Vulnerabilities in federal law, gaps in state fraud detection led to losses in unemployment insurance program, audits find

OLYMPIA – Emergency federal unemployment programs launched early in the COVID-19 pandemic included provisions that opened state unemployment benefits to fraud, the Office of the Washington State Auditor found in three audits released today.

While Washington was not alone in being targeted, the state Employment Security Department continues to struggle in answering customer questions, investigating suspected fraud and retrieving important data from its systems, the audits found.

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

The audits released today sought to establish the extent and scope of illegitimate claims activity, and to understand the reasons behind both the payments on fraudulent claims and the difficulties some legitimate claimants experienced in receiving timely payments and customer service. Key findings of the audits include:

• 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.

The Auditor's Office released three reports Tuesday: an accountability audit of the Employment Security Department, a related fraud report and a performance audit report looking at broader issues of customer service and fraud prevention. An interactive graphic showing key data from the reports, including timelines of claims and customers' experience calling ESD can be found here.

A fourth audit reviewed the Department's information technology systems, and its findings have been provided to agency management. A public version of that report will be published later this month, but for security reasons no details will be included.

The State Auditor's Office is conducting an ongoing investigation into potential misappropriation by ESD employees, and will issue a separate report upon its completion.

Previously, the Office's report in the Comprehensive Annual Financial Report examined the state's reporting of the unemployment fraud totals. Among other figures, that work found ESD issued 684 percent more in benefits funding (about eight times) to 390 percent more people (about five times) in fiscal year 2020 than in fiscal year 2019.