State agencies trade blame for $10B unemployment fraud

State agencies have been blaming each other for an estimated $10 billion scheme by state prison inmates, their associates and relatives to defraud California's unemployment benefit system.

This number is still an estimate, based on the percentage of fraudulent claims being found by a firm hired by the state to investigate.

The scandal has led legislators to propose new laws to stop future fraud. But old laws are playing a key role in the dispute -- specifically a disagreement over whether the Employment Development Department's investigators are legally considered law enforcement officers eligible to receive sensitive data like Social Security numbers to compare claims against prison populations.

A review of California's relevant code sections appears to reveal that they are. However, the change happened as part of an immense omnibus bill, and it's unclear whether the prisons department officials would have been told they could pass on the information.

Unlike many other states, California doesn't cross check Social Security numbers in unemployment benefit applications with prison and jail records. This is one of the factors that allowed prisoners, including notorious convicted murderers, to receive benefits for months before being discovered.

Disagreement about what the relevant laws actually say and what power they allow different agencies appears to be one of the underlying causes that allowed the fraud to go unnoticed.

"Under current law, CDCR [the California Department of Corrections and Rehabilitation] is prohibited from releasing Social Security numbers to EDD," the agency that handles unemployment payouts, corrections department spokeswoman Dana Simas wrote in an email. "Once CDCR has criminal offender record information, which includes the Social Security number, it is limited to sharing the information only with other criminal justice agencies. EDD is not a criminal justice agency because it does not have as its principal function the apprehension, prosecution, adjudication, incarceration or correction of offenders."

She pointed to a section of the Penal and Government Codes governing access to the California Law Enforcement Telecommunications System. The Department of Justice administers the system, which has "very strict requirements on accessing and using the information," Simas said.

The California Department of Justice confirmed in an email, "There is no formal legal opinion on the issue." However, the email from the press office said, employment investigators are law enforcement officers, even though they do not carry guns.

"Penal Code Section 830.3, subdivision (q) provides that investigators employed by the Investigation Division of the Employment Development Department and designated by the director of the department are considered peace officers when carrying out their duty to enforce the Unemployment Insurance Code," said the Justice Department email. "As such, EDD investigators are peace officers authorized under Penal Code Section 11105 to receive criminal offender record information in the course and scope of an investigation related to violations of the Unemployment Insurance Code."

The specific code section mentioned by the Department of Justice was passed in 2017 as a small part of AB 1516. This 213,000-word law was dubbed a "maintenance of codes" measure. It made minor changes in dozens of areas of state law. The section on Employment Development Department investigators referenced a legal code going back to 1974 defining who is considered a peace officer. Lawmakers have updated this code on numerous occasions to add investigators in various state departments to this list.

Officials with the Employment Development Department did not return a call and email seeking comment for this article.

Last month Assemblywoman Cottie Petrie-Norris, D-Laguna Beach, introduced a bill that aims to remove any doubt about the authority to share prisoner data to prevent future fraud. Petrie-Norris chairs the Assembly Accountability and Administrative Review Committee, tasked with studying the implementation, operation, and effectiveness of state programs and agencies.

AB 110 would amend the Penal and Unemployment Insurance codes to clarify that corrections and county jail officials can share names and Social Security numbers with the Employment Development Department. It is an urgency measure, requiring a two-thirds vote in each house and would go into effect immediately if Gov. Gavin Newsom signs it.

The scandal and the efforts to fix it have led to problems for legitimate unemployment benefits recipients. The Employment Development Department has paused payments on up to 1.4 million accounts while trying to root out which ones are fraudulent.

Earlier this month, a proposed class of recipients sued Bank of America Corp. claiming its practices had a role allowing the fraud. The complaint filed by Brian Danitz states the bank had lax security standards that helped enable the fraudulent transactions. Bank of America has an exclusive contract with the state to distribute unemployment benefits through debit cards.

Danitz is a partner with Cotchett, Pitre & McCarthy LLP in Burlingame. Yick v. Bank of America, 3:21-cv-00376-JCS (N.D. Cal., filed Jan. 14, 2021).

On Jan. 20, Rep. Josh Harder, D-Turlock, sent a letter to the Internal Revenue Service urging it to take "proactive measures identifying and resolving the high number of unemployment identity fraud cases this tax season." Harder said he is concerned people will be hit with tax bills for payments made in their names to fraudsters.