As jobless claims climb, criminals emerge to try to defraud employers and the government
With total jobless claims since mid-March exceeding 40 million, it is no surprise that criminals have moved quickly to exploit vulnerabilities in legacy systems in order to defraud governments by submitting fake unemployment insurance claims. Indeed, enhanced government benefits under the Pandemic Unemployment Assistance Program (PUA) have made unemployment fraud an even more attractive target for fraud.
In a recent Thomson Reuters webinar, Unemployment Fraud and COVID-19: What You Need to Know, a panel discussed the history of unemployment fraud, recent trends in unemployment fraud, and technology that can help prevent and mitigation this fraud. The panel was moderated by Thomson Reuters’s Gina Jurva, and included Philip Reiff, an assistant director with the U.S. Government Accountability Office’s (GAO) Forensic Audits Investigative Services; and Jon Coss, Vice President of risk, fraud, & compliance for Thomson Reuters’ Pondera Solutions.
Reiff began the webinar by providing an overview of unemployment insurance in the U.S., explaining that unemployment insurance is a “shared federal and state system” that generally provides benefits for 26 weeks. Eligibility for benefits was controlled by confirming the employer had paid the unemployment insurance payroll tax, verifying the employee had lost the job through “no fault of their own”, and that the employee fulfilled the weekly job search requirement.
Under the PUA, unemployment benefits were expanded to include:
- increased weekly benefits by $600 until July 31, 2020;
- an additional 13 weeks of benefits after state benefits run out; and
- was made retroactive to January 27, 2020.
The PUA also expanded the definition of eligible workers to include individuals who are:
- self-employed and lost business due to the pandemic;
- quarantined and can’t work due to the coronavirus;
- unable to work due to the risk of exposure to the coronavirus; or
- unable to work due to caring for a family member with COVID-19.
Reiff also explained how the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided the Office of Inspector General for the Department of Labor (OIG-DOL) with an addition $26 million for oversight of the PUA. The OIG-DOL will coordinate enforcement with the state workforce agencies. He also noted that the CARES Act also mandates the GAO prepare a report for Congress on its oversight of all spending under the Act, including unemployment insurance benefits.
The panelists noted that prior to the pandemic, most of the improper payments to employees were made to individuals who were not actively seeking work, were not “able and available to work,” or continued to collect payments after returning to work. Employer unemployment insurance fraud involved Form-1099 misclassifications and State Unemployment Tax Act dumping.
Thomson Reuters’ Coss then discussed unemployment insurance fraud prior to COVID-19, noting that in 2019 the improper payment rate for unemployment insurance was 10.61%. In fact, because of the record low unemployment rate prior to the pandemic, unemployment insurance fraud was not a “target rich” environment for fraud because “professional fraudsters” focus their efforts where they have the biggest opportunities, Coss said.
However, since PUA made changes to the existing unemployment insurance program that increased the number of verification points, the OIG-DOL and state workforce agencies are watching for fraud trends that could result from not just the increased number of claims but also the expanded access to unemployment insurance benefits. Coss noted that the OIG-DOL and state workforce agencies will be on the alert for the following unemployment insurance fraud trends:
- employees who return to work but continue to collect unemployment insurance benefits;
- mass or batch uploads of employee wage records;
- fictious employer schemes or “two-sided” schemes; and
- unemployment insurance benefits that are deposited into common bank accounts.
The additional federal funding, however, increased pressure to process the 40 million new applications in just a few months, and the strain on legacy unemployment insurance systems in the states has created a “perfect storm” for additional unemployment insurance fraud schemes, including:
- claimants filing under synthetic or stolen identities;
- claimants filing for inmates, deceased persons, or out-of-state applicants; or
- fictious businesses that hire and then layoff “employees” in order to file unemployment insurance claims.
The “huge influx” of applicants has also led to relaxed verification standards which also encourages “hit and run” fraud, Coss explained, adding that international crime rings have been active in unemployment insurance fraud, creating synthetic identities by combining real and fake data points or combining real information from multiple people to file claims. Additionally, crime rings can purchase large numbers of stolen identities through sites on the dark web.
Technology tools to stop unemployment insurance fraud
Although the PUA has provided fraudsters with yet another opportunity to steal from the state and federal governments, there are technology solutions that can help governments with fraud prevention.
Coss highlighted solutions that can make it possible for state workforce agencies to:
- use third-party data to validate existing and new claimants;
- implement or improve wage-benefit conflict cross-matches;
- validate new, recently active or other high-risk businesses;
- implement and improve analytics to identify collusive patterns; and
- prepare systems and processes for a potential second round of unemployment insurance fraud.
Further, these technology solutions can be used without delaying claims processing, Coss said, noting that as people being returning to work, state workforce agencies should anticipate that the focus of fraud will need to transition to overpayment where individuals have returned to work but are continuing to collect unemployment insurance benefits.
Coss encouraged state workforce agencies to look for “more collaborative” schemes in unemployment insurance fraud — not just the identities but also the “shared attributes,” such as multiple claims using the same shared address, same bank account, or shared email or IP addresses.
Coss also suggested state workforce agencies closely examine the employer side for red flags that a business might be fictious, such as the time between incorporation and the hiring of employees, when wages were paid, and how quickly employees were laid off. Any business started in the last few months is worth a closer look, he added.
If there is a second wave of the COVID-19 pandemic in the fall as some experts predict, state workforce agencies and enforcement should anticipate an even more organized and aggressive round of unemployment insurance fraud, he explained, further suggesting that fraudsters will prepare by buying the most complete and current identities from the dark web and start new businesses or reactivate dormant businesses to facilitate two-sided schemes.
The GAO’s Reiff added that using state licensing databases can assist states in verifying identities for the “new pool” of eligible professions.
In order to combat unemployment insurance fraud now and in the future, state workforce agencies need to be aware of the fraud trends and be prepared to use technology to check identities, confirm individual eligibility, and verify businesses are legitimate employers.
