Report - 2021 01 28 Ca Auditor Edd Report
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- 2021 01 28 Ca Auditor Edd Report
Summary
California State Auditor Report 2020-628.2, a high risk audit of the Employment Development Department's management of federal COVID-19 funds, transmitted by State Auditor Elaine M. Howle on January 28, 2021. The audit concludes that weaknesses in EDD's approach to fraud prevention led to payments of about $10.4 billion for unemployment insurance claims that EDD has since determined may be fraudulent. It reports that EDD directed Bank of America to freeze 344,000 debit cards without a plan to unfreeze legitimate accounts, and paid fraudulent claims filed under the names of incarcerated individuals estimated at $810 million. It recommends that the Legislature require regular cross-matches with correctional facility data and that EDD establish a central fraud prevention unit by March 2021. EDD agreed with all of the recommendations.
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Employment Development
Department
Significant Weaknesses in EDD’s Approach to
Fraud Prevention Have Led to Billions of Dollars
in Improper Benefit Payments
January 2021
REPORT 2020‑628.2
IMAGE PENDING
CALIFORNIA STATE AUDITOR
621 Capitol Mall, Suite 1200 | Sacramento | CA | 95814
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For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255
This report is also available online at www.auditor.ca.gov | Alternative format reports available upon request | Permission is granted to reproduce reports
Elaine M. Howle State Auditor
January 28, 2021
2020‑628.2
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, CA 95814
Dear Governor and Legislative Leaders:
As authorized by state law, my office presents the results of our high risk audit concerning the
Employment Development Department’s (EDD) management of federal funds related to the COVID-19
pandemic. EDD administers California’s unemployment insurance (UI) program and received a
significant amount of federal funding in response to the COVID-19 pandemic and related federal
expansion of UI benefits. The following report details our conclusion that significant weaknesses in
EDD’s approach to fraud prevention have led to billions of dollars in improper benefit payments.
EDD did not take substantive action to bolster its fraud detection efforts for its UI program until
months into the pandemic, resulting in payments of about $10.4 billion for claims that it has since
determined may be fraudulent because it cannot verify the claimants’ identities. Specifically, EDD
waited about four months to automate a key anti-fraud measure, took incomplete action against claims
filed from suspicious addresses, and removed a key safeguard against improper payments without
fully understanding the significance of the safeguard.
Further, EDD’s lack of preparation left it unable to manage two important fraud-related situations
that arose during its 2020 pandemic response. In September 2020, because of fraud concerns, EDD
directed Bank of America to freeze 344,000 debit cards (accounts) that it used to provide benefit
payments to claimants. However, EDD did not have a plan in place to ensure that it could unfreeze
those accounts found to belong to legitimate claimants, and it has been slow to acknowledge its role
in freezing these accounts. EDD was also unprepared to prevent payment of fraudulent claims filed
under the names of incarcerated individuals, the total of which is an estimated $810 million. Because
it had not developed the capacity to regularly match data from its claims system with data from state
and local correctional facilities, EDD did not detect fraudulent claims until after it had paid them.
EDD has put its UI program at higher risk for such fraudulent payments by relying on uninformed and
disjointed techniques to prevent and detect impostor fraud. For example, EDD has not established a
centralized unit that is responsible for managing its fraud prevention and detection efforts, and it does
not monitor or assess its numerous fraud prevention and detection tools to determine whether they are
successful. Consequently, EDD may be using ineffective fraud prevention and detection techniques,
which can delay payments to legitimate claimants while it puts their claims through additional and
unmerited review.
Respectfully submitted,
ELAINE M. HOWLE, CPA
California State Auditor
621 Capitol Mall, Suite 1200 | Sacramento, CA 95814 | 916.445.0255 | 916.327.0019 fax | w w w. a u d i t o r. c a . g o v
iv Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
Selected Abbreviations Used in This Report
CARES Coronavirus Aid, Relief, and Economic Security
CDCR California Department of Corrections and Rehabilitation
EDD Employment Development Department
GAO Government Accountability Office
PUA Pandemic unemployment assistance
SSNs Social Security numbers
UI Unemployment insurance
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January 2021
CONTENTS
Summary 1
Introduction 5
EDD’s Fraud Prevention Approach During the Pandemic Was
Marked by Significant Missteps and Inaction 9
Recommendations 22
EDD’s Lack of Preparation Left It Unable to Effectively Address
Two High‑Profile Situations 23
Recommendations 30
EDD Has Relied on Uninformed and Disjointed Techniques to
Prevent Impostor Fraud 33
Recommendations 38
Appendix
Scope and Methodology 41
Response to the Audit
Employment Development Department 43
California State Auditor’s Comments on the Response From EDD 51
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C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 1
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SUMMARY
The Employment Development Department (EDD) is responsible for administering the
State’s unemployment insurance (UI) program, which provides partial wage replacement
benefits to eligible Californians who have become unemployed, including those affected
by the COVID‑19 pandemic (pandemic). Since the surge in pandemic‑related California
unemployment claims began in March 2020, individuals, news organizations, and law
enforcement officials have reported many cases of potential and actual UI fraud. Not
surprisingly, the pandemic conditions increased EDD’s UI workloads and also resulted
in changes to federal UI benefit programs, both of which have created a greater risk of
fraud. We assessed EDD’s response to increased fraud risk during the pandemic—such
as allegations of impostor fraud, which occurs when a perpetrator uses someone else’s
personal information to fraudulently collect benefits—and evaluated its overall efforts to
detect fraud. This report draws the following conclusions:
EDD’s Fraud Prevention Approach During the Pandemic Was
Marked by Significant Missteps and Inaction Page 9
EDD did not take action to bolster its fraud detection efforts until
months into the pandemic. As a result, its data show that it paid
about $10.4 billion in claims that it has since determined may be
fraudulent. Even as late as December 2020, EDD was allowing
claimants to continue to collect benefits using suspicious addresses
because it did not establish payment blocks for their claims. Further,
$1 billion of the $10.4 billion paid for suspicious claims was the
result of EDD’s decision to remove a key safeguard against payment
to claimants whose identities it had not confirmed. EDD staff
misunderstood the importance of that particular safeguard and, from
April to August 2020, made payments to claimants despite concerns
about the legitimacy of their identities.
EDD’s Lack of Preparation Left it Unable to Effectively Address
Two High‑Profile Situations Page 23
Because of fraud concerns, EDD directed Bank of America to freeze
344,000 debit cards (accounts) that it uses to provide claimants with
benefit payments. However, EDD did not have a plan to ensure that it
could selectively unfreeze accounts belonging to legitimate claimants,
has been slow to provide clear information about its role in freezing
these accounts, and does not have a full understanding of which
accounts are frozen. Additionally, EDD was unprepared to prevent
payment for fraudulent claims filed under the names of incarcerated
individuals—which it estimated to total about $810 million. EDD had
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January 2021
told the Legislature for years that it was considering adopting
a cross‑match between claim and incarceration data. However,
because it had not developed the capacity to match data between its
claims system and the data from state and local correctional facilities,
it did not detect these fraudulent claims until after the fact.
EDD Has Relied on Uninformed and Disjointed Techniques to
Page 33 Prevent Impostor Fraud
EDD has not established a centralized unit that is responsible for
managing its fraud detection efforts, and it does not reliably track
potential fraudulent activity from detection to resolution. As a
result, EDD’s UI program is at a higher risk for fraud. Further, it
does not monitor or assess its numerous fraud prevention and
detection tools to determine whether they are successful in mitigating
fraud. Consequently, EDD may well be using ineffective fraud
prevention and detection techniques and delaying payments to
legitimate claimants while it puts their claims through additional and
unmerited review.
Summary of Recommendations
Legislature
To protect against fraudulent UI claims, the Legislature should
amend state law to require EDD to regularly cross‑match its claims
against data from state and local correctional facilities.
To ensure that EDD effectively protects the integrity of the UI
program, the Legislature should amend state law to require EDD to,
by January 2022, and biannually thereafter, assess the effectiveness of
its fraud prevention and detection tools, eliminate those that are not
effective, and reduce duplication in its efforts.
