US benefits fraud tsunami

By Jeff Domansky

Ramped up demand for unemployment benefits during the pandemic. Fraud detection budget cuts during previous low unemployment. Federal and state governments failure to take widespread security improvements seriously. Sophisticated fraudsters in foreign countries filing applications in bulk.

The scale of US unemployment fraud is so massive it could reach a potential $100 billion-plus cost by the time it’s all added up at the end of the year.

A report by ProPublica highlights the jaw-dropping extent of fraud by malicious actors from around the world.

Staggering unemployment fraud numbers

Some of the individual fraud cases alone are just the tip of the iceberg. In ten months, a Bronx resident got $1.5 million. A California real estate broker gamed more than $500,000 in just six months. And, a Nigerian government official grabbed upwards of $350,000 in only six weeks.

The unemployment fraud house of horrors numbers are growing fast, according to a February 22, 2021, internal memo by the Office of the Inspector General (OIG) in the US Department of Labor:

UI benefits fraud iceberg
  • one person used a single Social Security number to make claims in 40 states; 29 states paid a total of $222,532
  • in June 2021, California paid at least 10% ($11 billion) of UI benefits to fraudulent claims and said it could potentially be as high as 27% ($29 billion
  • New York reported more than $1 billion in UI fraud, Washington ($600 million), and Maryland ($501 million)
  • fraud included 226,829 multistate claimants ($3.5 billion), more than 91,000 deceased individual SSN claims ($58.7 million), 16,446 federal prisoners ($98.3 million), and suspicious email accounts (more than $2 billion)
  • 276,194 suspicious email accounts received more than $2 billion in UI benefits; claimants using one anonymous email service received more than $269 million
  • in May 2021, AP reported Vermont stopped accepting new online applications for UI benefits after finding 90% of claims were fraudulent; applicants were told to apply by phone, and new applications dropped 90%
  • Rhode Island estimated in March 2021 that 43% of UI benefit claims were fraudulent in the previous 12 months; 382,684 were suspected as fraudulent applications, including 56,365 confirmed as fraudulent; claims blocked would have resulted in $3.2 billion in fraudulent payments
  • State Workforce Agencies (SWAs) have ineffective fraud controls; one SWA processed UI claims without running them through a fraud screening program; 35 of 54 SWAs failed to provide adequate data for SWA UI claims between March 2020 in June 2020
  • despite inadequate controls, an estimated $178 million in improper payments was prevented.

The OIG memo concluded, “ETA needs to take immediate action and increase its efforts to ensure SWAs implement effective controls to mitigate fraud and improper payments. Without effective controls, the UI program is exposed to substantial risks, including the cost of improper payments to ineligible claimants.”

Cybersecurity experts warned about risk years ago

It’s not like government officials weren’t warned about the problems in the past.

UI benefits fraud warnings

Way back in 1998, the OIG warned of potential fraud and security problems, the lack of information technology resources, and the inability to monitor many DOL program grants and funding.

In January 2003, the OIG issued more warnings about grant accountability, protection of pension assets and worker benefit funds, inadequate information technology, and a host of other challenges.

In 2015, the OIG published another in its long list of annual security warnings. “DOL’s Fiscal Year (FY) 2014 Agency Financial Statements estimated that national UI overpayments totaled $5.4 billion, and it is estimated that 3.19% of all UI benefit payments were due to fraud as defined by the individual states resulting in an estimated $1.5 billion in losses due to fraud. Over the past five years, the OIG has conducted 750 UI fraud investigations nationwide, which have resulted in 1200 criminal convictions and have identified more than $67.5 million in improper UI payments.”

Like the greatest hits on the Billboard magazine charts, the DOL-OIG security warnings keep on coming, unheeded.

Latest warnings on an unheard-of scale

On June 10, 2021, the Department of Labor (DOL) issued a withering assessment of the lack of security fundamentals and capacity to implement fraud prevention by federal and state agencies. “Our review found that DOL and the states struggled to implement the three key CARES Act UI programs. Specifically, DOL’s guidance and oversight did not ensure states implemented the programs and paid benefits promptly; performed required and recommended improper payment detection and recovery activities; and reported accurate and complete program activities.

$39 Billion in UI fraud horrors

DOL pointed specifically at “states’ IT systems were not modernized, staffing resources were insufficient to manage the increased number of new claims, and according to state officials, guidance from DOL’s Employment and Training Administration (ETA) was untimely and unclear.”

The numbers speak for themselves and reflect the desperate need for more investment in security, fraud prevention, and technology updates in federal and state government organizations, not to mention local governments which are notoriously ill-equipped to monitor and prevent fraud.

“In addition, many states did not perform required or recommended improper payment detection and recovery activities: 40% of states did not perform required detection cross-matches, 88% did not perform the recommended detection cross-matches, and 38% did not perform required recovery activities. Further, 42% of states did not report CARES Act UI program overpayments to ETA as required. States that did report overpayments understated the total amount reported by an estimated 89%.”

On track to hit $100 billion in UI fraud payments?

The US Department of Labor (DOL) estimates improper payments have measured more than 10% in 14 of the past 17 years. “As of January 2, 2021, based on a conservative improper payment rate of 10%, we estimated that at least $39.2 billion in UI improper payments – including fraud – was at risk of not being detected and recovered.”

UI fraud warnings

The DOL report continues, “Estimates for the CARES Act and its related extensions range up to $873 billion; therefore, by program end, $87.3 billion in UI benefits could be paid improperly, with a significant portion attributable to fraud. The OIG’s initial pandemic audit and investigative work indicate that UI program improper payments, including fraudulent payments, will be higher than 10%.”

Some cybersecurity experts expect a dramatically higher fraud total. As ProPublica reported, “From my experience, when this is all said and done, we are going to be counting in the hundreds of billions of dollars, not the tens of billions,” said Jon Coss, who heads a unit within Thomson Reuters that is helping states detect fake unemployment insurance claims.”

Coss said one US state received fake claims from IP addresses in nearly 170 countries. “They included countries historically linked to fraud, such as China, Nigeria, and Russia, as well as more surprising ones, such as Cuba, Eritrea, Fiji, and Monaco. Overall, Coss said, between 40% and 50% of the claims his group has analyzed seem highly suspect. He added, “It’s mind-boggling the level of fraud that we’re seeing.”

Anyone in the financial or payments industry knows cybersecurity risks and the cost of fraud are growing dramatically. If ever there was a case to be made for digital identity solutions like self-sovereign identity, UI benefits fraud makes the point overwhelmingly.

Unemployment benefits fraud may turn out to be the biggest fraud wave in US history. Unfortunately, we know from research, reporting, and first-hand experience that things in the private sector aren’t much better.

More PaymentsNEXT reporting on cybersecurity:

Critical pandemic lessons in mobile payment fraud prevention
Russian ransomware attacks American BBQ plans – citizens outraged
Global payment fraud jumped 69% in the past year