Fraud Files: Billions in federal funds meant to help unemployed stolen by scammers

Dept. of Labor lambasted by internal review, targets multi-level solution to address holes in the system
InvestigateTV examines pandemic unemployment fraud. (Reporter: Caresse Jackman, Videojournalist: Michael Estrabillo, Editor Scotty Smith)
Published: Jan. 2, 2023 at 10:07 AM CST
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(InvestigateTV) - The global spread of a novel coronavirus in early 2020 shut down businesses across the country, leaving millions of Americans out of work.

People were left searching for answers.

“The most embarrassing thing is to tell your kid, I don’t know what we’re going to eat,” one Metro Nashville man told InvestigateTV’s affiliate WSMV in 2020.

The federal government acted quickly and passed the CARES Act —a $2.2 trillion dollar stimulus bill with hundreds of billions of dollars in unemployment aid — in the late Spring of that year. But with that aid came scores of scammers who, according to the September 2022 semi-annual report to congress by the Department of Labor’s Inspector General, made off with tens of billions of dollars in potentially fraudulent claims. The Identity Theft Resource Center, a nonprofit organization, has tracked the number of unemployment claimants victimized by CARES Act fraud. Chief Operating Officer, James E. Lee, testified before the U.S. Senate Committee on Commerce, Science & Transportation as part of the committee’s hearing on enhancing data security on October 6, 2021.

During his testimony, Lee spoke candidly about ITRC’s findings and the effect fraud had on victims who were searching for unemployment aid.

“For the victims who were denied benefits, these cybercriminals got the money first,” Lee told the committee. “Our research shows, as the chair notes, 40% were unable to pay their bills, 14% were evicted. 33% could not pay for food.”

According to the Department of Labor’s Inspector General, it was a combination of federal and state mismanagement — combined with an array of scammer tactics — that led to billions in lost taxpayer dollars.

It begs the question: Where was the breakdown that allowed this fraud to happen?

The Beginning of the Pandemic

As part of the CARES Act, the federal government distributed more than $872 billion through the pandemic unemployment insurance program.

In October 2022, the Department of Labor stated it had identified more than $45 billion dollars worth of potentially fraudulent claims.

All of this fraud quickly came on radar of the Identity Theft Resource Center.

“In early April of 2020, the ITRC started receiving more and more calls on this issue, and so we realized, this was an emerging trend,” Eva Velasquez, President and CEO of the Identity Theft Resource Center said in an interview with InvestigateTV. “We were pushing these programs of enhanced benefits out very quickly and the mandate really was to get this money in the pockets of people who needed it.”

The tactics used by fraudsters ranged from people filing for benefits in multiple states to using the names of the deceased. Others were found to be using suspicious email accounts attached to claims. In one case, 11 members and associates of a gang were charged in a multimillion-dollar unemployment fraud scheme.

According to the Inspector General, the bad actors allegedly used stolen personal information of more than 800 victims to submit nearly 1,000 claims for unemployment insurance benefits.

LexisNexis Risk Solutions Government CEO Haywood Talcove, who has worked with organizations like the ITRC and Georgia State University to monitor and examine how scammers schemed state and federal unemployment programs, said identity theft was a major trend.

“We’ve seen this all throughout the pandemic. People were going out, using stolen identities to get benefits,” Talcove said.

One popular method Talcove said scammers used to infiltrate unemployment systems involved creating fake driver’s licenses and deep fakes on the dark web.

“They’re getting manufactured to bypass the system so that they can easily steal money from unemployment insurance agencies,” Talcove said.

David Maimon, Criminology Professor at Georgia State University, discusses the different ways that criminals used unemployment systems nationwide to commit fraud and identity theft.

Georgia State University professor and Director of the Evidence Based Cyber Security Research Group David Maimon said his group also saw many criminals manufacturing high-quality fake driver’s licenses and using them to authenticate their fake identities.

“What’s really interesting, in this sense, is the extensiveness of this operation,” Maimon said. “When you spend some time on those platforms you see how the criminals take those identities, steal identities, manufacture identities — embed them on driver’s licenses, passports — and simply start using to apply for all kind of benefits from the government.”

Maimon said he believes the government could do more to protect taxpayer money.

“I don’t think the government is doing enough. In fact, I don’t think that the government is doing enough to try and authenticate our real identity. At this point, it’s very easy to fake identities in order to steal money from the government,” Maimon said.

In its semi-annual report to congress, the Department of Labor’s Inspector General said it was a combination of factors that led to such rampant fraud, writing: The unprecedented infusion of federal funds into the unemployment program combined with stolen personal information — plus the program’s weaknesses over the last several years — led to the problem the department is grappling with today.

Losses at the State Level

The Depart of Labor report looked at fraud throughout the federal system but did not have a state-by-state breakdown of losses at that level.