EDD
To ensure that it does not suspend critical safeguards, EDD
should plan in advance which UI fraud prevention and detection
mechanisms it can adjust during recessions to effectively balance
timely payment with fraud prevention.
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To provide timely access to benefits for legitimate UI claimants
with frozen accounts, EDD should immediately obtain and review
a comprehensive listing of benefit accounts that are frozen and, by
March 2021, begin the process of unfreezing legitimate accounts.
To ensure that it can approach UI fraud prevention in a
comprehensive and coordinated manner, EDD should do
the following:
• By March 2021, establish a central unit responsible for
coordinating all fraud prevention and detection efforts.
• By May 2021, develop a plan for how it will assess the
effectiveness of its fraud prevention and detection tools.
Agency Comments
EDD stated that it undeniably struggled to timely distribute
benefits to the millions of newly unemployed Californians and
simultaneously prevent fraudulent claims. It agreed with all of our
recommendations and indicated that it will implement them all.
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INTRODUCTION
Background
The Employment Development Department (EDD) is responsible for
administering the State’s unemployment insurance (UI) program, which
provides partial wage replacement benefits to eligible Californians who
have become unemployed. In general, individuals who claim these
monetary benefits (claimants) must meet certain requirements, such as
being unemployed through no fault of their own and
being able and available to work. Claimants must also
provide certain information, such as their Social Security EDD Has Several Divisions and Offices That
numbers (SSNs) and information about their previous Undertake Fraud Detection Efforts
employment, including their estimated earnings, which • Investigation Division, Criminal Intelligence Unit:
can help EDD ensure that it issues proper benefit Manages fraud reports submitted by UI staff, by the
payments to the correct individuals. public, by law enforcement, by state and federal
agencies, by the Governor or Legislature, and by others;
The benefit payments that EDD administers are subject oversees EDD’s fraud hotline.
to two main types of potential fraud: benefit fraud and
• Investigation Division, Enforcement Operations Units:
impostor fraud. Benefit fraud can occur when individuals Investigate egregious and costly cases of fraud and may
misreport their earnings or employment information pursue criminal charges against impostors.
under their own identity. For example, individuals may
establish legitimate UI claims using their own personal • UI Support Division, Integrity and Legislation Unit:
Manages a fraud report mailbox and initiates the identity
information but then fail to report that they returned to
verification process for certain claims.
work, fraudulently continuing to collect UI benefits. EDD
has several methods for detecting benefit fraud and, in • UI Integrity and Accounting Division, Identity
general, this type of fraud is easiest to trace to a specific Verification and Technical Support Section: Verifies
individual because the person filing the fraudulent claim claimant identities when potential fraud or other identity
benefits from it. As we detailed in an earlier report about issues have been detected.
EDD, in March 2020 it indefinitely postponed most of its • UI Integrity and Accounting Division, Benefit
required UI eligibility determinations, which has likely Overpayment Section: Performs daily, weekly, and
increased the UI program’s vulnerability to benefit fraud quarterly matches between employer data and UI benefit
during the COVID-19 pandemic (pandemic).1 As we claims to detect improper payments and potential fraud.
discuss later in the Introduction, the pandemic‑related • UI Integrity and Accounting Division, Benefit Claims
benefits also increased EDD’s risk of the second type of Section: Assigns new unique identifiers to potentially
fraud: impostor fraud, which occurs when a perpetrator fraudulent claims to reduce the impact on the true
uses someone else’s personal information to collect owners of compromised SSNs.
UI benefits. • Information Technology (IT) Branch: Facilitates fraud
detection efforts through EDD’s technical systems,
including as directed by other responsible parties.
EDD’s Fraud Detection Processes
• Local field offices: Report potential fraud and suspicious
claims to the fraud report mailbox and initiate the
A number of divisions and offices within EDD play
identity verification process for certain claims.
a role in its efforts to detect UI fraud, as the text box
describes. According to EDD’s June 2020 report to the Source: Analysis of EDD roles and responsibilities, EDD
documentation, and interviews with EDD staff.
1 EDD’s Poor Planning and Ineffective Management Left It Unprepared to Assist Californians Unemployed by
COVID‑19 Shutdowns, Report 2020‑128/628.1, January 2021.
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Legislature on fraud deterrence and detection activities, in 2019
EDD investigated 61 ongoing and new UI fraud cases representing
potential fraud payments of around $24.4 million, including
14 cases of UI impostor fraud representing more than $5.5 million
paid in fraudulent benefits. EDD also reported more than 110,000
UI overpayments due to fraud—or payments that EDD expected
claimants to return to EDD—totaling $116.8 million in UI benefits
paid in 2019. EDD further reported that this $116.8 million
represented only 2.3 percent of its $4.9 billion benefit payments
made in 2019.
One of the key ways that EDD attempts to prevent impostor fraud
is by verifying the identities of prospective claimants as a condition
to providing benefits, as federal law requires. Historically, this
process has included basic automated verifications to ensure that
the information that claimants submit to EDD, such as SSNs and
driver’s license numbers, match the information retained by the
U.S. Social Security Administration and California Department of
Motor Vehicles. If these verifications detect discrepancies, EDD
activates a manual identity verification process to confirm whether
the claimant is the true owner of the identity. When it activates
the manual identity verification process, EDD’s system suspends
or stops payments to the affected claim while EDD attempts to
verify the claimant’s identity. EDD will pay eligible claimants whose
identities it confirms for the weeks their payments were paused.
This process does not block the claimants’ access to UI benefit
payments that EDD has already issued. However, in October 2020,
EDD introduced a new online identity verification tool, ID.me, as
part of its efforts to process claims faster while preventing impostor
fraud at the onset of a claim. EDD has indicated that ID.me makes
it easier for claimants to verify their identities, reduces the amount
of manual work by EDD staff necessary to process claims, and
includes more robust protections against impostor fraud.
Reported Cases of UI Fraud During the COVID‑19 Pandemic
Since the pandemic began affecting California unemployment
rates in March 2020, individuals, news organizations, and law
enforcement officials have reported many cases of potential and
actual UI impostor fraud. For example, the Beverly Hills Police
Department announced in September 2020 that it had arrested
44 individuals responsible for identity theft and EDD fraud and had
recovered EDD debit cards containing more than $2.5 million in
fraudulently obtained UI benefits. Moreover, in November 2020, we
reported that many individuals had received mail from EDD that
was addressed to other people, and that this mail may have been the
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 7
January 2021
result of attempts to fraudulently collect UI benefits.2 For example,
an individual who had recently moved into a new home reported
receiving more than 65 pieces of mail from EDD addressed to at
least 15 different people. The significant amount of mail returned
to EDD because it was undeliverable suggests that such cases have
likely been widespread. Finally, in a November 2020 letter to the
Governor, several district attorneys reported that EDD fraud was
occurring in prisons across the State. We discuss this inmate‑related
fraud later in this report.
Two main factors have made the UI program especially vulnerable
to fraud during the pandemic: the sudden and massive increase
in UI claims and the significant expansion of eligibility for
benefits. After the start of the pandemic and the imposition of
the statewide stay-at-home order, California’s unemployment
rate surged from 4.3 percent in February 2020 to 16.2 percent by
April 2020, according to EDD’s labor market information. This
surge in unemployment created a dramatic increase in the number
of UI claims individuals submitted: EDD received nearly 2.4 million
UI claims in April 2020, about 13 times as many as it received in
April 2019. This massive increase in demand for benefits may have
made it harder for EDD to carry out typical fraud detection efforts.
In addition, in late March 2020, the federal government enacted the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act),
which expanded UI benefits and relaxed some requirements for
receiving those benefits. For instance, the CARES Act extended
pandemic unemployment assistance (PUA) to certain individuals
who were not eligible for regular unemployment benefits, such
as individuals who had been self‑employed and therefore would
not have a third‑party employer to report their wages or validate
unemployment. Further, the CARES Act added $600 per week to
the amount of benefits claimants could otherwise receive under
state law between March and July 2020. The U.S. Department
of Labor (Department of Labor) has also specified that states
must backdate PUA claims to the first week in which claimants
became eligible for benefits, which was as early as February 2020—
meaning that a larger amount of money was available to claimants
because they could receive benefits from many previous weeks
before the date that they filed their claims. These factors further
contributed to the heightened risk of fraud, since impostors had
opportunities to earn more benefits without providing verifiable
information about their work histories.
