Unemployment fraud in the future phases of COVID-19

During the 12 months leading up to the outbreak of COVID-19, the United States Department of Labor estimated that improper payments accounted for 10.61% of just under $31 billion in Unemployment Insurance (UI) benefits. Then, 36.5 million Americans suddenly applied for unemployment insurance in less than 2 months. This has driven the nation’s unemployment rate to almost 15%, the highest since the Great Depression.  

The sudden surge in UI applications has overwhelmed state employment departments, many of which have waived certification and work search requirements. And while Program Integrity (PI) departments continue to work to protect the fiduciary trust put into them by businesses and citizens, they face an almost impossible task of reducing improper payments while not delaying applications and payments.

Fraud and scams: What to expect

The current circumstances brought on by COVID-19 create a “target rich” environment for potential Fraud, Waste, and Abuse (FWA) in state UI programs. While states are rightfully focusing on processing applications and making payments quickly, fraudsters now have more opportunities to “sneak through” the front door using stolen identities and other commonly used fraud schemes.

The sudden surge in claims makes traditional program integrity methods almost impossible to administer without slowing down essential payments. The additional $600 per week in benefits provided by the Coronavirus Aid, Relief, and Economic Security Act will invite an even greater volume of scammers. Even after the additional funding expires, successful fraudsters will continue to collect improper payments until they are identified and stopped.

Based on patterns seen during previous unemployment cycles, Program Integrity teams should anticipate the following 3 phases of improper payments over the next 18-24 months. Each phase usually brings an associated type of unemployment insurance scam. There will be some overlap between each phase, but the unique nature of this financial crisis could bring other rapid shifts as well.

Phase I: Fraudulent first-time claimants

Using stolen identities, fraudsters are filing, and will continue to file, first-time and ongoing claims for UI benefits. It’s common to see identities and Social Security numbers submitted from deceased, out-of-state, and incarcerated individuals. These scams will be perpetrated both as “one-offs” and in “bulk.”

These types of claims are likely already being filed and will continue to be an issue until the volume of new applications returns to historically regular levels.

Recommendation: Validate new and recent claimants

Consider adding additional batch or individual lookup capabilities to validate a claimant’s Social Security number, deceased status, residency, and incarceration status. This could include using files like state incarceration and vital records, as well as systems from the Department of Labor and the National Association of State Workforce Agencies (NASWA).

In addition, cross-matching identities against third-party data (from consumer data aggregators) is generally recommended to reduce over-payments based on incomplete, incorrect, or latent government data files.

To identify more collusive, high-risk schemes, states should invest in the ability to rapidly identify shared applicant attributes such as addresses, emails, phone numbers, and Internet Protocol (IP) addresses. This will help already overburdened PI staff achieve higher ROI from single investigations.

Phase II: Benefit–wage conflicts

Unlike any other sudden unemployment surge in our history, 83% of those filing new claims expect to get their jobs back within 6 months as states re-open their economies. This will bring a second wave of fraud or waste as people return to work and fail to notify state employment agencies.

Collecting benefits at the same time as earning wages has always been one of the most common abuses of state unemployment assistance programs, and the large volume of people returning to work in such a short period of time will dramatically increase overpayments. This phase will begin as states start to loosen lockdown restrictions and will continue until unemployment rates normalize.

Recommendation: Prepare for wage–benefit overlaps

As economies begin to reopen and citizens go back to work, watch out for an historically high number of wage-benefit conflicts. While traditionally viewed as minor loss, even a few additional payments spread across such a large number of people could result in significant total waste.

To address this, states should make sure they have the ability to quickly identify claimants that have returned to work and continue to collect payments. In addition, consider setting up automated collection notification systems that will allow busy PI staff to focus on more labor-intensive processes, without missing any eligibility updates.

Phase III:  Fictitious business scams

Fraudulent applicants regularly use two-sided tactics to steal from UI programs. For example, they could set up a shell business that can hire and fire fictitious employees, who would then steal unemployment benefits. The term “two-sided” refers to schemes in which both the employer and employee make use of fake or stolen identities so there is no one who will tip off the state to the scheme. While it’s possible that some of these two-sided schemes are already in operation, they usually take some time to organize.

Those that run these types of schemes were likely just as surprised as anyone by the rapid increase in unemployment brought on by COVID-19. The full effects of these types of schemes will probably not be felt until the summer and fall of 2020 but may continue to be a threat until more effective enforcement measures can be implemented.

Recommendation: Analyze new businesses

While it is already a standard process in most employment agencies, PI staff should be particularly careful when comparing unemployment claims against their cited business information. The design of two-sided schemes makes it extremely difficult to recover errant funds post-payment. Cross-checking the employers associated with claims against a list of businesses that have opened or reactivated since the start of the epidemic will help reduce improper payments to purely fraudulent actors.

Consider implementing a platform to support Program Integrity

Implementing software solutions and processes to handle each of the situations above will help state employment departments manage the onslaught of fraud, waste, and abuse that will accompany this unprecedented surge in unemployment claims. But it is likely that the economic effects of COVID-19 will continue to impact unemployment rates for some time, and the associated opportunities for fraud could linger well into the future.

When fraud schemes are identified and shut down, bad actors do not suddenly become honest citizens. Instead, they adjust their schemes and come up with new fraud methods that PI departments will need to keep pace with.

To address both immediate and long-term program integrity requirements, states should consider implementing a software platform solution that will support their changing enforcement processes and reporting requirements. This will allow agencies to deliver immediate value to their states while also centrally managing the software and analytics data that will be required to fight fraud, waste, and abuse well into the future.

State employment departments play a major role in supporting displaced workers, their families, and the whole economic system. This starts with the timely delivery of services and payments to those that need them. But Program Integrity is essential for every unemployment agency and to the businesses that pay into the state unemployment trusts.

The long-term success of each state depends on their ability to support their people without falling prey to schemes of fraudulent actors. To learn more about how to prevent unemployment fraud, waste, and abuse, attend the webinar Unemployment Fraud and COVID-19: What You Need to Know, or visit the Unemployment Programs page.

Thomson Reuters CLEAR

Locate, identify, and connect the facts you need to prevent unemployment fraud