Why scammers who stole billions in unemployment benefits may get away with fraud
Los Angeles Times February 25, 2023
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WASHINGTON (Tribune News Service) — Just a small percentage of the at least $60 billion in unemployment payments estimated to be lost to fraud during the pandemic has been recovered, and time is running out to prosecute those who committed the crime.
The statute of limitations for many pandemic-related unemployment insurance fraud investigations is set to expire in 2025. Government watchdogs are pleading with Congress to act, asking House lawmakers in two public hearings held this year to give prosecutors an additional five years to pursue fraudsters who took money that should have gone to unemployed Americans during the pandemic.
“This is a once-in-a-century fraud scheme,” said McGregor Scott, who was appointed California’s fraud special counsel by Gov. Gavin Newsom in 2021. “This is the largest fraud scheme ever perpetrated on the taxpayers in the history of the United States. And so in the context of that, why not give law enforcement and prosecutors that extra time.”
Michael Horowitz, chair of the federal Pandemic Response Accountability Committee, told the House Ways and Means Committee this month that extending the statute of limitations would give investigators and prosecutors more time to pursue groups and individuals implicated in unemployment fraud.
“We’re already three years since the beginning of the benefits going out. We’ve got a lot of work still to do, right? So, if it runs out in 2025, for some cases, that’s going to be a problem,” Horowitz said. “We’re going to need the 10 years.”
Because it is early in the 118th Congress, no legislation extending the statute of limitations has been filed, though a proposal is expected to be introduced in the coming weeks.
Congress has extended the statute of limitations to prosecute fraud in other pandemic-related economic programs. In August, President Joe Biden signed two bills into law that gave the Department of Justice and other federal agencies 10 years rather than five to investigate and prosecute fraud cases involving the Paycheck Protection Program, or PPP, and the COVID-19 Economic Injury Disaster Loan, or EIDL.
When government officials asked Americans to stay home in March 2020, the economy ground to a near-halt. Millions were suddenly without income. Congress approved trillions of dollars in aid with few guardrails, pumping an unprecedented amount of money into unprepared social safety-net agencies. State agencies, including the California Employment Development Department, that were swamped with overwhelming demand for help sent out benefits for months without scrutinizing whether applicants were who they claimed to be, or if they had lost income because of COVID-19.
More than $888 billion in unemployment insurance benefits were paid out nationwide. Millions of people avoided financial ruin, but the Department of Labor estimates that fraudsters claimed more than 21% of the money.
By the time safeguards were put in place, billions of dollars had already been lost to international crime rings, organized efforts to claim benefits filed in the names of prison inmates, domestic crime syndicates and petty criminals who easily gamed the system.
Watchdogs for the Department of Labor, Government Accountability Office and the Pandemic Response Accountability Committee, which Congress created to monitor pandemic economic relief, haven’t settled on an estimate for how much was lost due to improper unemployment insurance payments, but have provided lawmakers with a range at least between $60 billion to $191 billion.
Haywood Talcove, chief executive of the Government group at LexisNexis Risk Solutions, estimated that along with crime rings operating in at least four countries and at least 800 crime organizations working across state lines within the United States, up to 4 million people defrauded taxpayers.
Then-California State Auditor Elaine Howle released a report in January 2021 saying that the EDD might have overpaid more than a million people since March 2020 after it stopped enforcing eligibility rules so it could process claims faster. Former California Labor Secretary Julie A. Su, who oversaw EDD during the pandemic, is currently in the No. 2 post at the U.S. Department of Labor and is in the running to be the next Labor secretary.
Tracking down and prosecuting those responsible and recovering money are monumental tasks that are only now beginning in earnest three years later. State unemployment insurance agencies were overloaded with information requests, and states not accustomed to sharing data with one another scrambled to open communication channels and legally exchange information. The federal Department of Justice has created three strike teams to help with the flow of information and resources from the FBI to local district attorneys.
California has lost at least an estimated $30 billion to fraud. The House Oversight and Accountability Committee has signaled that the state is among a handful it expects to focus on as part of its investigation.
It’s taken time to put together investigative teams and put frameworks in place to allow different jurisdictions to work together, Scott said.