2 Follow‑Up—Employment Development Department: Since the COVID‑19 Pandemic It Continues to
Mail Documents Containing Social Security Numbers and Put Californians at Risk of Identity Theft,
Report 2020‑502, November 2020.
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C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 9
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EDD’s Fraud Prevention Approach During the Pandemic
Was Marked by Significant Missteps and Inaction
Key Points
• EDD failed to take fast enough action at the beginning of the pandemic to bolster
its UI fraud detection efforts. As a result, from March through December 2020, out
of $111 billion in UI benefits, EDD paid about $10.4 billion on claims that it later
determined might be fraudulent.
• EDD paid $1 billion of the $10.4 billion in part due to a problematic decision to
streamline its processes by removing a safeguard against paying individuals with
unconfirmed identities. EDD issued payments to those claimants with unconfirmed
identities before discovering it had inadvertently removed the safeguard for more than a
four‑month period.
• EDD faces an impending workload to assist the victims of identity theft whose personal
information was used to file fraudulent claims. Given the high levels of potentially
fraudulent claims and its processes for addressing them, EDD is underprepared to
handle this work.
EDD’s Failure to Act Promptly to Reduce Fraud Resulted in About $10.4 Billion in Potentially
Fraudulent UI Benefit Payments During the Pandemic
EDD’s data show that out of a total $111 billion paid during the pandemic, from March 2020
through December 2020, it paid about $10.4 billion for claims that it has since determined
could be fraudulent. These payments happened despite warnings from the U.S. Department of
Labor (Department of Labor) to states at least twice in the early months of the pandemic that it
had not relaxed its expectations related to fraud prevention in light of the pandemic. First, in its
April 2020 instructions for implementing and operating the PUA program, it reminded states
that they were required to take reasonable and customary precautions to deter and detect
fraud, such as conducting a random audit of a sample of claims. Then, in May 2020, it issued
another letter to remind states of their need to ensure the integrity of the UI program. This
letter advised that states should perform essential ongoing reviews meant to detect improper
payments throughout the UI program, including new benefits that the federal government had
established in March 2020. Also in May 2020, when it requested data from EDD to identify
fraud trends, the Department of Labor’s Office of the Inspector General warned EDD that
California was likely to see at least $1.2 billion in potential fraud based on the 2.9 million new
claims that EDD had received in March and April 2020.
Despite these repeated warnings, EDD did not take prompt action to enhance safeguards
against illegitimate benefit payments. As Figure 1 shows, EDD did not make any substantive
changes to its fraud detection practices until late July 2020—four months after the
pandemic‑related shutdowns led to a surge in UI claims. That July 2020 change automated
EDD’s process for stopping payment on claims that EDD believed were suspicious. Previously,
EDD’s staff needed to perform a manual review of daily reports of thousands of possibly
10 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
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fraudulent claims and manually stop payment on each. Because it
delayed this automation, EDD likely allowed fraudulent claimants to
collect benefits through the first four months of the pandemic. For
example, we reviewed the reports from just two days each of April,
May, and June 2020 and found that these reports had identified more
than 1,000 claims as suspicious or potentially fraudulent on each of
these days. EDD asserted that two staff members were responsible for
reviewing these reports each day and stopping payment by initiating
the identity verification process for all current claims that this report
identified as suspicious. However, EDD’s reliance on this manual
process gave claimants the opportunity to collect UI benefits before
staff were able to stop payment on the claims. Given that these reports
can contain more than a thousand claims each day, EDD may have
allowed many more fraudulent claims to collect payments without
impediment before it automated this process.
EDD delayed responding to instances in
which an unusually high number of claims
under different names were filed from a
single address.
Additionally, EDD delayed responding to instances in which an
unusually high number of claims under different names were filed
from a single address, despite having substantial evidence that
fraudsters were using this approach to defraud the UI program
during the pandemic. According to EDD, multiple claims from the
same address, such as a vacant building or house, can be a sign that
fraudsters are trying to intercept or gather the mail associated with
this address. However, EDD did not identify suspicious addresses
associated with these claims until September 2020. Further, at that
time EDD performed two separate analyses of the suspicious address
issue, it took action on only a portion of the cases it identified. One
of its assessments identified 26,000 suspect addresses that were
associated with a total of more than 555,000 claims. However, EDD
stated that it did not stop payment on all of these claims because
it considered this list informational. Rather, it performed another
assessment to determine addresses that may have been associated
with fraudulent claims, which identified only 10,000 suspicious
addresses associated with 250,000 claims. Most of these
10,000 addresses also appeared on the larger informational list of
26,000 addresses. EDD asserted that it stopped payment on this
set of 250,000 claims and required these claimants to verify their
identities. The most egregious example from this analysis was a case
of more than 1,700 claims going to a single address.
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 11
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Figure 1
EDD Responded Slowly to Fraud Risks as Claims Surged
Six months and 7.4 million
claims later, EDD:
• Stops automatically “backdating” new
claims, or allowing them to receive
payments for previous weeks without
additional action.
Four months and more than
• Begins taking action on addresses with
UI claims begin to surge. 5.6 million claims later,
unusually high numbers of claims.
By the end of March, EDD had EDD automates its process to stop
received more than 2 million payment on certain suspicious • Asks Bank of America to freeze
claims since the start of 2020. claims. 344,000 suspicious accounts.
12,000,000
10,000,000
9,490,000
Cumulative Number of Initial Claims in 2020
8,000,000
7,700,000
6,000,000
4,000,000
2,000,000
2,040,000
0
March August
May June July
September
January February
April
October
Source: Analysis of EDD’s claims data and its fraud tools and modifications made during the pandemic.
It is almost certain that because of its lax approach, EDD missed
stopping payment on fraudulent claims during the pandemic. As
Figure 2 shows, we selected three addresses that appeared only
on EDD’s list of 26,000 addresses. In other words, EDD identified
claims from these three addresses as potentially fraudulent but did
not take any action to stop payments on claims from those addresses
(unblocked addresses). More than 80 UI claims were filed at one of
these unblocked addresses. Moreover, because EDD was unable to
verify the identities of claimants for more than 70 of those claims,
12 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
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it is likely that impostors used this address to file fraudulent claims.
However, EDD’s fraud detection tools failed to detect 12 of the more
than 80 claims as suspicious, allowing those 12 claims to remain
active. As of mid‑December 2020, EDD has paid more than $300,000
in UI benefits related to these 12 active claims. One of the other two
unblocked addresses that we reviewed, which had more than 20 claims
associated with it, raised similar concerns. Our review illustrates
that EDD continues to pay claims despite having evidence that they
are very likely fraudulent. After we shared our concerns with EDD,
it performed another analysis identifying more than 572,000 claims
at more than 30,000 addresses it identified as indicative of fraud.
Most of these 30,000 addresses were included on EDD’s larger
informational list of 26,000 addresses identified in September. EDD
asserted that it stopped payment on some of those fraudulent claims
in mid‑December. However, EDD still had not stopped payments on
the claims associated with two of the three unblocked addresses we
selected, including the address with 12 active claims. We made other
observations about EDD’s efforts to address problematic numbers of
claims at a single address and, to avoid publishing information that
could expose EDD to additional fraud, we shared those observations
with EDD’s management in a confidential letter.
Figure 2
EDD Has Not Stopped Payments on Claims at Addresses It Identified as Suspicious
EDD identified 26,000 addresses that it determined were linked to suspicious claims
but it only stopped payments to claims associated with 10,000 of these addresses…
We looked at three of the
unblocked addresses and
found one with…
More than more than
80
total claims...
12 of which
were still eligible to
$300K
had been paid to
receive payment and… claims at the address.
Source: Review of EDD’s analysis of suspicious addresses and claim information.
