UIA releases report on potential fraud exposure

Report identifies specific steps Agency took to enhance fraud prevention and address vulnerabilities, ensuring protection of Michiganders and unemployment system

November 25, 2020

Contact: Jason Moon, 517-282-0041

The Dept. of Labor and Economic Opportunity and Unemployment Insurance Agency have submitted to Gov. Gretchen Whitmer a report prepared by Deloitte & Touche LLP  documenting the chronology of the State’s efforts to identify and respond to fraud risks regarding unemployment claims during the COVID-19 pandemic.

In July 2020, LEO selected Deloitte, a nationally recognized professional services organization, to assist the UIA with financial operations, investigations into imposter claims and a forensic review to help identify fraudulent activity that can be quickly turned over to law enforcement for prosecution.

The report identified areas where UIA’s policy, technological and organizational changes increased the Agency’s potential exposure to fraud, and documented steps UIA has already taken to enhance its fraud risk management capabilities to address those identified vulnerabilities in the unemployment system.

“While the Agency’s previous decisions sought to balance fraud prevention and timely payment to eligible claimants, we strongly agree with the report’s findings that policy, technological and organizational changes increased the Agency’s potential exposure to fraud,” said UIA Acting Director Liza Estlund Olson. “By releasing this report, our hope is that the public will better understand the aggressive measures UIA took to address these vulnerabilities. Our work isn’t done, and the UIA will continue to review our operations and organization to prevent criminals from accessing the unemployment benefits our hardworking families deserve.”

Since the beginning of the pandemic, the UIA has received as many claims as it did in the nearly seven previous years combined. This historical demand was coupled with criminal attacks on unemployment systems nationwide. The U.S. Secret Service (USSS) in May issued a national alert regarding an international criminal ring exploiting the COVID-19 crisis to commit largescale fraud against state unemployment programs. This week alone, saw largescale fraud schemes were announced in California, Illinois and Massachusetts . The Inspector General of the U.S. Dept. of Labor has warned that the pandemic created a perfect storm for criminal activity across the country.

In June, the Agency appointed Jeffrey Frost, a retired Special Agent in Charge for the U.S. Secret Service, to provide expertise in the UIA’s efforts to counter the criminal attacks being experienced by unemployment systems around the country, analyze fraudulent unemployment activity and clear legitimate accounts.

"When unemployed Michigan workers needed emergency financial assistance the most, criminals began filing malicious claims in an attempt to take advantage of a global pandemic. Law enforcement and the UIA took action to identify the fraud and malicious filings to investigate crimes against the unemployment system,” said Frost.  

The volume of claims filed in the spring peaked with a high of over 388,000 in a single week, compared with just 5,000 claims before the pandemic and a weekly high of 77,000 during the Great Recession. Since March 15, over $26B in benefits have been paid to over 2.2M workers, or roughly 97% of potentially eligible claimants. The UIA has increased capacity, improved workflow, and other internal systems, and reduced red tape to meet the unprecedented level of claims that have been filed since the pandemic began.

Customer facing staff has more than quadrupled. Before the pandemic, the UIA had around 650 staff. Nearly 3,000 UIA team members are now helping claimants. This includes answering phones through the call center, making proactive calls, answering questions online, solving technical issues and adjudicating claims.

The Deloitte report identified policy, technological and organizational areas that had an impact on UIA’s ability to identify and manage fraudulent claims. All of the potential vulnerabilities identified by Deloitte involved issues where UIA, faced with call volumes that were more than 150 times higher than normal, was attempting to balance the need for timely payments for families in distress against protection from criminal actors attempting to defraud the state. In each instance, UIA has enacted measures to address each finding and in many cases had taken action even before the Deloitte investigation began.

Technology

Finding: The UIA uses a technology platform called Fraud Manager, among other tools, to automatically screen claims for potential fraud. Because of a sequencing error, from April 5, 2020 until May 19, 2020, it was possible for a claim to be filed, certified and a first payment made on the day it was filed before Fraud Manager could process the claim.

  • Corrective Action: The UIA re-sequenced the claims payment process so that claims and certifications (regardless of type) are run through Fraud Manager prior to being paid (effective as of May 19, 2020).

Finding: There are several filters used by Fraud Manager to identify claims for additional investigation or review. While the filter regarding suspicious bank routing numbers remained, many of these filters were turned off in April due to concerns that they were incorrectly identifying too many legitimate claims for review. This resulted in an increased risk of fraudulent payments being made.

  • Corrective Actions: The Agency reactivated all filters on May 22, 2020 and additional filters were later added.

Policy

Finding: The UIA suspended first-payment review on claims, commonly referred to as the “10-day hold requirement” which previously allowed employers 10 business days to help verify eligibility and respond to/dispute new claims before being released for certification. The removal was in line with actions taken by other states and helped ensure the expedited delivery of benefit payments. Though as a result, UIA personnel had less ability and time to review claims for eligibility before payments were released.

  • Corrective Action: The Agency reinstated the 10-day hold requirement for new claims on September 24, 2020.

Finding: Previously, claimants were required to submit claims within 14 days of unemployment. The federal CARES Act required states to backdate PUA claims to the date on which the claimant self-certifies that they lost income due to COVID-19, without respect to good cause. Knowing that UI systems were still overwhelmed, the UIA decided to permit the same timeline for traditional state UI claims, allowing applicants to backdate UI claims to March 1, 2020, and PUA claims to February 2, 2020, which greatly increased the amount of initial payments that could be paid to new claimants.

  • Corrective Action: The UIA implemented a benefit payment review for all backdated claims and returned to normal procedure for late filing on traditional state UI claims on June 11, 2020.

Finding: With hundreds of thousands of ID verification issues to resolve, the UIA made temporary procedural changes to its ID verification process, including allowing ID verification over the phone which increased the risk of fraudulent payments being made.

  • Corrective Action: The UIA discontinued ID verification over the phone on July 28, 2020, and instead requires claimants to submit required supporting documents to verify their identity.

Organizational

Finding: The UIA temporarily reassigned key personnel on its Investigations Unit to help issue timely payments to eligible claimants. As a result, the UIA’s Fraud Manager system had less operational oversight to detect and assess potential irregularities that were identified.

  • Corrective Action: The Agency reestablished the Investigations Unit on May 22, 2020, assembled the State’s Unemployment Insurance Fraud Task Force on June 5, 2020, and appointed retired Special Agent in Charge for the U.S. Secret Service Jeffrey Frost as a Special Fraud Advisor to serve on the task force on June 30, 2020.

Finding: The UIA hired more than 1,800 third-party contractors to help process claims. The large addition of contractors over a short period of time presented challenges related to maintaining adherence to State policies for security checks, onboarding, training, supervising and offboarding third-party contractors.

  • Corrective Action: The agency made a number of changes to the procedures for onboarding and managing contractors hired through third-party vendors and is running daily reports of offboarded contractors to deactivate system access.

For more information on the Michigan Unemployment Insurance Agency, visit: Michigan.gov/UIA.