Chapter 1 – Introduction
Conduct of the review
1.1 On 20 June 2017, the Senate Standing References Committee on Economics (the Committee) requested that the Inspector-General of Taxation (IGT) review the Australian Taxation Office’s (ATO) fraud control management. This request followed certain events including those relating to Operation Elbrus and allegations of tax fraud that may be linked to an abuse of position by a public official.
1.2 The IGT accepted the Committee’s request on 27 June 2017 and shortly afterwards commenced this review.1 In doing so, the IGT acknowledged the Committee’s concerns and that the community is entitled to expect the highest level of integrity in the administration of the tax system. Such a review would be aimed at restoring community confidence by providing independent assurance and making recommendations for improvement as necessary.
1.3 The IGT invited and received many submissions2 to this review from a broad range of stakeholders. The IGT also met with them including academics, legal and risk professionals as well as taxpayers, tax practitioners and their representative bodies.
1.4 To gain a better understanding of the issues and areas requiring further investigation, the IGT also held discussions with current and former ATO officers3 as well as senior staff in other Commonwealth government agencies such as the Australian Federal Police (AFP), Attorney-General’s Department (AGD), Australian Commission for Law Enforcement Integrity (ACLEI), Australian Transaction Reports and Analysis Centre (AUSTRAC), Australian Securities and Investments Commission (ASIC) and Australian National Audit Office (ANAO).
1.5 The issues raised in the above submissions and discussions were further tested during the IGT’s analysis of ATO controls, processes and procedures. This analysis included examining case records on the ATO’s case management system, Siebel, ATO internal fraud investigation case files as well as related statistics. The IGT also interviewed ATO officers across a range of business units including Fraud Prevention and Internal Investigations (FPII), Public Groups and International (PGI), Private Groups and High Wealth Individuals (PGH), ATO Corporate (ATOC), ATO People (ATOP) and other business lines.
1.6 It should be noted that whilst this review considers both internal and external risks of fraud and corruption, there is a stronger focus on the internal risks given that it was initiated largely due to the events related to Operation Elbrus. In addition, there are other reviews and processes dealing with risks of external fraud such as the Phoenix Taskforce4 and the Black Economy Taskforce5. The discussion of external risks in this review is limited mainly to the work the IGT has conducted in this area to date as well as a brief consideration of some specific issues.
1.7 Importantly, the review was conducted in a manner which ensured that the prosecutions, commenced as a result of Operation Elbrus, were not prejudiced in any way. For example, before finalisation of the review, the relevant parts of this report, including Appendix B were provided to the AFP and Commonwealth Director of Prosecutions (CDPP) for their consideration and comment all of which have been taken into account. Furthermore, the IGT has expressed no views on whether the events connected to Operation Elbrus amounted to fraud or corruption as this is a matter for the courts.
1.8 The review has found no evidence of actual internal fraud or corruption of a systemic nature. Generally, the ATO has sound systems in place for managing risks of internal fraud and, specifically, in relation to Operation Elbrus, they did restrict unauthorised access to taxpayer information. However, the detailed examinations of relevant ATO practices, procedures and structures and how they are enforced has identified a number of areas that require improvement, some of which are already being addressed as a result of reviews which the ATO itself has undertaken since Operation Elbrus.
1.9 Given the public interest in Operation Elbrus and related issues, Appendix B sets out, in some detail, the IGT’s understanding of the relevant events. In summary, Operation Elbrus concerns a joint agency operation to investigate an alleged tax evasion syndicate. It is understood that the syndicate may have used a payroll service provider as a vehicle to obtain approximately $157 million of Pay As You Go (PAYG) amounts, withheld from payments to thousands of contractors, and other taxes. A phoenix type arrangement may have been employed to dissipate assets through a complex process under the insolvency laws.
1.10 Operation Elbrus revealed that two of the alleged key syndicate members were children of the ATO’s then Deputy Commissioner for the PGH business line. The latter was also the Chair of the Government’s Phoenix Taskforce.6 The PGH business service line is the very area in the ATO tasked with investigating ‘those who criminally defraud the [tax] system or deliberately avoid their tax obligations’ and collaborates with regulatory and law enforcement agencies in doing so.7 The Deputy Commissioner was subsequently charged with abuse of position of a public official.
Focus of this review
1.11 As mentioned earlier, the main focus of this review is internal integrity or internal fraud risks. The IGT has avoided directly commenting on specific matters in Operation Elbrus as they are currently before the courts. However, events relating to Operation Elbrus, as well as concerns raised by stakeholders and the IGT’s own analysis have led this review to consider risks including the following:
- the suitability of personnel for the roles they perform including vetting and consideration of an officer’s family or associates;
- length of time staff remain in high risk roles;
- risk awareness, or integrity, culture including training;
- conflicts of interest;
- unauthorised access by ATO officers, related security controls and senior officer intervention in ATO compliance activities; and
- ATO capability in detecting and investigating staff fraud and misconduct.
