EDD ‘Missteps and Inaction’ Allowed Fraudulent Claims, New Report Says

The state Employment Development Department’s response to massive fraud was “marked by significant missteps and inaction,” fraud that so far has resulted in more than $10 billion in suspicious claims, a state audit reported Thursday.

“Despite repeated warnings, EDD did not bolster its fraud detection efforts until months into the pandemic,” wrote State Auditor Elaine Howle.

The audit said $10.4 billion had been paid out from March to December to people who “might be fraudulent,” and warned, “it is highly probable that EDD will ultimately determine that it improperly paid significantly more than the $10.4 billion we identify in this report as potentially fraudulent.”

The audit listed several lapses, including a system that allowed claimants to collect benefits even though they were using suspicious addresses.

In one case, it said, more than 1,700 claims were coming from a single address.

People throughout the state had been reporting since August that they were getting mailings with unknown names from EDD, yet the audit found that as late as December, the agency was “allowing claimants to continue to collect benefits using suspicious addresses because it did not establish payment blocks for their claims.”

EDD Director Rita Saenz, who began the job a month ago, told the auditor in a response that California was unprepared for the unprecedented surge in COVID-era claims. She said the agency got “insufficient support” from the Trump administration to address what she said were criminal syndicates targeting the new Pandemic Unemployment Assistance program. Most of the fraudulent claims have involved that program, created last spring to provide help for people who do not qualify for traditional jobless payments, such as self-employed people.

Howle noted, though, that the U.S. Department of Labor’s Office of the Inspector General warned EDD in May that “California was likely to see at least $1.2 billion in potential fraud based on the 2.9 million new claims that EDD had received in March and April 2020.”

And despite what Howle said were repeated warnings, “EDD did not take prompt action to enhance safeguards against illegitimate benefit payments.” The agency, the audit said, did not make substantive changes to until late July.

Saenz, in her response to the audit, listed several steps EDD has taken to combat fraud, including the use of ID.me, an identity verification program that aims to prevent fraud at the start of the unemployment claim process. A new fraud-fighting task force, led by the California Governor's Office of Emergency Services, combines efforts by state prosecutors, the U.S. attorney, and the state departments of Corrections and Rehabilitation and Justice.

Howle made several recommendations to EDD, which the agency agreed to implement. Among them are, by March, establishing a central unit for coordinating all fraud prevention and detection efforts. By May, EDD is to develop a plan for how it will assess the effectiveness of its fraud prevention and detection tools.

Among the audit’s findings about where EDD has stumbled:

• Making $1 billion in payments to claimants “despite concerns about the legitimacy of their identities before discovering it had inadvertently removed a safeguard for four months.”
• Having no special unit to ease the risk of fraud or manage detection efforts. As a result, the audit said, “EDD may well be using ineffective fraud prevention and detection techniques and delaying payments to legitimate claimants while it puts their claims through additional and unmerited review.”
• Being “unprepared” to guard against inmate fraud. EDD, the audit said, did not cross-match incoming claims against incarceration data, and has paid about $810 million in benefits to 45,000 claimants who were in prison last year.
• Having no plan to unfreeze certain debit cards that belonged to legitimate claimants. EDD directed Bank of America to freeze 344,000 cards used to provide direct unemployment payments, the audit said.

But the audit said that EDD “did not have a plan to ensure that it could selectively unfreeze accounts belonging to legitimate claimants, has been slow to provide clear information about its role in freezing these accounts, and does not have a full understanding of which accounts are frozen.”

Earlier this week, EDD estimated that its latest fraud prevention efforts have stopped about $60 billion in fraudulent claims. But the process has also led to the massive backlog that has delayed payments to hundreds of thousands of legitimate claimants.

More than two dozen people have been charged so far, including two former EDD employees, in cases in San Mateo County. Officials said claim funds have been taken by organized cybercrime rings operating out of Nigeria, Russia and elsewhere.

Earlier this week, Howle issued a report faulting EDD for backlogs in handling residents' claims and phone calls.

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