Discover What We Learned about Unemployment Insurance Fraud from the Pandemic with Guest Amy Simon

Unemployment Fraud combined with the pandemic has created a multi-hundred-billion-dollar fraud against the American people. Who was involved, how this happened, and is there any way to clean this up will be addressed. International as well as domestic criminals have been involved, so this FraudKast will examine what can be done to keep this from happening again. 

DISCLAIMER: The information provided in this podcast is for informational purposes only and is not intended to and shall not be used as legal advice. The views and opinions expressed in this episode are solely those of the speaker/s and do not necessarily reflect the views or positions of LexisNexis Risk Solutions. LexisNexis Risk Solutions does not warrant that the information provided in this podcast is accurate or error-free. 

Transcript

Narrator: Hello and welcome to the FraudKast, brought to you by LexisNexis Risk Solutions. The series that shines a light on fraud and theft across numerous government benefit programs. FraudKast is hosted by Larry Benson, Director of Strategic Alliances for LexisNexis Risk Solutions Government division, and the creator and principal author for the Fraud of the Day website. And now, here’s Larry with today’s guest.

Larry Benson: Welcome to the FraudKast. This is Larry Benson, your host, and today, we're going to be speaking on unemployment fraud. To do that, we’ve brought in Amy Simon, who is the founder and owner of Simon Advisory. Amy is an expert in unemployment. In the past, she's worked for the Department of Labor as the Chief of Staff and acting Deputy Assistant Secretary for the Employment and Training Administration. Amy, welcome.

Amy Simon: Thank you so much for having me.

Larry Benson: Amy, tell me a little bit about the Simon Advisory. When you started it? Why you started it? And give me some background.

Amy Simon: Sure. As you mentioned, I was at the US Department of Labor during the early part of the pandemic. And then when I left government, I decided to set up my own shop. So that's where Simon advisory was born, and it has been a fantastic adventure. In a nutshell, we provide strategy and management consulting services for high impact leaders and organizations. But for me personally, that's been primarily in the unemployment insurance space. So I've loved getting to stay in this corner of the policy and technology world that I first met at the Department. So it has been a wild ride for these past two and a half years, and I'm delighted to be here and talk more about my favorite subject.

Larry Benson: So tell me a little bit. We've had COVID, unemployment really took a large black eye during that period. How did this happen and where do we go from here?

Amy Simon: Yeah, that's a great question. And I think it's helpful to have a little bit of background.
So the unemployment insurance system is federally funded on the administrative side, but state law governs each state’s program and state employers are the source of funding for the benefits paid to claimants in each state. So, that state structure in normal times provides a great triangle of data.
When a claimant comes and they say I used to work here, I've been laid off, and I'd like to apply for benefits. That person's identity, the state can check with their former employer, can line up all the pieces. And so typically in pre-pandemic times, that system certainly had issues. There's certainly an issue with improper payments, but it was usually not around fraud and certainly not around identity fraud in most cases. And so the pandemic era, it's so much to think back to early 2020, but if we zoom back there to the Cares Act, which was passed in mid-March, it had several new unemployment insurance programs that were very different from the existing state structure.
There were three programs in that first bill, in the Cares Act, that increased (1) The duration of Benefits; (2) The generosity of benefits, and (3) The populations covered by unemployment insurance. So this is where these programs, the FPOC or the $600 or $300 supplement on top of benefits. PEUC, which extended how long folks could collect benefits. But then our big program that expanded coverage, the Pandemic Unemployment Assistance Program, or PUA, was launched in late March 2020, and again this covered gig workers, self-employed folks, brand new categories of workers that had never been in a state unemployment insurance system. So of course the regular system was also dealing with a tsunami of claims. I believe the previous record for weekly claims was under 700,000 claims, way back in the late 80s, and for two weeks in a row in April of 2020, it was over 6 million. There was just a complete tsunami across the entire unemployment insurance system. So to zoom in on the fraud question, this PUA program, unfortunately, it had a key flaw. It didn't have a requirement with any teeth around identity or earnings verification, and so the self-certification standard that was in that program was effectively a giant welcome mat to anyone and everyone who wanted to come get PUA. And unfortunately, the doors basically stayed open on that program from March through December of 2020 when Congress finally closed that loophole. And so I think there is so much to the unemployment insurance fraud story. So, I in no way want to oversimplify that complexity, but I think when I look back, that program was the source of some of the worst and most brazen fraud. And it was really based on a key flaw that was in the statute in late March. So when Congress closed the door and states upped their game on the fraud side, claims often dropped off fairly quickly. But the program between March 2020 and September 2021, when it ended, certainly facilitated vast, vast amounts of fraud.