InvestigateTV reached out to more than two dozen states and combed through several state legislative audit reports to find out how much money was potentially lost due to fraud and identity theft over the last two years. Of the dozen states that responded, all of reported losing over a million dollars. Some lost much more.

According to the California state auditor’s office, the California Employment Development Department (EDD) failed to take fast-enough action at the beginning of the pandemic to bolster its UI fraud detection efforts. As a result, from March through December 2020, $10.4 billion out of $111 billion in UI benefits EDD paid were later determined might be fraudulent.

Pennsylvania’s most up-to-date data on unemployment fraud during the pandemic is reflected in an Independent Fiscal Office report, which found there was an estimated $6 billion in fraud across both traditional and temporary federal unemployment programs for 2020 through the 3rd quarter of 2021, combined.

The remaining states InvestigateTV contacted either did not respond to requests for information or stated they were unsure how much money was potentially lost due to fraud and identity theft. A compete rundown of responses is available at the end of this article.

‘Nobody could have predicted the spike in claims’

Department of Labor Deputy Director for Policy Michele Evermore at the office of Unemployment Insurance Modernization said her department is now targeting changes at the federal and state level following the scathing review from the inspector general.

According to the inspector general’s report, the Department of Labor’s “lack of sufficient action significantly increases the risk of even more payments to ineligible claimants.”

The report adds: “Immediate action is needed.”

Evermore said the unemployment insurance system itself was simply one avenue for criminals to capitalize on stolen identities.

“They weren’t necessarily hacking into unemployment insurance systems, they were using information that was exploited in other breaches to apply for benefits in people’s names,” Evermore said. She also said the fact unemployment insurance is a federal and state partnership means there are dozens of different systems that can be exploited in a multitude of ways.

“Even if one state figures out how to program in and fix those to block the scammers, that same group of people couldn’t be teleported to another state with the same problem because it’s an entirely different system than they’re running on,” Evermore said.

Investigate TV asked Evermore what is being done right now to make sure the federal government can effectively mitigate fraud during the next emergency.

“There are so many new products and so many new solutions out there to fight fraud,” she said. “Every state is now participating with this ID hub at the National Association of State Workforce Agencies. We’re adding new products all the time.” Evermore identified what she called “tiger teams” made up of fraud experts and equity experts who “examine all of the bottlenecks in the system” to identify weaknesses.

As for the exact amount of money lost to fraud, Evermore said the exact number may never be known.

“This is a whole government, a whole society problem,” she said. “A lot of these scammers are international crime rings, so we have to work in concert with the Department of Justice and other federal agencies to make sure that we’re actually tracking this for everyone.”

In December, Julie Su, Deputy Secretary of Labor, wrote a blog post stating how the agency is preparing for the next storm.

Su says the the department has:

  • Invested $134 million in American Rescue Plan funds for fraud prevention grants to 50 states.
  • Allocated $260 million in equity grants and awarded $18 million in navigator grants for states to address systemic inequities in the UI system.
  • Invested in the UI Integrity Data Hub supporting various cross-matches to help determine UI eligibility more quickly and accurately, including the multi-state cross-match functionality to verify that UI applicants are who they say they are and to combat fraud (these efforts have resulted in a significant increase in usage of this cross match to 48 states).
  • Developed centralized tools to make it easier for states to use plain language and user-friendly interfaces to improve the claimant experience and accurately determine eligibility.
  • Engaged multidisciplinary tiger teams with 30 states to help them address fraud, work through backlogs, improve equity and access in the UI system, and to implement improvements in these areas.
  • Launched an identity verification pilot to evaluate the use of GSA’s as a possible identity verification service for the UI program.

However, the Department of Labor admits that their efforts alone will not solve the problem.

Su stated that the need for state administrative funding to reduce improper payments cannot be overlooked.

The department said the president’s 2023 fiscal year budget calls for updating the outdated UI administrative funding formula to give states adequate resources — both in regular times and during times of crisis. The department also added they’re encouraging Congress to take legislative action to better support states’ administration of the UI program while those at the federal level continue to invest additional resources to fight and prevent fraud.

For months, InvestigateTV has asked the White House for an interview with Gene Sperling, the man in charge of tackling unemployment fraud for the Biden Administration.

So far, no response to those requests has been received.

Investigate TV also asked the Federal Bureau of Investigation for information on how that agency plans to tackle cybercrime and security related to protecting federal programs. That request has also gone unanswered.

Experts said tracking and fighting fraud has always been a challenge, but stressed that those challenges must be addressed: Taxpayers’ dollars must be protected before the next emergency strikes and people turn to federal programs for help.

“The worst thing that can happen is that the magnitude of this crisis hurts UI’s brand and people are reluctant to apply when they lose work,” Evermore said.