EDD Fraud: How Identity Theft Can Cost You Your UI Benefits

Fred DeckerMarch 7, 2022030 views

The pandemic created an intense unemployment crisis, abruptly putting people out of work on a scale not seen since the Depression. This led to an equally unprecedented wave of unemployment claims, on a scale no state was well prepared to handle.

Scammers were quick to see opportunity in the situation, and California’s Employment Development Department – because of the Golden State’s population and relative wealth – was disproportionately targeted. As a result, EDD fraud has become a major problem for Californians who legitimately need benefits.

Pandemic-Driven EDD Fraud

Through the beginning of 2021, California’s EDD processed 19.5 million claims and paid out a staggering $114 billion in benefits (both well above records set during the 2008-2010 recession). As of January 2021, the EDD reported that 9.7 percent of claims were verified as fraudulent, and 17 percent were under investigation. At the time of that report, the agency had uncovered and prevented $60 billion in fraud but confirmed losses had already exceeded $11 billion and were likely to grow.

One modest silver lining? Only 5 percent of fraud occurred through the existing EDD unemployment insurance system – down from 6 percent the year before – with 95 percent tracing back instead to the emergency Pandemic Unemployment Assistance program.

Although the January report was quick to point out that on a percentage basis, California’s fraud numbers were below the national average, that’s little consolation to any Californian who had to deal with the beleaguered agency during the crisis. A scathing report from the state’s auditor general, released in two parts on January 26th and January 28th, found significant shortcomings in both the EDD’s handling of legitimate claims and its approach to loss prevention.

How Does EDD Fraud Happen?

That tsunami of fraud didn’t come from nowhere. It had its roots in the existing criminal infrastructure, where identity theft has been a large and growing industry for years. Massive data breaches over the years have placed hundreds of millions of users’ personal information into the hands of criminals, and widespread phishing attacks and phone scams capture millions more each year.

Criminal rings or individual scammers simply needed to purchase personal information inexpensively in bulk from shady marketplaces on the Dark Web and then use those names and SSNs to claim benefits or dupe others into doing it for them. Others took a different tack, manufacturing fraudulent EDD debit cards for resale (the state has since rolled out chip-enabled cards to counter that threat). You may even be approached by scammers leveraging the crisis to commit identity theft, impersonating the EDD with phishing texts or scam phone calls.

In fairness to the EDD, it faced a legitimately difficult balancing act. On one hand, it was under tremendous pressure to get money out to applicants quickly, in the teeth of a historic humanitarian crisis; but on the other hand, it was trying to rein in rampant fraud. The predictable outcome was frequent failures on both counts.

The Impact of EDD Fraud

The auditor’s report highlighted the EDD’s unpreparedness for the volume of claims it would face (at one point, the call center was managing to address just 1 percent of incoming calls). The claims system would likely have ground to a near-halt just addressing the record number of legitimate claims, and the volume of fraudulent claims added on top of that just made matters worse.

Anyone filing a claim during the crisis would have been impacted by the agency’s struggles. You may have faced slow processing times, had to make repeated phone calls to get through, or been obligated to provide the same information numerous times because your original submission fell through the cracks. Some may have been cut off from new claims or existing benefits because hastily implemented anti-fraud measures flagged some aspect of their claim.

In a worst-case scenario, you may discover that you’ve been the victim of identity theft and that your personal information has been used to file a fraudulent claim with the EDD or with one or more other state agencies (the Department of Labor cited one scammer who applied for benefits in 40 states with a single SSN, and was paid out by 29 of them). Untangling that kind of mess is a nightmare: investigative journalism site ProPublica reported on a victim in New York whose benefits were restored after seven months of emails and phone calls. His case only involved one other state.

If You’re the Victim of EDD Fraud

There are a few ways you might discover that your identity has been stolen and used to commit EDD fraud. The obvious worst-case scenario is a denial of your claim or a stoppage of existing benefits because of a conflicting claim. You may also receive mail from the EDD reporting the progress of a claim you haven’t made, or you might receive a 1099-G reporting income from a bogus claim. No matter how it happens, you’ll need to act quickly.

