Despite the warnings, the federal government largely left it to states to detect which applications are fake. But state workforce agencies, stymied by decades-old IT systems and flooded with applications, have been ill-equipped to find and prevent the fraud, which appears to be far more extensive than the usual attempts to bilk government programs. Now states are asking for help.

“We’re fighting this fight with ’70s era technology with some modern Band-Aids put on top of it,” Ryan Wright, Kansas’ acting secretary of Labor, said in an interview. “I would like to have seen a more aggressive response from the federal government.”

Last year, Wright said, his agency had no cases of impostors using fake employers to apply for benefits; in recent months, it has stopped 55,000 such claims. The fraud “now is reaching a scope that is difficult for states to weed through,” he said.

Labor Department Communications Director Megan Sweeney told POLITICO in a statement that the agency “is actively working with all states to combat fraud in UI programs,” especially in Pandemic Unemployment Assistance, which expanded jobless benefits to the self-employed. “The Department requires states to work with the Department’s Office of the Inspector General and to work collaboratively with other federal, state, and local law enforcement to investigate and prosecute fraud and to work closely with financial institutions to recover fraudulent payments,” Sweeney added.

State officials are seeing big surges in unemployment applications indicating that criminals are trying to game the system. And while they have been successful at blocking some of the theft attempts, the sheer scale is making it difficult to stop entirely.

Colorado officials estimated that three-quarters of unemployment applications they received over the summer were fraudulent, and they reported averting as much as $1 billion in attempted thefts. But criminals still may have absconded with $40 million. Pennsylvania officials say they’ve uncovered tens of thousands of fraudulent applications that resulted in the loss of millions of dollars in unemployment aid. And Montana’s labor department said criminals stole $189 million from its aid program over the summer.

In California, the Beverly Hills Police Department said it recovered $4.5 million in stolen unemployment aid after out-of-state scammers went shopping on Rodeo Drive with bundles of cash and state-issued debit cards.

When the economy was booming from mid-2018 to 2019, the Labor Department estimated that 3.2 percent of the payments made in unemployment compensation programs ended up in the hands of criminals. Experts and state officials say the amount of fraud occurring during the pandemic is likely much higher, in part because of the provisions in the March CARES Act relief package that allowed workers to self-certify their eligibility for aid and immediately receive the money before their application was verified.

“Something in the CARES Act triggered a broader set of international criminals, and probably U.S. criminals, to take advantage of the system,” said Andrew Stettner, senior fellow at the liberal-leaning Century Foundation.

The $2 trillion rescue package created several programs to bolster jobless benefits during the pandemic, including Pandemic Unemployment Assistance. It also established Federal Pandemic Unemployment Compensation, which gave laid-off workers an extra $600 a week on their benefits checks through July 31.

According to the latest data available as of Oct. 3, the Employment and Training Administration says roughly $347 billion in benefits have been paid out under the programs started under the CARES Act. As of Aug. 31 about another $103 billion has been paid in state-funded programs.

From the beginning, federal officials were worried about handing out so much money so fast.

“There was concern that with the speed at which we were asking states to implement these programs, the size of the benefits, that they would be enticing to the fraudsters,” said one Labor Department official in an interview. “It was too sweet of a pie for them not to attempt to take advantage of.”

Federal officials have been alerting states to the scams at least since May, when the Secret Service told state agencies of a “well-organized” ring that was exploiting the Covid-19 crisis to commit “large-scale fraud” against state unemployment insurance programs. The Secret Service warned that a Nigeria-based ring was using hundreds or thousands of people to submit applications based on personal information stolen in data breaches.

The influx of fraud because of COVID “is unlike anything I’ve ever seen,” said Jon Coss, founder of the California-based fraud-detection service Pondera Solutions, “and I’ve been doing government technology for 30 years.”

Federal officials have been ramping up efforts to help states combat the thefts in recent weeks, after months of warnings from the Labor Department’s internal watchdog that more needed to be done. DOL officials met last month with state workforce agencies to share information about schemes and offer identity verification tools and strategies to minimize risk.

And the agency last month also announced it would dole out $100 million to ramp up fraud investigations and recover payments, as federal law requires.

Attempts to combat the fraud have contributed to delays for legitimate applicants who have lost their jobs in states including New Jersey, Pennsylvania and Colorado. California’s backlog of unpaid claims, a source of growing outrage, illustrates the pitfalls of using old-school prevention methods for modern scams.

In a report released last month, a Strike Team appointed by Gov. Gavin Newsom found that California’s automated identity verification program was “simplistic and easy to exploit” with stolen information. But the agency’s attempts to block the fraud by flagging “an excessive” number of claims for further review didn’t work either, it wrote. Rather, it mostly stalled aid to workers in need.

About 99.8 percent of those flagged claims were actually legitimate, the Strike Team’s review found.

California has launched a new identity verification system requiring a photo ID upload or virtual video session, a step officials hope will more effectively weed out fraud and deliver aid more quickly.

As of last month, roughly 1.6 million applicants were still awaiting benefits.

There are “three levels of victim here,” said Michele Evermore, a senior policy analyst with the National Employment Law Project: the people being impersonated, who might not be able to get benefits for themselves in the future; the people with common characteristics as those being impersonated, who may be flagged in fraud investigations; and the even larger pool of people waiting for their initial claims to be processed who might face delays.

“Whenever this fraud ring hits,” Evermore said, “the first thing states do is stop processing their backlog to deal with the fraud.”

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