions, even in light of the shortcomings in its evidence gathering.59 He submits that the continuing effect of ss 228 and 240 catches activity where a person or a business did not suffer their predicted revenue decline, and did not repay the wage subsidy, or where they made an application knowing that they did not meet the eligibility requirements.
[127] Mr Mijatov submits that because of MSD’s misunderstanding of the relevant provisions of the Crimes Act, it cannot have asked itself the right question, and was labouring under a misunderstanding as to the law.60 He submits that MSD did not consider that statements or representations could become false, or that an omission to disclose a material particular could suffice, or that recipients were under an ongoing obligation to inform MSD of any changes that may have affected their eligibility.
[128] He refers also to Official Information Act responses to requests made by Mr Nelson, in which statements were made such as “in the most serious cases, where there is evidence of deliberate fraud, the Ministry will consider criminal prosecution”. He says that this is evidence of the approach that MSD was applying to investigations, only really considering prosecution in cases of ‘serious deliberate fraud’, rather than in all circumstances that met the requirements of ss 228 and/or 240 of the Crimes Act.
[129] Mr Mijatov refers to guidance prepared for MSD staff when conducting post- payment integrity checks. He referred to the following statement in a document prepared to provide such guidance, which was issued on 20 July 2021:
Where you have identified possible fraud you will be required to refer this for investigation. Fraud means dishonesty in statements made in the application, or how the funds were applied. Some examples of this includes applications
59 Mr Mijatov emphasised in argument that his reference to these decisions was by way of example, and that the redactions from the decisions were immaterial because Gama’s case was focused on a ‘global failure to prosecute’ rather than in respect of any individual decision.
60 Discount Brands Ltd v Westfield (New Zealand) Ltd [2005] NZSC 17, [2005] 2 NZLR 597 at [5]; and Ye v Minister of Immigration [2009] NZSC 76, [2010] 1 NZLR 104 at [45].
where the business does not exist, employees did not exist, or the applicant has used the funds for their own purposes rather than paying staff.
[130] Mr Mijatov submits that this passage is further evidence of a conception of fraud operating at the relevant time (rather than for the purpose of justification after the fact), that shows that MSD was operating on a conception of fraud that related to the time the declarations were made by an applicant and the money obtained. He says that this is an understanding of fraud that is too narrow, and therefore unlawful.
[131] Mr Conway submits that MSD’s written policies and procedures contain no identifiable error of law and have not fettered MSD’s discretion. He says that the written policies, particularly regarding pre-payment and post-payment checks illustrate that MSD was aware of and investigating for fraud in the categories of cases described by Gama, and that these investigations were not coloured by an incorrect understanding of the law.61 He says also that Gama has taken Ms Kime’s evidence out of context, and refers to another passage from her second affidavit, where Ms Kime acknowledges that the relevant offences are continuing, stating:
For a retrospective case, where MSD suspects a business is dishonestly retaining funds knowing they did not suffer the required decline, MSD must show the business is dishonestly retaining the funds (rather than by mistake). Again, proving state of mind about eligibility is inherently difficult.
[132] Mr Conway submits that it is implicit in that passage that MSD is looking at post-application conduct, and that Ms Kime’s evidence in full shows that MSD contemplated prosecuting for fraudulent behaviour at all times, and did so operating within the law. He says that MSD’s policies illustrate that MSD acted lawfully. In response, Mr Mijatov submits that the Court must also look at the substance of what has occurred, alongside the evidence of what MSD’s policies were, to obtain the correct view of what standard was applied.
[133] Mr Conway says that the best evidence of the Ministry’s approach to prosecution is the Recovery and Response Panel’s Terms of Reference. Mr Conway submits that the Terms of Reference show that the Recovery and Response Panel
61 However, Mr Conway did appear to accept in argument that MSD was not requesting documentary verification in these processes until March 2021—although his argument included the submission that obtaining documentary evidence was a key plank in MSD’s investigation processes, rather than upon application or in post-payment checks prior to March 2021.
applies a careful and individualised analysis and exercised discretion to decide upon a response that serves MSD’s principles and objectives, as well as the Solicitor- General’s Prosecution Guidelines. He submits that the ‘polycentric’ nature of this analysis makes it essentially impossible to infer that an unwritten practice not to prosecute has been applied. He also highlighted the tension between:
(a)a person who applied for the wage subsidy dishonestly, with no basis for a belief that they were entitled, where prosecution would be appropriate; and
(b)where an initial application has been made in good faith, without dishonesty, and any dispute or refusal to pay is based on genuinely held beliefs or objective evidence, which would mean that civil recovery would be more appropriate.
