Fraud had ‘significant’ role in $163 billion leak from pandemic-era unemployment system

More than $163 billion in benefits likely leaked from the unemployment system during the pandemic, with a “significant portion” attributable to fraud, according to a U.S. Department of Labor report.

Congress created many new programs in March 2020 to support millions of people who lost their jobs from the Covid-19 fallout. Together, the programs raised weekly benefits, increased their duration and expanded the pool of workers eligible for payments. They ended last September, though many states opted out sooner.

In that time, the federal government issued almost $873 billion in total unemployment payments, the Labor Department said in a semiannual report to Congress released Thursday.

More from Personal Finance:
Advocates slam Biden’s move to cancel $10,000 in student debt
Employer fertility benefits are on the rise amid the Great Resignation
Make these money moves before the Fed raises interest rates again

“The unprecedented infusion of federal funds into the [unemployment insurance] program gave individuals and organized criminal groups a high-value target to exploit,” according to the report.

Criminals were able to defraud the system due to program weaknesses and easily stolen personally identifiable information, the agency said.

Many states weren’t prepared to process the crush of new claims for benefits and struggled to implement the newly created programs — and many traditional internal fraud controls weren’t used as a result.

Criminals could make a fraudulent claim for benefits with relatively low risk of being caught, potentially getting tens of thousands of dollars, the Labor Department said.

Much criminal activity targeted the temporary Pandemic Unemployment Assistance program for gig, self-employed and other workers. Lawmakers initially let program applicants self-attest their qualification for benefits; they later rescinded that feature and added fraud safeguards, as did states.

The Labor Department has also taken additional fraud-prevention measures, including grant money to help states upgrade their administrative systems.

Some argue that less red tape was critical to pump financial aid into households quickly amid a deep crisis.

Even with rules that were initially laxer, it took states weeks (sometimes months) to start issuing Pandemic Unemployment Assistance. For example, early PUA checks corresponded to delays of six or seven weeks, according to a recent report from The Hamilton Project, part of the Brookings Institution.

“These delays were consequential in terms of consumer welfare,” the report said, mentioning an inability to pay bills, increased credit card debt, high interest rate borrowing, depleted savings, food scarcity and homelessness.

So-called “improper payments” occurred even before the pandemic. This isn’t all because of fraud; some may be from processing errors by state labor agencies or application mistakes from claimants.

In December, the Labor Department reported that 18.7% of benefit payments in 2021 were issued improperly. By applying the 2021 rate to the $873 billion of total pandemic-era unemployment benefits, the Labor Department derived its new estimate that at least $163 billion may have been issued improperly.

Before the pandemic, the Labor Department’s Office of Inspector General opened about 120 investigations each year related to unemployment insurance. In the pandemic era, the Office has gotten more than 144,000 unemployment fraud complaints from the U.S. Department of Justice and has independently opened more than 39,000 fraud investigations — an increase in volume by a factor of more than 1,000, it said.

“The volume of investigative matters currently under review is unprecedented in the OIG’s history,” its report said.