The federal unemployment insurance program has been rife with fraud for decades. But Labor Department programs created for pandemic relief spawned so much fraud, the department is opening a hundred new investigative cases a week. For the details, the Federal Drive with Tom Temin  spoke to Seto Bagdoyan, the director of the Forensic Audits and Investigative Service at the Government Accountability Office.

Interview transcript:

Tom Temin

And we could admire the number, I think it’s $60 billion so far, in fraud under the pandemic programs. But really, I think the important question is, what is the essential mechanism to prevent fraud that seemingly was not in place for a long time before the pandemic? Now, the pandemic just gave new petri dishes to the same bacteria.

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Seto Bagdoyan
Exactly right. Yes, the estimate we have is a lower bound estimate over 60 billion, we are in fact working on an updated one, also adding an upper bound, so just for context for your listeners. And yes, neither the Labor Department nor the states were prepared for what they encountered once the pandemic kicked in and the programs began dispensing assistance. They didn’t have any of the fundamentals in progress management, they’d hadn’t done any assessments, they didn’t have a strategy. What few controls there were, were turned off essentially, to get the money out quickly under pressure of claims and political leaders and others. So it was a perfect storm, basically, of what not to do in these circumstances.

Tom Temin
And you’ve, in the report, laid out some illustrative examples of fraud cases for unemployment insurance, and they all seem to have phony identities at the heart of it. And seems like that’s where efforts should be concentrated, is to somehow verify people are who they say they are.

Seto Bagdoyan
That’s right, that is a fundamental fraud risk management control, identity verification triggers, everything else that follows, the eligibility determination, the amount of the benefit to be paid, and also the duration of that benefit. So, it is absolutely, the first foremost control to help manage fraud risk.

Tom Temin
Now, this is a program typical of these types of programs where it is federal dollars allocated to states to disperse. Correct?

Seto Bagdoyan
Well, actually, unemployment insurance is funded through state withholdings. In the pandemic, there was additional federal funding that was provided to enhance benefits for certain durations. So at its essence, this is a federal state partnership, but the funding burden in normal times lies with the states.

Tom Temin
Right. So it’s not really necessarily a federal concern for the fraud levels prior to the pandemic?

Seto Bagdoyan
Well, it should be a federal concern, because the Labor Department has, at a minimum, nominal oversight over the program. So labor is not absolved of its responsibility. In fact, they were late comers to the game after fraud, what became prevalent, there was pressure for labor to act that they did take some steps here and there. But those steps were reactive, they were ad hoc. They were not strategically organized and targeted and prioritize risks, all the fundamentals of fraud, risk management. Really, none of them were in place.

Tom Temin
All right. So just to clarify, then prior programs that have been going for many, many years, state withholdings with DOL oversight. In the case of the pandemic, unemployment insurance programs, that was congressional appropriations, as part of all the pandemic spending that was rushed out.

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Seto Bagdoyan
Yes, right. That’s the gist of it. Correct.

Tom Temin
Ok. So besides the ability to identify people, is that the fundamental thing that’s missing from these program, is simply verification of ID?

Seto Bagdoyan
Right. Yeah, that is part of it, certainly. But the overall fraud risk management structure, the capacity, if you will, is just not there. It hasn’t been there. We made recommendations, to that effect, back in October of 2021, as part of our initial deep dive into unemployment insurance fraud risk. We made a number of recommendations to labor and 16 plus months, hence they have yet to act decisively. They have told us they are taking some action, but we don’t know what the nature of those actions are. We have no insight, whether they’re the right ones, they’re being done in the right sequence, because it’s a very deliberate process. You can’t do certain things before other things happen and so on.

Tom Temin
We’re speaking with Seto Bagdoyan director of the Forensic Audits and Investigative Service at the GAO. Yes, you made 19 recommendations. And outside of the verification of ID, what are some of the other basics that have to be in place there?

