Internal Control Weaknesses Combined with an Antiquated System Allow for Massive $3.8 Billion in Unemployment Fraud and Overpayments



 

Columbus – Auditor of State Keith Faber’s Office released an audit of the Ohio Department of Job and Family Services (ODJFS) focused on fraud in Ohio’s unemployment system. Auditors noted changes to the federal requirements and a lack of controls led to vulnerabilities in the system allowing for over $475 million to be paid to criminals while another $3.3 billion in overpayments were made. This public interest audit was launched after ODJFS initially failed to disclose the risk and magnitude of ongoing fraud within the unemployment system. This increased risk and lack of controls resulted in the inability to obtain reasonable assurance about the accuracy and completeness of reported amounts within the State’s June 30, 2020 financial statements and led to the Auditor of State’s office (AOS) to issuing a modified state opinion in regard to Ohio’s financial outlook.

“It’s appalling that Ohioans in need were victimized not only by a pandemic that ravaged our economy, but by criminals who took advantage of a system that was outdated, overwhelmed and ill-prepared for the onslaught of unemployment claims caused by COVID,” said Auditor Keith Faber. “The fact that the Department neglected to acknowledge it’s failures until hundreds of millions of dollars in fraud and overpayments had been made, potentially delaying assistance from eligible and deserving Ohioans is more than disappointing. Fortunately, upon his appointment Director Damschroder demanded transparency and efficiency and pursued the necessary assistance to address the weaknesses in the system and pursue the necessary procedures to protect Ohio’s unemployment dollars.”

Audit Highlights: By the Numbers

  • 26% of all unemployment payments for the fiscal year ended June 2021 were potentially paid as overpayments or to fraud accounts. Before 2020, fraud and overpayments were around 3.5% of total payouts.
  • Benefit payments were below $900 million for the three fiscal years prior to the pandemic; after the pandemic, benefits rose to $9.4 billion in 2020 and $14.2 billion in 2021.
  • With over $3.8 billion identified in fraud and overpayments, that equates to over $673 for every Ohioan in the labor force. Governor DeWine and the General Assembly utilized ARP funds to reimburse the federal government for the cost of this program.
  • Using the data auditors obtained, they performed a series of 12 data analysis queries utilizing Ohio Job Insurance (OJI) and the Unemployment Framework for Automated Claim & Tax Services (uFACTS) benefit claims paid data significant results included payments made to deceased individuals, and incarcerated individuals, SSNs associated with four or more bank accounts, unique bank account and routing number combinations associated with multiple individuals, and addresses associated with five or more individuals.
  • 85,944 potential instances where the payment was sent to a name that was also in the incarceration file
  • 141,617 potential instances where the payment was sent to a name that was reported deceased a week before the benefits were requested
  • 356 potential instances where abnormal names were used such as “Adidas” (54 instances), “Dummy” (150 instances), “Guess” (41 instances), and “Demon” (26 instances)
  • 8,703 potential instances where an individual was paid more than $35,000

Main Issues that Lead to the Failures

Dated System: The system was simply not built or prepared for the mass amount of claims and applicants that came with the pandemic.

Failure of Early Action and Prevention: Fraud was discussed with Department officials several times during the 2020 financial audit, yet on May 27, 2020 and again on February 10, 2021, the now former Director testified in front of both the Ohio House of Representatives’ Ways and Means Committee and Finance Committee, respectively, that she was aware of the unemployment fraud committed at the recipient level due to the spike in claims filed during the COVID-19 pandemic. This is contradictory to what was stated as part of the 2020 financial audit. However, in our interviews as part of this audit, Department officials indicated the 2020 audit responses were interpreted to only identifying internal/employee-related fraud within ODJFS at the county and state levels, not fraud committed by recipients.

Lack of Controls: The uFACTS system processed approximately $8.1 billion in pandemic unemployment for the Pandemic Unemployment Assistance, Federal Pandemic Unemployment Compensation, and the Lost Wage Supplemental Payment Assistance programs. The Department did not establish procedures to determine whether the service organization had sufficient controls in place and if they were operating effectively.

Relaxing of Verification Requirements: The Department did not send a Request to Employer for Separation Information Form to the employer. At the beginning of the pandemic, when the Governor issued the stay at home order and businesses closed, the Department made a management decision to allow claimants to file using a special COVID-19 designated mass layoff number to expedite the claim filing process. This resulted in the Department processing claims without obtaining the claimant’s unemployment eligibility from the employer.

History

The COVID-19 Pandemic presented the Department with many challenges and obstacles including a sharp increase in the volume of unemployment claims as well as the expansion of regular unemployment benefits by the federal government.  The Department did not have the man-power or technology resources to adequately deal with this drastic increase in claim activity and the addition of new federal unemployment funding. The Departments legacy unemployment System, OJI, has been in place since 2004 and due to its age and functionality, it was unable to handle the increased volume of applicants brought on by the pandemic. The Department contracted with a service organization, Deloitte, for processing of pandemic unemployment benefits and maintaining key functions of the benefit claims processing, which were customized to fit Ohio’s needs (effective May 14, 2020).  This outside system, the Unemployment Framework for Automated Claim & Tax Services (uFACTS) System, was used for certain pandemic benefits only.

During this time-frame, fraud actors recognized the opportunity presented by the unprecedented increase in unemployment claim activity, the relaxed eligibility and employment/earnings verification requirements associated with the new expansion of benefits, and the stress being placed on the Department and its systems to get benefits processed and into the hands of unemployed Ohioans.  The combination of high claim volume and the increase in imposter fraud negatively impacted the Department’s ability to keep up, creating a backlog of claims pending adjudication.

In August 2020, the Department created a Fraud Dashboard to monitor and investigate fraudulent issues, trends, and potential overpayments, including fraudulent overpayments.  In late January/early February 2021, the Governor initiated the Public-Private Partnership (P3) Project, a team of consultants/subject matter experts from 12 private sector companies with expertise in fraud, call center operations, and claims processing. The P3 Project worked with the Department and the service organization to strengthen fraud prevention, prioritize payment of claims to real Ohioans, segment fraudulent claims out of the adjudication backlog, and improve communication capabilities.  In addition, the Department, in consultation with the service organization and the P3 Project, took steps to strengthen the ID verification processes for both the OJI and uFACTS systems starting in late March/early April 2021.

Certifications of fraud and overpayments are made to the Ohio Attorney General’s Office for collection.

A full copy of this report is available online.

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