PACC Committee Report

Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

NINTH REPORT

The Standing Committee on Public Accounts has considered Chapter 34 of the December 2000 Report of the Auditor General of Canada (Other Audit Observations: Canada Customs and Revenue Agency and Human Resources Development Canada) and has agreed to report the following:

INTRODUCTION

The December 2000 Report of the Auditor General of Canada contained an audit observation on the handling of cases of alleged fraud and abuse under the Employment Insurance (EI) program in lower mainland British Columbia. The Committee believes that it is particularly important to limit opportunities for abuse under the EI Program in order to preserve its viability and protect the interests of legitimate claimants, law-abiding employers and employees, and Canadian taxpayers.

Because of its concerns regarding the integrity of the EI Program, the Committee met on 12 June 2001 to review the audit observation. Ms. Sheila Fraser (Auditor General of Canada), Mr. Jean Ste-Marie (Assistant Auditor General) and Mr. Neil Papineau (Director, Audit Operations) represented the Office of the Auditor General of Canada. Mr. Guy Proulx (Director General, Revenue Collections Directorate, Assessment and Collections Branch), Mr. Harvey Beaulac (Assistant Commissioner, Appeals Branch) and Mr. Michael Henderson (Director, CPP/EI Appeals Division, Appeals Branch) appeared on behalf of the Canadian Customs and Revenue Agency. Mr. John McWhinnie (Assistant Deputy Minister, Insurance), Mr. Gordon McFee (Director, Policy and Legislation Development) and Mr. André Hurtubise (Acting Director General, Investigation and Control) represented Human Resources Development Canada.

BACKGROUND

            Human Resources Development Canada (HRDC, the Department) and the Canada Customs and Revenue Agency (CCRA, the Agency) jointly administer the Employment Insurance Act. HRDC is responsible for paying benefits and the CCRA is responsible for insurability provisions and collecting premiums. The CCRA is also responsible for resolving insurability employment questions through insurability rulings

            To receive EI payments, individuals must provide a Record of Employment form, prepared by their former employer, showing how many hours or weeks they have worked and their earnings prior to termination of employment. If, after a preliminary investigation, HRDC’s Investigation and Control Directorate determines that a Record of Employment form is inaccurate, questionable, or false, it asks one of the CCRA’s local CPP/EI rulings units to make an insurability ruling. Rulings units then review the evidence by interviewing claimants and their former employers before making a decision.

            Claimants, employers, and HRDC can appeal rulings decisions to CCRA’s Appeals Division. Claimants and employers frequently appeal rulings; HRDC rarely does. Decisions by the Appeals Division can in turn be appealed to the Tax Court of Canada. Again, claimants and employers frequently appeal Appeal Division’s decisions and HRDC never does.

OBSERVATIONS AND RECOMMENDATIONS

            Acting on a complaint, the Office of the Auditor General of Canada reviewed the manner in which HRDC and the CCRA examined, investigated and responded to alleged abuse and fraud of the Employment Insurance Program in British Columbia. The audit confirmed the presence of abuse and found that EI benefits were obtained through the use of false Record of Employment forms. The audit also found that HRDC and the CCRA had been aware of allegations of abuse for over 20 years and that corrective measures had had mixed results.

            According to the Auditor General, there were  a series of flaws in the processes used to review cases of suspected abuse and fraud with regard to Record of Employment forms. The Committee  heard that:

·        If HRDC finds sufficient evidence to question the validity of a Record of Employment form, it ceases its investigation and refers the matter to CCRA for an insurability ruling. The CCRA verifies the evidence rather than conducting a full-scale investigation of its own. The Auditor General testified that, as a consequence, “no in-depth investigation is ever completed on cases where insurability is an issue.”

·        CCRA’s rulings training and policy manuals contain no information providing guidance on dealing with suspected cases of fraud or abuse.  Rulings officers are not trained as auditors or investigators. They do not use the expertise of CCRA’s investigators or forensic accounting specialists.

·        When reviewing a suspect claim, CCRA rulings officers “seldom leave their offices to visit business premises, examine original business records or meet claimants or employers.” If there was a language barrier, rulings officers “almost always” used the claimant’s family and friends as translators.

