Arizona prevents more than $75 billion in unemployment benefit fraud
How Arizona safeguarded its unemployment benefit programs while supporting families and stabilizing its economy
On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a pandemic. In an attempt to slow transmission, economies around the world shutdown and forced millions out of work. While lawmakers rushed to provide financial relief, the national unemployment rate skyrocketed from 3% in February 2020 to nearly 15% in April 2020. In Arizona, initial Unemployment Insurance claims exploded. The Department of Economic Security was hiring one new team member every 87 minutes to help handle the volume.
As states focused on implementing new legislation and issuing timely assistance to those in need, identity thieves seized the opportunity to cash in. Arizona was one of the first states to quickly deploy program integrity measures that would go on to prevent more than $75 billion in fraud and pave the way for other states to follow suit.
Broad program requirements from the federal programs opens the door to fraud
On March 27, 2020, federal lawmakers enacted the Coronavirus Aid, Relief, and Economic Security Act, more commonly referred to as the CARES Act. The legislation infused a record amount of money into the U.S. economy and established three new unemployment programs: Pandemic Emergency Unemployment Compensation (PEUC), Federal Pandemic Unemployment Compensation (FPUC), and Pandemic Unemployment Assistance (PUA).
Arguably the most novel was the PUA program. It leveraged the existing Unemployment Insurance (UI) framework and expanded unemployment benefits to previously ineligible workers including self-employed, contract, and gig workers. Recognizing these non-traditional workers may have difficulty proving employment history and lost wages, federal law did not include the employer verification process that is part of the regular UI program and excluded other traditional fraud controls. Anyone with a name, date of birth, address, and Social Security Number could self-attest to being unemployed and receive benefits with limited scrutiny. Fraudsters who easily obtained this information through corporate data breaches and the dark web began submitting fraudulent claims across the country. Well-organized attempts at identity theft – domestic and abroad – would yield billions from states across the nation.
Retroactive week suspension
Given the strain of the unprecedented number of claims on the existing legacy unemployment system, Arizona moved to stand up a new portal to administer PUA. On May 11, 2020, just six weeks after federal guidance was issued, Arizona launched its PUA program, expanding benefit eligibility and issuing assistance to those impacted by COVID-19.
By mid-July, Arizona had disbursed $4.6 billion in PUA and was receiving more than 200,000 new applications every week. Nearly three million weekly certifications were also being filed each week. The volume quickly surpassed the number of non-traditional workers in the state.
Our team swiftly partnered with Google Analytics to develop a fraud scoring model. This enabled the Department to parse through a queue of more than one million suspected fraud claims, prioritize valid claims, and identify patterns and trends. This work uncovered that criminals were submitting millions of retroactive or backdated claims, many with dates before the first case of COVID-19 community spread in Arizona. This scheme allowed fraudsters to generate even larger payouts.
On July 26, 2020, Arizona suspended applicants from retroactively submitting weekly certifications online. This immediately slashed the number of weekly certifications by 87%.
Figure 1: Number of weekly Pandemic Unemployment Assistance certifications filed by week from the program’s launch on May 11, 2020 through August 15, 2020.
In late summer 2020, the President authorized the Lost Wages Assistance program to supplement expiring FPUC. Arizona was the first state to administer this program. While this provided continuity for individuals in need, it made Arizona a target for new claim fraud. From the beginning of August to mid-October, the number of new PUA applications skyrocketed by more than 10 times the weekly average. The Department was sifting through a sea of millions of fraudulent claims, hindering our ability to issue timely benefits for valid claimants.
Using the trends identified by Google Analytics, the Department found suspicious claim activity indicative of identity theft from criminals located around the globe. Mindful that any measure implemented to suppress fraud may create barriers or delay payments for valid claimants, we searched for a solution. We quickly leveraged an existing statewide contract to onboard the identity verification vendor, ID.me. ID.me was an emerging industry leader with several established relationships in other states and was the only vendor to offer a live chat or “trusted referee” option to assist claimants. It also accepted a pay structure that allowed Arizona to only pay for successful verifications. This incentivized the vendor to help claimants overcome any obstacles they encountered – a key factor competitors lacked.
By the end of October 2020, the Department implemented real-time identity verification for all new PUA applications. New application volume plummeted by 99%. On December 4, 2020, we implemented a similar real-time interface for all weekly PUA certifications – cutting weekly certification volume by 66%.
Figure 2: Number of new Pandemic Unemployment Assistance applications filed by week from August 1, 2020 through October 31, 2020.
By January 2021, criminals unable to find an opening in PUA began targeting regular Unemployment Insurance in Arizona. Within the first six weeks of the new year, more than 220,000 new Unemployment Insurance claims poured into the Department. Fortunately, traditional Unemployment Insurance requires employment verification to determine eligibility. This safeguard prevented thousands of fraudulent actors from ever receiving benefits.