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 13
January 2021
EDD took another action that compounded the effect of its slow
and inadequate reaction to potential fraud. As part of its temporary
COVID‑19 procedures, EDD instructed staff to automatically
backdate new UI claims to the date the claimant said they became
unemployed. In other words, staff were told to enter an effective date
for a claim that could be weeks before the date the claimant actually
filed, allowing that individual to be paid benefits for those weeks. The
Department of Labor provided guidance instructing states to backdate
pandemic related claims to the week in which claimants first became
unemployed. According to EDD, it automatically backdated new
claims to comply with this guidance. EDD asserted that automatically
backdating claims reduced the manual workload that would have
otherwise been required to pay claimants. However, since early
September 2020, in response to suspected fraud in the PUA program,
EDD has required claimants to submit a separate request, aside
from their UI claim, to obtain backdated payment. Since EDD took
that action, claims for PUA have fallen considerably. Although we
cannot establish a direct link between EDD’s actions and the drop
in PUA claims, it is possible that by ceasing its practice of automatic
backdating, EDD has deterred fraudulent claims from occurring.
Since early September 2020, EDD has
required claimants to submit a separate
request, aside from their UI claim, to obtain
backdated payment.
A Key Process for Detecting Fraud Has Been Overwhelmed During
the Pandemic
Under normal circumstances, some of EDD’s benefit fraud detection
efforts might have allowed it to detect impostor fraud. Benefit fraud
can occur when individuals continue to receive benefits by failing to
report that they have returned to work. To detect such fraud, EDD
performs daily reviews using California employer data and weekly
reviews using nationwide employer data. Because these reviews use
SSNs to identify overlap between EDD’s benefit data and employer
databases, the reviews would detect when impostors filed claims using
the identities of people who were earning wages. When an overlap is
detected, EDD generates and mails documents to the employers of
the claimants whom the system detected as both continuing to work
and receiving UI benefits, asking for further information about the
claimant. EDD staff must then review the returned documents to
assess whether fraud has occurred and take appropriate action.
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However, during the pandemic, the amount of work generated by
these matches overwhelmed the unit responsible for performing these
reviews—the Benefit Overpayment Section within the UI Integrity
and Accounting Division. Between March and November 2020,
this process generated more than 840,000 matches, illustrating that
hundreds of thousands of claimants were either collecting UI benefits
while working or had had their identities stolen and impostors were
using those identities to collect benefits. These 840,000 reviews
generated during the pandemic were quadrupled from the number
generated for this section to complete in 2019. This process relies on
employers to provide details about whether an employee who matches
a claimant in EDD’s system is earning wages. EDD staff explained that
this process can enable EDD to learn about potential impostor fraud
because employers often notify EDD that the employees are continuing
to earn wages and have attested to the employer that they are not
collecting UI benefits. Complaint data we reviewed indicated that
employees tell their employer that they are not receiving UI benefits
after being questioned by their employer. However, because of the
significant increase in the number of reviews generated, as of the end
of November 2020, the section responsible for performing them had
completed only 113,000 of the 840,000 reviews generated during the
pandemic. This process is entirely paper‑based and, as of the end of
November 2020, the section was still processing documents received
in August 2020. Staff do not stop payment on these claims until they
process these documents, meaning that EDD has likely continued to
pay on these potentially fraudulent claims, despite having identified
them through this process. As a result of these workload challenges,
EDD has been unable to effectively leverage this practice of relying on
existing cross‑match reviews to quickly detect fraud.
…an employment data match process
generated more than 840,000 matches,
illustrating that hundreds of thousands
of claimants were either collecting UI
benefits while working or had had their
identities stolen…
EDD’s Slow Response Has Led to About $10.4 Billion in Payments to
Suspicious Claims
As of late‑December 2020, EDD had more than 2.2 million claims
submitted during the pandemic for which it could not confirm the
identity of the claimant—24 percent of the 9.5 million claims filed
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 15
January 2021
from the time the CARES Act became law in March. EDD issued at
least one benefit payment on about 597,000 of those claims before
identifying them as potentially fraudulent.3 In total, EDD paid about
$10.4 billion for these claims, as Figure 3 summarizes. Although
EDD explained that it is not able to confirm that all of these claims
are fraudulent—some of the claimants may have legitimate reasons
for ignoring EDD’s request for identity information—it does not
know how many are legitimate and how many are fraudulent. More
than 534,000 of the claims were paid UI benefits in excess of EDD’s
traditional dollar threshold for pursuing a criminal investigation
of an impostor. As we explain in the Introduction, EDD reported
that in 2019, its Investigation Division investigated only 14 cases
of UI impostor fraud representing more than $5.5 million paid in
fraudulent benefits. EDD’s Investigation Division told us that as of
December 10, 2020, it had opened more than 250 criminal cases
related to potentially fraudulent claims filed during the pandemic
and estimated an initial loss totaling greater than $30 million on
these cases. However, considering that EDD’s data show many more
potentially fraudulent claims and the difficulty of identifying the
perpetrators of the impostor fraud in 2020, it seems highly unlikely
that EDD will be able to investigate more than a small fraction of
these fraudulent claims, let alone recover a significant portion of
the lost funds.
We asked EDD for its perspective on the slow and reactive approach
that it took to combating fraud in 2020. EDD asserted that its
fraud tools effectively identified and stopped potentially fraudulent
claims throughout the pandemic and that it enhanced its existing
processes and tools as needed. However, an estimate of the total
UI benefit payments EDD prevented through these fraud prevention
tools demonstrates that EDD paid almost as much to suspicious
claims as it prevented. Using the number of claims associated with
individuals with unconfirmed identities to which EDD had not issued
payment and an estimated benefit amount based on Department
of Labor data for 2020, we estimated that EDD stopped about
$12.8 billion in payment to potentially fraudulent claims. Although
any amount of fraudulent payment that EDD stops is a benefit to the
UI program, a thorough analysis of the effectiveness of EDD’s fraud
prevention efforts needs to compare the amount of fraud prevented
to the amount paid to potentially fraudulent accounts. As we note
in the next paragraph, the total amount EDD paid to fraudulent
claims is likely to continue growing as it completes upcoming work,
further showing that EDD’s fraud prevention methods have not
been adequate to stop it from paying on fraudulent claims during
the pandemic.
3 This figure does not include approximately 10,000 additional claims for which EDD could not
verify the identity of the claimant but issued at least one payment, and for which the claimant
has appealed EDD’s determination that their identity was unverified.
16 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
Figure 3
EDD Paid About $10.4 Billion in Benefits to Claimants With Unconfirmed
Identities
A critical part of EDD’s fraud prevention
efforts is validating claimant identities.
ID
ID NOT CONFIRMED
CONFIRMED
EDD stopped payments from
going to 1.6 million claims on
which it could not identify the
claimant...
But it paid benefits
to almost 597,000
other such claims.
These payments totaled
$10.4 Billion.
Source: EDD data on payments and identity alerts, and Department of Labor estimated fraud rates
for UI programs.
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 17
January 2021
The $10.4 billion is likely not the full amount of improperly paid
benefits. As we describe earlier in this section, we observed
instances in which EDD continued to pay on suspicious claims
that its fraud detection methods had not yet identified. During our
audit, the number of claimants for which EDD could not confirm
identity grew. Further, EDD’s pending reviews of employment data
mean it is likely that more claims will be called into question. As
of early January 2021, EDD has requested identity information
from more than 1.2 million claimants to whom it has already paid
$19.5 billion in benefits. It is unlikely that EDD will verify the
identity for all of these claimants with pending identity issues.
Therefore, it is highly probable that EDD will ultimately determine
that it improperly paid significantly more than the $10.4 billion we
identify in this report as potentially fraudulent.
EDD Suspended a Critical Fraud Prevention Safeguard During the
Pandemic Because of Its Poor Planning
Early in the pandemic, EDD altered a critical fraud prevention
mechanism, resulting in it paying more than $1 billion of the
$10.4 billion in benefits we discuss in the previous section to
suspicious claimants. Figure 4 summarizes this problem. As we
describe in the Introduction, EDD stops payment on claims while
it verifies claimants’ identities, ensuring that it pays benefits only to
legitimate and verified claimants. However, early in the pandemic,
EDD decided to remove a key safeguard against paying claims
for which staff had identity concerns because of the mistaken
belief that other safeguards would stop payments on these claims.
However, because the EDD leadership who made these decisions
did not adequately understand how the stop payments worked,
EDD waived the barriers to payment for almost 77,000 claims
and paid more than $1 billion on claims that it has determined are
potentially fraudulent.
