Negligence and missteps led to benefits fraud, says auditor

A combination of negligent inaction and significant missteps taken by California's Employment Development Department led to the largest unemployment insurance fraud scheme in state history, according to the results of a scathing state audit released Thursday.

Since March of last year alone, the state has paid out more than $10 billion in fraudulent unemployment claims, according to the audit. A task force of state and federal prosecutors who have already brought charges in relation to the scheme have said many of those payments were received by people who are incarcerated, including convicted murderers on death row and thousands in county jails across the state.

As claims began pouring in soon after the federal government bolstered California's unemployment insurance funding pool last year, the state failed to reinforce its fraud detection capabilities and neglected to centralize its response to the threat, allowing thousands upon thousands of fraudulent claims to be approved, according to California State Auditor Elaine M. Howle's findings.

"Specifically, EDD waited about four months to automate a key anti-fraud measure, took incomplete action against claims filed from suspicious addresses, and removed a key safeguard against improper payments without fully understanding the significance of the safeguard," Howle wrote in a letter to Gov. Gavin Newsom and state lawmakers detailing the results of her audit Thursday.

That safeguard, which normally would have temporarily suspended payments on claims flagged with potential identity problems, was removed early on in the pandemic after someone or a group of people in leadership in the Employment Development Department mistakenly believed that other safeguards would continue to prevent payments being sent on questionable claims. Those leaders, who are not identified in the audit, "did not adequately understand how the stop payments worked," and their decision to eliminate the safeguard allowed 77,000 potentially fraudulent claims to be approved, totaling more than $1 billion alone.

The state also did not have a plan in place to prevent payment on claims filed under the names of incarcerated people, which made it through the system without scrutiny because the state does not cross-match claimants' personal identifying information with state prison and county jail rosters, like most states do. Howle estimated in her report that California has paid $810 million to people behind bars since the onset of the pandemic.

The majority of that money was paid out in the form of prepaid bank cards from Bank of America, which were cashed by people who were not in custody and then sent to inmates in prisons and jails. In September, the state directed Bank of America to freeze nearly 400,000 debit cards due to fraud concerns, but there was no plan in place to ensure legitimate claims could be unfrozen once they were deemed not fraudulent. The department has neglected to take responsibility for this action, the audit states.

In response to these failures and the state's disjointed response, several legislative measures have been introduced over the course of the last week that are aimed at restructuring the department to prevent future fraud. And the audit called on the Legislature to do just that, including amending state law to require cross-matching of claims against incarceration rosters and to complete biannual reviews that assess the efficacy of its fraud detection tools.

Within the department, the state auditor said, by March officials must begin unfreezing legitimate claims by reviewing every account that's frozen and establish a central unit that will focus solely on fraud detection and prevention.

According to the audit, the state has agreed to implement each of these recommendations.