Up To $1.1 Billion Lost By WA Unemployment System In 2020: Audit

OLYMPIA, WA — The state's unemployment agency was unprepared for a massive fraud scheme last year, and total losses may top $1 billion once everything is accounted for, according to new reports from the Washington State Auditor's Office. The Employment Security Department sharply criticized some of the findings, saying the audits contained inaccuracies, inconsistencies and inflated figures.

The trio of audits released Tuesday is the latest step in the state's probe into issues at Washington's unemployment agency, including hundreds of millions lost to "imposter fraud" and persistent backlogs in claims.

"Our goal as auditors was to establish the facts surrounding a massive fraud that targeted our unemployment insurance system," said Pat McCarthy, the Washington State Auditor. "Together these reports paint a detailed picture. There are fraud prevention techniques that Washington's program could have used to lessen the impact of these schemes, but the agency's resources also were overcome by circumstances beyond its control."

An earlier report, released last December, found roughly $600 million paid out to fraudulent claims, with $250 million recovered by the U.S. Department of Justice. The auditor acknowledged ESD faced unprecedented challenges in 2020, including a 390 percent increase in people it served, a state-ordered waiver eliminating one-week waiting periods, and difficulties with the federal Pandemic Unemployment Assitance Program. However, the auditor found ESD still shouldered much of the blame.

While investigating the fraud, the auditor's office announced a data breach of its own, through a third-party vendor, potentially compromising private information for up to 1.6 million unemployment applicants.

Tuesday's reports include an accountability audit, performance audit and a new fraud report, outlining several recommendations to combat fraud in the future. In the performance report, the auditor found the agency "wholly unprepared for the massive degree of imposter fraud committed in 2020," and had insufficient prevention measures in place.

The auditor's office highlighted five other key findings:

• The loss to the unemployment insurance program in 2020 may be as high as $1.1 billion, including:
  • $647 million in known misappropriations and
  • $461 million in questionable payments – claims that were flagged by ESD for review, but not yet investigated.
• Some forms of fraud continue and a backlog of 56,000 possible cases was awaiting investigation at the end of 2020.
• ESD has only been able to answer a small share of calls from people with questions about their unemployment insurance.
• ESD and other states were targeted with imposter fraud schemes that took advantage of new provisions in emergency federal legislation that did not require states to verify people claiming benefits were actually eligible.
• Prior to the pandemic, ESD lacked a proactive anti-fraud unit, and in early 2020 some tools within its fraud-prevention portfolio were not working, for example, checking identities against state prison registers before issuing payments.

In statements released Tuesday morning, ESD officials pushed back on the audits' findings, calling the accountability audit a "gross mischaracterization" and "deeply flawed." The agency said more than $200 million listed under "questionable payments" had no confirmed fraudulent payments. ESD officials also said its backlog of uninvestigated claims was much lower than what the audit showed.

ESD identified four examples it said were inaccurate:

• False claims of a backlog of 56,000. Instead, there were 19,000 claims with new issues that were awaiting initial review – the rest had been investigated and determined and were therefore not part of a backlog.
• Cleared claims counted as fraud. Some claims the SAO categorizes as “claimant fraud” have in fact been investigated and cleared.
• Lack of understanding of processes. This led to numerous examples of incorrect information and confusion, including about eligibility and identity fraud and basics about how the unemployment programs work.
• Payments to incarcerated individuals remains a low risk issue. The Accountability Audit calls out 1,500 incarcerated individuals applied for unemployment insurance in 2020. What the findings fail to elaborate is that of the 1,500
  • Only 67 were newly identified claimants that were determined to be committing fraud.
  • The rest had already been flagged, were legitimate claimants or otherwise found to be not fraudulent.

Unemployment officials argue ESD move quickly to stop fraud last year and effectively stopped more from happening.

"The Department's swift action to halt the imposter fraud attack last year was highly effective in stopping further fraud," ESD officials wrote Tuesday. "Even using the SAO's figures for illegitimate payments, less than 5 percent of total benefits were paid to imposters during 2020. That makes ESD currently well below the 10 percent baseline for improper payments made during the pandemic."

The state's investigation is ongoing and the auditor expects to release an information technology report later in April. The auditor's office said a separate report will detail an investigation into "potential misappropriation by ESD employees."