UNEMPLOYMENT FRAUD DETECTION

How is Unemployment Fraud Detected?

Many U.S. states are increasing efforts to stop improper payments and prevent unemployment fraud across their department offices.

As the pandemic shuttered non-essential businesses worldwide, state unemployment systems faced an even bigger problem: The tidal wave of layoffs led to a deluge of unemployment program applications, including claims for newly established CARES Act programs. 

According to the Department of Labor (DOL), initial claims (most of them filed by fraudsters) were 10x pre-pandemic levels within 2 to 3 weeks, higher than what state systems could handle. In five months, there were 57.4 million reported initial claims—the largest ever in the DOL unemployment benefits tracking system's history—costing $63B.

Unemployment benefits provide continued survival for most jobless workers and their loved ones. Sadly, bad actors compromise employee data and submit claims using their information, unfairly drawing fraudulent payments. 

Many states are increasing efforts to stop improper payments and prevent unemployment fraud across their department offices.

How does unemployment fraud happen?

Unemployment fraud happens when someone provides false, misreported, or unreported information when filing documents to collect fraudulent unemployment benefits.

Unemployment fraud happens when someone provides false, misreported, or unreported information when filing a claim to collect fraudulent unemployment benefits. 

Identity thieves pose as company employees, purposely using their genuine information to register fraudulent claims and steal billions of dollars in unemployment benefits. 

The scammer gets the unemployment benefits, while the victim only gets the associated 1099-G tax form. Victims of such fraudulent activity suffer losses, mainly because the federal government (and some states) taxes unemployment benefits.

During the pandemic, con artists preyed on the global confusion and consumers' fear to steal data and file unemployment and other benefits in their unsuspecting victims' names.

Claudia Trapp, a victim of unemployment identity theft, narrated her ordeal after receiving a letter from the Department of Employment Services (DOES) in September 2021.

According to Trapp, the letter confirmed her eligibility for unemployment benefits starting mid-September 2021 and ending in 2022. Yet, she was employed throughout the pandemic, so she didn't need to apply for any unemployment insurance. 

A DOES representative informed Trapp of a claim in her name and flagged her account, but that's where the investigation stopped.

With no idea whether the issue was resolved or someone was still drawing unemployment payments in her name, Trapp filed a fraud notice with her bank, a police report, and informed the Internal Revenue Service (IRS). 

This is one among scores of imposter fraud victims who are still looking for answers to fraudulent unemployment claims.

Potential consequences of committing unemployment fraud 

Scammers aren't the only ones who commit unemployment benefits fraud. It can happen in various ways through people who:

  • Receive benefits, get recalled to work, and still file for benefits. 
  • Lie about looking for work or their inability to work yet still file for unemployment benefits
  • Fail to report extra income and still receive unemployment pay
  • Run illegitimate companies that lack federal tax ID numbers and illegitimate products or services and still claim unemployment benefit

An unemployment benefits application is a legal document. The law expects each applicant to provide their name, Social security number (SSN), current mailing address and phone number, and current employee details.

So, any identity misrepresentation that misguides the federal government or government agencies to collect unemployment benefits is liable to punishment by law through serious penalties, fines, and/or imprisonment.

The DOL requires states to assess a minimum penalty of 15% of the amount of the fraudulent claim on claimants committing fraud connected with Federal or state unemployment compensation programs. 

States may impose a greater penalty, but generally prohibit individuals culpable of committing unemployment fraud from receiving future benefits for a period of time. 

In Arkansas, for instancem state laws governing unemployment benefits may classify related fraud as a felony or misdemeanor offense, based on the extent of the fraud.

In Michigan, individuals convicted of unemployment fraud may face at least one or more penalties, including imprisonment, fines, and state tax return garnishment.

A recent example is Jermaine Rose, a former Michigan Unemployment Insurance Agency (MUIA) lead claims examiner, who took part in a $1.5M pandemic-related fraudulent unemployment insurance claims scheme. 

