SPOKANE — The state Employment Security Department did not have adequate controls to prevent a slew of illegal unemployment insurance claims last spring that grew into the largest fraud in state history, the Washington State Auditor said Friday.
The first of five audits expected on the scandal provided the first accounting of the circumstances surrounding schemes that targeted Washington state’s unemployment benefits as the coronavirus pandemic was growing.
As part of its annual audit of the state’s financial statements, the State Auditor found that the Employment Security Department also initially reported inaccurate fraud and recovery numbers that have since been updated.
“We are still learning about what happened and vetting the information,″ Auditor Pat McCarthy said in a press release. "I expect more clarity in the months to come. This audit is a building block – it is the first in a series that will examine the fraud at the ESD.
Data used in this audit is as of June 30, 2020, the end of the fiscal year. Key findings include:
—The “known and suspected” fraud loss, as of June 30, was about $600 million. This sum covers more than 122,000 known or suspected fraudulent claims in fiscal 2020.
—The state had recovered $250 million as of June 30, resulting in an estimated net loss of $350.9 million for fiscal year 2020.
—These amounts are almost certainly different today, as ESD’s recovery efforts are ongoing.
The Employment Security Department paid out more than $7.5 billion in Unemployment Insurance benefits to 926,815 people in fiscal year 2020. The vast majority of those payments happened after the pandemic began in March.
The ESD in fiscal 2020 issued 684% more in benefits funding (about eight times) to 390% more people (about five times) than in fiscal 2019, the audit found.
The audit found that changes in ESD’s internal controls that made the program more vulnerable to fraud.
For instance, the agency in March eliminated the “waiting week,” which is time ESD typically would use to verify eligibility for benefits. This decision was driven by federal incentives to distribute pandemic relief quickly as well as an executive order from the governor. As a result, benefits were paid before eligibility was verified.
An automated process to detect claims that present a higher risk for identity theft was not working for much of the year. By the time it was repaired in May, a large number of fraudulent transactions had already occurred, the audit said.
The audit found that some pandemic-related relief funding was especially vulnerable to fraud.
The federal Pandemic Unemployment Assistance Program offered benefits to self-employed people and others who would not typically be eligible for unemployment insurance. These claimants were not required to submit documentation to substantiate employment.
“This fraud is a source of major concern for the public, legislators, and the media – all of whom are considered users of these financial statements,” McCarthy said. “Additionally, these funds were given to the state to use for the benefit of Washingtonians. The financial statements should be transparent about what happened.”
Employment Security Department Commissioner, Suzi LeVine said her agency appreciated the feedback and that all the auditor’s recommendations are actions the agency had already taken.
"We especially welcome the recognition of our critical work on funds recovery, which currently stands at $357 million and rising,″ LeVine said.
"Washington was among the first states to be impacted by the nationwide unemployment fraud attack, but we were not the last,″ she said.