Perspective: States fiddle while defrauders steal

More than 9 million American consumers fall victim to identity theft each year.

But the most underpublicized identity theft crime is one in which thieves defraud state governments of payroll taxes by filing fraudulent unemployment claims.

It can be a fairly lucrative scheme, too. File a false unemployment claim and you can receive $400 per week for 26 weeks. Do it for 100 Social Security numbers and you've made a quick $1.04 million. It's tough to make crime pay much better than that.

The victims in this crime--the state work force agencies that tirelessly oversee our unemployment insurance programs and the U.S. Department of Labor--are reluctant to discuss this topic for obvious reasons.

The net result of this fraud is that unemployment taxes are going up.

While credit card companies invest extraordinary amounts of money to detect identity fraud, state governments are lagging behind on investing in systems that could detect and deter fraud. Moreover, some federal IT initiatives that could slow down unemployment insurance claims fraud are moving at a glacial pace.

The slow response of state and federal agencies is quickly threatening the integrity of the unemployment insurance system. It turns out that crime is a very efficient market and word spreads quickly. Got a stolen Social Security number? You can more easily turn it into money by defrauding the government than by defrauding the credit card companies.

The net result of this fraud is that unemployment taxes are going up, and that makes it that much harder for small businesses and big businesses to do business. Even more, higher payroll taxes slow down economic growth because they make it more expensive to hire new employees.

Clearly, companies that have sensitive data must take the proper steps to protect the data. But it's public awareness and governmental systems that ultimately will save the day. Here's what needs to happen:

Admitting the problem
Kathy Moore, chief of the Employment Security Office of Special Investigations for Washington state, has started talking publicly about the amount of fraud making its way through the system. Other states need to follow suit and acknowledge that unemployment fraud is hurting small- and big-business economics. Discussing the problem will help rally the allocation of funds needed to adequately address the problem.

Investment in fraud detection software
Software is available on the market that is specifically designed to detect and prevent unemployment insurance fraud, including individual fraudsters and organized fraud rings. Most states have not yet invested in this software. They need to do so--fast.

Accelerating National New Hire Database plan
The soon-to-be-released National New Hire Database will put a dent in individual unemployment frauds. Currently, if a crook works in Illinois and makes unemployment claims in Michigan, it's unlikely the crime will be detected. The new database will make it easier to cross-match new hire data with unemployment claim data to catch those crooks who falsely claim they are unemployed while collecting a paycheck for their job. Let's pick up the pace on this initiative. We've been working on it for far too long.

A national stolen Social Security database
An unemployment claim that is fraudulently made on a stolen Social Security number would be easier to detect if there were a national database of stolen Social Security numbers. At the current time, this initiative isn't even being discussed in the halls of Congress, even though it should be near the top of their agenda. If and when a database is created, the only caveat is that it must possess airtight security features.

A business-as-usual approach by state and federal government agencies won't get the job done.

Increase fraud penalties
If a criminally minded individual is contemplating defrauding state and federal government, he or she needs to know punishment will be swift and severe. A slap on the wrist is not a helpful deterrent.

More federal funds for state agencies
The ability of state agencies to fight unemployment insurance fraud is constrained in large part by the funding they receive from the federal government. State work force agency directors and employees have the skills and talent to fix this problem. What they don't have are enough funds. The Bush administration's 2006 budget includes both funding requests and a set of legislative proposals that will strengthen the integrity of the unemployment insurance system. Approval of these welcome initiatives needs to happen sooner, rather than later.

These problems are fixable. Everyone benefits from making it tough to commit unemployment insurance fraud. But a business-as-usual approach by state and federal government agencies won't get the job done. It's true that the government is being mauled by unemployment insurance fraud, but let's not blame the victim. Working together, we can stop fraud dead in its tracks.

Biography
Michael Alter is president of SurePayroll, a payroll outsourcing company that processes and remits payroll taxes for more than 15,000 small businesses across the country.

More Perspectives

[twyrick]

What facts back this up?

I question the validity of this story. For starters, the figures presented seem to be an absolute worst-case scenario. In my state (Missouri), for example, you are required to report to your unemployment office every 4 weeks for "in person reporting", or else your benefits are withheld. Failing to report in person for 2 consecutive weeks means your benefits are automatically terminated. The maximum amount paid out per week is $250, not $400. And it seems they randomly require additional measures from some applicants, including possibly having to report for training/education or job search assistance on a certain scheule. Failure to meet all of these requirements again means termination of benefits. There is also the requirement that applicants apply for at least 3 jobs per week, and keep a log of contacts. Again, this is probably not normally looked at, but they do reserve the right to demand it be presented to them. (I suspect they randomly request these detailed job search logs from a certain percentage of applicants.)

Doesn't sound to me like an easy way to fraudulently collect paychecks! A scammer would have to report in-person 100 different times a month, at the bare minimum, to perform the fraud in this story's example. (And with only a handful of local offices, I'd assume he/she would quickly get noticed too!)

I find this difficult to believe

This is being debated on http://slashdot.org via the article:

http://yro.slashdot.org/yro/05/06/24/1225257.shtml?tid=103&tid=158&tid=123

Things just aren't adding up here. In my eyes, there are too many checks in the system for this to happen. For instance, the unemployment office typically needs a face-to-face meeting with the person. It'd be interesting to find how all these people get around that. It'd take a very talented con-artist in my eyes to really steal from multiple accounts.

Additionally, they check with your company to verify whether you are eligble for unemployment. How are they getting around this?

The article describes people collecting for unemployment while working in another state. How many people are going to travel to another state just to defraud unemployment?

Also, have you checked the penalties for frauding the state unemployment systems lately? They were pretty steep the last time that I looked (~35K, IIRC, plus any criminal charges). That's not tough enough?

Based on the above, I'd say that the numbers that are being described are most likely overinflated.

[ka1axy]

How would this work?

In MA, your SSN is checked against a quarterly list of SSNs submitted by your former employer, to verify that you worked for them for enough quarters to collect benefits. Last time I was laid off (a few years back), the qualification process was stringent, and there was much mention of penalties for providing false information. I know they checked up, because my state-issued unemployment benefit statement listed how much the company had paid me for the four previous quarters. This was information that could only have been obtained from my former employer.

To pull off this fraud in MA, the fraudster would need to link the stolen SSN to a particular company, then somehow get someone at the company to lie to the state about that SSN having been laid off, when in fact, the (real) person was still employed. It just wouldn't work in this state.

I'm not convinced. This article reads more like an advertisement for fraud detection services or software that probably isn't needed by most states or employers.

Can this happen in California? MORE DOUBTS!!!

Here in CA, when one goes on unemployment, the last employer is contacted and must give some kind of consent. He pays into it so he must approve of it. If the employee was fired with cause or quits, then the unemployment is turned down. So, if somebody were to apply for unemployment in my name, I'd think my boss would want to know what was up since I was sitting at my desk being very employed.

Somthing is fishy in this story

[alphtoo]

And here in S.C....

Unemployment compensation applications are handled in a similar fashon as described for California. Larger employers routinely challenge every claim, I presume in order to keep their premiums down. In short, I just don't see how this could be done in this state. Of course crooks have many tricks I don't know about; I learn about new ones often.

I don't doubt for a minute that governments' security programs are grossly inadequate to deal with the level of evil so rampant in society today. However if the problem this article covers is as common as is claimed, such theft would involve a whole lot more than showing up at the local state employment office with somebody else's SS number.