EDD explained that the early months of the pandemic presented
challenges in balancing prompt payments for claims against
its fraud prevention efforts. In the effort to respond to the
overwhelming volume of unemployment claims, EDD leadership
decided to identify and remove certain barriers to payment.
EDD management asserted that it removed these barriers to
streamline its processes. Nevertheless, this decision had significant
consequences: EDD incorrectly believed that other safeguards in its
claims processing system would stop all payments to claimants with
unconfirmed identities. As Figure 4 shows, this incorrect belief was
costly. We found that EDD continued to waive this payment barrier
into August 2020—meaning it was not until four months after its
decision to waive the barrier that EDD reversed its decision and
ceased the practice.
18 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
Figure 4
EDD Removed a Key Fraud Safeguard and Paid $1 Billion to Individuals With Unconfirmed Identities
ON HOLD
Normally, EDD applies
STOP PAYMENT ALERTS
to claims with potential identity
problems.
ID NOT
CONFIRMED
Early in the pandemic,
EDD removed these
PAY NOW
stop payment alerts.
EDD mistakenly believed
that other safeguards would
continue to stop payment on
these claims.
EDD paid $1 BILLION
ON HOLD to the unknown claimants
before eventually reinstating
the stop payment alerts in
August 2020.
Source: Analysis of EDD’s claims database and interviews with EDD staff.
The decision to waive this safeguard could have had even more
significant consequences. At the time EDD waived the safeguard,
it paid an additional 93,000 claims an additional $490 million
in benefits before knowing that the claimant identities were
confirmed. Although EDD eventually confirmed the identity of
these claimants, it did not have that assurance when it issued
these payments. Had EDD evaluated the risk of removing barriers
to payment, it may have determined the need to streamline other
processes in its system that would not have exposed it to so much
potential fraud.
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 19
January 2021
EDD paid $1 billion for almost 77,000 claims
that it determined may be fraudulent.
We found that the majority of claims with unconfirmed identities
for which EDD waived the payment safeguard had future payments
prevented by other safeguards. In fact, most of the 77,000 claims
received payments only for backdated benefit weeks. For example,
one claimant filed a claim on August 3, 2020, but reported having
become unemployed due to the pandemic on February 2, 2020—
26 weeks prior to filing the claim. EDD immediately stopped
payment on the claim on the same day it was filed. However,
when it waived the safeguard for this claim, its data show that it
paid benefits for the backdated weeks—totaling almost $22,000.
Secondary safeguards stopped any future payments on the claim.
Subsequently, EDD was unable to confirm this claimant’s identity
and disqualified the claim from any additional payments.
EDD could have avoided this misstep through more careful
planning and preparation. As we explain in more detail in our
earlier review of EDD, the department was unprepared for an
economic downturn.4 Its planning deficiencies extend to the area
of fraud prevention. As shown by the decision we describe above
to remove a claim payment safeguard, EDD leadership made a
critical misstep because it had an inadequate understanding of
its fraud prevention mechanisms—a gap in understanding that is
more easily discovered and dealt with when planning in advance of
a crisis moment. In addition to the key features of sound recession
planning that we identified in our previous report, EDD’s recession
planning must include descriptions of the available adjustments to
fraud prevention practices that EDD could make while continuing
to best mitigate risk. Identifying the types of tasks it determines
it is able to stop or delay during a recession while maintaining
acceptable fraud detection and prevention efforts would minimize
the need for less informed steps like the decision we describe above.
In the Near Future, EDD Will Likely Need to Dedicate Considerable
Resources to Assisting Victims of Identity Theft
EDD will likely face a significant workload in the future to support
the many individuals whose identities were stolen by impostors who
filed fraudulent claims during the pandemic. Between March 2020
4 EDD’s Poor Planning and Ineffective Management Left It Unprepared to Assist Californians
Unemployed by COVID‑19 Shutdowns, Report 2020‑128 / 2020‑628.1, January 2021.
20 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
and early January 2021, more than 2.2 million claimants did not
satisfactorily answer EDD’s request that they provide identity
documentation. According to EDD, fraudsters are often not able to
provide documents to confirm identity; therefore, EDD considers
claims that are disqualified due to nonresponse as evidence that
it has effectively deterred fraud. Although not every one of these
2.2 million claims made it far enough in the process to be paid,
EDD’s data indicate that it paid benefits totaling about $10.4 billion
on almost 597,000 of these claims, suggesting that these individuals
may have obtained benefits fraudulently. However, these are only
the cases EDD has identified; the actual number of claims filed
with other people’s personal information may be higher because
people who have not yet learned that they were victims of identity
theft have not yet reported it to EDD. Further, we do not believe
that EDD’s fraud detection tools have yet detected every fraudulent
claim filed during the pandemic.
When EDD pays benefits on claims involving stolen identities,
the victims of that identity theft may be asked to pay taxes on the
benefits or to pay back the benefits. A victim’s interactions with
EDD to resolve the theft will depend upon the circumstances under
which the fraud is discovered, as we show in Figure 5. For example,
victims of identity theft may not know they are victims until they
receive a tax form notifying them to report income from benefits,
are contacted by EDD, or try to collect UI benefits themselves. In
each of these cases, the work EDD will need to perform to assist
these identity theft victims represents a potentially significant
increase in its workload.
EDD’s main process for addressing complaints of identity theft has
been overwhelmed during the pandemic. If individuals discover
that their identity has been used to file a fraudulent claim with EDD,
they can notify EDD through its online fraud reporting portal or
through its telephone hotline. EDD’s data show that by July 1, 2020,
EDD was receiving hundreds of these reports each day, growing to
consistently receiving more than 1,000 a day in September 2020
and peaking at more than 1,800 reports on a single day that month.
By comparison, EDD only received 6,000 UI fraud reports in all of
calendar year 2019. EDD has dedicated only a single staff position
to receive and assess these reports, and that position became vacant
in July 2020. As a result, from April through October 2020, EDD
responded to less than 2 percent of the UI fraud reports it received
through its online portal. Further, it had yet to address more than
77,000 fraud reports as of November 2020. Many of these reports
likely involve victims of identity theft who will need EDD’s help to
resolve their situations.
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 21
January 2021
Figure 5
EDD Will Likely Need to Assist Victims of Identity Theft in Several Ways
TAXES DUE REPAYMENT DEMANDED CLAIM COMPLICATIONS
Victims may be asked to pay EDD may request money back Victims may attempt to collect
taxes on benefits they did not from victims that the victims benefits on their own UI claims and
receive or request. did not receive. realize fraudulent
claims exist.
EDD would need to EDD would need to perform EDD would need to perform a
determine the legitimacy a manual identity verification manual identity verification
of a complaint and process to remove any process, stop payment on the
coordinate with the IRS. repayment. fraudulent claim, and assign the
claim a unique identifier that
indicates it was fraudulent.
Source: Analysis of EDD’s data, workload, and fraudulent claims processes.
To successfully resolve each case of suspected identity theft,
EDD must first investigate the complaint to determine whether
it can substantiate that identity theft has likely occurred. Once it
completes that analysis, EDD can perform the work necessary to
clear the reported income from the victim’s name. According to
data EDD provided, as of mid‑December 2020, it had performed
this work for about 21,000 victims of identity theft for claims that
had been filed from March through November 2020. This process
will prevent the victims of identity theft from receiving incorrect
tax forms. However, if EDD did not complete this process for an
identity theft victim before reporting income to the IRS—a likely
outcome given the volume of potentially fraudulent claims and the
number of outstanding fraud reports that EDD has received but
not yet addressed—the victims will need to contact EDD to resolve
their cases. EDD will need to respond to fraud reports as identity
theft victims submit them. EDD anticipates these submissions will
represent a large workload in the future.
EDD could be better situated if it modified its existing practices to
handle this upcoming work. Specifically, instead of continuing
to receive complaints of identity theft through its regular fraud
report mechanisms, EDD would provide faster and better service
to identity theft victims by setting up a dedicated communication
channel for those individuals. Further, to better understand the level
of work it needs to accomplish, EDD should establish a working
group specifically to coordinate the work needed to resolve each
complaint of identity theft and make decisions about staffing levels
necessary to accomplish that work. Without a concentrated focus,
22 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
EDD risks unnecessarily delaying assistance to victims of identity
theft, who will remain in precarious tax situations until EDD
completes its work.
