State unemployment agencies can use federal funding to reduce potential fraud

The dramatic increase in need, expanded benefits and the new opportunity for self-employed individuals to file for unemployment insurance (UI) under the CARES Act created a perfect storm for unemployment benefit fraud.

As early as May 2020, the Secret Service issued a memo suggesting that an international fraud ring was allegedly targeting state unemployment systems. In September, California announced it was investigating reports of unemployment fraud. States can and should begin moving from reactive to proactive, taking advantage of the opportunity to use federal funds to correct and help protect against potential improper payments and overpayments.

The Families First Coronavirus Response Act (FFCRA) included $500 million of immediate additional funding to state agencies for staffing, technology, systems and other administrative costs, as long as they meet basic requirements about ensuring access to earned benefits for eligible workers. And on Aug. 31, 2020, the Department of Labor announced it would provide an additional $100 million to state workforce agencies to help their efforts to prevent UI fraud and recover past overpayments related to false benefit claims and overpayments.

Unemployment agencies looking to make meaningful changes to their programs can use those federal funds to help adapt typically susceptible systems. In its guidance, the Department of Labor recommended that state agencies validate UI claims and uncover suspicious or potentially fraudulent characteristics through identity verification, data mining and analytics.  With funds available, there are several ways agencies can begin addressing some of the gaps in the system.

1. Verify identity at application

By incorporating automated applicant verification to validate identity as well as eligibility at the point of application, multi-channel authentication checks can take place in milliseconds using a variety of data sources. Additionally, secondary account verifications can take place on additional application data points including confirmation that a direct deposit account number provided by a claimant actually belongs to that person or flagging applications for review when individuals apply for unemployment in one state and have a direct deposit bank account in another state.

In a recent test conducted for one state unemployment agency, commercial identity and verification tools were able to help identify nearly 30% of initial applications for unemployment as a potentially improper payment. While the test was conducted on applications already in progress, state agencies can help prevent potential improper payments by using identity tools and data to quickly screen applications.

2. Tap into better data

Agencies that integrate commercial data into their process can potentially deliver immediate improvements to program integrity. Utilizing the most recent employment and income data can make evaluating initial and continued eligibility much more accurate (and potentially catch bogus applications). If data shows an applicant for unemployment is currently employed, it's a flag that it may be an imposter claim. Conversely, when the applicant-supplied data matches a timely dataset, that claim can move more quickly through determination or continuation.

Commonly pulled data sources, like State Wage Data and the National Directory of New Hires run months behind, making accurate re-certifications difficult. An Equifax survey found that IRS data is the second-most utilized government dataset used to verify employment and income; yet tax return data is generally provided only annually, which means the information is at least one year old and possibly up to 18 months old for 2019 returns. That’s a big gap for potential exploitation.

3. Refocus on reverifications

Take advantage of the “second chance” review that recertifications offer and automate them. With the crushing volume of applications over the last six months, many states have significant recertification backlogs. Automating the process can mean setting alerts for reverifications or scheduling a batch run to help validate ongoing need.

Consider an analysis of 2018 income data from a commercial verification vendor that showed that the median monthly income of individuals changed as much as 20% month-over-month.

Even in that short timeframe, those shifts are meaningful to individuals applying for aid and to those who request extended benefits through recertification of eligibility. Imagine how much that variance may have changed over the last several months during the current public health crisis.  Using a data-centric approach to reverifications can help state workforce agencies improve their efforts to prevent and detect improper payments or overpayments.

With the funds available from FFCRA and the recent Department of Labor guidance, state agencies can begin taking meaningful steps to close the gaps being exposed by culprits. Adding identity verification, automation and timely data to make initial and re-certification determinations puts extra defenses in place against potential overpayments without sacrificing service. State agencies can potentially reduce the strain on caseworkers while improving service to eligible individuals and protecting the integrity of their programs.