Nevertheless, the influx of fraudulent claims bogged down work queues and startled the business community. On February 7, 2021, the Department implemented identity verification for regular Unemployment Insurance to filter out invalid claims and deter criminal activity. By the following week, Unemployment Insurance initial claims fell by 96%.
Figure 3: Number of new regular Unemployment Insurance claims filed by week from December 26, 2020 through February 27, 2021.
Although identity verification has proven to be exceptionally effective, some fraudsters have evolved their schemes and are leveraging social engineering tactics to bypass ID.me. While the number of criminals estimated to successfully engage in this activity is nominal, Arizona adopted OnPoint technology to enhance its detection, prevention, and investigation efforts. This technology allows the Department to cross-match claims against national state workforce agencies and private sector financial data, identify claims that have a high likelihood of being fraudulent based on sophisticated scoring models, and prevent bad actors from ever receiving a fraudulent payment.
Program integrity effectiveness
Broad federal legislation, coupled with antiquated technology, cultivated an environment conducive to fraudulent activity. However, as Arizona implemented comprehensive program integrity measures, the number of suspected fraud cases plummeted. Today, the number of identity fraud cases is nearly zero.
Figure 4: Total benefits across all unemployment programs issued fraudulently from May 2020 through September 2021.
A nationwide problem
Arizona’s story is not unique. Unemployment benefit fraud continues to infiltrate states across the country. To protect the integrity of unemployment compensation programs, federal lawmakers leveraged best practices employed by states like Arizona and enacted the Consolidated Appropriations Act on December 27, 2020. The legislation required states to implement program integrity measures, including identity verification, although Arizona had already done so.
Several states have since implemented identity verification requirements - many of which have opted to use ID.me. However, some states have taken a more aggressive approach and are requiring claimants to video chat with a live person in order to verify their identities. Others like Kentucky and Vermont temporarily suspended their unemployment programs for several days, citing rampant fraud activity.
Monetary losses due to unemployment benefit fraud are astronomical. In March 2021, the federal government estimated approximately $89 billion had been issued fraudulently across the country; and that number continues to grow. While many states have been reluctant to share their losses, in January 2021, California estimated a loss of up to $31 billion.
Arizona’s loss, prevention, and recovery efforts
As of September 2021, Arizona had disbursed $4.4 billion in fraudulent payments that have not yet been recouped. While that number is significant, had Arizona not responded so quickly, fraudulent benefits may have topped an estimated $80 billion.
While Arizona has nearly eradicated unemployment benefit fraud, we continue to partner with financial institutions and law enforcement agencies across the country to recover losses and aggressively pursue legal action against perpetrators of fraud. Our partnerships with more than 100 law enforcement agencies, including the FBI, U.S. Department of Labor, U.S. Secret Service, and the U.S. Department of Homeland Security and over 200 financial institutions around the globe have allowed us to investigate complex multi-client fraud schemes, cross match data with credible sources, and analyze inconsistencies with both physical and IP address information. To date, these partnerships have led to the recovery of more than $1.4 billion in fraudulent benefits. More than 200 cases have been submitted to the Arizona Attorney General’s Office for prosecution, over 100 have resulted in criminal indictments.
More information about additional convictions related to pre-pandemic investigations can be found via the Unemployment Insurance Fraud Conviction Report, which details conviction information from May 2020 through August 2021. Specific case information can be located via the Arizona Supreme Court and Maricopa County Superior Court databases.
A national model
Though this work is far from over, Arizona continues to be hailed as a national model for unemployment benefit fraud prevention and recovery. States across the country, as well as other public and private entities, have reached out to learn from our story. In June of 2021, the DES Office of the Inspector General (OIG) hosted the U.S. Department of Homeland Security and the Rocky Mountain Information Network (RMIN) to discuss our success in investigating complex fraud schemes. I also served as a panelist and was invited to join Norton Lifelock and Politico for a webinar to discuss identity theft and how states can take action. These partnerships and dialogues continue to be critical in helping national leaders safeguard not only unemployment programs but also other public assistance programs across the country.
The commitment and dedication of our team members throughout the course of the COVID-19 pandemic and beyond is commendable. It is through their work that millions of Arizonans and their families received critical services during the pandemic. We will continue to work with our partners to ensure the integrity of our programs and provide timely assistance for those in need.
Report unemployment benefit fraud
If you suspect unemployment benefit fraud or believe you may be a victim of identity theft, please file a report with our team here. We also advise that you monitor your credit report for any other fraudulent activity that may follow as a result of identity theft. If you did not receive a 1099 for unemployment insurance benefits, there is no action to take.