Seto Bagdoyan
Yes, there are the basics, as your referenced. First, you basically have to have a dedicated entity, some unit within labor, for example, that assumes the responsibility to build a capacity for fraud risk management. That is a fundamental. And then, you go do fraud risk assessments, you develop a profile of risks, which is essentially the DNA of each risk. And then you feed into an anti-fraud strategy, you execute that. And part of the strategy is the sequencing of controls to verify identity, as I mentioned, establish eligibility, determine the amount to be paid and the duration for which that amount will be paid.

Tom Temin
And is there any mechanism elsewhere in the government that labor could learn from? I’m thinking, maybe, [Centers for Medicare & Medicaid Services (CMS)]. They all have fraud, it’s a matter of degree. And if you have 1%, that’s the spillover you’re going to get. Even though the numbers look big, it’s still a small percentage. Social Security, there’s a dozen big programs like that.

Seto Bagdoyan
There are big ticket programs, you’re absolutely right. Many of them are still not where they need to be. CMS, Center for Program Integrity, for example, has responded, generally well to our recommendations over the years, so they are on the right track. And then another one, a much smaller entity, the Export Import Bank of the United States, they really take this very seriously. And they’ve made considerable progress over the last three or four years of our reporting on their activities. And we have referred other agencies to them, sort of a standard setter, if you will, for how to do fraud risk management reasonably well. We’re not looking for an absolute standard here, we’re looking for a reasonable standard.

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Tom Temin
Right. So getting back to the number of $60 billion in unemployment insurance fraud from the pandemic, those programs alone, what percentage does that represent? And do you have any sense of what your upper limit might be? Because that’s what usually ends up being.

Seto Bagdoyan
Right. So the over 60 billion number represents, roughly between, seven to 8%, if my math is correct, of the total spend. We suspect the upper bound, by definition, will be higher. We are working on it diligently. We just obtained some more data from the Department of Labor, that my methodologists colleagues, including the chief statistician, Jared Smith. And his team will be working diligently to create a new updated estimate that has a lower bound and an upper bound. And hopefully, that will grab people’s attention, as to the extent of the problem, that sets the stage for what needs to be done. Labor acting swiftly and decisively getting the states involved, because as I mentioned earlier, and you’ve correctly pointed out, this is a federal state partnership.

Tom Temin
Yes, in a week ago or so, your colleague Rebecca Shea appeared on the show. She made a comment that was kind of interesting. We weren’t talking about unemployment insurance, but other pandemic relief programs that also had high levels of fraud. She said the tough thing about this, in some ways, is that it was, maybe to a small degree, Russian gang hackers or Chinese or whatever the case might be. But mostly, it was just Americans seeing an opportunity. And that was kind of a heartbreaking aspect of it. When it comes to unemployment insurance, that’s almost all people here in the country just jumping in because they can get away with it.

Seto Bagdoyan
Well, there was a lot of money put out there very quickly with minimal controls. So what you ended up is attracting anyone who had an inkling to take some of that money for themselves. Then, of course, again, the large amounts attracted international organized crime or freelancers anywhere from Russia, China, Nigeria, the usual suspect hotspots of just fraud criminality in general.

Tom Temin
And by the way, the Labor Department, as you report states, is opening 100 cases a week to investigate instances of fraud. So they’re in heavy duty, find prosecute and clawback mode, but that only yields a small percentage of what it is that went out in the first place?

Seto Bagdoyan
Yeah, that’s right. That’s the Office of Inspector General, Mr. Turner and his team. They are opening hundreds of cases, as we speak, they probably have a backlog they’re working through. But the clawback aspect of this is really just noise. You’re not going to recover that money, once it’s gone, it’s gone. These cases take a long time to adjudicate and they’re very complicated. You have to prove intent, and you have to pick your battles. You can’t do everything. So that really underscores the need to be preventative, to be front loaded, to manage this as best as you can so that you aren’t arguing about how bad the problem is at the tail end. And then further pursuing restitution or whatever else the adjudicative process yields. So yeah, it’s just imperative that you do this right up front. Even if it slows things down, which is the main concern of agencies. We got to get the money out, if we lose some that’s the cost of doing business.

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