Soon after they began doling out billions in aid last spring to those who lost their jobs to the COVID-19 pandemic, federal officials warned the states that the money represented a jackpot waiting to be looted.
They issued alerts about fraud schemes. They disbursed extra money to help state unemployment agencies deal with potential problems.
California, though, was one of 15 states that did not follow one of the key pieces of advice — to cross-check Social Security numbers with prison inmate records — until it may have been too late.
Last week, a coalition of district attorneys detailed a fraud scheme throughout California’s prisons and jails that resulted in as much as $1 billion in improper pandemic unemployment benefits being paid to inmates and their accomplices.
These prosecutors criticized Gov. Gavin Newsom and the state’s Employment Development Department, which manages the unemployment program, for not implementing a cross-checking system like that used in 35 other states.
Prosecutors say inmates using contraband cell phones fed Social Security numbers, birth dates and other information to outside accomplices, who applied for benefits on their behalf. EDD mailed the accomplices the benefits, in the form of prepaid debit cards, and the accomplices cashed out the cards, took a pre-arranged cut for themselves, and sent the rest to the inmates via money orders.
It wasn’t until law enforcement arranged to have the two lists cross-checked — a process that took weeks — that investigators were able to break the case open. Fresno County District Attorney Lisa A. Smittcamp said she believes that halted much of the fraudulent behavior, although it remains uncertain if inmates are still cheating the system.
“I would hope that most of the bleeding has stopped,” she said.
Anne Marie Schubert, Sacramento County’s DA and leader of the coalition, last week said EDD’s response to the fraud allegations was “slow and nonexistent,” and there was little cooperation from the agency’s top management.
The scandal largely involves the Pandemic Unemployment Assistance program, created by Congress in March through the CARES Act as a unique way to provide unemployment benefits to people who historically could not qualify for such payments, such as business owners and independent contractors.
The program, which now provides up to $450 a week to eligible Californians — but for a while paid up to $1,050 a week — is funded by the federal government but managed by the state.
The fraud scheme is the latest setback for EDD, a vast bureaucracy with nearly 10,000 employees who must process tens of billions of dollars in unemployment claims, oversee the compilation of job-market data and perform other tasks.
EDD, like unemployment agencies in most other states, has been deluged since the COVID-19 pandemic sent the economy into a deep recession. Claims reached unprecedented levels, lawmakers applied pressure to get benefits out quickly, and constituents often complained they could not get help quickly enough, if at all.
After intense criticism over the backlog in dealing with claims, EDD Director Sharon in late October announced her retirement, effective Dec. 31. She’s been with EDD for nearly 40 years but was appointed director just 10 months ago.
Unemployment fraud beyond California
Soon after the pandemic program began, the U.S. Labor Department warned state agencies around the country that it could be vulnerable to fraud.
On May 11, it sent a 13-page advisory to states saying it “strongly recommends” they use Social Security cross-checks and other strategies to combat potential fraud.
The unemployment system, the advisory said, “is facing historically high levels of claims in the regular UI program while simultaneously implementing the newly-created temporary programs authorized by the CARES Act,” such as PUA.
“During this time, there is a heightened need for states to maintain a steadfast focus on UI functions and activities that ensure program integrity and the prevention and detection of improper payments and fraud across all UI programs,” the department said.
Three days later, on May 14, the U.S. Secret Service put out an alert warning that a cybercrime group from Nigeria had attacked seven state unemployment agencies and added: “It is extremely likely every state is vulnerable to this scheme.” One of the seven states, Washington, disclosed that the Nigerian scammers had stolen $650 million in unemployment benefits.
Armen Najarian of Agari Data, a Foster City consulting firm, said the fraud group, known as Scattered Canary, used stolen Social Security numbers to apply for benefits for thousands.
“They effectively assembled identifications of legitimate people,” Najarian said. He said the Nigerian scam doesn’t appear to have any connection to the fraud that was perpetrated in California’s prisons.
Tools to fight prison fraud
Experts have been preaching for years the virtues of computer systems that could use personal data to prevent unemployment insurance fraud.
In 2014, when Jerry Brown was governor, the California EDD received a federal grant to implement a pilot program, developed by a Folsom high-tech company, that would match unemployment claims against publicly available personal data.
When district attorneys asked for access to the information, they were refused because EDD wasn’t “sure they were going to keep the system,” said Vern Pierson, El Dorado County’s district attorney. EDD eventually discarded the system, he said.
A year later, Nebraska became one of the 35 states to routinely cross-match prison records against unemployment claims. The program resulted in a drop in suspicious claims, according to a report by the National Association of State Workforce Agencies.