·        Rulings officers spend an average of five and a half hours to complete rulings in cases of suspected abuse and fraud. The Auditor General claims that this is not sufficient.

·        When CCRA interviews claimants and employers to verify facts provided by HRDC, they will accept the claimants’ and employers’ versions of events even if they contradict evidence gathered previously by HRDC. HRDC is not informed when any new or contradictory evidence is obtained and is thus not able to comment on or rebut it.

·        There was not enough evidence in many files to justify rulings and many files contained evidence that contradicted rulings. Many files had insufficient evidence to support appeals decisions.

·        When rulings are appealed, the CCRA follows the same procedures it does prior to issuing rulings. Appeals officers in the Appeals Division interview claimants and employers by phone and do not leave their offices to visit businesses, review records, or meet claimants and employers.

·        Appeals officers give greater credence to evidence they have gathered than to evidence gathered previously by HRDC or rulings officers. HRDC does not have an opportunity to comment on, or rebut evidence gathered by appeals officers.

·        If an employer or claimant decides to appeal a decision by the Appeals Division before the Tax Court of Canada, a CCRA appeals officer decides whether or not CCRA should defend its position in the Tax Court. This decision is made without further representation from HRDC.

            According to the Auditor General, there has not been a single prosecution, by the CCRA, under the subsection of the EI Act that deals with the making, participating, assenting to, or acquiescing in the making of false or deceptive statements in a return, certificate, statement or answer filed or made as required. For its part, HRDC has not prosecuted any employers in British Columbia under its offence sections of the Act in the last three years, although it has levied some administrative penalties. It is clear that the current investigation process is not capable of producing the level of proof needed to demonstrate fraud.

            Neither the Department nor the Agency disputed the Auditor General’s findings; both promised corrective action. The CCRA has created a new position — Complex Case and Technical Review Officer — to deal with complex cases where EI fraud is suspected. Mr. Proulx stated that these positions are currently being filled and that the new officers will receive training to help them handle cases of suspected fraud and abuse. He also testified that, in cases of suspected abuse and fraud, CCRA has empowered its more senior officers to “go out a do a little bit of an auditing and bookkeeping review” to ensure that the Record of Employment is “anchored in reality and … not fraudulent and not just paperwork coming out to generate the claim machine.”  In addition, the Agency is clarifying its procedures to ensure that information identified by investigations and control officers at HRDC will be considered appropriately during CCRA’s rulings process. The Agency also indicated that it is working with HRDC to improve communications and clarify respective roles. Finally, HRDC and the CCRA have engaged Consulting and Audit Canada to determine the standards for the delivery of the rulings and appeals aspect of the EI Program.

            While these measures are welcome and have received the Auditor General’s overall approval, witnesses provided only marginally more detail than had originally been offered following completion of the audit observation. The Committee was accordingly pleased to receive a copy of an action plan drawn up by the CCRA and HRDC. This action plan addresses each of the Auditor General’s recommendations and includes implementation and completion dates.

            Although the Committee is pleased that the Department and Agency have responded positively to the audit observation, there are several concerns that it would like to see directly addressed. These concerns involve the need for better communication between the Department and the Agency and the Agency’s allocation of resources for its rulings and appeals processes.

            The need for improved communication between HRDC’s Investigation and Control Directorate and the CCRA’s rulings units is apparent. As the audit observation noted, once HRDC had referred a case to the CCRA there was little, if any, communication between them prior to a ruling. If, in the course of verifying evidence provided by HRDC, CCRA rulings officers obtained new or contradictory evidence, they did not contact HRDC. Once they made a decision, rulings officers rarely informed HRDC (or claimants or employers for that matter) of the reasons behind their decisions. If a ruling was appealed, the same conditions tended to apply.

            In attempting to explain this lack of communication, the CCRA indicated that it is important for rulings and appeals officers to “maintain their independence and impartiality” when making decisions and that “great care” had to be exercised in involving HRDC during the rulings and appeals processes. The Agency pointed out that the EI Act mandates separate roles for it and HRDC and that a recent Tax Court of Canada decision (Sharbells Fish Market) underlined the need to “guard against involving HRDC in the determination of insurability in a manner that may taint the process.”[1] Mr. Proulx emphasized these same points in his testimony.

