The Privacy Commissioner is looking into the Ministry of Social Development's investigative practices.
The ministry confirmed the inquiry on Thursday.
"We're very serious about protecting the privacy of our clients, but we also have a responsibility to investigate serious benefit fraud allegations in a fair and timely matter," said deputy chief executive service delivery Viv Rickard.
"We're taking this step because concerns have been raised by the Office of the Privacy Commissioner, and beneficiary advocates, and it is timely to look at our current practice in line with our commitment to clients on privacy matters."
Auckland Action Against Poverty welcomed the inquiry into the ministry's "cruel investigation practices".
"The inquiry by the Privacy Commissioner is an acknowledgement of the concerns advocacy groups have regarding the Ministry of Social Development’s toxic culture and abusive approach to investigations," said spokesperson Ricardo Menéndez March.
"The investigations carried out by the Ministry of Social Development have the potential to destroy people's lives, with investigators having the ability to reach out to the beneficiary's family members, friends and acquaintances to ask incredibly sensitive questions regarding relationships and sex life.
"The beneficiary is often unaware they are being investigated while the ministry contacts these people in their life to obtain information. Several of these investigations would have started because vindictive ex-partners anonymously call the dedicated tip-off line to accuse the beneficiary of being in a relationship."
The ministry says it has to approach third parties without informing the person being investigated because "approaching people directly for information first was delaying investigations, and only yielded the information requested in 5 percent of cases".
"We want to ensure we have the right balance of enabling timely and thorough investigation with fair and appropriate procedures while safeguarding people's privacy," said Mr Rickard. "We welcome working with both OPC and advocates on this."
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