Taxpayers likely on hook for EDD fraud
Pandemic Unemployment Assistance program led to unverified eligibility issues
A 1-year- old in Fresno raking in $167 a week. An ex-state employee stealing $200,000 from California’s unemployment system, some by impersonating Sen. Dianne Feinstein. Another $1.2 million swindled by a rapper who bragged about it on Youtube, $1 billion drained in the name of state prisoners and $2 billion in jobless benefits siphoned off stateissued debit cards.
If doing the math on unemployment fraud in California during the pandemic isn’t dizzying enough, add the untold numbers of workers still fighting for funds that they say were stolen in unauthorized transactions at faraway ATMS, casinos and convenience stores.
“You’ve already been robbed once and now it feels like they’re doing it again,” said Kori Chase, a 60-year- old housekeeper in Humboldt County living in her car while she tries to claw back more than $3,000 from state unemployment payment contractor Bank of America. “I feel like I’ve been thrown in the sewer, pretty much.”
The state is just beginning to tally how much of the $110 billion paid out in unemployment since March has disappeared in what law enforcement officials say is the biggest fraud investigation in California history. As the state’s own unemployment fund falls deeper into debt and Congress passes a new stimulus bill to restart $300-a-week supplemental payments, a battle is already underway over whether taxpayers might ultimately be asked to pick up the tab for fraud.
Some argue that the fraud panic has already swung too far toward criminalizing out-of-work Californians caught up in crackdowns this fall when the state Employment Development Department temporarily stopped processing claims and some 350,000 debit cards were cut off. But federal officials warn that 1 in 10 unemployment insurance dollars paid during the pandemic could be linked to fraud, which in California would total about $11 billion — more than the state spends annually on community colleges, workforce development and homelessness.
“About 10% of UI payments are improper under the best of
“This is an unprecedented period for benefit fraud activity across the country. At this time, we are unable to provide any estimates on total fraud activity during this pandemic due to an analysis effort still underway to verify identities on suspect claims.” — Employment Development Department
times,” Scott Dahl, former inspector general of the U. S. Department of Labor, told Congress this summer. “And we are in the worst of times.”
Now, fraud losses are poised to collide with a state unemployment system in financial free fall. In less than a year, California’s Unemployment Insurance fund bankrolled by employer payroll taxes has gone from a surplus of $3 billion to a projected $48 billion deficit by 2021. That’s even after the federal government stepped in during the pandemic to fund benefits for contract workers and provide temporary $600 and $300 weekly supplemental payments.
With the new stimulus bill in Washington poised to flood the strained system
with more cash, the coming weeks will test whether the state can strike a balance between paying benefits out quickly and securely. It’s a challenge that increasingly pits the Employment Development Department against its own payment contractor, Bank of America. Experts say any state missteps could prove costly for the public despite a 2010 contract with the bank that says the agency “shall not be liable for overdrafts, fraud, misuse and lost or stolen debit cards.”
“If it turns out that California should not have approved all these claims,” said Mason Wilder, a research specialist at the Association of Certified Fraud Examiners, “then regardless of what their agreement says with Bank of America about debit cards, I would think that ultimately the taxpayers are going to be on the hook for California’s errors.”
A web of fraud
Unemployment fraud is not new. “Imposter fraud,” or using someone else’s personal information to apply for benefits, has been a threat since the days when unemployment was paid out of cash boxes at local field offices. From the 1960s to 2010, paper checks had their own vulnerabilities. With California’s current system almost solely reliant on prepaid Bank of America debit cards, officials must keep up with a widening array of fraud: forged online applications, large batches of debit cards ordered to central drop houses, intercepted mail, social media scams, debit card skimming and more.
In recent years, the state’s “improper payment” rate has hovered about 8%. Much of the fraud anxiety in the COVID-19 era revolves around the Pandemic Unemployment As
sistance program, better known as PUA, created by the federal government’s $2 trillion spring stimulus package. The program aimed to quickly establish a safety net for self- employed and contract workers shut out of traditional unemployment, but its rushed application process relied on applicants self- certifying their eligibility.
“Thieves took advantage of a desperate situation and exploited it beyond belief,” Sacramento District Attorney Anne Marie Schubert said.
Last month, a new law enforcement task force chaired by S c hub er t warned Gov. Gavin Newsom that fraud linked to state inmates alone may hit $1 billion. The task force is now attempting to curb fraud by working with the Employment Development Department, which employs only 17 dedicated investigators, plus the California Department of Cor
rections and other state agencies brought into the fold by Newsom.
“The only way to get our hands around this in an efficient way is to do something like this,” Schubert said.
Law enforcement officials and security consultants emphasize potential links between unemployment fraud and organized rings looking to bankroll serious crimes such as human trafficking, drug dealing or gun smuggling. But other analysts say it’s important to keep out-of-work claimants from being overshadowed by fraud and to distinguish less sophisticated identity theft that could be detected relatively easily by better monitoring social media, foreign IP addresses and identity documents submitted by unemployment applicants. A September report by a governor- appointed “strike team” criticized the Employment Development Department’s “culture of allowing fear for fraud to trump all other considerations,” while still failing to catch fraud.
“This is an unprecedented period for benefit fraud activity across the country,” the employment agency said in a statement. “At this time, we are unable to provide any estimates on total fraud activity during this pandemic due to an analysis effort still underway to verify identities on suspect claims.”
The new stimulus bill would give states discretion in how to distribute additional federal benefits. A provision grants states authority to claw back pandemic aid, but at the same time, waives repayment if fraud wasn’t the recipient’s fault. Ultimately, the buck stops with Newsom, who will be judged on how he steers the state through its unemployment crisis.