Big benefits, claims a ‘perfect storm’ for unemployment fraud in Michigan

LANSING — Record unemployment claims and generous federal benefits for workers who lost jobs because of the coronavirus created a “perfect storm” for fraud by international crime syndicates, the director of Michigan’s Unemployment Insurance Agency said Wednesday. 

Steve Gray, in testimony before a legislative committee, said most of the 340,000 active claims the state has investigated for potential identity theft or other forms of fraud involved self-employed workers seeking $600 a week in federal pandemic unemployment assistance.

Imposters recognize that by professing to be self-employed, “there’s not going to be an employer on the other side” to contest the claim and safeguard against fraud, Gray told lawmakers. 

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Gray declined to say how many cases of fraud the state has confirmed so far, but the agency says roughly 58,000 Michigan residents have self-reported imposters using their names to seek unemployment benefits, and all those claims are likely fraudulent. 

MIchigan’s unemployment system had already been overwhelmed by massive jobless claims in mid-May, when the Secret Service warned states a “well-organized Nigerian fraud ring exploiting the COVID crisis to commit large-scale fraud against state unemployment insurance programs" had initially targeted Washington state, which prompted the Michigan probe. 

The investigation has ensnared hundreds of thousands of law-abiding Michiganders who legitimately lost jobs or otherwise qualified for unemployment benefits but had their accounts frozen until they took extra steps to prove their identity. 

Of the 340,000 active accounts the state had initially flagged, 220,000 have been “cleared” of wrongdoing and restored, spokesperson Jason Moon said Tuesday. The state has also cleared about 110,000 new claimants but continues to hold payments on another 90,474 accounts.

While residents have complained about the identity verification process, Gray said the agency has hired “hundreds of staff to weed out malicious claims and clear real ones.” The state now has 850 workers dedicated to the effort, Gray told lawmakers.

“This criminal attack was intentionally timed to take advantage of the immense emergency need and resulting record benefits being paid, the large expansions in federal unemployment benefits and overtaxed state systems,” Gray testified.

“This environment has created a perfect storm for criminal activity.”

The $2 trillion CARES ACT approved by Congress and signed by President Donald Trump in late March extended unemployment benefits to self-employed and gig-economy workers who would not typically qualify, making them eligible for $600 a week in pandemic unemployment assistance. 

In a May 26 memo, an assistant inspector general for the U.S. Department of Labor warned that allowing jobless residents to "self-certify" for benefits opens the door to fraud. 

Scott Dahl, the inspector general for the U.S. Labor Department, has predicted that at least $26 billion in federal unemployment funding "will be wasted, and a large portion of that will be pocketed by fraudsters instead of going to legitimate workers."

For traditional jobless claims, employers have the ability to contest applications from their employees or imposters to ensure they qualify. 

“These built-in safeguards do not exist for self-employed workers, which has made the PUA program the primary target for fraudsters,” Moon, the MIchigan UIA spokesperson, told Bridge this month. 

The unemployment agency in 2017 acknowledged a software glitch that may have made the personal information of up to 1.87 million Michiganders accessible to unauthorized users, but a subsequent state police investigation did not reveal any actual breaches. 

And that remains true to this day, Gray told lawmakers.

“Identities haven’t been stolen from the unemployment insurance system, but other data breaches at other locations [around the world] have allowed criminals to develop quite an expansive database of stolen identities,” he said. 

MIchigan has battled imposter fraud in the past and already had systems in place to detect it, Gray added. He declined to discuss details of those programs or recent changes, citing fear that crime rings would learn to work around them if made public. 

“The criminals are constantly evolving their attacks and constantly changing the methods they use, and so we’ve had to make adjustments to our system,” he said. “And that was one of the reasons why we put the additional identity checks in place.”

No timeline for unemployment offices

Lawmakers pressed Gray to explain when and how Michigan will begin to reopen its unemployment insurance offices to jobless residents who have struggled to navigate the state’s sluggish website and call center. 

“There are people out there who can’t get through,” said Sen. Kim LaSata, a Republican representing Bainbridge Township in west Michigan’s Berrien County.

“They just want to talk to someone, and I know you know who stressed people are. So why can’t you be open for appointments, or why can’t there at least be regionally some people in the office.”

Gray said he understands the frustration. He told lawmakers that the Unemployment Insurance Agency is developing plans to reopen physical offices, but he gave no clear timeline. 

Before reopening, the agency wants to launch its own appointment system, similar to the online program used by the Michigan Secretary of State, which opened branch offices by appointment earlier this month. 

That would ensure residents are guaranteed face-time if they visit an office and would also allow the agency to spread out visitors and maintain public health protocols, agency officials said. 

“We also don’t want to have the similar experience they had in Kentucky, where I feel like they probably opened their offices too early and had ten-hour lines,” Gray told lawmakers. 

But those long lines seen last week in Kentucky “shows you the need,” Lasata said. “What can be done tomorrow? What's the plan?”

Gray agreed on the need for quick action but said the fraud probe has set back state efforts to speed up process claims. The 850 new employees the agency brought on in recent weeks were initially expected to work the phones but were instead diverted to identity verification, he said. 

“As a practical matter, we serve the majority of our clients over the phone,” Gray told lawmakers. “I understand how frustrated people have been that we have not been able to answer most of the phone calls that come in, and our plan is to change that starting next week.”

Nearly 12,000 Michigan workers who filed for jobless benefits between March 15 and May 1 have yet to be paid or denied, but Gray said the agency should resolve that backlog by July 4. 

All told, there are still 123,959 applicants currently awaiting eligibility determinations from the Michigan Unemployment Insurance Agency, including cases flagged for possible fraud. 

While legislators are clamoring for the agency to re-open offices, phone workers have traditionally been more efficient, said Todd Cook, a legislative liaison for the agency. Prior to the pandemic, unemployment office workers averaged about 21 face-to-face interactions a day, while phone workers average about 41 calls, he said. 

When offices are reopened, appointments should be prioritized for jobless residents who may have limited access to the internet or other technical challenges, Cook added. 

By shifting workers from identity verification to claims processing next week, the agency should be able to handle 35,000 phone calls per day, Gray told lawmakers. That would still not match the 150,000 calls that may come in on any given day, but many of those are repeat callers who might stop once they finally get through, he said. 

“We think we’ll see a significant decrease in demand for people to come into the office,” Gray predicted. 

Still, for many Michigan residents who have spent weeks or months trying to navigate the unemployment insurance system, a long wait at a physical office may not sound that bad, said Rep. Matt Hall, a Marshall Republican who chairs the Legislature's Joint Select Committee on the COVID-19 Pandemic.

“The reason that the public has made it so clear that they want to see these unemployment offices opened is because there is a communication issue with the department,” he told Gray. “We’ve heard from multiple people, and they just want to hear back from someone. They want to have contact with someone. They want confirmation that the information they submitted was received.

“I think for many of these people, a 10-hour wait in line would be a lot shorter than what they’ve experienced, and that is why they’re frustrated.”