The U.S. Department of Labor is offering millions of dollars in additional funding for state agencies to help them identify fraud and recover illegally paid benefits.
What will the states do with all this money?
When the Department of Labor released a program note earlier this summer, the intention was to provide states with a means to upgrade their systems, acquire better technology solutions and tools, and hire more staff to address the fraud that grew up around the Coronavirus Aid, Relief, and Economic Security Act (CARES) and its unemployment compensation programs. The Department of Labor announced in its letter of June that it could provide up to $225,000,000 to cover the administrative costs of state agencies related to reporting, overpayments detection, and recovery activities.
In its most recent program letter, the Department of Labor noted that the additional funding would allow states to better “support accurate report” and detect and recover any overpayments made during the pandemic. The Department of Labor also listed the permissible use of these funds.
Payment of expenses incurred in reporting investigation and overpayment activity;
Payment of expenses incurred in gathering business requirements, programming computer systems, or implementing tools, strategies, or solutions for detecting, establishing, and recovering overpayments.
We are hiring staff or contracting services to process and recover overpayments.
The Department of Homeland Security’s letter on program funding focuses on fraud prevention and recovery. It also includes a list of the administrative expenses that each state can claim. In its latest change, the Department has extended the deadline to October 30, 2020, for state agencies applying for additional fraud funding.
The lessons learned from the unemployment fraud
The CARES Act was primarily responsible for the surge in fraudulent unemployment claims. Under the CARES Act, the federal government allocated an estimated $260 billion to enhanced benefits and three new pandemic unemployment benefit programs. Few states were ready to deal with the surge in individual unemployment claims, let alone the fraudulent applications that illicit actors made using personal data acquired from data breaches and purchased on the dark internet. In the five months that followed the CARES Act’s passage, the Department of Labor stated that the states had processed “10 to 15 times the usual volume of claims” and that 57.4 million initial claims were filed.
Unsurprisingly, in the initial days of lockdowns and shutdowns caused by pandemics, the state agencies prioritized assisting those who applied. They did not give much attention to screening for fraud.
This, combined with many states already having outdated and overburdened IT systems, led to an inevitable outcome: millions of fraudulent claims were paid out improperly. The U.S. Employment and Training Administration (USETA) reported an incorrect payment rate of 18.71% in 2021. A “significant portion” of this was due to fraud. Meanwhile, the Department of Labor estimates that $163 billion may have been improperly paid.
In an audit by the Office of Inspector General of the Department of Labor (OIG), the OIG identified several areas of vulnerabilities which contributed to the increase in fraud found in these programs. These included state IT systems “that were not modernized”, and staffing levels “that were insufficient to handle the increased number of claims”.
Fraud funding opportunities are increased.
The additional funding offered to improve the state’s efforts to recover unemployment fraud seeks to correct these past problems. Such other resources would go a long way to alleviate states’ current burdens. They could also help reduce the lack of staff and reliance on outdated IT systems vulnerable to criminal abuse.
Many fraud prevention technology solutions can be used to help state unemployment agencies identify fake employers, fictitious businesses, and deceased or synthetic identities.
The state agencies responsible for identifying and rectifying past improper payments, recovering them, and preventing them in the future, should see any additional fraud funding they receive through this program as an opportunity to hire more staff to help alleviate these workload problems. They should upgrade and modernize their IT systems and acquire new tools and solutions to help them quickly identify and investigate fraud.