The Inspector-General of Taxation’s (IGT) review into the Australian Taxation Office’s (ATO) fraud control management was commenced at the request of the Senate Economics References Committee. It followed events connected to Operation Elbrus including allegations of tax fraud that may be linked to abuse of position by a public official.

The review has not found evidence of systemic internal fraud or corruption. Generally, the ATO has sound systems in place for managing risks of internal fraud, however, the review has uncovered a number of areas which require improvement.

One of the areas identified for improvement concerns the ATO controls to appropriately identify and manage conflicts of interest as inadequate management of such conflicts can lead to risk of corruption. In this regard, following Operation Elbrus, the ATO has made significant improvements to its staff instructions and guidance, however, further improvements are required.

The IGT is of the view that, in determining whether conflicts of interest has occurred, the ATO should consider the nature of the interest, such as the closeness of the personal relationship giving rise to a potential conflict, the seniority of the officers’ roles and the nature of the official duties, such as relevant transactions or other responsibilities. A recommendation has been made which is aimed at ensuring undeclared conflicts are systematically captured, appropriate action is taken in respect of identified conflicts and former colleagues of current ATO officers do not obtain information or exert influence by reason of their previous association.

Another area identified as requiring improvement relates to senior ATO officer intervention in individual cases. A recommendation has been made to improve the transparency of such interventions by clearly specifying when they may occur, requiring appropriate documentation of all resulting actions in an accessible form and periodically reviewing compliance with such policies.

The IGT particularly considered the ATO’s controls with respect to medium to high risk roles. A number of recommendations have been made such as periodic rotation of officers in these roles and bolstering the induction for new SES officers, recruited from outside the ATO, to focus on the ethical standards and highest levels of integrity that an organisation such as the ATO must exemplify.

Other IGT recommendations aimed at achieving significant improvements to the ATO’s management of internal fraud risk include:

  • bolstering the independence of its Audit and Risk Committee by ensuring that the majority of its members, including the chair are external to and independent of the ATO;
  • maintaining the role of the Integrity Advisor and enabling ATO staff to discuss ethical or fraud related concerns with him or her;
  • conducting periodic reviews of its corporate integrity indicators and providing results and actions arising from them to the Commissioner;
  • strengthening the ATO’s staff recruitment processes, ongoing checks and mandatory fraud awareness training to ensure its workforce maintains integrity and engenders continuing public confidence;
  • acting on the advice, received from corruption risk experts, to improve its ability to detect internal fraud and corruption risks by such means as enhancing staff ownership of the risks;
  • requiring staff to make contemporaneous notes of any requests made by one officer to another to access taxpayer information (so-called ‘access by proxy’);
  • conducting periodic quality reviews of internal fraud investigations as well as the appropriateness of associated disciplinary actions;
  • enhancing its analysis of behavioural events to assist in detecting serious misconduct; and
  • increasing transparency of settlement processes.

The review also examined aspects of the ATO’s management of the risks posed by external parties who seek to exploit the tax system and commit fraud against the Commonwealth (‘external fraud’), in particular those attracting criminal sanctions. In this regard, the IGT examined certain areas and conducted case studies to identify areas of improvement which would complement other recent initiatives aimed at addressing tax and financial crime, for example the Phoenix and Black Economy Taskforces.

The specific areas examined include the ATO’s tax evasion referral (TER) process which involves receiving and acting on intelligence provided by the community. It was already the subject of an IGT own-initiative investigation as a result of complaints made by dissatisfied taxpayers who had referred those they suspected of tax avoidance to the ATO. The IGT has concluded that TERs are a valuable source of information for detecting external fraud. A recommendation has been made for the ATO to formalise and document consistent processes, across all business lines, for dealing with TERs as well as better informing the public and reporting on resulting outcomes to enhance public confidence and thereby improve the quality and quantity of TERs.

Another area of particular focus in this review was the ATO’s response to alleged fraud in the precious metals industry, where $2.5 billion was estimated to be at risk due to weaknesses in the GST regime. The IGT found that there were lessons to be learnt from this experience such as identifying risks early and taking prompt whole of ATO action to prevent the propagation of fraud.

More broadly, the IGT has made recommendations to improve processes aimed at prevention of external fraud and these include ATO officers routinely considering whether the source of risks encountered in their case work are potential weaknesses in the system and ensuring that such risks and weaknesses are prioritised and investigated.

The review also considered ATO’s collaboration with other agencies to combat serious tax crime. Through the Serious Financial Crimes Taskforce (SFCT), which is responsible for identifying and addressing the most serious and complex tax and financial crimes, law enforcement agencies and the ATO share information and coordinate their activities. Some recent steps have been taken to improve the quality of ATO referrals to the SFCT and the ATO’s capability to conduct criminal investigations jointly with the Australian Federal Police (AFP). The IGT has identified further improvement opportunities and has recommended to the Government to review the current arrangements for interagency collaboration including optimal models for sharing specialist capabilities and information as well as the management, structure and funding of taskforces.

In addition to the above recommendation to Government, the IGT has made a total of 13 recommendations to the ATO who has agreed with all them in whole or in part. The ATO has indicated that some of these recommendations have already been implemented and this would be verified by its Audit and Risk Committee. The implementation of the agreed recommendations should significantly bolster the ATO’s management of fraud and corruption risks. However, the full benefit of the package of improvements may not be realised due to disagreement with certain aspects of recommendations.

In closing, it should be noted that the review has ensured that the matters, relating to Operation Elbrus, which are currently before the courts have not been prejudiced in any way. To this end, relevant parts of this report were provided to the AFP and the Commonwealth Director of Public Prosecutions for their consideration and their comments have been taken into account.