Larry Benson: Who was involved with doing this? Are these domestic fraudsters? Are they international fraudsters? Is this organized crime? Expand a little bit on who's involved.

Amy Simon: Yeah, a little bit of everyone. So there was certainly the sort of run of the mill, every day fraudsters, if I'm applying as someone else, or I say that I used to have a business and so I'm applying in my own name, but I really am not eligible, so there's lots of that little fraud. But the reason I think, kind of to your question, that this got so large was that there was actually very organized, sophisticated, international cybercrime gangs and in some cases it's been proven that they're state sponsored hacking groups. So this was not a run of the mill, my neighbor down the street entered a few pieces of information wrong. This was at-scale, international cybercrime efforts that were raking in billions of dollars. And so, and it was also domestic, so there were plenty of evidences, especially if you read recent DOJ indictments, of domestic gangs getting into financial crime more broadly, and that this was a very rich vein for them to tap during the early pandemic. So there were folks around the globe applying for unemployment insurance.

Larry Benson: What are the estimates, Amy, on the total loss? And I know now when we talk about total loss, we're still adding it up. But right now, what would you estimate is a ballpark figure at what's been lost, and how much of that has gone out of the country?

Amy Simon: Yeah, that's a great question, and I think to your point, people are still adding it up.
Big picture, the federal government spent between $800 and $900 billion on unemployment insurance benefits during the pandemic. So that's across programs that it created and across the benefits that it funded, sometimes split with the state level. So out of that $800 to $900 billion, the IG currently estimates that almost $200 billion were improperly paid. So that's not necessarily all fraud, but that's a conservative estimate in my opinion.
Private estimates have ranged closer to several $100 billion to $300, $400 billion, and the most recent PUA improper payment report just came out a few weeks ago, had an improper payment rate of 35.9% total, and so even if you take that $1 in $3 didn't go to the right place or the right amount.
Again, improper payments is bigger than fraud, but if you take that sort of 1/3 improper payment rate and even assume that a good portion of it was fraud, we're talking well over that $200 billion line that the OIG has set. So hundreds of billions can safely be said that were misspent.

Larry Benson: So what kind of efforts do you see now being imposed by the Fed and the states to start addressing this? Because let's face it, COVID could come back. We're starting to see that again.
Another pandemic could happen. What are they putting in place now, to protect in case that does happen, because the odds are sooner or later we're going have it again?

Amy Simon: Yes, there will be another emergency, and I think that's one of the reasons that it's really important to not miss this experience, and to not sweep it under the rug and say that was a bad time, a lot of difficult things happened, let's sort of forget what happened there. I think there are really critical lessons for any emergency in the future. So certainly Congress was not impressed with the scale of fraud, there were several oversight hearings at the beginning of this Congress. There's legislation, lots of state auditors, state legislatures have done their own oversight of the program as well. So I do think that getting to the bottom of what actually happened, that work is still ongoing, and I'm intrigued to see how that plays out in States and at the federal level. And I’d also say, the prosecution recovery effort is still ongoing. There are thousands and thousands of cases in some point from having the data the whole way to charging and sentencing, there are thousands of cases in that pipeline at federal and state level. And so that work is also ongoing.

Larry Benson: I have to believe that as time goes on, they're going to get to the point where there's a dollar figure that was stolen and they're going to say it's going to cost more to prosecute it than it is just to sweep it under the rug.

Amy Simon: Yeah, I think that's already happened in some cases. And I think that's understandable given the resource constraints, but again, that's one of the lessons, that you don't have fraud controls at the beginning and then you don't have the capacity you need on the prosecution and recovery side, on the other side. So if there are more fraud controls on the front, we could have probably handled the volume on the back end. 

Larry Benson: Now, have you seen states, I've actually been involved in some states that were very quick to act to try and solve the problems right up front in early 2020, when the pandemic was just starting. Are you seeing other states that are dragging their feet, and just, it's easier just to pay it all out and we'll worry about it later?

