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Risk Fraud & Compliance

Labor Dept offers state funding to combat unemployment insurance fraud

Melissa D. Berry  Lead Compliance Attorney Editor / Regulatory Intelligence / Thomson Reuters

Melissa D. Berry  Lead Compliance Attorney Editor / Regulatory Intelligence / Thomson Reuters

To help states resolve the myriad of fraud that came with pandemic-era federal unemployment programs, the US Labor Department is offering states funding to upgrade systems or hire staff

The US Department of Labor issued a program letter earlier this summer, providing states with information on existing funding sources to better help states “resolve outstanding items” from the expired Coronavirus Aid, Relief, and Economic Security (CARES) Act unemployment compensation programs. The Labor Department also announced up to $225 million for administrative costs related to reporting, overpayment detection, and recovery activities under certain CARES Act unemployment compensation programs.

As part of the CARES Act, the federal government provided an estimated $260 billion for enhanced and expanded benefits under three new pandemic unemployment insurance benefit programs. These programs expanded the number of individuals eligible for unemployment benefits, extended the eligibility period, and also increased the benefits by $600 per week.

Unfortunately, few states were prepared to handle the influx of individual applications for unemployment benefits much less the rampant fraudulent applications made by criminal enterprises using personal information available from data breaches and purchased on the dark web. During this time, states were processing “10- to 15-times the typical volume of claims.” Within the first five months, the Labor Department reported 57.4 million initial claims for benefits.

In addition to the increased volume of claims that overwhelmed antiquated systems, states prioritized getting assistance to individuals over screening for potential fraud. As a result, millions of fraudulent applications were approved and billions of dollars in fraudulent claims were paid.

The US Employment and Training Administration reported an improper payment rate of 18.71% for 2021 in two of the three pandemic unemployment benefit programs with a “significant portion attributable to fraud.” By this estimate, at least $163 billion could have been improperly paid, according to the Labor Department.

The department identified multiple vulnerabilities that contributed to the increased fraud in these programs, including:

      • state information technology systems that “were not modernized”;
      • staffing resources that “were insufficient to manage the increased number of new claims”; and
      • federal guidance that was “untimely and unclear.”

Fraud detection & overpayment recovery

Under the most recent program letter, the Labor Department is providing an additional $225 million to states to “support accurate reporting, as well as detection and recovery of overpayments.” Permissible uses of these administrative funds include:

      • 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 as well as processing allowable waivers of recovery;
      • hiring staff or obtaining contract services for processing overpayments and recovering those overpayments; and
      • corrections of program eligibility issues.

Although the 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 expenses. Applications for funding must be received no later than close of business on September 23, 2022.

Labor Dept. funding provides opportunities

The unemployment fraud recovery efforts adds another burden to state employment programs, which must still process applications for benefits quickly while operating with reduced staffing. These programs also are still relying on the same IT systems that remain vulnerable to exploitation by criminal enterprises.

A full 88% of states — 44 of the 50 states — did not perform all recommended benefit payment control crossmatches, according to the 2021 Labor Department audit. Cross-verification can help states identify the most obvious of fraudulent claims, including those involving i) multi-state claimants; ii) Social Security numbers of deceased individuals; iii) claims made by federal prisoners; and iv) claims made using “suspicious and disposable email accounts.”

Investing in technology solutions and tools that can help verify beneficiary identities at the application stage can greatly reduce the payment of fraudulent claims. These solutions would allow states share data and crossmatch personal information to identify fraudulent applications.

Indeed, the Labor Department audit found that 38% of states did not perform the required recovery activities. Other technology solutions are available that can help states identify the bank accounts previously associated with fraudulent schemes that also received unemployment benefit deposits. This would create a higher probability that the state could recover improperly paid unemployment benefits.

The Labor Department funding provides a unique opportunity for states to increase staffing to alleviate some of these workload issues, or to invest in technology solutions and tools that could help them recover improper payments that were already made and even prevent future unemployment benefit fraud as well.

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