            During testimony, this reluctance on the part of the CCRA to co-operate with HRDC became evident in another respect. CCRA witnesses were asked if, on the basis of information obtained through investigations of tax abuse, evasion, or fraud, the Agency alerted HRDC to employment sectors at risk of preparing suspect Record of Employment forms. In response, Mr. Beaulac pointed to section 241 of the Income Tax Act, which limits the ability of officials to provide taxpayer information.

            The Department and Agency intend to improve their communications with one another. However, this improved communication is limited to developing a better understanding of each other’s roles, general handling of complex cases, and sharing information on workloads involving large-scale fraud investigations. There was no explicit mention made of plans to improve communication during the conduct of individual rulings or appeals.

            The Committee believes that one of the keys to more effective management of cases of suspected fraud or abuse involves better communication between HRDC and the CCRA during the rulings and appeals processes. Furthermore, the Committee believes that this can be accomplished without compromising the independence of the rulings and appeals officers. The Committee therefore recommends:

RECOMMENDATION 1

That Human Resources Development Canada and the Canada Customs and Revenue Agency explore ways to improve information sharing during insurability rulings and appeals processes, and discuss the results in their performance reports for the period ending 31 March 2002.

            The Committee also believes that there is considerable merit in exploring the possibility of using information gathered by the CCRA in the conduct of other investigations to point HRDC towards areas of heightened risk. The Committee accordingly recommends:

RECOMMENDATION 2

That the Canada Customs and Revenue Agency inform the Investigation and Control Directorate of Human Resources Development Canada of areas in which there is heightened risk of abuse and fraud as identified by its other investigations and enforcement activities.

            CCRA’s budgeted time standard for insurability rulings is four and a half hours. The audit observation found that the CCRA’s rulings officers averaged five and a half hours to complete each ruling where abuse and fraud was suspected. In the Auditor General’s opinion, this was not enough time to adequately review, examine and reach a determination. This stands in contrast to Mr. Proulx’s assertion that rulings officers “carefully research, analyse, and weigh” evidence before making decisions. Later on, Mr. Proulx told the Committee “in actual fact, it takes approximately nine hours on average to complete an investigation.” He added that CCRA had received additional funding “in recognition of the complexity of the cases [the Agency] handle[s] and the hours spent on insuring that cases are given the recognition they deserve.”

            The rulings process needs to be adequately resourced based on a realistic evaluation of what is required to do the job properly. The Committee therefore recommends:

RECOMMENDATION 3

That the Canada Customs and Revenue Agency carefully review the resources, including time and funding, needed to make thoroughly investigated insurability rulings and to handle appeals regarding employment insurance claims where abuse or fraud is suspected, adjust its budgeted time standard accordingly, and seek additional funding if required.

RECOMMENDATION 4

That the Canada Customs and Revenue Agency include a discussion of the human, technological, and financial resources it intends to devote to dealing with employment insurance claims where abuse or fraud is suspected in its Report on Plans and Priorities for fiscal year 2002-2003.

            In paragraph 34.31 of her Report, the Auditor General wrote that the CCRA’s rulings officers do not use the expertise of the Agency’s investigators or forensic accounting specialists in its special investigations units. Mr. Beaulac explained that this was because special investigations units have their own mandates that are not related to rulings and appeals on insurability decisions. There is no apparent reason, however, why the expertise located elsewhere in the Agency could not be used to reinforce the capacity of its CPP/EI rulings units. The Committee therefore recommends:

RECOMMENDATION 5

That the Canada Customs and Revenue Agency consider strengthening the capacity of its CPP/EI rulings and appeals units by making the expertise of its special investigations units available to them in cases involving suspected fraud, and report its  progress in its performance reports beginning with the report for the period ending 31 March 2002.

            While developing and implementing an action plan is an appropriate response, it is nonetheless a belated one. The Auditor General reported that “HRDC officials have been aware of … alleged fraudulent practices for over 20 years,” and that CCRA officials have known about them “for many years.” Mr. McWhinnie acknowledged that this was so, testifying, “it is something that has gone on for many years.” “It is true,” he admitted, “it has been longstanding.” Although Mr. McWhinnie asserted that “to say nothing has been done would not be true,” initiatives taken by HRDC to combat the abuse have produced “mixed results.” As a consequence, the EI Program as administered in lower mainland British Columbia has been exposed to risk year after year with no successful attempt to do anything about it. As the Auditor General stated about suspected abusive and fraudulent practices in British Columbia, “little was done to stop it.”

