Who will pay for all of California’s unemployment fraud?
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 state-issued 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 finalizes 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 cutoff. 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 some $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 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.”
“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 around 8%. Much of the fraud
anxiety in the COVID-19 era revolves around the Pandemic Unemployment
Assistance 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,” said Sacramento
District Attorney Anne Marie Schubert.
Last month, a new law enforcement task force chaired
by Schubert 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 Corrections 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 like
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.
A financial battle begins
While fraud targeting state unemployment enrollment
systems is a widespread concern, it doesn’t explain the problems of people like
Kori Chase, who have experienced issues directly with their state-issued debit
cards.
Up until October, she thought the odd charges she’d
seen over the summer at places she hadn’t visited had been resolved, since the
money was credited to her account. But just before Chase paid her October rent,
her balance plummeted to negative $3,000. Bank of America had reversed the
fraud credit, she said, leaving her unable to pay $530 for her room in
McKinleyville. She hasn’t been able to get the money back since.
Bank of
America declined to comment on how many California unemployment accounts have
seen fraud credits reversed, though dozens have shared
similar stories and documentation with CalMatters. A spokesman said the
bank has unfrozen some 54,000 accounts after jobless cardholders appealed
disputes, and that the “vast majority” of fraud appears related to state
enrollment processes. The Employment Development Department told CalMatters
that “Bank of America assesses potential fraudulent charges” involving debit
cards.
At the state
Capitol, some staffers attempting to remedy constituents’ unemployment woes
have grown frustrated with what they say is a lack of cooperation from the
bank, aside from a five-page letter sent in response to a
letter to Bank of America CEO Brian Moynihan from more than 50 state lawmakers.
They question how the bank is flagging accounts for fraud, and whether there
are parallels between problems in California and other states with Bank of
America unemployment payment contracts, including Arizona
and Maryland.
Overhauling unemployment?
The more than
17 million unemployment claims
that California’s Employment Development Department has processed since March
far exceeds the demand for benefits the state has seen in any other recession.
Still, security pitfalls weren’t hard to see coming. The state auditor reported last month
that the agency mailed some 38 million letters with Social Security numbers
during the pandemic, despite previous calls to stop.
The
vulnerabilities have been compounded during the pandemic by large infusions of
federal cash with PUA payments and $300-600 weekly supplements. Though many
workers badly need the money, it’s doubled as a lure for fraud that could
undermine the future of the state’s cash-strapped unemployment
fund.
Assemblymember Rudy Salas, a Democrat from
Bakersfield, said lawmakers don’t yet know how much unemployment money is
missing, let alone whether it came from state or federal coffers. He’s awaiting
a broader state audit in January, then will come the tougher question: “How do
we backfill that?” said Salas, who has introduced one of several unemployment
reform bills, AB 56, that the Legislature is set to take up
next year.
As new virus closures once again swell the state’s
unemployment backlog, competing priorities are emerging in the onslaught of new
reform bills. Republicans have seized on unemployment dysfunction to rail
against bureaucratic mismanagement and Newsom’s leadership, while Democrats are
introducing more incremental bills to tweak the system.
“We’ve got a lot of messes to clean up,” said
Democratic Assemblymember Lorena Gonzalez, who introduced bill AB 47 to require the state to offer a
direct deposit option for unemployment, in line with 47 other states.
“Ultimately, we do have to make people whole.”
Assemblymember Jim Patterson, a Republican from
Fresno, describes the employment agency as a “rats nest of incompetence.”
Patterson made the remark in a press conference where he attacked the state’s
much-touted new ID.me automated verification system, citing constituents still
stuck waiting months for benefits after promised improvements.
In the meantime, states like Washington have already recovered hundreds of millions of dollars
after fraud — something Wilder of the Association of Certified Fraud Examiners
said could prove much more difficult with California’s scattershot fraud
issues.
“Especially if it’s just one-off cases, a bunch of
individuals, that means you can’t find somebody that put through a thousand
fraudulent claims,” Wilder said. “That’s a thousand separate investigations
that the state is going to have to deal with.”
Lauren Hepler covers the California economy for CalMatters. Her past stories have been published by the New York Times, the L.A. Times, the Guardian and others. Steven Council is working as an Audience Intern this summer and is a rising junior at Northwestern University's Medill School of Journalism. Elk Grove News is a media partner of CalMatters.
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