Process of fast-tracking jobless aid made WA vulnerable to fraud attack, auditor finds
A new audit of the state’s unemployment system described the department processing the claims as being overwhelmed and underprepared for such an onslaught, with decisions to speed payments ultimately putting the payment system at higher risk of fraud.
According to the state Auditor’s Office investigation, Washington State Employment Security Department “did not have adequate internal controls to prevent the fraud. The Department also reported inaccurate fraud and recovery numbers for the state’s financial statements.”
The auditor issued a finding to the state itself “for not explicitly noting fraud on its financial statements.”
The report notes, “The audit found ESD originally reported incorrect numbers for the state’s financial statements because it planned to account for and investigate the fraud in its entirety during the next fiscal year. Those numbers have been corrected in the final CAFR (Comprehensive Annual Financial Report).”
The finding issued to the state “concerns the decision made by the Office of Financial Management that it would not list the fraud as a separate category on financial statements as an ‘extraordinary event.’”
State Auditor Pat McCarthy contends that decision was wrong.
“This fraud is a source of major concern for the public, legislators, and the media — all of whom are considered users of these financial statements,” McCarthy said in a statement released Friday. “Additionally, these funds were given to the state to use for the benefit of Washingtonians. The financial statements should be transparent about what happened.”
ESD commissioner Suzi LeVine said in a statement issued Friday:
“We so appreciate the feedback this audit provides and are proud that all of their recommendations are actions we’ve already taken. Additionally, the areas they’ve identified as causes have already been disclosed, identified and — where it is in the state’s power to do so — acted upon. We especially welcome the recognition of our critical work on funds recovery, which currently stands at $357 million and rising.”
She noted, “Washington was among the first states to be impacted by the nationwide unemployment fraud attack, but we were not the last.”
LeVine acknowledged the speed of payments did in fact cause problems but also did what it was intended to do in serving legitimate claimants.
“Some of these conditions were created by the federal law or guidance. For instance, the waiving of the waiting week was encouraged and paid for by the federal CARES Act,” she said. “While it affected some of the fraud, waiving it enabled claimants to receive funds more quickly at a time they desperately needed relief due to mandatory shutdowns.”
According to highlights of the findings posted on the auditor’s website:
▪ The “known and suspected” fraud loss, as of June 30, was about $600 million, covering more than “122,000 known or suspected fraudulent claims in fiscal year 2020.”
▪ By June 30, Washington state had recovered $250 million, “resulting in an estimated net loss of $350.9 million for fiscal year 2020.”
▪ According to the report, “These amounts are almost certainly different today, as ESD’s recovery efforts are ongoing.”
▪ ESD paid out more than $7.5 billion in Unemployment Insurance benefits to 926,815 people in fiscal year 2020; the totals includes the fraudulent claims, with vast majority of those payments issued after the pandemic began in March.
▪ In fiscal year 2020, ESD issued 684 percent more in benefits funding (about eight times) to 390 percent more people (about five times) than in fiscal year 2019.
The audit is the first in an announced series of audits of the Employment Security Department since a major fraud scheme targeted unemployment benefits this past spring, as claims soared amid the COVID-19 pandemic.
The fraud led to ESD slowing approvals of new claims down to a trickle and causing massive backlogs and delays in payments.
LeVine offered public acknowledgments and updates about the backlog in regular briefings with the media over spring and summer and would offer performance metrics at the time which she showed progress being made.
The fraudulent claims also swarmed major employers, including the City of Tacoma and CHI Franciscan.
INTERNAL CONTROL ISSUES
The audit said the decision to speed relief to the newly unemployed made the state particularly vulnerable to the fraudulent attacks, including eliminating the typical “waiting week” used to verify eligibility.
The audit found federal incentives to distribute the relief quickly, coupled with an executive order from Gov. Jay Inslee, drove the decision.
“As a result, benefits were paid before eligibility was verified,” the Auditor’s Office said.
According to the findings, “An automated process to detect claims that present a higher risk for identity theft was not working for much of the year. By the time it was repaired in May, a large number of fraudulent transactions had already occurred.”
The audit also found in particular that the federal Pandemic Unemployment Assistance Program, which offered payments to self-employed people and others normally not eligible for unemployment insurance, was ripe for risk.
“These claimants were not required to submit documentation to substantiate employment,” according to the Auditor’s Office.
ESD TOUTS IMPROVEMENTS
LeVine, in her statement Friday, listed countermeasures and improvements the department had taken, including:
▪ Standing up a 100-person customer service intake team to handle reports of fraud.
▪ Establishing a secure portal for receiving verification information from victims and businesses for faster response.
▪ Implementing a two-day hold on payments to help investigate fraudulent claims prior to payment
▪ Reallocating resources and increasing staffing for fraud investigations.
▪ Repurposing staff for data analysis to detect trends in fraud and improve the discovery process.
The CAFR is one of a series of audits reviewing the swarm of unemployment fraud.
In an interview Friday with The News Tribune, McCarthy said plans are for the next audit, an accountability audit, to be released sometime in the first quarter before March.
She said to think of it as a compliance audit.
“So what that looks at are things such as did they follow state laws or policies or procedures,” McCarthy said.
Following that is a federal-focused audit, which is due in March, “to look at all the federal grants and all the federal dollars. So that will that will give us another picture,” she said.
“Think of all of these audits as providing building blocks for each other; they inform the next audit.”
After that, McCarthy said, there’s an IT systems audit. “And, I will say the IT systems audit and the performance audit — they have started their work.”
The systems audit won’t come out until probably early April, she noted, and as it will be “informed” by the previous audits, “that will give a broad picture. That will give pretty much the full story of what transpired.”
After auditor’s office complaints became public this fall that the office was not receiving the level of cooperation required from ESD, McCarthy now says that “we are getting information from the ESD, and we have been since that time period. So things improved and we are getting the information that we need.”
McCarthy noted that current issues claimants are facing, such as overpayment notices sent in error or payments not sent at all, will be part of the ongoing reviews.
“Part of these reviews will look at the communication with the stakeholders involved, with the claimants, with the public, and that will probably most likely be reflected in the work that the performance auditors will do.”
“We welcome these audits as an opportunity to make improvements in practices and systems for the future,” LeVine said Friday.
This story was originally published December 18, 2020 at 10:23 AM with the headline "Process of fast-tracking jobless aid made WA vulnerable to fraud attack, auditor finds."
