Unemployment Benefit Fraud Surges: What Government Employers Should Consider

Written exclusively for My Community Workplace for Government

In the spring of 2020, Washington experienced the largest unemployment fraud in its history, costing the state $576 million.

Washington was one of the first states to pay expanded unemployment benefits enacted by Congress. By late March, a resident, or someone claiming to be one, could apply for benefits totaling $1,390 per week. It was also one of many states that eliminated the normal one week waiting period during which unemployment claims are verified before being paid. The last week of March, the state's Employment Security Department (ESD) received 181,975 unemployment claims, which was 30 times more than the same week in 2019.

ESD recently released data that showed that the fraud continued for two months before ESD publicly disclosed it. By the time it did so in mid-May, 56 percent of claims each week were fraudulent, many filed by criminals overseas. Fraudulent claims ramped up from March to May, and fraudulent claims paid by ESD totaled $409.8 million in the first week of May alone.

On May 13, ESD temporarily stopped all payments. It subsequently flagged 200,000 claims as suspicious and eventually confirmed that 86,449 claims had been fraudulent.

ESD officials said they learned of the fraud shortly before April 21, not from their internal fraud detection technology, but because employers contacted the agency after receiving notification of a claim for an employee who was not unemployed.

ESD processes claims through its $44-million-dollar Unemployment Tax and Benefits (UTAB) system, which supposedly includes fraud control features such as scanning claims for signs of fraud. ESD previously used LexisNexis's identity verification service to check applicants' information against online databases; however, ESD cancelled that service in 2018 in part because of its high price.

Some people, including state lawmakers, have questioned if ESD unknowingly enabled the fraud by reducing its fraud detection protocols in order to speed up payments to the state's unemployed. According to one state senator, ESD made a "deliberate call" to "turn off the internal fraud detection" after an extensive internal debate on the risks of that decision. Another state senator noted that the agency had to figure out a balance "between accessibility to the public and vulnerability to fraud."

However, the commissioner of ESD denies that the agency changed its fraud detection systems. She says that identity thieves were able to carry out fraud because the agency was overwhelmed by an unprecedented number of legitimate claims, as happened in other states as well.

ESD officials said that a Nigerian-based fraud ring called "Scattered Canary" was partly responsible for the state being so hard hit. They added that attacks against ESD were sophisticated and used Social Security numbers and personal information stolen in data breaches to create fraudulent claims that were hard to distinguish from legitimate claims.

ESD has recovered $340 million of the funds lost to fraud. It has also increased its anti-fraud measures. Paul Roberts "It Took Washington 2 Months to Stop Unemployment Claim Fraud" governing.com (Aug. 11, 2020).

Commentary and Checklist

Government agencies must always balance efficiency with cybersecurity. However, before changing any processes to increase speed and efficiency, conduct an audit to determine if the risk of getting rid of certain protective measures is too great.

The challenge in the face of an unprecedented number of legitimate claims needing to be processed is to maintain cyber safety yet get the benefits out to those suddenly unemployed and in need of speedy benefit payments.

Work with fraud experts to determine what cyber and other protections are best to both reduce risk and allow for effective operations.

Watch for fraud red flags, no matter how strong your fraud protections measures. Red flags may include an increase in traffic from offshore internet addresses or claims using out-of-state bank accounts.

The U.S. Government Accountability Office (GAO) provides “A Framework for Managing Fraud Risks in Federal Programs” to help managers of government agencies and programs combat fraud.

The four major recommendations of the GAO to prevent fraud are:

  • Commit to combating fraud by creating an organizational culture and structure conducive to fraud risk management.
  • Plan regular fraud risk assessments and assess risks to determine a fraud risk profile.
  • Design and implement a strategy with specific control activities
  • to mitigate assessed fraud risks and collaborate to help ensure effective implementation.
  • Evaluate outcomes using a risk-based approach and adapt activities to improve fraud risk management.
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