Unemployment Fraud during the Pandemic
By Nicole McNeil Donecker, CPA, CVA, CAMS, Manager, Advisory Services
In March 2020, the federal government introduced financial assistance programs to help families adversely impacted by COVID-19. That financial impact resulted in the unemployment rate reaching an all-time high of 14.7%. It was an urgent effort to get financial aid to those in need and addressing that need often took priority over establishing controls to ensure that only qualified recipients received the benefits.
These record high unemployment numbers caused the Federal government to implement multiple financial assistance programs to aid families adversely impacted by COVID-19. Reports of fraud within programs implemented to assist COVID-19 victims have been widespread. Two of these programs are discussed below. Over the last year, reports of fraud within the programs have been widespread, and ultimately, billions of dollars in unemployment benefits were lost to fraudsters.
Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act
Relief for American workers came in two primary forms:
- The Families First Coronavirus Response Act (FFCRA), signed into law on March 18, 2020 (expired December 31, 2020).
- The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, signed into law on March 27, 2020.
The FFCRA provided funding for state unemployment insurance programs to add staff and prepare for the increased workload. In addition, the FFCRA provided flexibility for states, on a temporary basis, to adopt unemployment insurance reforms.
Meanwhile, the CARES Act expanded unemployment benefits to include individuals who would not normally be eligible for benefits. It also created the federal Pandemic Unemployment Assistance (“PUA”) Program, which provided additional compensation of $600 per week.
Independent contractors are among those who wouldn’t normally be eligible for unemployment benefits, but who were included in the CARES Act. Typically, employers are contacted to verify that the person receiving benefits is no longer employed. But with independent contractors, there is no employer to contact for verification. This eliminated a barrier for fraudsters. State unemployment offices were inundated with claims and applications were not always properly verified.
Identifying and Addressing Fraud
Several government and private organizations have conducted studies intended to estimate the extent of fraudulent activity within COVID-19 assistance programs and measures to address the issue. Results of several studies are outlined below.
U.S. Department of Labor, Office of Inspector General
The Office of Inspector General (“OIG”) for the U.S. Department of Labor issued a Pandemic Response Oversight Plan, updated April 27, 2021 (“Pandemic Oversight Plan”).1 The initial report published in April 2020, along with five subsequent reports, identified areas of concern in the unemployment insurance (“UI”) program, including:
- State preparedness;
- Initial eligibility determinations;
- Benefit amount;
- Return to work;
- Improper payment detection and recovery; and
- Program monitoring.
The most notable concern of the OIG was the “reporting of improper payments and fraud vulnerabilities due to state reliance on self-certifications alone to ensure eligibility for the Pandemic Unemployment Assistance (PUA) program.” The Pandemic Oversight Plan stated that the OIG identified more than $5.4 billion in potentially fraudulent unemployment benefits paid to individuals in several high-risk areas:
- Social security numbers filed in more than one state;
- Social security numbers of deceased individuals;
- Social security numbers of federal inmates; and
- Social security numbers used to file claims with suspicious email accounts.
As of its April 2021 report the OIG had opened more than 15,000 investigations, with a majority linked to identity theft-related UI fraud. In response, the OIG has increased the investigative staff by 20%, adding 22 special agents and prioritizing the case inventory so that 75% of investigations are focused on unemployment fraud.
How much unemployment fraud is there?
The Association of Certified Fraud Examiners (“ACFE”) released a series of reports titled “Fraud in the Wake of COVID-19: Benchmarking Report” (“Benchmarking Report”) in May, November, and December 2020. The reports measured, through surveys, the level of fraud that resulted from COVID-19. As of November 2020, 69% of respondents had observed a significant or slight increase in unemployment fraud, and 81% expected a significant or slight increase over the next twelve months.
Many fraudulent unemployment benefit claims were made with stolen identities. The Benchmarking Report shows that respondents saw a 73% increase in identity theft as of November 2020. Some fraudulent claims were discovered when the actual person received documentation in the mail, such as denied claims or 1099-Gs.2 In 2020, the Federal Trade Commission received complaints from more than 394,000 consumers that their identity had been used improperly to apply for government benefits, an increase of 3,000% from 2019.