Recommendations
To ensure that its recession planning encompasses its fraud
prevention efforts, EDD should identify the fraud prevention and
detection efforts it can adjust during periods of high demand
for UI benefits. It should ensure that it accounts for all probable
consequences of the adjustments and design procedures that
appropriately balance the need to provide prompt payment during a
recession with the need to guard against fraud in the UI program.
To prepare to respond to victims of identity theft who receive
incorrect tax forms, EDD should, by mid‑February 2021, provide
information on its website and set up a separate email box for such
individuals to contact EDD and receive prompt resolution.
To ensure that it provides appropriate assistance to victims of
identity theft who report fraud through its online fraud reporting
portal, EDD should, by March 2021, establish a working group to
coordinate the work needed to resolve each complaint of identity
theft, make decisions about staffing levels necessary, and add
staffing to accomplish the work.
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 23
January 2021
EDD’s Lack of Preparation Left it Unable to Effectively
Address Two High‑Profile Situations
Key Points
• In September 2020, EDD directed Bank of America to freeze 344,000 debit
cards (accounts) because of concerns about UI fraud. Since then, EDD has
not acknowledged its responsibility for this action, and it did not have a plan
or take action to ensure that it could unfreeze those accounts belonging to
legitimate claimants.
• EDD left itself especially vulnerable to UI fraud associated with incarcerated
individuals—which it estimates has reached about $810 million—because it has not
had a system to regularly cross‑match UI claims with information from state and local
correctional facilities.
When EDD Directed the Freezing of Accounts for 344,000 Claims, It Did Not Take Sufficient
Action to Help Legitimate Claimants
EDD’s reactive response to its discovery of potentially fraudulent activity appears to have
harmed legitimate claimants. Bank of America—the State’s vendor for distributing UI
benefit payments—identified more than 309,000 of its UI accounts that it believed to be
fraudulent and notified EDD of its plans to freeze—or shut down to prevent cardholders
from accessing the funds—these accounts in mid to late September 2020. EDD reviewed the
accounts the bank identified and confirmed that Bank of America should freeze 271,000 of
the accounts. EDD also directed Bank of America to freeze another set of 73,000 accounts
that Bank of America had not identified as accounts it planned to freeze. Therefore, in late
September 2020, EDD directed Bank of America to freeze about 344,000 benefit accounts,
which Bank of America did, effectively stopping anyone in possession of the debit cards
aligned with these accounts from spending the benefit payments deposited into them. Bank
of America froze 53,000 additional benefit accounts in the same week because the accounts
exhibited certain fraud indicators established by Bank of America. However, because those
fraud indicators differed from EDD’s fraud criteria, Bank of America quickly unfroze the
majority of these accounts in early October 2020 in an effort to align its fraud efforts with
EDD’s. Figure 6 summarizes key exchanges between EDD and Bank of America.
Several elements of EDD’s role in these events are troubling. First, EDD did not initiate the
request to freeze these potentially fraudulent accounts on its own, indicating that its fraud
detection and prevention methods were not functioning optimally. Second, EDD mishandled
the aftermath of this incident. Following public outcry in early October 2020 from legitimate
claimants who could not access their benefits, EDD requested that Bank of America
unfreeze all 344,000 accounts it had originally directed the bank to freeze—including the
73,000 claims it had independently identified as potentially fraudulent. In effect, EDD’s
response was to permit potentially fraudulent activity to continue to ensure that legitimate
claimants received their benefits. However, it had no analysis supporting its decision to make
such a swift change to its previous direction. In the end, Bank of America disregarded EDD’s
24 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
request to unfreeze the accounts. In a subsequent letter to the
Legislature, Bank of America cited its obligation to prevent fraud
under federal law as its reason for freezing accounts without EDD’s
approval. This series of events reveals flaws in EDD’s response
to fraud: it erred in its initial analysis and request that Bank of
America freeze the 344,000 accounts, and it reacted poorly once it
realized that accounts of legitimate claimants had been frozen.
Figure 6
EDD and Bank of America Have Repeatedly Corresponded About Fraudulent
Accounts
9/18
Bank of America sends EDD a list of more than 309,000 accounts
that it believes are fraudulent.
9/23-25
EDD directs Bank of America to freeze 344,000 accounts, which
Bank of America does.
9/29-10/1
Bank of America freezes 53,000 additional accounts demonstrating
indications of fraud, in addition to those on EDD’s list.
10/3
EDD's director issues a memo to Bank of America directing it to
unfreeze the accounts that do not meet EDD's fraud criteria.
10/4
Bank of America only unfreezes 51,000 of the accounts that it
originally froze.
10/5
EDD requests that Bank of America unfreeze the 344,000 frozen
accounts it directed the bank to freeze.
2020 10/31
EDD sends a list of 2,270 verified accounts to
Bank of America to unfreeze.
11/3
Bank of America sends EDD a list of 104,000 suspicious accounts
to review.
11/17
EDD sends another list of 2,280 verified accounts to
Bank of America to unfreeze.
12/2
EDD sends another list of 3,000 verified accounts to
Bank of America to unfreeze.
12/7
Bank of America notifies the Legislature that it has identified
more than 640,000 potentially fraudulent accounts.
12/10
EDD informs Bank of America that it already stopped payment on
99,000 accounts of the 104,000 suspicious accounts that
Bank of America sent in November.
Source: Analysis of EDD’s correspondence records with Bank of America and public documents.
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 25
January 2021
In addition, EDD’s lack of transparency throughout
this exchange damages the public’s trust in its EDD’s Director Did Not Acknowledge EDD’s Role
statements. When it became apparent that legitimate in Freezing 344,000 Accounts
claimants had been included in the listing of frozen Assemblymember: I know my district office has continued
accounts—leading to media reports of people being to receive several constituent calls more recently regarding
unable to pay their bills or feed their families—EDD the Bank of America cards that have been suddenly frozen.
was slow to provide information. In fact, we found Can you give us a sense as to why are they being frozen? And
no public statements that acknowledged that EDD whose accounts are being frozen? Is that something that the
had directed the freezing of the 344,000 accounts. department directed them to do or is this something that the
About a week after EDD directed Bank of America bank is doing?
to freeze those accounts, the director of EDD EDD Director: This is part of the Bank of America’s fraud
testified to the Legislature that EDD and Bank of protection services, I guess. And that’s what I mentioned, that
America were coordinating “additional review” of B of A and our—EDD and Labor Agency—we’re meeting this
more than 350,000 suspicious claims. As the text box afternoon to walk through exactly what was going on, what
shows, when one assemblymember asked the makes sense. And look at that balance again between paying
director who froze the accounts, the director did not claims versus fighting fraud. So we’re aggressively taking a
describe EDD’s responsibility and identified Bank of look at that.
America as the responsible party. A letter from Source: Director’s testimony at a hearing of the Assembly
59 members of the Legislature in November 2020 to Budget Subcommittee on State Administration on
October 7, 2020.
the chief executive officer of Bank of America shows
that the Legislature believed that EDD had far less of
a role in freezing accounts than it actually did. The
letter indicates that EDD informed the Legislature that frozen
accounts were solely the result of Bank of America’s efforts. Although
it is true that Bank of America froze some accounts without direction
from EDD, the department played a significant role in directing that
344,000 accounts be frozen.
Subsequent coordination between EDD and Bank of America
about potentially fraudulent accounts has also been problematic.
First, EDD has been slow to respond to another list of questionable
accounts that the bank identified. In early November 2020 Bank
of America sent EDD a list of more than 104,000 accounts that it
identified as suspicious and requested guidance from EDD about
what to do with the accounts. EDD delayed providing direction to
Bank of America until one month later, risking that some fraudulent
claimants would continue to collect benefits while EDD performed
its analysis on those accounts. Further, when it did respond, EDD
informed Bank of America that it had already stopped payment
to more than 99,000 of the accounts, but failed to provide explicit
instructions to Bank of America as to whether it should freeze
those accounts. Therefore, EDD did not direct the bank to protect
the money that it had already deposited into those accounts.