Rose pleaded guilty to one count of conspiracy to commit wire fraud by providing his co-conspirators with COVID-19 unemployment benefits of more than $920,000, which they weren't entitled to. The court sentenced him to two years in federal prison for participating in the fraudulent scheme.

Criminal prosecution may result in penalties, such as:

  • Up to 60 days' imprisonment
  • Fines of up to 50% of the overpayment amount (15% if repaid in 30 days)
  • Pay back the unlawful benefit payment received
  • State tax return garnishment

The grave impact of unemployment fraud

Unemployment fraud affects everyone—consumers, businesses, the government, and the economy.

Unemployment fraud affects everyone: consumers, businesses, the government, and the economy. The Federal Trade Commission (FTC) is still investigating the number of identity-theft victims, especially during the health crisis, but estimates project about $26 billion may fall into fraudsters' hands.

Whether the fraudster is a real claimant or an identity thief, unemployment fraud can be the precursor to much larger issues, including: 

  • Inaccessible funds: People with legitimate unemployment benefit claims, who may end up not accessing the needed funds. Unemployment fraud investigations take several weeks or months, resulting in delayed benefits. 
  • Increased corporate unemployment tax payments: Businesses end up paying more in unemployment taxes.
  • Strained state funds: State unemployment trust funds suffer strain from the thousands of unemployment benefits claims (genuine or fake).
  • Psychological and financial impact on consumers: Fraud victims are more worried, frustrated, and angered by fraud. Their exposed personal identity information increases their potential to be defrauded again, and they face problems with the IRS over suspected under-reported income.

Addressing unemployment fraud

The pandemic created a target-rich environment for potential fraud in unemployment benefits programs, giving criminals even more opportunities to defraud their victims. 

If your organization was a victim of fraud during the pandemic, it's possible to get back on track. 

Some useful tips to consider: 

  • Report fraud: If you think an individual or corporate customer is committing unemployment fraud, or you suspect that identity thieves are trying to use your client's personal information to file false unemployment insurance benefits claims, report it immediately to the relevant authorities.
  • Validate new and recent claimants: Add extra individual or batch lookup capabilities to validate claimants' SSNs, residency, and incarceration or deceased status. Use systems from the DOL and National Association of State Workforce Agencies (NASWA), vital records, and files like state incarceration to get more details while cross-matching identities against third-party data.
  • Use fraud detection tools: Traditional program integrity methods are no match for the sudden surge in unemployment benefits claims. You need AI-powered fraud detection tools like Inscribe that automate document verification and manual review processes to determine whether they're fake or manipulated. This prevents your organization from consequences like financial losses and a damaged reputation.
  • Compare claims against individual and business information: Personal identification employees should scrutinize unemployment claims against cited details, cross-checking the associated employers against registered businesses to reduce improper payments to fraudulent actors.
  • Adjust your organization's rules: With hundreds of millions of unemployment claimants, each filing a claim for benefits, financial institutions should adjust their rules and models to fit the new realities and catch suspicious activities.  
  • Flag dormant accounts: Not all accounts are genuine—some are opened for fraudulent purposes. Check for dormant accounts that have been inactive for years and are suddenly showing signs of life or whose holders suddenly start transacting with unfamiliar accounts despite a period of dormancy. 

Detect more fraud with Inscribe

The economic impact of the global health crisis will probably continue affecting unemployment rates, meaning related unemployment fraud opportunities could linger into the near future. 

Implementing fraud detection software solutions and processes to handle such situations will help you manage the onslaught of fraud that accompany fraudulent unemployment benefits claims.

Inscribe's AI-powered tool supports your changing fraud prevention processes and requirements, delivering immediate value to your business. 

Talk to one of our experts to find out how to update your organization's systems and processes, save time on manual reviews, and reduce fraud-related reputation damage and financial loss.

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