Your first step should be a visit to the agency’s AskEDD website. From there, you can pick “Report Fraud” if your claim has been denied or if you’re receiving information about a bogus claim; or “Form 1099G” if you’ve received 1099 showing a bogus claim as taxable income. That starts the investigative ball rolling and should – eventually – result in the fraudulent claim being expunged from your record. Follow the instructions you’re given by the EDD, provide any necessary supporting documentation, and above all, be patient: you can expect this process to take some time.

The federal Department of Justice maintains a special site to track this kind of specialized “disaster fraud,” which started long before COVID and will continue long afterward. Reporting your case there will help the DOJ build strategies to make this kind of fraud more difficult in the future. As with any identity theft case, you should also:

Report it on the FTC’s IdentityTheft.gov website. That puts your case “on the radar” and, on a practical note, gives you step-by-step instructions on how to minimize the damage resulting from identity theft (a topic we’ve also covered in some depth).
Report it to the FBI’s Internet Crime Complaint Center (IC3). Aside from its own investigations, data gathered by the IC3 is shared by the FBI with other law enforcement agencies.
Report the identity theft to the major credit reporting agencies (if you tell one, they’re obligated to pass that information to the others). You should also probably set up a fraud alert or credit freeze with each agency to minimize the risk of identity thieves taking advantage of your personal data in more conventional ways.
Order copies of your credit report as well, and scrutinize them for new credit, credit applications, or other activity you can’t account for. You’re entitled to one free report each year from each agency, so if you spread them out, you can have a new one every four months at no cost.

Prosecution and Penalties for Unemployment Fraud

Being victimized by EDD fraud can cost you months of your time and cause you a lot of transient financial hardship if you were depending on receiving benefits. It’s only natural that at some point in the process, you’ll wonder darkly what kind of penalty the fraudsters will face if they’re caught.

Nationally, sentences for unemployment fraud aren’t typically heavy in and of themselves – the United States Sentencing Commission reported an average sentence of just 10 months for fiscal year 2020 – but sentences skew toward the maximum when the number of victims goes up, or when the dollar amounts involved are unusually large. High-volume EDD fraud would certainly qualify on either or both of those counts.

Under California law, a conviction for EDD fraud can carry a jail sentence of 2 to 5 years, a fine of up to double the amount of the fraud, both a fine and jail time or even an order of restitution to the victims. Prosecutors can also look at the circumstances of a specific crime and up the ante by bringing other charges as appropriate, such as theft, forgery or conspiracy. Those all carry penalties of their own and can beef up the final sentence to something more satisfactory.

The Bottom Line on EDD Fraud and Identity Theft

At the end of the day, your best defense against EDD fraud is the same as for any other form of identity theft: taking practical, commonsense steps to protect yourself. Develop good, safe habits online and teach them to your kids, your parents, your colleagues and anyone else whose imprudence might potentially leave you vulnerable (maybe even your boss?).

Identity theft is an unfortunate fact of modern life, but sensible precautions – while there’s no silver bullet – will sharply reduce the risk of you becoming a victim and help speed your recovery if the worst should happen.

Sources:

California Employment Development Department: California Unemployment Fraud By the Numbers

Auditor of the State of California: EDD’s Poor Planning and Ineffective Management Left it Unprepared to Assist Californians Unemployed by COVID-19 Shutdowns

Auditor of the State of California: Significant Weaknesses in EDD’s Approach to Fraud Prevention Have Led to Billions of Dollars in Improper Benefit Payments

Varonis: 98 Must-Know Data Breach Statistics for 2021

KCRA Sacramento: EDD Fraud Involves Stolen Identities, Dark Web, International Crime

Monterey County Now: California’s Unemployment System Fell Apart During the Pandemic. State Senator John Laird is Pushing Back.

California Employment Development Department: Debit Card

California Employment Development Department: Employment Development Department Warns About Telephone Phishing Scams, Reminds Californians to Prepare for Ending Federal Benefits

US Department of Labor Office of the Inspector General: Alert Memorandum: The Employment and Training Administration (ETA) Needs to Ensure State Workforce Agencies (SWA) Implement Effective Unemployment Insurance Program Fraud Controls for High-Risk Areas

ProPublica: How Unemployment Insurance Fraud Exploded During the Pandemic

California Employment Development Department: AskEDD