Fraud Still Upending Effort to Update State Unemployment Systems

States are still grappling with fraudulent claims pouring into their unemployment insurance systems months after expanded emergency pandemic jobless aid expired, underscoring the challenge the Biden administration faces with overhauling the safety net.

“It’s still enormous,” said Michele Evermore, deputy director for policy at DOL’s new Office of Unemployment Insurance Modernization. “It’s not as big as it was in 2020, and we keep working on solutions. When it comes to fraud, it’s baked into all of our different areas of work.”

While the Biden administration has doled out millions of dollars in grants to help states fight the fraud, and even deployed expert teams directly to help states identify the gaps in their systems, states such as Maryland and Vermont say the money isn’t enough. Experts and state officials in Virginia, Colorado, and Michigansay those states are also still fighting fraudulent claims.

Calls for more federal help come as the U.S. Department of Labor is working to implement a broad plan to modernize the unemployment insurance system and despite $2 billion dedicated to the effort provided under the March 2021 American Rescue Plan Act.

Nearly every state reported fraudulent claims—often filed by actors using stolen identity information from past data breaches—early in the pandemic. But the ongoing attacks to jobless aid systems add to processing backlogs, taking time and resources away from states as they juggle efforts to rebuild their programs.

“The schemes our fraud experts continue to uncover are sophisticated, ever-changing and increasingly brazen,” Maryland Secretary of Labor Tiffany Robinson wrote in a letter to Maryland’s congressional delegation on March 1.

“While we appreciate the federal funding we have received to fight fraud,” Robinson added, “it unfortunately pales in comparison to the scale of the current challenge... Additional resources and merit staff flexibility are desperately needed in order to win this battle.”

Unprepared and Overwhelmed

The business shutdowns caused by the pandemic in March 2020 triggered a flood of applications for jobless benefits, overwhelming state computer systems and exposing the disjointed nature of the unemployment system. While the U.S. DOL sets the general structure and pays for the administration of benefit programs, 53 state or territorial unemployment agencies actually set the rules and pay out the benefits.

Many states, such as Vermont, hadn’t updated their systems for years when the pandemic struck.

“Heading into the pandemic we didn’t even have a fraud unit,” said Michael Harrington, commissioner for the Vermont Department of Labor. “Because we’re so small and because our federal funding had been so limited, we didn’t have a lot of the programmatic pieces in place to handle not just the deluge claims, but the varying issues that came out of that.”

“We still see them on a weekly basis,” Harrington added of fraudulent claims. “It’s not overwhelming, but we are still seeing fraud being committed, especially identity theft fraud and suspicious actor fraud, and so those are the ones that continually crop up.”

Adding to the confusion, Congress set special rules when it enacted new emergency unemployment aid programs under the March 2020 CARES Act, waiving certain documentation requirements so that laid-off workers would be able to quickly access the aid and wouldn’t have to wait for verification.

A Perfect Storm

The combination of weathered state unemployment systems, the sheer amount of claims, and relaxed eligibility requirements created a perfect storm for fraud—resulting in many legitimate unemployment claims being clogged in a backlog of applications.

Federal officials in one instance warned that a Nigeria-based fraud ring was using personal information stolen in large data breaches to target multiple states.

The Biden administration has taken steps to address the magnitude of fraud targeting the pandemic emergency unemployment programs, which DOL’s independent watchdog estimates could result in as much as $87.3 billion in benefits being paid improperly, “with a significant portion attributable to fraud.”

President Joe Biden announced last week during his state of the union address that the Department of Justice will appoint a chief prosecutor dedicated to investigating fraud within the pandemic-aid programs.

The team of “specialized prosecutors” will target “those committing large-scale identity theft, including foreign-based actors” as well as identity theft schemes in the unemployment insurance, and other Covid-19 relief programs, according to the White House.

Late Funding

The U.S. DOL also has issued more than $210 million in grant funding to states to help address fraud, and recently announced $15 million available under its “Navigator Program” that can be used for fraud management.

Vermont officials said they have applied to four different DOL grants aimed at combating fraud, but that the funding didn’t truly serve its purpose because it was delivered too late.

“The real difficulty is, it’s great to give us the funds necessary to do some of the investigation and work but you know, without continued ongoing funding moving forward to support the outcomes that are identified through these efforts, it becomes really difficult to improve them,” said Cameron Wood, director of Vermont’s Unemployment Insurance office.

Wood said that while DOL may provide some funding upfront to develop fraud prevention tools, the funding doesn’t cover the ongoing costs that it takes to manage those programs, like licensing renewal.

“So although we’re going to utilize those funds for the first few years, potentially to help cover those costs,” Wood explained, “once the initial grant application goes away, unless the U.S. DOL and Congress are going to increase our base administrative funding, all of a sudden we have a new technology that we don’t have the ongoing funds to continue to administer.”