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State audit finds Colorado Dept. of Labor and Employment paid $73M in potential fraudulent claims

Department agrees to adhere to auditor's recommendations on fixes
Colorado Department of Labor and Employment
Posted at 5:20 PM, Dec 06, 2021
and last updated 2021-12-07 12:43:24-05

DENVER – A state audit released Monday found the Colorado Department of Labor and Employment paid out $73 million in fraudulent or potentially fraudulent unemployment claims in the first 14 months of the COVID-19 pandemic – tens of millions more than the department had identified earlier this year.

The Colorado Office of the State Auditor’s 74-page report identifies a host of issues with the state’s unemployment insurance program and makes recommendations on how the CDLE can fix them to improve the payment, complaint, fraud hold and other processes – all of which the department agreed to work on and fix by various deadlines over the next two years.

The audit found there were about 8,200 likely or potentially fraudulent claims that were paid out $73.1 million between March 1, 2020, and April 30, 2021 – including more than $45 million to 3,300 claimants that had several fraud indicators and more than $18 million to about 2,900 claimants with suspicious bank account information.

Another nearly $9 million was paid out to about 1,700 claimants who were actually deceased or incarcerated, another indicator of likely fraud, the audit found.

Those claims were paid out because the CDLE was torn in between getting unemployment payments out as quickly as possible in accordance with state and federal orders and thoroughly investigating claims to prevent fraud on the front end, the audit found.

But the department also lacked a host of tracking mechanisms and failed to properly document complaints and fraud holds, resulting in benefit payment delays of up to several weeks for people with legitimate claims while also letting some fraudulent claims slip through the verification process, according to the audit.

“It’s important to protect taxpayer resources by having measures in place to prevent and detect fraudulent claims,” said Audit Manager Jenny Page in a statement. “But it’s also important to have effective processes in place to assist those individuals whose legitimate claims may have been put on hold as a result of these same fraud prevention and detection measures.”

The Office of Government, Policy and Public Relations, speaking on behalf of the CDLE, said in an emailed statement the department has prevented around $600 million in fraudulent claim payments.

“Nonetheless, this unprecedented challenge has certainly highlighted opportunities for improvement,” an unnamed spokesperson said. “The Department has already begun work to implement many of the audit’s recommendations, and we are working hard each and every day to combat fraud and ensure all legitimate claimants receive their benefits.”

In 2020, 852,000 Coloradans received unemployment benefits of some sort that totaled $6.9 billion. In 2021, about 577,000 Coloradans received $4.6 billion in payments as of October, according to the report. The amount paid out in 2020 represented a 1,625% increase over the $400 million in benefits paid out in 2019 before the pandemic.

The audit found that the 79% of claims that had not been paid as of mid-May this year, they were held because a claimant still needed to take further action, the claims had been confirmed as fraudulent, or fraud holds had been placed on the claims.

More than 8,000 likely fraudulent claims led to tens of millions in payouts, audit finds

During the 14-month period the OSA reviewed from March 1, 2020, and April 30, 2021, more than 4 million unemployment claims were filed. The audit found about 8,200 of those claims that were paid out totaled the $73.1 million in likely or potential fraud.

In April of this year, the CDLE said it had paid out $19.3 million in fraudulent benefits but said that number would grow. The audit says in September, the department reported it had paid out $29.8 million in fraudulent claims.

But the OSA conducted analysis on what data was available from the CDLE to find additional likely fraudulent claims whose benefits were paid out, as the report states the department could not provide auditors with a breakdown of claims or payments identified as being potentially fraudulent.

The audit says that as of September, the CDLE reported there were more than 130 active criminal investigations into fraudulent unemployment claims and that about $35 million in suspected fraud has been recovered by banks and financial institutions but will have to be investigated and confirmed as fraudulent.

“Despite the numerous steps that the Department has taken to prevent and detect fraudulent unemployment claims, our audit identified potentially fraudulent claims that the Department did not identify, as well as improvements that the Department should make to better mitigate and address the risk of fraud,” the audit report states. “Altogether, we identified $73,123,710 in likely or potentially fraudulent claims that the Department paid, which the Department did not identify as fraud prior to our audit work.”

The $73 million figure pales in comparison to what other states have reported they have paid out in fraudulent benefits. According to the audit, Ohio reported in May it had paid out $462 million in fraudulent claims. Kansas reported in August it had paid out $380 million.

And in September, Arizona reported it had paid out $4.4 billion in fraudulent unemployment claims. Washington said it paid out $647 million in fraudulent benefits – 99% of which were linked to identity fraud, according to the audit.

The audit found the CDLE did not have sufficient internal controls to identify likely fraud claims for people who were deceased; that the liveness check implemented along with the identity verification system was not put in place until April; and that the department lacked incarceration checks for people receiving Pandemic Unemployment Assistance benefits.

The audit warns that the federal government could potentially require the state to repay the federal government for the money paid out to fraudulent claims and also that the payments were a waste of taxpayer money. As of late October, the state still had a $1 billion loan from the federal government to continue to pay benefits from the unemployment trust fund.

Audit finds poor response to fraud holds

Auditors also found the CDLE took an average of seven weeks to address fraud hold issues in the cases it did document – which amounted to only 27% of the total requests for assistance on holds. The department had no documentation to show that it had addressed 73% of them, however.

The department told auditors it believed it had resolved 192,000 of 196,000 fraud holds because MyUI+ would clear them after identities were verified through, but the department did not document that, the audit found. Additionally, the department only documented the date a request was made and the date it was resolved in 26% of cases, so it is unclear the full scope of how long it often took to resolve all fraud holds – which led to a snowballing effect.

“When the Department does not resolve fraud holds or provide claimants timely assistance with them, legitimate claimants do not receive unemployment benefits,” the department wrote. “Additionally, when the Department does not provide claimants timely assistance, the claimants contact the Department more frequently and take up the limited Department resources available to assist all claimants.”

The auditors found nearly 52,000 people had submitted more than one request for assistance with their fraud holds, including one person who sent 112 requests over 46 days, whose hold was not resolved until two months after the initial ask for help.

That is because department had no written policies, procedures or processes on how to help claimants, how to investigate fraud holds and how to document the process, the audit found. It also needed better automated tracking and monitoring, the audit found.

Lack of tracking complaints about call centers

But as the department fell behind on addressing claims and holds, its call center did too as the state worked to add hundreds of workers – mostly through contracts – to address issues with the unemployment system. The audit found at the peak in April 2020, each customer called the call center seeking assistance an average of 55 times.

Between April and June 2020, 95% of inbound callers either didn’t have their calls answered, were disconnected, or received a busy signal.

The audit also found that the CDLE didn’t properly collect or maintain data on complaints about call centers or the unemployment process and took little to not action to resolve complaints, despite increasing the number of questions its virtual agent could answer.

“When the Department does not resolve complaints or require its contractor to resolve complaints, it cannot ensure that the problems are addressed in a manner that prevents reoccurrence,” the audit found. “…Unresolved complaints about benefits could ultimately affect not only the claimants, but the State’s economy when individuals do not have funds available to purchase the goods and services they need.”

The auditors issued several recommendations to improve the shortcomings identified in the audit – some of which have already been completed, others which the department says will be complete by March, and still others the department pledged to complete by 2023.

Those include improving the fraud detection and monitoring methodology, investigating each potentially fraudulent claim, tracking and resolving customer complaints more quickly and compiling data on them, and figuring out how to address requests for help and fraud holds in a more timely fashion.