“It has become a powerful prevention tool,” the association said. Officials with the Nebraska Department of Labor declined comment for this story.
In California, however, the state believes it couldn’t routinely cross-check. Because the Department of Corrections and Rehabilitation relies on a Department of Justice database to verify inmates’ Social Security numbers, it couldn’t share that information with agencies outside law enforcement, such as EDD, according to a Newsom administration official not authorized to speak publicly.
It was only when served with a subpoena from federal investigators that the state prison system was able to surrender the inmates’ data, enabling investigators to conduct their own cross-check of prison rolls with jobless claims, this source said.
Cross-checking doesn’t appear to be a foolproof way to prevent fraud. Thousands of Pennsylvania prisoners carried out a pandemic assistance fraud scheme similar to California’s, raking in an estimated $100 million, officials announced in late August. More than 70 inmates and outside accomplices have been indicted.
Pennsylvania’s Department of Labor & Industry had been checking whether people claiming benefits were behind bars, said Sarah DeSantis, the agency’s press secretary. She declined to say how the inmates were able to beat the system anyway.
About the time Pennsylvania authorities were announcing the first round of indictments, the U.S. Labor Department was again urging the states to be vigilant — and citing once again the value of cross-checking Social Security numbers.
On Aug. 31, in a 17-page advisory to state officials around the country, it warned that “As UI claims are filed, states are strongly encouraged to employ multiple techniques to validate UI claims and uncover suspicious or fraudulent characteristics, including: Identity Verification — to verify personal information supplied by individuals filing claims, using a variety of methods and resources, such as: Social Security Administration Cross-match — to validate a Social Security Number supplied by a claimant.”
The next day, the department provided additional funding to battle fraud. California received $2.4 million.
States could use the money for staff or contract services “to conduct fraud investigations and other fraud detection-related activities, and to implement tools to increase prevention, detection and recovery of fraudulent improper payments in the PUA and Pandemic Emergency Unemployment Compensation programs.”
Labor said states were to work with its Employment and Training Administration and the Unemployment Insurance Integrity Center to “use these resources to address fraud aggressively in these programs.”
It also advised that the center’s Integrity Data Hub could be a valuable tool, calling it “a secure data cross-matching system, containing an array of effective fraud prevention and detection tools. The Hub’s new identity verification solution is now fully operational and available to all states.” State officials declined to respond to questions about whether they used the tool.
The Newsom administration said it did try aggressively to detect and investigate fraud.
“The EDD’s investigation team is working closely with local, state, and federal partners to expose, stop, and hold offenders accountable,” the agency said Sept. 3. “While specific details cannot be shared at this time at the risk of jeopardizing investigations, recent schemes have triggered multiple mail items with different names sent to addresses throughout the state.”
The Newsom administration official who asked not to be named said that in hindsight, its ID.me program, which aims to create a more secure way of verifying one’s identity, could have been started sooner.
The program began Oct. 5 after the state stopped processing new unemployment benefit applications for two weeks so the program could be retooled.
It was too little, too late, Smittcamp said.
“I do not think the state has a handle on it,” she said. “(Newsom) did nothing until the elected district attorneys brought it to the media.”
In his letter to the DA’s, Newsom pushed back on suggestions that he dragged his feet, saying the state took steps as early as September to “deter and eliminate fraudulent claims.” He didn’t elaborate on those steps, but in early September EDD announced it was investigating reports of possible fraud.
Federal warnings continue
On Oct. 21, a federal watchdog agency still saw problems with fraud throughout the country.
“An unprecedented volume of claims and the short timeframe to implement the PUA program under the CARES Act have contributed to the risk of improper payments and fraud,” the Labor Department Inspector General said in its report.
It surveyed 45 states, including California, and found states routinely had problems with fraud because of, among other reasons, the PUA self-certification system.
The report reiterated the value of cross-checking, saying it “strongly recommends states use cross-matching with state and national databases,” such as the Social Security Administration.
It also warned it “believes states’ reliance on self-certifications alone to ensure eligibility for PUA will lead to increased improper payments and fraud.”
Tuesday, Newsom said Mark Ghilarducci, director of the Office of Emergency Services, will head a task force to coordinate and help the fraud investigations. Participants will include officials from the state Department of Technology, California Highway Patrol, EDD and the Department of Corrections and Rehabilitation.
Smittcamp is still concerned that not enough is being done.
She was particularly irritated that Newsom said in his letter that EDD is cooperating with law enforcement “while protecting the personal information of inmates.”
She said Newsom “is more interested in protecting the inmates than he is in protecting the victims.”
This story was originally published December 03, 2020 5:00 AM.
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