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What state agencies should do with their additional unemployment fraud funding

· 5 minute read

· 5 minute read

As state agencies attempt to grapple with the unprecedented caseloads of fraud that came out of federal unemployment programs during the pandemic, the U.S. Department of Labor has offered relief in the form of millions of dollars of additional funding to identify fraud and recover benefits paid out illegally.

The question now is, what are states going to do with this money?

The intention, when the Department of Labor issued a program letter earlier this summer, was to give states a way to fund system upgrades, acquire better technology tools and solutions, and hire additional staff in order to better address what became a flood of fraud around the now-expired Coronavirus Aid, Relief, and Economic Security (CARES) Act and its series of unemployment compensation programs. In its June letter, the Department of Labor announced that up to $225 million in additional funding was going to be available to pay for state agencies’ administrative costs related to reporting, overpayment detection, and recovery activities.

In its most recent program letter, the Department of Labor notes that the additional funds will allow states to better “support accurate reporting” as well as detect and recover overpayments that may have been made during the pandemic. The Department also outlined permissible uses of these funds, including:

  • payment of expenses incurred for reporting on investigation and overpayment activities;
  • payment of expenses incurred to gather business requirements, program computer systems, or otherwise implement tools, strategies, or solutions to detect, establish, and recover overpayments; and
  • hiring staff or obtaining contract services for processing and recovering overpayments.

Although the Department’s program letter focuses on fraud detection and overpayment recovery, it also acknowledges the need for states to ensure that “eligible individuals with legitimate claims get the benefits they are entitled to when they are due.” Attachments to the program letter detail the amounts available to each state for administrative expense; and in its most recent change, the Department extended the deadline for state agencies to apply for the additional fraud funding to October 30, 2022.

Lessons learned from unemployment fraud

Much of the wave of fraudulent unemployment claims came out of the CARES Act, by which the federal government provided an estimated $260 billion for enhanced and expanded benefits under three new pandemic unemployment insurance benefit programs. Unfortunately, few states were prepared to handle the influx of individual applications for unemployment benefits, much less the greatly heightened number of fraudulent applications made by illicit actors using personal information obtained from data breaches or purchased on the dark web. Within the first five months following the passage of the CARES Act, the Department of Labor reported that states were processing “10- to 15-times the typical volume of claims” and that 57.4 million initial claims for unemployment benefits had been filed.

Not surprisingly, given the economic emergency that gripped the nation during the early days of pandemic-induced lockdowns and closures, state agencies made it a priority to get assistance to those who had applied, leaving screening for potential fraud as a secondary concern.

That — coupled with many states’ already overwhelmed and antiquated information technology (IT) systems — led to a very predictable outcome: Millions of fraudulent applications were approved and billions of dollars in fraudulent claims were improperly paid. Indeed, the U.S. Employment and Training Administration reported an improper payment rate of 18.71% for 2021, with a “significant portion attributable to fraud”; while the Department of Labor estimated that at least $163 billion could have been paid out improperly overall.

In an audit, the Department of Labor’s Office of Inspector General (OIG) went on to identify several areas of vulnerability that contributed to the increased fraud discovered in these programs, including state IT systems that “were not modernized” and staff levels that “were insufficient to manage the increased number of new claims.” The OIG noted that “many states did not perform required and recommended improper payment detection and recovery activities.” In fact, the OIG found that 40% of states did not perform required cross-matching, and 38% did not perform required recovery activities.

Additional fraud funding provides opportunities

Fortunately, the additional funding now being offered to improve states’ unemployment fraud recovery efforts seeks to rectify these previous problems. Indeed, such additional resources could go a long way to easing much of the burden states still face, along with alleviating the chronic short staffing and continued reliance on the same outdated IT systems that were so vulnerable to criminal exploitation.

For example, simple technological updates that would improve states’ required process of cross-matching would allow state agents to identify the most obvious of fraudulent claims, coming from i) multi-state claimants; ii) deceased individuals; iii) federal prisoners; and iv) those using “suspicious and disposable email accounts.” Other fraud-prevention technology solutions also are available that can help states’ unemployment agencies identify deceased or synthetic identities, as well as fictitious employers and businesses.

State agencies responsible for identifying, rectifying, and recovering past improper payments and keeping them from being made in the future should view any new fraud funding received through this program as a unique opportunity to increase staffing to alleviate some of these workload issues. They should invest in upgrades and modernization for their IT systems, and acquire new tech tools and solutions that could help them detect and investigate fraud much more quickly and efficiently.

Wise investment in this case would put states’ anti-fraud efforts in their unemployment benefits area on much firmer footing.

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