Social security abuse and the grey economy

Social security abuse refers to intentional action aimed at obtaining social security benefits without entitlement or in an amount exceeding the person’s entitlement. Methods may include providing false or incomplete information to public authorities or withholding information about circumstances affecting entitlement to a benefit.

In Finland, social security consists of services and benefits that protect people’s livelihoods. Social security is administered by several organisations, including the Social Insurance Institution of Finland (Kela), wellbeing services counties, unemployment funds and insurance institutions.

Abuse can be roughly divided into two main categories:

• Misuse of residence-based social security, involving the falsification or concealment of information concerning residence and residence requirements.
• Misuse of employment-based social security, involving false or concealed information about income, employment or insurance coverage.

Social security abuse is a wide-ranging phenomenon that changes along with society. It is closely linked to the grey economy and other forms of crime. It may involve both individual acts and systematic and professional activity. Abuse may also involve cross-border actors and activities directed from abroad.

Forms of social security abuse

Social security abuse typically occurs when individuals receive benefits without entitlement or in amounts higher than they are entitled to. Examples of such abuse include:

• False or incomplete information in applications, such as concealed income or assets or false information about housing circumstances.
• Undeclared work while receiving benefits, for example where an employer pays wages in cash, fails to report them to the Incomes Register and neglects the related statutory social insurance contributions.
• Misuse of the Incomes Register, such as reporting earnings payment data even though no wages have actually been paid, or reporting excessive amounts of tax withheld in order to manipulate taxation.
• Misuse of identities, such as using the identity or personal identity code of a person who has left Finland to apply for and receive benefits.
• Misuse related to housing, such as declaring an artificially high rent even though the tenant does not actually pay the stated amount to the landlord.
• Accident and insurance fraud, involving false or misleading information about an accident or its circumstances.
• Misuse related to studies and job-seeking, such as sham studies or false information about studying or seeking employment.

Social security abuse may constitute a criminal offence and result in criminal liability. Typical offences include fraud, aggravated fraud and forgery.

Scale and impacts of social security abuse

No comprehensive centralised statistics are available on social security abuse, but the available data indicate that the phenomenon is significant. For example, Kela detects approximately 2,500–3,500 suspected cases of benefits abuse every year, some of which result in a request for police investigation. A high proportion of these cases result in a judgment. (Kela statistics)

The actual extent of the phenomenon is likely to be significantly greater than the statistics indicate, as a considerable proportion of cases are believed to remain undetected. Individual euro amounts do not reflect the full impact of abuse, as it is often linked to other grey economy phenomena and crime, such as undeclared wages, identity theft, the use of undeclared or unauthorised labour, migrant smuggling, labour exploitation, tax offences and other forms of economic crime. The harm caused ranges from losses of public funds to distorted competition and the erosion of social trust.

According to observations by public authorities, social security abuse is particularly associated with labour-intensive and low-paid sectors, such as construction, transport, restaurants and cleaning. The platform economy has also been found to be associated with social security abuse. The phenomenon also involves professional facilitators who organise or enable abuse. In addition, social security abuse has been linked to companies with fictitious or only limited genuine business activity and to organised crime.

Misuse of the Incomes Register may also, for example, enable unjustified access to a loan or serve as a tool for international crime.

Social security abuse is prevented through co-operation between public authorities

Preventing and detecting abuse requires sufficient powers and the effective exchange of information between public authorities.

Example: Undeclared wages or incorrect earnings payment data detected during a tax audit or other control measure carried out by the Tax Administration can be reported to Kela. This may prevent the payment of benefits claimed on false grounds, such as unemployment benefit or social assistance.

Example: During an inspection, the occupational safety and health authority encounters individuals working in a restaurant whose earnings data cannot be found in the Incomes Register. The presence of such “helpers” may indicate both undeclared work and social security abuse if the individuals are receiving benefits without informing the relevant public authorities that they are working. The occupational safety and health authority may, on its own initiative, report suspected abuse to the competent public authorities, such as Kela and the Tax Administration.

However, there is still room for improvement in the exchange of information and in the powers available to public authorities. Restrictions on some public authorities’ rights to disclose information may prevent them from providing information on their own initiative to the authority competent in the matter. During supervisory measures, some public authorities may also have limited powers to verify the identities of people working for the company being inspected.

Preventing abuse also requires effective administrative sanctions alongside criminal proceedings. In addition to national co-operation, international co-operation is playing an increasingly important role in preventing abuse. For example, improving the exchange of information between social security institutions in EU Member States may enhance the prevention of abuse.

Private individuals and companies can help prevent abuse by:

• protecting their personal and company data;
• checking the information recorded about them in the Incomes Register [.fi]›; and
• reporting any suspected abuse to the relevant public authorities.

Read more:

Kela: Social security in Finland [.fi]›
Undeclared work – Grey economy & economic crime