1.12 As mentioned already, this review also considers risks of external fraud but to a lesser extent. It draws on recent IGT work in this area. For example, at the time that this review was commenced, a separate IGT review was being conducted into Goods and Services Tax (GST) refunds verification.8 In that review, one aspect of the ATO’s approach to fraud in the precious metals industry was examined. The broader risks of fraud in this industry have been explored in this review together with the ATO’s treatment approach including interagency collaboration — refer to Appendix D.
1.13 Similarly, as a result of a number of complaints being made to the IGT, an investigation was already initiated into the ATO’s management of tax evasion referrals (TERs) by the community before the commencement of this review.9 Given their direct relevance to this review, the results of that investigation are incorporated into Chapter 6 of this report.
1.14 This review also briefly considers the ATO’s approach to certain other compliance risks, such as illicit tobacco and offshore tax evasion, as was exposed by the Panama Papers leaks. It also examines cooperation with other agencies to deal with financial crime, including information sharing arrangements.
Relevant IGT investigations
1.15 During the review, the IGT received a number of complaints which alleged or suggested ATO fraud and/or corruption. Such complaints were investigated where sufficient information was provided, or could be obtained, to at least make initial inquiries. The investigations were conducted in parallel to this review and insights from them have also been incorporated into this report.
1.16 Where complaints were made anonymously, insufficient information was provided or the IGT had no other means of verifying the concerns, broader inquiries were made during the review to determine whether ATO controls were sufficiently robust to deal with the allegations raised. Any identified weaknesses were treated as areas requiring improvement. Complaints which related to previous ATO practices or processes were treated in the same manner, i.e. the allegations were tested against current practices.
1.17 The remainder of complaint investigations that raised valid concerns were isolated instances and did not, of themselves, suggest criminal culpability, for example, an ATO officer’s conduct in private interactions with members of the public. The ATO has confirmed consideration of disciplinary action in such cases and the IGT used the insights in these cases as part of a broader consideration of the ATO’s culture regarding integrity issues.
Relevant reviews by other agencies
1.18 In conducting this review, the IGT also considered a number of reviews and inquiries conducted by other bodies and agencies including those conducted by the ATO itself. The key reviews are described below whilst a list of reviews which were also considered, together with a short description, is provided in Appendix C.
ATO internal reviews
1.19 Subsequent to the events in Operation Elbrus, the ATO commenced a number of reviews relating to the detection and investigation of internal fraud risks. These include the following:
ATO Corruption Risk Review (2017)
1.20 The objective of this ATO commissioned review10 was to evaluate the current areas of corruption risk within the ATO and to identify potential areas of emerging risk to inform future mitigation efforts. It was found that whilst the ATO’s FPII unit was a key pillar in the ATO’s corruption resistance framework, the ownership of corruption risk was also concentrated in that unit rather than being more widely accepted by the ATO’s business lines as a shared responsibility.
The ATO September 2017 Report
1.21 The ATO September 2017 Report was the outcome of an internal review11 which examined the ATO’s arrangements in relation to conflicts of interest, security clearances and positions of trust to assess whether they appropriately addressed integrity risks. A number of recommendations were made including improvements to how conflicts of interest are reported and monitored as well as a need to identify high risk roles and associated controls beyond those related to security clearances.
1.22 The issue of combatting illegal phoenix activity was the subject of an interagency government taskforce with a range of proposed measures recently being announced by the Government.12 Accordingly, in this report, the IGT has only provided some information on these issues, allowing some time for the measures to be implemented and bear fruit before making further recommendations.
Black Economy Taskforce Report
1.23 The Black Economy Taskforce has examined issues which overlap with those in the terms of reference for this review and the IGT has sought to complement the matters raised in the Taskforce’s report.13
Performance audit of the ATO’s use of settlements
1.24 The ANAO has recently conducted a performance audit of the ATO’s settlement of tax liabilities with a number of recommendations being made.14 Once again, some time should be afforded before further review of the processes involved in such ATO activities. However, it is noted that it may be necessary for the IGT to review ATO senior officers’ assessment of ‘litigation risk’ in the future. The ATO’s key control in this respect is the retrospective analysis conducted by retired judges in major settlement cases. It is noted that very few cases have been subjected to this process thus far.15
Review of the Public Interest Disclosure Act 2013
1.25 The Public Interest Disclosure (PID) regime, which enables current or former public servants’ allegations of misconduct or wrongdoing to be reported and investigated, was recently reviewed by the Department of the Prime Minister and Cabinet. This review found that whistleblowers did not have a positive experience after making a disclosure and that the relevant agencies believe the Public Interest Disclosure Act 2013 (PID Act) has been difficult to apply. One of the recommendations involved certain agencies, including the IGT, being considered as ‘investigative agencies’ to encourage disclosers to come forward.16 Elements of the PID regime are discussed in this report where relevant.