[134] Mr Conway submits that this illustrates that MSD clearly understood the requirements of fraud—because MSD cannot prosecute in circumstances where an applicant has not suffered the required revenue decline, unless it can be shown that the applicant knew that they did not or would not do so. He says that these evidential difficulties mean that real caution is required in attempting to infer anything from the number of prosecutions that have eventuated.
[135] As noted, the relevant provisions are ss 228 and 240 of the Crimes Act.62 There is no offence of ‘fraud’ in the Crimes Act. The relevant offences are instead ‘dishonestly taking or using a document’ and/or ‘obtaining or causing loss by deception’. Both of those offences are continuing offences—meaning that initially honest conduct which subsequently becomes dishonest conduct is captured. In respect of s 228, this is because the word ‘uses’ has been given a broad interpretation, including a single action and the continuing use of a document over a period of time.63
62 These are the two sections pleaded by Gama, I note however, that Ms Kime’s evidence indicates that these were not the only offences MSD considered relevant. MSD also considered ‘theft by a person in a special relationship and ‘receiving’, see ss 220(1) and 246 of the Crimes Act 1961 respectively.
63 See Vuniduvu v R [2022] NZCA 420 at [22]; Ngamu v R [2010] NZCA 256, [2010] 3 NZLR 547 at [12]–[14]; and R v Baxter [1998] 3 NZLR 144, (1998) 15 CRNZ 580 (CA) at 153.
The same is true in respect of s 240(2)(b), as an ‘omission to disclose a material particular’ is captured within the definition of ‘deception’.
[136] I do not accept that there is any indication in the evidence that demonstrates that MSD has been operating under an error of law as to whether s 228 and/or s 240 of the Crimes Act are continuing offences. Indeed, the passage relied upon by Mr Mijatov in Ms Kime’s second affidavit comes directly before the passage referred to by Mr Conway, showing clearly that continuing behaviour is within MSD’s contemplation. That passage shows that MSD was aware of and has engaged with the difficulties inherent in proving the elements of the relevant offences.
[137] I also consider it highly unlikely that MSD was operating under such an error of law in circumstances where the eligibility criteria depended on future events. It accordingly must have been within MSD’s contemplation that if a predicted revenue decline did not eventuate, then that eligibility criterion would not be met, and that in the absence of re-payment, enforcement action may have been necessary. I am not satisfied that the documents referred to by Mr Mijatov change that position.
[138] Criminal conduct could have occurred essentially in two sets of circumstances. First, in an application, with dishonest intent, or recklessness as to falsity. That would involve, for example, an applicant making an application representing that their revenue decline was at the requisite level and caused by COVID-19, knowing that to be false or being reckless as to its falsity. Alternatively, it could involve an application made with the intent not to take any active steps to mitigate the financial impact of COVID-19. Second, it would involve an application based upon a genuine belief that all criteria were met, and with an intent to abide by the criteria, followed by a dishonest failure or omission to disclose that this had not occurred.
[139] In the first set of circumstances, it is likely relatively simple to show dishonest intent or recklessness as to falsity. However, it is more difficult to describe a situation where the wage subsidy was obtained on the basis of a genuine belief in eventually experiencing the projected revenue decline, which then did not eventuate due to extenuating circumstances, as constituting intentional deception or dishonesty in the absence of immediate repayment. An honest even though unreasonable belief that the
representation is true will negate any element of deception.64 Further, if the predicted revenue decline has resulted from circumstances outside of an applicant’s control, their ineligibility has not come about by way of deception. Therefore, the consequent loss has not without a failure to disclose been caused by deception or dishonesty.
[140] In other words, there is an inherent difficulty in proving to the criminal standard of proof that in failing or omitting to disclose a material particular, such as the fact that an anticipated revenue decline has not eventuated, a person intended to deceive MSD, and/or made a false representation, and/or acted dishonestly. I note that the legal analysis applied by MSD in its assessment of individual cases is redacted in the materials provided in evidence on the basis that it is legally privileged information.
[141] However, even without that, the difficulties inherent in prosecuting are illustrated in some of the individual decisions provided by MSD for the purpose of this proceeding. Although noting that Gama did not challenge individual decisions, they are in this context helpful to have reference to by way of example. In one of its decisions, the Recovery and Response Panel records:
[Confidential], as director of the applicant company, genuinely believed that his application was legitimate, correctly made, and that his approach to demonstrating the needed 30% revenue decline was correct. The auditor determined that the application had been made in good faith.