Amy Simon: Yeah, I think this is one of the difficult things about unemployment insurance, is that states are actually very different in how they respond to the challenges presented to them in some cases. And so to your point, some states saw the risk, put tools in place, did what they could, even within the confines of, the constraints of the statute, to prevent the fraud they could see. And then other states, I think really didn't take the steps necessary until they were forced to by law. And now I think there are states that are very uninterested in dealing with the consequences of their choices as well, and letting the prosecution and recovery piece slide under the rug as well. And, you know, I've had state folks tell me I don't want to spend more state money going after misspent federal dollars.
So there's also this tension between the state and the federal levels, and I think there are some incentives that we can fix on that front. But I think it's unconscionable to ignore the states that have not made this a priority from start to finish.

Larry Benson: That goes on to my next question.
We know the challenges that we've seen, we know that this is ongoing, we're going to learn as we go along. Can you point out some of the lessons that we've learned so far? And obviously there's more to go, but what have we learned and how can we apply it?

Amy Simon: Yeah, that is a great question.
So I think one of the big lessons is program design matters, what goes in the statute matters. And I think identity verification needs to be in statute in a lot of these cases, especially in emergency benefit programs, identity verification needs to happen on the front end. It does not need to be a pay and chase model. I think we've learned quite effectively that pay and chase is a very ineffective model. I think the second lesson is benefit programs are and continue to be targets for fraudsters.
I think in a lot of cases it was a mindset shift for folks in unemployment insurance to realize that they were a fraud target on par with large retailers, financial institutions, and I think that requires a mindset shift. And I think other benefit programs need to be equally making that pivot, and I'm not convinced that's happening at the program level the way that it should be. But I think that's a lesson that we should learn.

Larry Benson: So you're saying that also things like retirement, SNAP, housing, etcetera. All of these have a lesson to learn from this as well.

Amy Simon: Yes, absolutely, I think everyone should take the unemployment insurance lesson learned and apply it. It's not just about UI, it's about benefit programs. Cash and cash equivalent benefit programs need to expect fraud attacks and need to identify, prevent, and defend against them.

Larry Benson: Tell me a little bit about the challenges between states and the federal government where states may be able to recoup money, but then they have to hand it back to the federal government. So now all of a sudden they've spent money to find these federal dollars, and really, at the end of the day after they give them back to the Fed, they are now out money for doing the right thing.

Amy Simon: Yes, exactly. And I think especially in an era when states are strapped for resources, they face very steep tradeoffs around what my staff member is going to be doing if they're doing prosecution and recovery on federal dollars, or are they doing work that I need for state claimants.
And so I think that that incentive misalignment is one of the reasons that there is legislation that's passed the House, it's been introduced in the Senate specifically to address this incentive problem. So it would allow states to keep a portion of their recoveries of federal funds for program integrity purposes in their state. And I really think that that model is necessary if we're going to continue to fund unemployment insurance the way that we do. States need to have some skin in the game for federal losses, but they also need to be given a reward when they do the right thing and they track it down and they recover it.

Larry Benson: They need an incentive. I've seen the same thing over on the SNAP program where they look at it as federal dollars coming in, and whether it goes to a fraudster or a legitimate party, it's money coming into their state. And they need an incentive to turn that around and say, you know what, for every dollar that I saved the feds, I'm going to make $0.05 or $0.10, but it ends up adding to millions. And now all of a sudden they can cover their costs.

Amy Simon: Yes. And I think that piece about incentives is I think one of the bigger lessons I'd love for the entire unemployment insurance system to take away from the pandemic, is that the way the PUA program, for instance, was designed, gave terrible incentives to applicants and claimants.
The way it gave terrible incentives to fraudsters all around the globe, and I think regardless of the intent behind the program, the actual reality of it was that it incentivized many of the wrong people to do the wrong thing. And I really think on a public policy front, thinking about how do we use technology and program design to incentivize, making the right thing the easy thing. Instead, I think for so many eligible claimants, we made doing the right thing very difficult. They make a mistake on a form. They try to wait in line the way that they're supposed to. It's months until they can get something resolved, until they can talk to someone on the phone. So we put those folks at the back of the line, and instead we let fraudsters go at the front of the line. And I think that is a lose-lose, and it's how do we change that into a win-win? By detecting and preventing fraud on the front end, we allow eligible claimants to get to the front of the line sooner. There's not a volume issue created by fraudsters crashing the system and overwhelming the helpline, all of that. We are allowing eligible claimants to get the help that they need in a timely manner. And I think so often, we had that sort of flipped on its head, and I'd really think aligning the incentives to make doing the right thing easy and the wrong thing hard, and using technology and tools to do that at the state level, I think that's a really important next step for the entire system.