            There is no ready explanation of why previous corrective measures have produced mixed results. There are, however, two absolute requirements if the new corrective measures are to succeed: regular monitoring of performance, and increased transparency that will promote fuller accountability.

            The Department and the Agency must monitor the progress of the new measures they are adopting and report the results to Parliament. HRDC has already taken steps in this direction. In the Department’s latest Performance Report it indicated it had “started to develop a broader performance measurement system to capture all aspects of [its] mandate to prevent, deter and detect fraud and abuse” in the EI Program, promising to have this system in place for fiscal year 2001-2002.[2] This new performance measurement system must also, in the Committee’s view, cover efforts to prevent, deter and detect fraud and abuse with regard to Record of Employment forms. Both the Department and the Agency must monitor performance in this area and report the results to Parliament. The Committee accordingly recommends:

RECOMMENDATION 6

That Human Resources Development Canada and the Canada Customs and Revenue Agency monitor the performance of all measures, including those outlined in their action plans, to prevent, deter and detect fraud and abuse with regard to Record of Employment forms, and report the results to Parliament in their performance reports beginning with the reports for the period ending 31 March 2002.

            HRDC has also informed Parliament that it is arranging the transmission of Records of Employment via the Internet on a trial basis and that it had “begun to redesign the system that employers use to provide [the Department] with payroll information to assist in reducing fraud or abuse.”[3] The Department announced that it was planning pilot implementation of this system by 31 March 2001. While this measure was not referenced among the steps described for the Committee by officials, the Committee believes that Parliament should be informed of its success in reducing fraud and abuse. The Committee therefore recommends:

RECOMMENDATION 7

That Human Resources Development Canada make specific reference to the impact of its new payroll information system in reducing fraud and abuse under the EI Program  commencing with its Performance Report for the period ending 31 March 2002.

            The audit observation was triggered by a complaint about the way the Department and Agency deal with cases of suspected abuse and fraud under the EI Program in lower mainland British Columbia. The work that produced the audit observation was restricted to British Columbia and all witnesses were careful to stress that the findings could not be applied nationally. However, as the Auditor General pointed out, “the training, the policies, the lack of guidance is national in scope.” She added that she presumed that lack of guidance “must have some effect elsewhere in Canada.” She indicated later that if the action plan of the Department and the Agency is adequate and should a follow-up audit find that it has produced results, her Office would not conduct other audits in other provinces. However, the Committee is concerned that since the Department and the Agency have followed the same procedures nationally, there is a possibility that what was happening in British Columbia was not exclusive to that province. The Committee therefore wishes to emphasize that it fully expects that the new measures adopted by the Department and the Agency will be applied nationally. Furthermore, it expects that Department and Agency will measure and report on their efforts to detect, deter, and prevent abuse and fraud on a national basis. The results should demonstrate to Parliament and Canadians whether these efforts are succeeding and whether a full-scale, nation-wide audit by the Auditor General of Canada is called for.

CONCLUSION

            Under current procedures, efforts by HRDC and the CCRA to identify the misuse of Record of Employment forms in lower mainland British Columbia to receive EI benefits are inadequate. The absence of an effective rulings system exposes the Program to risk and does not adequately defend the interests of Canadian taxpayers, honest employers, and legitimate claimants.

            In its Report on Plans and Priorities 2001-2002, HRDC informed Parliament that:

HRDC strategies for improved services [to Canadians] … reflect the third factor in our planning environment — the best possible use of public funds. This has always been an important driver for measures to combat abuse and misuse of EI funds …[4]

            The Committee fully expects HRDC and the CCRA to fulfill this commitment and to urgently take all the steps that are necessary to produce a workable system for identifying, limiting and prosecuting abuse and fraud under the EI Program.

Pursuant to Standing Order 109, your Committee requests that the Government table a comprehensive response to this report.

A copy of the relevant Minutes of Proceedings (Meetings Nos. 22 and 27) is tabled.

Respectfully submitted,

John Williams, M.P.
Chair