​Exploiting the Crisis

As job losses mount, fraud rings target already overburdened unemployment systems.

Comments Views

​Throughout the coronavirus pandemic, the state of Washington has paid out hundreds of millions of dollars in fraudulent unemployment claims, the Associated Press reports. State and U.S. government officials allege that a West African fraud ring is filing false claims using stolen identities. Many of those people still were employed, so they weren't likely to notice that someone had filed an unemployment claim in their name unless their employer contacted them about it.

Like many states, Washington has faced a massive spike in unemployment claims. Since March, 2 million unemployment claims have been filed in the state, with weekly initial claims topping 180,000 compared to the usual amount of 6,000.

Authorities have tried to recover some of the money paid to false applicants and have blocked some other payments. Since Washington first discovered the fraudulent claims, eight other states have reported similar schemes to defraud their unemployment systems.

Lessons Learned

Around the world, governments have paid out huge amounts to assist individuals and businesses adversely affected by the COVID-19 pandemic. These payments have supported millions of people who have been laid off or furloughed, as well as assisted businesses of all sizes.

But in responding to the unpredictability and urgency of the crisis, governments emphasized speed over controls to get money to those in need as quickly as possible. That has created opportunities for fraud.

The unemployment fraud in this story is one of many schemes seeking to take advantage of growing demand for financial relief. There are several audit-related strategies governments can adopt to help clean up this fraud now and be better prepared to provide aid during a second wave of the pandemic.

Audits Internal auditors need to audit the performance of temporary relief programs. These reviews should include looking for ways to achieve a more optimal balance between delivering benefits quickly and accurately.

Throughout the crisis, government officials in areas such as employment and taxation may have approved payments and not referred suspected abuse to their quality control, integrity, or enforcement functions. For example, Canada Emergency Relief Program staff members were instructed that applicants should still receive benefits even if records indicated they quit voluntarily or were fired for possible misconduct. However, the program's legislation excludes these factors from eligibility for benefits.

Not only should the departments directly involved in assistance programs perform audits, so should national audit functions, such as the U.S. Government Accountability Office, given the widespread nature of the government's response. Additional funding may be needed to undertake this work.

Controls Program controls over emergency financial relief programs should be designed and operate in relation to other existing employment and social support programs such as unemployment insurance. Government agencies need to conduct pre-payment verifications and post-payment reviews to some degree, even during an emergency situation.

For example, government agencies have discovered a significant number of individuals who were receiving duplicate payments. Some people received this money by mistake, but others were intentionally trying to collect both emergency and unemployment payments at the same time. Uncovering these "double dippers" should be simple because applicants must provide basic identifying information to apply for either program. What is necessary is taking faster action to verify the problem and recover the money.

Deterrence Effective fraud deterrence measures include clear warnings to benefit recipients about the consequences of cheating. In the example of a business that falsifies documents to claim a wage subsidy benefit, a deterrent would be penalties that are larger than the amount received through the program.

Whistleblower mechanisms also are needed. They should be tailored to the design of emergency programs and their eligibility criteria, and should operate via existing taxation agencies. These agencies typically collect reports of tax cheating such as not declaring all income, accepting "under the table" cash payments, or setting up a fake business to claim losses and reduce taxes.

Adding emergency financial relief programs to the existing whistleblower system may require someone who wants to report a potential fraudster to provide key information about the suspect. These details may include the individual's work or education situation, or his or her employer's number of employees and total payroll.

Ongoing Assistance Governments should implement "exit strategies" for assistance programs that balance the ongoing needs of those who still are affected by the COVID-19 crisis with the necessity to reopen economies. Fewer people will require help as businesses reopen and workers are rehired. However, those who still don't have a job, or those who cannot qualify for unemployment insurance, may still need some form of assistance.

Moving forward, the lessons that governments learn from this crisis about audits, controls, and fraud deterrence could help them design a more effective, less fraud-susceptible relief program.

Art Stewart
Internal Auditor is pleased to provide you an opportunity to share your thoughts about the articles posted on this site. Some comments may be reprinted elsewhere, online or offline. We encourage lively, open discussion and only ask that you refrain from personal comments and remarks that are off topic. Internal Auditor reserves the right to remove comments.

About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

Comment on this article

comments powered by Disqus
  • Galvanize-September-2020-Premium-1
  • FSE-September-2020-Premium-2
  • Auditboard-September-2020-Premium-3