As special counsel, Scott, a former federal prosecutor, facilitates the investigations being done by local, state and national law enforcement in California, but he does not have the power to prosecute. Scott said he has helped a “completely overwhelmed” EDD set up processes to respond to a flood of subpoenas and search warrants from local, state and national law enforcement agencies.
Under state law, EDD cannot legally respond to a search warrant or a subpoena from a law enforcement agency outside California because it doesn’t have jurisdiction. Now, requests from other states get funneled through the attorney general’s office, which does have jurisdiction, he said.
In June, EDD trumpeted the recovery of $1.1 billion in unemployment insurance funds after Bank of America deactivated unused debit cards loaded with benefits. Seven months later, that total still makes up nearly all of the recovered funds to date. Scott said he expects EDD and Bank of America to announce the recovery of an additional $4 billion from deactivated debit cards in the next few months.
As of December, only an additional $27 million has been recovered in other investigations, according to EDD. Statewide, 1,751 investigations have led to 605 arrests and 278 convictions, according to November figures from the agency, which notes that not all counties report information to EDD.
Scott said he’s working with EDD contractors hired to confirm applicant identities to compile packages of information and data about potential crimes and forward them to the proper law enforcement agencies. They’ve completed about 50 packages so far, he said.
Much of their focus is on going after individuals who committed fraud and, upon conviction, seizing their bank accounts, cash and assets.
“Those are much smaller amounts [of money], obviously, than the [$1] billion or $3 billion, but they add up over time,” Scott said. “We’re now in a grinding phase. We’ve got the pieces in place, and now we’ve just got to keep grinding to bring these people to account for what they chose to do.”
Scott is also working with the new California-based U.S. Department of Justice strike force team, which includes the U.S. Attorney’s Offices for the Central and Eastern Districts of California and agents for the FBI, the U.S. Secret Service and several other agencies. The team investigates all pandemic program fraud, not just unemployment insurance scams.
Talcove estimated that about 10% of the stolen money went to individuals, 20% went to domestic organized crime groups and 70% went to international criminal organizations that flooded state agencies with fake applications, often using stolen identities.
Hundreds of investigators across more than a dozen state and national agencies, including the FBI and the Secret Service, are working on pandemic-era unemployment insurance fraud cases. Department of Labor Inspector General Larry Turner told the House Ways and Means Committee that his office has opened more than 198,000 complaints and investigations involving unemployment insurance, and opens at least 100 new investigations each week.
The investigations led to over 1,200 charges, more than 500 convictions and the recovery of at least $900 million, Turner said.
State prosecutors aren’t set up to go after the international crime rings that stole the majority of the unemployment money, or the criminal organizations that operate in multiple states. That job largely falls to the Secret Service, which is tasked with protecting the U.S. financial infrastructure, and Department of Justice.
International cases are the most convoluted and will take years to complete, Horowitz said. The rings are based in countries including Nigeria, China and Russia that are unlikely to extradite, making it even more unlikely the leaders of such crime rings will face prison time in the United States.
“One of the biggest challenges we have is following the fraud through overseas gang activity and fraudsters,” Horowitz said.
David Smith, assistant director of the Secret Service Office of Investigations, told the House Oversight Committee this month that the agency has assisted in returning about $3 billion in unemployment insurance benefits since 2020 and has initiated more than 2,300 unemployment insurance fraud investigations.
Rep. Kevin Kiley, R-Calif., who served in the state Assembly during the first years of the pandemic, said Congress needs to give prosecutors additional time to prosecute fraud.
“Those limits were formulated certainly not with a fraud of this scale in mind. We’ve never seen anything like it. And so it’s really just overwhelming the capacity of our court system and our law enforcement agencies to deal with that volume of claims within the allotted time,” he said.
Even if Congress provides another five years to prosecute, government watchdogs acknowledge that most of the billions of dollars lost to fraud will never be recovered.
Still, Horowitz said, they have to try.
“The recovery rate is clearly going to be far below what the fraud rate is. Having said that, the public should know we’re gonna do everything we can in our power to try and track down and find every dollar,” he said. “Congress has given us tools to do that. We’re asking for some more. And we’re going to do everything we can.”
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