Australian Commission for Law Enforcement Integrity—inquiry into jurisdiction
1.26 A Parliamentary Joint Committee inquiry into the jurisdiction of ACLEI considered whether the ATO should be included within ACLEI’s remit.17 The inquiry recommended an independent assessment of the ATO’s corruption risk profile, together with an examination of the feasibility of including the ATO within ACLEI’s jurisdiction. The current role of ACLEI is explained in more detail in Chapter 5.
1.27 This report is divided into two main sections: internal fraud and external fraud. However, the IGT recognises that fraud and corruption events may result from the convergence of these two risks. This is also known as ‘complex fraud’.18 For example, an outsider intending to commit external fraud may seek the assistance of an ATO officer to commit internal fraud such as providing tip-offs to evade detection. This report addresses such convergence in the most relevant sections.
1.28 Chapter 2 of the report begins by explaining a range of integrity-related concepts, such as fraud, corruption and conflict of interest. It proceeds by describing the Commonwealth Fraud Control Framework, including the role of other key Commonwealth government agencies, followed by the general ATO arrangements under that framework. Finally, a summary of relevant approaches adopted by other revenue agencies in comparable jurisdictions is outlined.
1.29 Chapters 3 and 4 of the report consider issues relating to internal fraud and corruption risks, including those raised by Operation Elbrus, and the discussion is aligned with the broad requirements of the Commonwealth Fraud Control Framework, namely:
- fraud and corruption prevention measures (Chapter 3), including:
- controls in recruitment processes and vetting of staff more generally;
- rotation of staff into other roles;
- risk awareness culture including training;
- management of conflicts of interest;
- appropriateness of senior officer intervention in audits and reviews;
- integrity of settlement decision-making and issuing of letters of comfort; and
- prevention through predictive models; and
- fraud and corruption detection and response (Chapter 4), including:
- the FPII unit’s detection methods and investigations; and
- the ATO’s Fraud and Corruption Control Plan.
1.30 Chapter 5 is the final chapter that discusses internal fraud and corruption issues and it focuses on governance and oversight.
1.31 The last two chapters of this report (Chapters 6 and 7) focus on key risks posed by external parties who seek to exploit weaknesses in the tax system for their own gain. Chapter 6 examines the ATO’s own prevention, detection and response whilst the ATO’s collaboration and cooperation with other agencies in addressing major external fraud risks is examined in Chapter 7.
1 The review was commenced pursuant to paragraph 8(3)(d) of the Inspector-General of Taxation Act 2003.
2 Terms of reference are reproduced in Appendix A of this report.
3 In accordance with subparagraph 8(2A)(b)(iii) of the Ombudsman Act 1976 which applies by virtue of subsection 15(h) of the Inspector-General of Taxation Act 2003.
4 The Hon. Kelly O’Dwyer, MP, Minister for Revenue and Financial Services, ‘A comprehensive package of reforms to address illegal phoenixing’ (Media release, 12 September 2017); Australian Government, Budget Paper No. 2 (May 2018) p 37.
6 Commonwealth, Inquiry into insolvency in the Australian construction industry, Senate Economics References Committee, 28 September 2015, p 26 (Deputy Commissioner of the PGH business line).
7 Commissioner of Taxation, Annual Report 2016–17 (2017) p 59.
8 Inspector-General of Taxation (IGT), Review into GST Refunds (2018).
9 The investigation was commenced pursuant to subsection 8(1) of the Inspector-General of Taxation Act 2003.
10 Professor David Lacey and Jane Bailey, ‘ATO Corruption Risk Review 2017’, report to the ATO (2017).
11 Australian Taxation Office (ATO), ‘Review of ATO Conflict of Interest and Security Clearance Processes – Management Initiated Report’ (Internal ATO document, 6 September 2017).
12 Above n 4, pp 37–38.
13 The Treasury, Black Economy Taskforce – Final Report (October 2017).
14 Australian National Audit Office (ANAO), ANAO Report No. 21 2017–18 Performance Audit – The Australian Taxation Office’s Use of Settlements (2017).
15 Above n 7, p 68.
16 Mr Philip Moss, ‘Review of the Public Interest Disclosure Act 2013’, report to the Government (15 July 2016) p 13 rec 2.
17 Joint Committee on the Australian Commission for Law Enforcement Integrity, Parliament of Australia, Inquiry into the jurisdiction of the Australian Commission for Law Enforcement Integrity (5 May 2016).
18 Attorney-General’s Department (AGD), Preventing, detecting and dealing with fraud, Resource Management Guide No. 201 (August 2017) p 7 para .