State auditor reports about $10.4 billion in fraudulent claims were paid out, while backlog sits at over 1 million claims
SACRAMENTO – While Americans are left with uncertain futures from the pandemic, a certainty that everyone can count on has arrived: tax season. In the spirit of the chaos of 2020, a hefty bill could be awaiting unsuspecting Tulare County citizens whose identities were stolen for fraudulent unemployment claims.
As illustrated by the recent Auditor of the State of California’s report, the state did not act fast enough to fortify their fraud detection efforts. According to the report, an increased workload plus changes to federal Unemployment Insurance (UI) benefit programs in light of the pandemic created greater risk of fraud. Of the $111 billion paid out in UI during the pandemic in 2020, California Employment Development Department (EDD) data shows that about $10.4 billion was paid for claims that it has since determined could be fraudulent.
In his recent press release, Congressman Kevin McCarthy said that last year, Congress funded a new program called Pandemic Unemployment Assistance (PUA), designed to provide unemployment benefits to gig workers, independent contractors or self-employed individuals—Americans who would typically not be eligible for unemployment benefits—an action the federal government warned might invite fraud.
“Let us be clear—the mismanagement of taxpayer dollars in the amount of [$10.4 billion] is absolutely unacceptable,” McCarthy said, “and the delay in processing Californians’ legitimate COVID-related unemployment assistance claims is also absolutely unacceptable.”
A few perils potentially await victims whose identities have been stolen and fraudulently used to collect unemployment insurance payments: victims may be asked to pay taxes on benefits they did not receive or request and EDD may request money back from identity theft victims who did not receive payments at all. The former would require coordination with the IRS to determine the legitimacy of the complaint, the latter would need manual identity verification by the EDD.
Worse yet, victims may attempt to collect benefits on their own UI claims and realize fraudulent claims already exist, in which EDD would need to manually verify their identity, stop payment on the fraudulent claim, and indicate with a unique identifier that the previous claim was fraudulent. A bureaucratic nightmare awaits an already overburdened system.
As of Feb. 10, the UI backlog was 1,009,189 claims while now neck deep in fraudulent claims, a financial disaster from which the auditor report states, “in the near future, EDD will likely need to dedicate considerable resources to assisting victims of identity theft.” The report claims that the problem is likely to grow in size as more cases are investigated and the extent of the damage becomes clearer.
Warnings, decisions and consequences
According to the state auditor report, a critical mistake was made by the EDD early on in the pandemic when leadership made the decision to remove a key safeguard against paying claims with unconfirmed identities in order to streamline its process. Normally, EDD puts stop payment alerts to claims with potential identity problems. EDD removed these stop payment alerts, mistakenly believing that other safeguards would continue to stop payment on potentially fraudulent claims. By the time the stop payment alerts were reinstated in August, EDD had waived the barriers to payment for almost 77,000 claims and paid more than $1 billion on claims that it has since determined are potentially fraudulent.
A glaring example of the safeguard mistake lies in an individual’s claim filed on Aug. 3, but reported having become unemployed due to the pandemic on Feb. 2, 2020—26 weeks prior to filing the claim. The state auditor report states EDD stopped payment on the claim the same day it was filed, but because the safeguard was waived, it paid benefits for the backdated weeks, totaling almost $22,000. EDD was unable to confirm the claimant’s identity and disqualified the claim from any additional payments.
State Senator Shannon Grove (R-Bakersfield) condemned Governor Newsom’s handling of the EDD, who’s camp has cited the former Trump administration as the weak link.
“The governor and his failed unemployment department may play the blame game and say it was the federal administration’s fault,” Grove said, “but this audit confirms these failures took place within the Democrat-run EDD and on a Democrat governor’s watch despite warnings from the federal government to enact fraud prevention measures.”
After congress passed the PUA March 27 to provide unemployment insurance to self-employed workers, The U.S. Department of Labor sent multiple advisories about fraud prevention and UI program integrity, once in April and again in May. The state auditor report concludes that despite these repeated warnings, the EDD did not take quick action to enhance safeguards against fraud.
A system overwhelmed
The state auditor report claims that under normal circumstances, some of EDD’s benefit fraud detection efforts might have allowed it to detect impostor fraud. EDD performs daily reviews using California employer data and weekly reviews using nationwide employer data, using Social Security numbers to identify overlap between EDD’s benefit data and employer databases to attempt to determine if individuals are continuing to receive benefits by failing to report that they have returned to work.
During the pandemic, this system was quickly overwhelmed. More than 840,000 matches were generated between March and November 2020, illustrating that hundreds of thousands of claimants were either collecting UI benefits while working or had had their identities stolen and impostors were using those identities to collect benefits.
By the time EDD began addressing fraud in late July, the state had already received 7.7 million claims, according to the state auditor report. The move was to automate the process to stop payment on certain suspicious claims, a responsibility previously carried out manually by only two staff members reviewing daily reports. The auditor report claims that since daily reports could contain more than a thousand claims a day, EDD may have allowed many more fraudulent claims to collect payments without being checked before it automated this process.
To receive and assess fraud reports, EDD has dedicated only one staff position, which became vacant in July, according to the state auditor report. Having only received 6,000 UI fraud reports in 2019, EDD started consistently receiving more than 1,000 a day by September 2020, topping out at 1,800 in a single day. EDD had yet to address more than 77,000 fraud reports as of last November.
According to the state auditor, the EDD was also late to the game in responding to instances where an unusually high number of claims under different names were filed from a single address. EDD failed to identify any addresses associated with these claims until September.
EDD identified 26,000 addresses linked to such suspicious claims, but rendered the list informational, and only took action on 10,000 addresses. The state auditor pulled just three addresses from the list of 26,000, and found one with more than 80 total claims, 12 of which were still eligible to receive payment and more than $300,000 already paid to claims from the address.