Thieves easily tricked the State of California into sending them at least $10.4 billion in fraudulent unemployment benefits, the state auditor said on Thursday.
The auditor identified several key weaknesses that allowed criminals to exploit the Employment Development Department and get paid with ease.
“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,” State Auditor Elaine Howle said in a letter outlining the new audit.
READ THE NEW AUDIT: STATE AUDITOR WEBSITE
Howle said that when EDD did respond to growing concerns about fake claims, it often blocked real workers.
She noted how EDD directed Bank of America in September to freeze 344,000 unemployment benefit accounts that it suspected were fraudulent. Legitimate applicants, however, quickly complained to NBC Bay Area that they were being denied access to their benefits. Howle explains why.
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“EDD did not have a plan in place to ensure that it could unfreeze those accounts found to belong to legitimate claimants, and it has been slow to acknowledge its role in freezing these accounts,” she wrote. Many accounts are still frozen. Howle recommended the EDD work to unfreeze them by March.
The Thursday audit builds upon a report issued Tuesday that identified other lapses in EDD’s claim handling. Taken together, those gaps gave thieves an unprecedented opportunity to fleece the state.
AUDIT SLAMS EDD FAILURES: ALSO RELEASED THIS WEEK
EDD has described the thieves as organized and likely based overseas.
But, some California prisoners were among the criminals who exploited EDD’s systems. The audit criticizes EDD for allowing this to occur.
The agency was “unprepared to prevent payment of fraudulent claims filed under the names of incarcerated individuals, the total of which is an estimated $810 million,” Howle wrote. “Because it had not developed the capacity to regularly match data from its claims system with data from state and local correctional facilities, EDD did not detect fraudulent claims until after it had paid them.”
Overall, Howle describes an agency that was and still is ill prepared to prevent or detect fraud. She said EDD employs “uninformed and disjointed techniques.” Howle said EDD should establish a “central unit” that is responsible for coordinating “all fraud prevention and detection efforts.”
Howle said the criminals’ fraud was likely to exceed $10.4 billion. That’s because at least one million unemployment accounts remain unverified. Any fake -- yet paid -- accounts would push the $10.4 billion price tag higher.
NBC Bay Area’s contacts in banking and law enforcement have said most of the lost money likely will be impossible to claw back.
“That’s what we’ve heard as well,” said San Francisco Assembly member Phil Ting. “It’s clear that [the thieves] were organized. This is not somebody who just got on the Internet and was just doing this for fun for the first time, clearly.”
EDD did not help matters. Howle noted that EDD identified 26,000 street addresses that were suspected of fraud. Yet, EDD blocked payments to just 10,000 of those addresses. Howle went on to say her office identified one address that was home to 80 different claims. EDD sent more than $300,000 to that one address.
In a written response to the audit, EDD director Rita Saenz said, “EDD undeniably struggled to timely distribute benefits to the millions of newly unemployed Californians and simultaneously prevent fraudulent claims.”
Saenz did not dispute the recommendations the auditor laid out -- seven in total.
“EDD will use all seven fraud related recommendations provided by the State Auditor to continue making improvements and strengthening protection of our unemployment system,” Saenz wrote. “We look forward to implementing these recommendations, providing updates as requested, and our continued collaboration.”
Ting, the San Francisco Assembly member said the legislative will be watching.
“It’s all about being the right seven,” he said.