It was exactly the kind of opportunity fraudsters look for—$873 billion in federal funds for COVID-19 unemployment insurance (UI), underfunded state UI programs, an overwhelming increase in UI claims, relaxed UI requirements, internal control systems that were not designed to handle the volume and complexity of pandemic UI claims, and a pressure to pay benefits quickly. Scammers wasted no time finding ways to profit from the crisis, and profit they did.
The U.S. Department of Labor (DOL) Office of Inspector General (OIG) estimates that at least $87.3 billion was paid in improper or fraudulent COVID-19 UI claims.1 And that’s based on the average improper payment rate of 10 percent from previous years. The OIG expects the percentage for pandemic UI claims to be higher.
This article highlights the challenges state governments face in recovering from UI fraud and offers some tips on how fraud analytics can help.
Analyzing the Data
While some may have fared better than others, every state in the country has been affected. Estimated losses range from several hundred thousand dollars paid by less populous states to hundreds of millions in those more heavily populated. In at least two states, the estimated fraud price tag has soared into the billions.
Now, states are sifting through mountains of data to identify fraudulent claims and try to recover as many improper payments as possible. But analyzing millions of claims and the corresponding data can be overwhelming and time-consuming—keeping state employees from focusing on serving the citizens. That’s why states are turning to firms like BKD to help them get the answers they need.
By using a combination of fraud analytics and forensic accounting techniques, BKD has been able to help states like Colorado identify suspicious UI claims and provide information they can use to potentially track down perpetrators and potentially recover funds.
Our experience and knowledge of schemes and tactics used by scammers has helped BKD develop dozens of procedures to swiftly analyze millions of claims and identify potential indicators of improper and fraudulent payments. Rather than using traditional sampling, we have found that analyzing 100 percent of claims is more beneficial, as it allows for the identification of patterns or anomalies that might not be evident in a sampling approach. This provides states with a more in-depth look at the data, which offers more confidence in the information identified. For Colorado, BKD used this approach to assist the state in reviewing more than four million UI claims from March 2020 to April 2021 identifying $73.1 million in potentially fraudulent benefit payments.2
Fraud analytics can identify potential fraud by testing for red flags such as:
- UI claims initiated in foreign countries
- Multiple claimants using the same address, emails, and bank accounts
- Suspicious claimants (too young, too old, or deceased)
- Suspicious accounts (email, banking, etc.)
- Suspicious Social Security numbers
- Unusual timing or location of claim submission
In Colorado, testing for these red flags identified 8,200 suspicious claims. More than $45.7 million of the $73.1 million was paid to claims made with suspicious email, IP, or mailing addresses. Just under $9 million was paid on behalf of deceased and incarcerated individuals.
Now that the suspicious activity has been flagged, Colorado can use appropriate forensic procedures to identify fraud—the first step in recovering lost funds.
States like Colorado are using the events of the past two years to evaluate and improve their systems. It’s not enough just to identify how fraud happened; they want to learn from it and prevent this type of fraud from happening in the future. Using data analytics with forensic investigation techniques, states can find areas of weakness in their systems and make improvements. Here are a few things states can do to get started:
- Evaluate existing controls for vulnerabilities
- Reinstate pre-existing controls that were dropped during the pandemic
- Work with available databases (such as death records, incarceration records, etc.) to help identify fraudulent claims
- Develop proactive processes for detecting potential fraudulent claims
- Test cybersecurity measures for vulnerabilities
- Set up an easy way for individuals and companies to report identity theft and UI fraud
- Turn to trusted advisors to provide guidance about next steps
Developing and implementing new security measures and identifying and investigating fraud takes time and resources—two things most state agencies don’t have a lot of. That’s why many states are looking to advisory firms and outside service providers to help.
At BKD, we understand that identifying potential fraud takes time, tools, expertise, and extra resources that most state agencies don’t have. That’s where BKD can help. Our professionals have extensive experience helping organizations efficiently and effectively assess possible fraudulent activity in large data sets. We use an array of analytics tools and techniques that can help identify potential fraudulent claims, how much was paid, the root causes of the fraud, and more. If you have questions about the next steps in your fraud recovery efforts, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.
The U.S. DOL Employment & Training Administration offers guidance and resources to help states with COVID-19 UI3 and the American Rescue Plan Act of 2021 UI.4
2 Unemployment Insurance Benefits — Public Report | Colorado General Assembly↩