There is no indication of dishonesty on the part of the applicant company and/or its director, and it is not intended to consider the initiation of prosecution proceedings.
[142] While in some circumstances this difficulty may have been caused by the inherent design of the wage-subsidy scheme, in the way that information was or was not collected, the evidence before the Court does not illustrate that there is an error of law in the approach that MSD has applied to ss 228 and 240 of the Crimes Act.
[143] In another decision by the Recovery and Response Panel, where an investigation revealed that a number of the employees for whom the wage subsidy had been claimed did not qualify as they were no longer employees, the Recovery and Response Panel made an in principle decision to prosecute, subject to the outcome of
64 R v Conrad [1974] 2 NZLR 626 (CA); Lang v Police [2011] NZCA 484 at [8].
a further investigation. Again, this does not establish that MSD has applied an unduly narrow definition of fraud—but rather illustrates that as a prosecuting agency, MSD has attempted to properly discharge its responsibilities.
[144] Accordingly, I am not satisfied that MSD has erred in law by applying an unduly narrow definition of fraud.
Did MSD unlawfully fetter its prosecutorial discretion?
[145] The second error of law pleaded by Gama is that MSD unlawfully fettered its prosecutorial discretion. This point was addressed by Mr Trevella in argument. While Mr Trevella accepts that MSD is able lawfully to adopt prosecution polices and frameworks, which in the first instance he described as ‘unobjectionable’, he submits that MSD’s policy:65
…[crossed] the line between legally acceptable limits on the exercise of discretion and those which are not legally acceptable, [fettering] the discretion [unlawfully].
[146]He submits that:
While reliance on policy is not unlawful, blind following of policy is.66 The applicant submits that the same goes for a practice – MSD’s blind following of its “pay and walk away” approach, in combination with the overly constrained (and legally wrong) threshold or test it set for commencing criminal prosecutions, meant it did not exercise its prosecutorial discretion in a “real and genuine sense” across the board.67
[147] Mr Trevella says that this can be illustrated by reference to the evidential and public interest tests for prosecution. He submits that even on the evidence that MSD did collect, it should have concluded that the evidential test for prosecution could be met where recipients who no longer met the eligibility criteria did not repay part or all of the subsidy dishonestly or with an intention to deceive. Mr Trevella says that once evidence had been gathered, there would have been a clear public interest in prosecuting recipients who had wrongly claimed or held on to the wage subsidy. He says that the presumption is that the public interest requires prosecution where there
65 Criminal Bar Association of New Zealand Inc v Attorney-General [2013] NZCA 176, [2013] NZAR 1409 at [118].
66 Criminal Bar Association, above n 65, at [118].
67 At [119].
has been a contravention of the criminal law. Further, the amounts of money involved were significant.
[148] Once these factors are compiled, Mr Trevella submits, then it is open to the Court to infer that MSD has and/or had a practice not to prosecute certain categories of cases. He accepts that there were limited exceptions to that practice, but says that this is not fatal to the inference that such a practice existed.
[149] It appears to me that a conclusion that MSD has unlawfully fettered its discretion is conditional on findings both that an unlawful practice not to prosecute existed, and that MSD adopted an unduly narrow definition of fraud. For the reasons above, I have found that Gama’s allegations in those respects have not been made out. It follows therefore that I am also satisfied that MSD did not unlawfully fetter its discretion.
[150] Gama accepts that MSD was properly able to apply its own policies specific to the exercise of its prosecutorial discretion in respect of wage subsidy fraud. MSD did so in the form of the Recovery and Response Panel’s terms of reference. I am not satisfied that any of the provisions contained in the Recovery and Response Panel’s terms of reference unduly constrain or fetter MSD’s prosecutorial discretion. Rather, they appear to me to be proper and lawful considerations, included for the purpose of ensuring that discretion was exercised properly. Accordingly, I am not satisfied that this error of law is made out.
Relief
[151] As I have concluded that Gama’s application for review may be dismissed, it is not necessary to address the question of relief.
Result
[152]The application for judicial review is dismissed.
Costs and confidentiality matters
[153] If counsel are unable to agree costs, the Crown is to file a memorandum of no more than five pages within ten working days, with Gama to file a memorandum of no more than five pages in a further five working days. I will then determine costs on the papers. Should counsel agree costs, a joint memorandum indicating as such should also be filed.
[154] In either separate or joint memoranda, counsel should also address the need for the continuation of the interim non-publication/confidentiality orders made by Cooke J.
McQueen J
Solicitors:
R N Zwaan, Wellington for Applicants
Crown Law Office, Wellington for Respondents
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