Moreover, EDD neglected to mention what it had determined—
if anything—about the remaining 5,000 accounts that Bank of
America originally provided for review. EDD explained to us that it
was still verifying the identities of the majority of these claimants as
of December 10, 2020.
26 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
Still more problematic have been difficulties that EDD and Bank of
America have had in agreeing how to unfreeze accounts that belong
to legitimate claimants. One complicating factor has been that,
during our review, EDD did not know which accounts were frozen
or needed to be unfrozen. In fact, EDD confirmed that it does not
have a centralized process for tracking and monitoring these frozen
accounts, making it unclear how many accounts in total were
frozen. Therefore, it does not have a systematic way to ensure that
it reviews all frozen accounts to determine whether the accounts
should be unfrozen and returned to legitimate claimants. Without
such a process, any attempt that EDD makes to address the problem
of legitimate claimants with frozen accounts may be incomplete and
potentially flawed. Further, Bank of America has required EDD to
individually verify the identities of the claimants associated with the
344,000 frozen accounts that EDD identified before it will unfreeze
the accounts. An external consultant determined that 72,000 of
the 344,000 frozen accounts were at low risk of being fraudulent
claimants; however, EDD will need to manually verify these claims
as legitimate before Bank of America will unfreeze those accounts.
As of December 10, 2020, EDD had verified the identities of only
about 7,500 affected claimants. Although EDD may find that it
disqualifies some of these claimants—potentially from both the
low‑risk group of 72,000 accounts and the remaining population of
the original 344,000 frozen accounts—for failing to respond to its
requests for identity documentation, there will likely be a significant
number still to be addressed. Therefore, it will be important for
EDD to explore using ID.me or another type of expedited identity
verification to avoid prolonging the process by which it resolves
frozen benefit accounts that belong to legitimate claimants.
When we presented EDD with our concerns about its interactions
with Bank of America, EDD explained that it was concerned about
correspondence it had received from the bank that predated the
September freezing of 344,000 accounts. EDD cited examples of
Bank of America contacting EDD with eight lists of problematic
accounts from mid‑July through mid‑September 2020. However,
our review shows that EDD also handled some of these cases
poorly. Specifically, Bank of America shared a list of almost 66,000
potentially fraudulent accounts with EDD in mid‑July 2020 and
requested EDD’s review of these accounts. However, EDD was
unable to provide any correspondence that demonstrated it
ever answered Bank of America’s request. In August 2020, Bank
of America notified EDD that it was freezing approximately
5,700 accounts due to fraudulent activity. Records show that EDD
knew about those frozen accounts and no record we reviewed
shows that EDD expressed concern that the bank had frozen
the accounts without first consulting the department. In early
September 2020, Bank of America again sent EDD a list of more
than 150,000 accounts that the bank identified as having suspicious
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 27
January 2021
activity, requesting EDD to review the accounts and determine if
any are fraudulent and should be frozen by Bank of America. Again,
EDD was unable to provide any correspondence that demonstrated
that it ever answered Bank of America’s request. These earlier
requests are evidence of yet another warning about potential fraud
that EDD does not appear to have comprehensively addressed.
EDD Was Unprepared to Detect and Handle the Hundreds of Millions
of Dollars in Fraudulent Claims Associated With Incarcerated
Individuals
As we show in Figure 7, EDD left itself especially vulnerable to fraud
associated with incarcerated individuals—which law enforcement
officials have said has totaled hundreds of millions of dollars in
fraudulent payments during the pandemic. In late November 2020,
nine county district attorneys signed a letter announcing that the
Department of Labor identified roughly 35,000 unemployment
claims filed from March 2020 through August 2020 using data
that matched individuals incarcerated in state prisons against UI
information. According to November 2020 correspondence from
the deputy secretary of communications at the California Labor
and Workforce Development Agency, 21,000 of these claims
received payments that totaled $400 million. EDD later
estimated that between January 2020 and November 2020, it paid
about $810 million in benefits to roughly 45,000 claimants with
information that matched incarcerated individuals, based on both
state prison data and a December 2020 analysis by a private vendor
that used data from state and local correctional facilities across the
country. EDD noted that most of the problematic claims were for
PUA; as we note in the Introduction, the CARES Act relaxed some
requirements for receiving these benefits, such as extending the
benefits to individuals who had been self‑employed and therefore
would not have had a third‑party employer to report their wages.
EDD was unprepared to guard against inmate fraud in this program
because it lacked a system to cross‑match all incoming claims
against incarceration data.
EDD estimated it paid $810 million in
benefits to 45,000 claimants who were
incarcerated.
28 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
January 2021
Figure 7
Because It Delayed Obtaining Critical Information, EDD Was Unprepared for UI Fraud by Incarcerated Individuals
2016
November A national survey shows that UI administrators in 35 states cross-match claims against
incarceration data.
2018
June EDD notifies the Legislature that it is considering adopting a cross-match against
incarceration data.
2019
June EDD again notifies the Legislature that it is considering adopting a cross-match
against incarceration data.
2020
April EDD begins receiving PUA claims.
June EDD again notifies the Legislature that it is considering adopting a cross-match
against incarceration data.
July PUA claims begin to spike. EDD’s criminal investigators communicate with local law
enforcement about specific cases of UI fraud related to incarcerated individuals.
August EDD reaches out to CDCR to request information that would allow it to cross-match
data on incarcerated individuals against claim data.
October EDD develops a contract with a private vendor that claims it can provide
access to incarceration records, such as data from local jails.
November Nine county district attorneys sign a letter announcing UI fraud involving tens of
thousands of inmates and hundreds of millions of dollars.
December EDD and CDCR sign a data sharing agreement for CDCR to provide EDD with data
on individuals incarcerated in state prisons.
2021
January Based on data from CDCR and the private vendor, EDD estimates it paid about
$810 million in claims associated with incarcerated individuals.
Source: Emails from and interviews with staff at EDD, EDD claims data and vendor analysis, EDD’s annual fraud reports to the Legislature, a letter from
nine district attorneys, EDD’s data sharing agreement and contract information, and a national survey of state unemployment programs.
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EDD’s failure to institute this type of cross‑match is of special
concern given the wide use of this approach throughout the rest
of the country. According to a 2016 report on the results of a
survey from the National Association of State Workforce Agencies,
35 states were cross‑matching unemployment claims with state
prison data and 28 states were cross‑matching claims with county
jail data at that time. For example, Washington state’s Employment
Security Department reported in December 2016 that it was
cross‑matching electronic jail records against its database of
unemployment benefits three times per week and that it was
examining the feasibility of creating a more robust cross‑match
using real‑time data. In that report, Washington’s department
noted that since it had begun cross‑matching these records, from
March 2015 through July 2016 it denied benefits on nearly 1,500
such cases and recovered almost $250,000 in related overpayments.
Given the prevalence and usefulness of the incarceration data
cross‑match, it is troubling that EDD failed to implement this
fraud prevention tool previously. According to EDD’s annual
report to the Legislature on fraud deterrence from June 2020, it
already had processes to cross‑match its records against other
types of data, such as a monthly cross‑match with mortality data
and a real‑time verification of claimants’ SSNs with the Social
Security Administration. By contrast, the report noted that
EDD was “considering” new options for sharing data, such as
incarceration data, with government agencies—language that it
had also included in its 2018 and 2019 reports. However, according
to the chief of EDD’s Investigation Division, since starting his
position in April 2016 and until recent conversations on this
topic in 2020, he was not part of or aware of discussions with the
California Department of Corrections and Rehabilitation (CDCR)
about sharing state prison data to cross‑match against UI claims.
During the pandemic, when EDD became aware that this gap in
its safeguards was allowing a substantial amount of fraud to occur,
EDD spent months negotiating access to CDCR’s state prison
data after an EDD investigator initially reached out to CDCR
in August 2020 about sharing information to identify potential
fraud. CDCR originally took a stance that, except in limited
circumstances, it was prohibited from providing the information
to EDD, but it indicated that the Attorney General authorized it to
provide the inmate information to EDD in early December 2020.