Theft by International Crime Organizations
The Secret Service is investigating fraudulent unemployment claims linked to international crime organizations in Nigeria, among other countries. In December 2020, USA Today conducted a Zoom interview of a student from Nigeria about how he was able to make approximately $50,000 of unemployment benefits using stolen identities. The student, using the name Mayowa3, stated that he compiled a list of real people and linked that list to social security numbers and birthdates from a database of hacked information.
Mayowa paid $2 in cryptocurrency to connect a name to the social security number and birthdate. For an additional small fee, he was able to find other identifying information to assist with his fraud, such as mother’s maiden names and high school mascots.
Efforts to Stop Unemployment Fraud
Efforts have been made to filter out fraudulent unemployment benefit claims. The American Rescue Plan included $2 billion to modernize the unemployment benefit system, provide equitable access, and fraud prevention. Many states have contracted with ID.me to assist with fraud prevention. According to the ID.me website, “The application uses advanced technologies such as biometrics and artificial intelligence as well as real-time access to trillions of records in authoritative data sources to perform identity proofing.”
I have personally gone through the ID.me process. It included taking a real-time selfie and providing copies of identifying documents, plus a video interview with an ID.me representative.
Some states are seeing results. In Arizona, initial PUA claims filed the week ending October 10, 2020 totaled 570,400. After one month of using ID.me to screen new applications, the number of initial PUA claims fell by 99%.4
According to Axios, other states have shown reductions in fraudulent claims after fraud prevention measures have been implemented.5 Here are a few examples.
- Florida’s claims dropped 90.6% after fraud controls were introduced the end of January 2021;
- In Colorado, 12.7% of total claims were verified by ID.me as legitimate.
- In New York, weekly average claims decreased 92.2% in March 2021 when fraud prevention measures were put in place.
- California instituted prevention measures as of October 1, 2020 after which claims dropped from 440,882 the week of September 5, 2020 to 14,843 the week ending October 3, 2020.
Although states have been able to reduce the number of fraudulent unemployment claims, the damage has already been done. The CEO of ID.me, Blake Hall, states that America has lost more than $400 billion to fraudulent claims and that “50% of all unemployment monies may have been stolen.”6
Unemployment Fraud in the News
NBC10 Philadelphia reported in August 2020 that 10,000 state prison inmates in Pennsylvania fraudulently applied for unemployment benefits and prosecutors were announcing charges against 33 individuals. Then U.S. Attorney Scott Brady later announced that the fraudulent claims totaled nearly $250 million.
In a music video posted to YouTube, rapper Nuke Bizzle (aka Fontrell Antonio Baines) holds envelopes from the California Employment Development Department (or “EDD”, which is also the title of the video) that he obtained by submitting fraudulent claims for unemployment benefits. In addition to the rap video, Baines boasted about the fraudulent claims on Instagram. In court, Baines pleaded not guilty to three felony offenses related to fraudulently applying for $1.2 million in unemployment benefits from California. He could face up to 22 years in prison if convicted.
Leelynn Danielle Chytka of Lebanon, Virginia was sentenced to nine years in prison for filing nearly $500,000 in fraudulent unemployment benefits claims. According to a press release from the U.S. Attorney’s Office in the Western District of Virginia, “Chytka, and others, conspired to collect personal identification information of more than 35 co-conspirators, including 15 inmates in the custody of the Virginia Department of Corrections, and to file fraudulent claims of pandemic-related unemployment benefits.” Also, it was reported in court documents that Chytka told investigators that she wanted to make her business “legit” by charging a fee to file the fraudulent unemployment claims rather than steal the claimants’ money. Chytka’s boyfriend Gregory Tackett was sentenced to 108 months in prison for his role in filing the fraudulent unemployment benefit claims.
- Form 1099-G is used to report unemployment compensation to recipients by states and many people received a 1099-G for the first time.
- The camera was off to hide Mayowa’s identity.