Larry Benson: One of the things that you had mentioned was two models. One is the preventative, keeping the fraudsters from actually getting into the program to begin with, and then pay and chase. What's the percent recovered dollars on a pay and chase versus a preventative program?

Amy Simon: Yeah, I think it's not always exactly clear. I'd say I think the total federal dollars recovered at this point is close to five-ish billion. So it's a very small portion of what's been lost.
I think the pay and chase model is easy when you're under pressure to pay benefits, and there was incredible pressure in early 2020 from eligible folks, and I don't want to discount the economic emergency that we were all in at that point. The flip side is, I think in that moment of crisis, there's, sort of the blinders go on and we don't think about other ways to sort of solve the problem.
And I, that's where the preventative model pares down the number of problems on our plate, right? There are not as many people coming through the front door. Your system isn't crashing because you have bot attacks. You are able to manage your call center, it's not overwhelmed because you have fraudsters and eligible claimants calling. So I think it's those sorts of things, like instead of reactionary model of like, I’ll pay now and I'll figure out the rest later. It's how do I put my state in a position to facilitate that eligible claimants getting to the front of the line, defending against, deflecting fraudsters so that we can get to a virtuous cycle. That needs to be the case going forward.

Larry Benson: So realistically, when it's a preventative model, for every dollar you prevent going out the door, you saved a dollar.

Amy Simon: Yes, absolutely.

Larry Benson: And from what you're saying, 5 billion that we've been able to recover out of hundreds of billions, we're down at maybe a 2% recovery rate.

Amy Simon: Yes, if we're lucky.

Larry Benson: And by the time you get done with all the law enforcement, court times, incarceration costs, maybe even deportation costs, we're probably down at a 0% recovery after you pay all those extra costs.

Amy Simon: Right, which more expensive.

Larry Benson: So, it's a total loss.

Any Simon: Yes, absolutely. And I think this is, in some sense it’s, there's a different set of stakeholders that see the prosecution and recovery experience then who see the claimant benefit applicant experience at the front of the process. And I do think there needs to be a stronger partnership between state workforce agencies, their law enforcement partners, and even the financial services institutions that serve the states or maybe have frozen illegitimate benefits in an account but haven't returned them. There is a whole ecosystem of stakeholders that, I think, the pandemic has incentivized greater partnership, but I want to see that partnership continue, because to your point, it's extremely difficult and expensive to get these different players on the same page afterwards, to get a case together, to make sure the case gets the whole way to prosecution, and that recovery actually happens. So I'd much rather see that partnership and preventative mindset on the front end.

Larry Benson: The savings are enormous, I agree.

Amy Simon: Yes.

Larry Benson: Amy, the States and the federal government all have systems in place.
Most of them were deemed obsolete quite a while back, can you speak to system modernization and what needs to be done?

Amy Simon: Yeah. So state unemployment insurance technology systems for many reasons were at a very fragile state, in most cases, on the eve of the pandemic. And the pandemic experience exposed that frailty, and we all experienced it together. And so I think many states in the wake of the pandemic understand that this is the time that they need to do system modernization. So, many states have hired technology firms and are doing that work or starting that work now. And I think one of the pieces that I really hope in this round of unemployment insurance modernization, is that fraud detection and prevention is not seen as an ad hoc side process that we add on to an unemployment insurance system, but it's seen as part of the modernization. That moving towards a proactive posture of fraud detection and prevention is baked into the system itself, it's not an external add-on. So, I do hope that system modernization in this round also includes mindset modernization around fraud and identity and eligibility fraud prevention. And I think there are very interesting projects happening in several states, there's very interesting work happening at the federal level, and I'm hopeful that we're going to see systems and states in a much stronger place going forward.

Larry Benson: Amy, I want to thank you for your time and your insight. This has been illuminating, and I'd like to have you back on the program in the near future to find out what else we've learned in the meantime. So thank you very much.

Amy Simon: I'd love that. Thank you so much.

Narrator: Thank you for listening to this episode of the FraudKast. If you’re interested in learning more, head over to our website at FraudKast.com for more episodes, transcripts, and social media links. And remember, that’s FraudKast with a K, not a C. And to stay current on what’s occurring in the world of fraud, be sure to check out FraudoftheDay.com.