Over $1 billion in unemployment aid is being threatened by fraud, in schemes ranging from lying about personal income to sophisticated cybercrime, state and federal officials told NBC News. The main target: Pandemic Unemployment Assistance.
The widespread fraud is plaguing unemployment systems nationwide, hampering states’ efforts to get money into the right hands. The U.S. Secret Service has launched over 500 investigations in 40 states as part of a multiagency effort to protect taxpayer dollars.
“It’s very rampant,” David Smith, the agent in charge of the investigation, said in an interview. “Criminals knew the priority was to get that money into the hands of Americans sooner than later. So they just jumped on an opportunity."
In Colorado, cybercriminals took advantage of the unemployment system so aggressively that over the course of one month, 75 percent of applications were ruled fraudulent. In Pennsylvania, thousands of inmates applied and qualified for benefits before getting caught. In California, officials suspect fraud is behind a recent spike of more than 100,000 extra claims.
Pandemic Unemployment Assistance was created as part of the Coronavirus Aid, Relief, and Economic Security, or CARES, Act introduced by Congress in March. It provides unemployment benefits to self-employed or gig workers who, in typical circumstances, would not qualify. The program uses federal dollars, but is administered by the states. With almost 7 million people out of work at the start of the pandemic, many states were inundated with a record number of unemployment applications, all while depending on decades-old computer systems.
The assistance program is particularly vulnerable because, since it is specifically for self-employed people or independent contractors, there is no employer to verify an applicant’s income. While the CARES Act legislation does ask applicants to submit documents to prove their income, it also allows people to receive the minimum benefit payment of $172 per week without any supporting paperwork.
Law enforcement officials told NBC News they knew from the beginning that there would be fraud. Similar to when FEMA distributes large amounts of money in disasters, these funds have a tendency to attract criminal elements, officials said. On May 26, just two months after the CARES Act was signed, the Department of Labor’s Office of the Inspector General warned that there was significant risk of fraud, noting that unemployment insurance programs historically face some of the highest levels of fraud in the federal government.
“We consider it fairly low-hanging fruit," Smith said. "The bad guys don't necessarily want to work hard. You don't have to necessarily work hard in order to exploit the vast amount of funds out there."
The Secret Service has worked with various other federal and state law enforcement agencies to tackle the fraud as it continues to crop up.
Smith said that much of the fraud is traditional social engineering, in which a person’s trust is exploited in order to take advantage of them financially.
However, in Colorado, authorities uncovered a much more technologically advanced scheme that threatened to pilfer over $1 billion in unemployment aid.
Officials at the Colorado Department of Labor and Employment became suspicious in July when they saw a spike in pandemic unemployment assistance, or PUA, claims even though there was a decrease in regular unemployment claims. In late August they discovered an advanced level of fraud that was well beyond the technical abilities of a layperson and involved extensive identity fraud.
“These aren't individuals who happen to be filing one or two claims. These are schemes that have figured out ways to get into the system and override security systems that are in place,” said Joe Barela, executive director of the Colorado Department of Labor and Employment.
In just one month, fraudsters accounted for more than three-quarters of all PUA applications. After installing a new security feature, the state still detected 50,000 fraudulently attempted claims totaling as much as $1 billion. State officials estimate that $40 million of federal money was lost before they realized what was going on.
In California, one of the first red flags was spotted in August when PUA claims more than doubled in the span of just two weeks. For the week ending Aug. 29, the number of claims in California represented more than half of all PUA claims filed nationwide.
“We do suspect that a big part of the unusual recent rise in PUA claims is linked to fraud,” Loree Levy, deputy public affairs director of the California Employment Development Department, said in an email.
Her department, which processes and pays out claims, describes the attacks as “unscrupulous,” alleging that cybercriminals are using stolen identities from previous data breaches to pose as legitimate applicants. California is now partnering with federal law enforcement to investigate.
While the state declined to comment on the size or scope of the problem, California has stopped automatically backdating PUA claims and will limit multiple payments to the same address when suspicious activity is detected.
In Pennsylvania, authorities uncovered an organized scheme that involved 10,000 jail and prison inmates applying for PUA benefits. Inmates would use their personal identification to apply for and qualify for benefits and then have the money sent to contacts on the outside. The scheme was discovered in July when law enforcement officers were monitoring inmate phone calls at Allegheny County Jail. In total, authorities say the crimes involved over $100 million.
"The unprecedented scope and audacity of this inmate unemployment compensation fraud is appalling,” said Scott Brady, the U.S. attorney for the Western District of Pennsylvania, who is prosecuting these cases, along with Pennsylvania Attorney General Josh Shapiro.
“Every dollar taken out by one of these criminals is a dollar less available for a family legitimately in need,” Shapiro said in an interview.
Nationwide, the fraud is also siphoning resources from state unemployment offices struggling to pay out benefits to legitimate applicants. Millions of laid-off workers are having to wait weeks or even months to receive their unemployment benefits, with some even at risk of losing their home due to the delay.
“The pandemic did not create any new criminals. It just created an environment for criminals to exploit,” Smith said.
“The same people who were involved in romance scams and employment scams six months, eight months, two years ago — they're now using the pandemic as an opportunity to victimize Americans.”