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The public cost of the dark web: Tackling the explosion in unemployment insurance fraud

Jon Coss, Risk & Fraud Solutions

Fraud is almost always a crime of opportunity. When the opportunity is greater, instances of fraud will grow. Unfortunately, the circumstances created by the pandemic have meant that the opportunity for unemployment insurance (UI) fraud has flourished, diverting public funds away from the rightful recipients and into the pockets of fraudsters and organized crime networks.

Following the start of the pandemic, unemployment compensation claims in the United States rose exponentially to historically unprecedented levels. Prior to the pandemic, the U.S. Department of Labor reported that numbers of UI claims were low, receiving 282,000 claims on 14 March 2020. Less than three weeks later, initial claims rose to 10 times pre-pandemic levels, much greater than state systems were designed to handle. Then, within five months by, 15 August 2020, the Department reported a staggering 57.4 million initial claims, the biggest increase since the Department began recording UI data in 1967.

With these levels of claims, the pandemic created a perfect storm for fraud. Not only was there a high value target, but states, often overwhelmed with claims, navigating new rules, and using outdated systems, have struggled to keep up. Meanwhile criminals became more organized and adopted new sophisticated methods of fraud. Among the key tools available to fraudsters is the dark web, which has become a haven for UI fraud and the go-to place to acquire step-by-step guides on how to steal from state employment programs. 

This criminal activity has very real implications for society and its ability to support the most vulnerable.

It’s shockingly simple to buy IDs online via the dark web. For a few dollars, thieves can buy access to a full set of stolen personal data that includes a person’s name, Social Security number, date of birth, address, and more. This is the level of sophistication organized crime has gained in its efforts to steal from governments. Furthermore, the supply of stolen identities has rapidly increased over the last 15 years. In 2019 alone, over 164 million sensitive records were exposed in the U.S.

Easily attainable personally identifiable information combined with the challenges faced by states in managing UI claims paved the way for exploitation of the system. Furthermore, the urgency created by the pandemic meant states were asked to disburse Pandemic Unemployment Assistance (PUA, part of the CARES Act) to self-employed Americans who are not covered by traditional UI programs. People could purchase fake tax returns on the dark web if they wanted to show previous self-employment “income” and fraudulently claim $600 per week in PUA funds. Not surprisingly, some states have found that a lot of their PUA claims are fraudulent.

The scale of fraud is unprecedented - in 2021, the U.S. Department of Labor recorded a case where a single individual used one Social Security number to file unemployment insurance claims in 40 states. Twenty-nine states paid up, sending a total of $222,532. Meanwhile the State of California estimates to have paid out over $20 billion in improper claims. If you think about this at a national scale, the extent of fraud is jaw dropping. The Department of Labor’s inspector general’s office estimates that more than $163 billion has been paid out improperly, through fraud or errors since March 2020, but in fact the actual number could be even higher.

This criminal activity has very real implications for society and its ability to support the most vulnerable. The problem is amplified by the large numbers of false claims which clog the system and delay states’ ability to get the money out to those who need it. Staff on the front lines have faced an overwhelming increase in fraud attempts and unrealistic pressure from officials to push funds out to keep the economy afloat. The very real human cost is that innocent people had to wait months to receive their unemployment benefits because the systems were overwhelmed with fictitious claims.

And this human cost goes even further. The billions of dollars of funds from this crime are also often used to pay for other crimes such as human trafficking, gun smuggling and the drug trade, all of which have a detrimental impact on our communities. As well as U.S. gangs, the funds would also often fall into the hands of international organized crime rings in countries such as Russia, China, Nigeria and Romania, presenting a further layer of risk for the U.S. Government.

So, what can be done to address fraud in the future? Governments are certainly trying their best to reduce fraud and get funds to those in need, but they are hindered by out-of-date technology and limited resources, meaning they are all too often outmaneuvered by the fraudsters.

The first consideration is how governments can move to a preventative model to tackle fraud. The approach of paying out claims and then following up afterwards to chase fraud is ineffective and wastes public funds. Instead, the opportunity lies in moving to a preventative model where governments can analyze claims and stop false claims before any money is paid out, or at minimum, reduce the time it takes to detect and address false payments which have already been paid. This requires sophisticated technology which leverages data analytics and algorithms. When governments have the right controls in place, supported by innovative technology, they can process legitimate claims more effectively.

At Thomson Reuters our fraud and risk tools include Pondera Solutions, which leverages advanced analytics and the power of cloud computing to combat fraud, while our CLEAR tool combines data sources to help identify fraudulent activity quickly and efficiently. Together tools such as these help to tackle fraud, waste and abuse and help governments save billions of dollars.

For example, we’re currently working at federal level and with over 25 State employment departments, to support the greater use of technology in preventing and detecting UI fraud. This includes leveraging our tools to quickly analyze backlogs and identify low risk claims so legitimate claims can be paid more quickly.

However, there is an opportunity to do more, particularly when it comes to tackling fraudsters who move from state to state or from program to program to exploit the systems for public funds. This wide reaching problem requires a wholistic solution, where the tools to detect and prevent fraud are applied at a federal level and across states and programs. We need to break down the artificial barriers between states so that they are working together against this problem. Criminals cross state lines, so states need to look beyond their borders. Finally, legislatures need to invest in providing those on the front lines with more advanced measures like pattern recognition algorithms to identify large-scale fraud rings. 

As the world emerges from the COVID-19 pandemic there is now an opportunity to address the need to modernize government programs so they can more effectively detect and prevent fraud. This is vital to ensure we can collectively tackle the associated criminal activity and ensure public funds go to those who most need them.

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