Since it became apparent during the pandemic that its failure
to cross‑match claims against incarceration data was allowing
illegitimate benefits payments, EDD has pursued two solutions
to address this gap in its fraud prevention efforts. First, according
to EDD’s chief information officer, EDD has recently expanded
its cross‑checking capabilities through a private vendor to
cross‑reference inmate data from prisons and jails in multiple states.
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This vendor provided the December 2020 analysis that contributed
to EDD concluding that it had paid about $810 million in benefits
associated with incarcerated individuals. A contract between EDD and
this vendor with a term of October 2020 through June 2021 includes
access to what the vendor calls “real‑time incarceration and arrest
records.” An EDD IT Branch staff member confirmed that, although
the vendor’s analysis for EDD has largely been retrospective, EDD is
considering using the vendor in the future to perform more timely
checks of new incoming claims against incarceration records. The
chief information officer noted that she had not been in her position
before May 2020 and, therefore, could not speak to why EDD had not
pursued this option before the pandemic. Second, in early December
2020, EDD and CDCR established a data sharing agreement for
CDCR to provide inmate data to EDD’s investigators at least monthly
for two years. State law authorizes the Office of the Attorney General
(Attorney General) to share criminal offender information with EDD
when there is a compelling need and allows CDCR to provide this
information on the Attorney General’s behalf.
Despite these new efforts, the Legislature should take action to help
ensure that the State prevents future fraud by inmates. Although EDD
has established a data sharing agreement with CDCR and a contract
with a private vendor that likely will provide additional local data,
such as from county jails, the CDCR partnership is dependent on the
Attorney General determining that EDD has a compelling need for
the information. Because of EDD’s fraud prevention deficiencies that
we discuss here and elsewhere in this report, and because EDD must
rely on other entities such as CDCR to provide inmate data, legislative
action is necessary to ensure that EDD can regularly access and use
data from state and local correctional facilities to prevent future
fraud. A mandate to share information and use that information to
check incoming UI claims for potential fraud related to incarcerated
individuals would address what has been a longstanding gap in EDD’s
fraud prevention approach that allowed significant fraud to occur
during the pandemic.
Recommendations
Legislature
To ensure that EDD prevents fraud associated with incarcerated
individuals, the Legislature should amend state law to do the
following:
• Require EDD to regularly cross‑match UI benefit claims against
information about individuals incarcerated in state prisons and
county jails to ensure that it does not issue payments to people
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who are ineligible for benefits. The Legislature should specify
that EDD perform the cross‑matches as quickly as possible after
individuals file claims and with as little disruption of legal and
eligible claims as possible.
• Require CDCR and any other necessary state or local
government entities to securely share information about
incarcerated individuals with EDD to enable EDD to
prevent fraud.
• Require EDD to include, in its annual report to the Legislature
about fraud, an assessment of the effectiveness of its system of
cross‑matching claims against information about incarcerated
individuals. The assessment should include how regularly EDD
performs the cross‑matches, how successful the cross‑matches
are in detecting and preventing fraud, and whether the
cross‑matches negatively affect eligible claimants attempting to
legally obtain benefits.
EDD
To ensure that it provides legitimate claimants with benefits but
does not pay benefits related to fraudulent claims, EDD should
immediately obtain from Bank of America a comprehensive list
of claimants’ accounts that are frozen. EDD should immediately
thereafter evaluate the list—including considering using ID.me to
verify claimants’ identities—to identify accounts that should be
unfrozen. By March 2021, it should direct Bank of America to take
action to freeze or unfreeze accounts as appropriate.
To ensure that it reviews each account that Bank of America reports
to it as suspicious or potentially fraudulent, by February 2021, EDD
should establish a centralized tracking tool that allows it to review
and stop payment on claims, as appropriate. EDD should use this
tool to monitor its own internal decisions and track whether the
claimant responds to its requests for identity information and
should, therefore, have their account unfrozen.
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EDD Has Relied on Uninformed and Disjointed
Techniques to Prevent Impostor Fraud
Key Points
• EDD’s disjointed approach to fraud prevention has placed its UI program at a higher risk
for fraudulent activity. It has not established a centralized unit to manage its fraud detection
efforts, and it does not reliably track suspicious claims to ensure that it is taking appropriate
action to resolve any issues, including those that suggest fraud has occurred.
• Best practices for fraud prevention suggest that government agencies should have
a dedicated unit to mitigate the risk of fraud. Until EDD designates such a unit and
develops a comprehensive approach to preventing and detecting fraud, it is at a greater
risk for paying benefits on fraudulent claims.
• EDD does not measure or monitor any of its fraud prevention or detection tools to
determine how effectively each one detects fraud. As a result, it may be using ineffective
fraud prevention and detection techniques that fail to prevent fraudulent payments or
delay payments to legitimate claimants.
EDD’s Approach to Fraud Prevention Is Disjointed and Ineffective
In nonrecessionary years, EDD is responsible for the oversight and administration of a UI program
that pays more than $5 billion annually in benefits to Californians who qualify for assistance. An
essential element of effective management of such a program is prevention of attempts to receive
benefits fraudulently. Not only is maintaining the integrity of the UI program a federal expectation,
it is critical to ensuring that it provides assistance only to those who genuinely need it rather than
those who misrepresent themselves to obtain money illegally. Given the importance of fraud
prevention, we expected that EDD would have a cohesive and centrally managed fraud prevention
effort, that it would track potential fraudulent activity from detection to resolution, and that it
would ensure coordination between the fraud prevention and detection initiatives it uses. Because
these practices are lacking, EDD’s UI program is at a higher risk for fraud.5
EDD has not assigned responsibility to any single departmental unit for ensuring that its fraud
detection efforts operate as intended, contributing to its disjointed approach to stopping fraud. As
we note in the Introduction, many different divisions and offices have roles related to detecting
fraud. These individual EDD units forward reports or allegations of fraud to one another and—
in the process—do not remain involved in the resolution of the allegations. Figure 8 shows key
units within EDD and the independent responsibilities they have related to fraud. As the figure
shows, EDD’s fraud detection approach is highly dependent on a variety of units all coordinating
effectively with one another. Separation of responsibilities may be an appropriate way for EDD
to divide its labor. However, that separation also increases the risk that units will not coordinate
5 Federal law requires EDD to perform regular audits of randomly selected claims in an effort to determine its improper payment rate. Those
audits also identify the causes for EDD’s improper payments. However, those efforts differ from a focused attention on individual claims and
are, therefore, only part of the solution to preventing fraud in the UI program.
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effectively with one another. For example, EDD has assigned primary
responsibility for receiving and reviewing fraud allegations to the
Criminal Intelligence Unit within its Investigation Division. However, the
chief of the Investigation Division stated that the Criminal Intelligence
Unit cannot stop payment on claims that it identifies as suspicious. It
must refer any potentially fraudulent claims to other units or divisions for
further investigation or administrative action. This delay may allow EDD
to continue paying UI benefits on fraudulent claims, even after EDD staff
have identified them.
We observed that a key mechanism EDD’s units use to communicate
about potentially fraudulent claims is dedicated email accounts that
are managed by multiple staff. Referral and tracking of potential fraud
by email increases the risk that EDD will mishandle a fraud report. For
example, the Criminal Intelligence Unit’s hotline operator monitors
and receives reports of fraud from the public. If the hotline operator
finds that an allegation has merit, the operator forwards the report to
a dedicated email address for the UI Integrity and Legislation Unit.
The UI Integrity and Legislation Unit reviews the claim associated
with the fraud report and then passes the fraud report to the UI
Identity Verification and Technical Support Section for further work.
We attempted to follow two fraud reports that the hotline operator
emailed to the UI Integrity and Legislation Unit in April and July 2020
to determine what action the unit took. In neither case could the UI
Integrity and Legislation Unit locate the original emailed referral from
the hotline operator, and the unit could only demonstrate that it had
reviewed one of the two fraud reports. These examples demonstrate the
gaps in the way EDD manages reports of potential fraud.
Referral and tracking of potential fraud
by email increases the risk that EDD will
mishandle a fraud report.
In another example, EDD has not coordinated its identity verification
efforts, leading to duplicated effort with no discernible benefit. Since
its implementation in October 2020, EDD has touted ID.me—an
identity verification program that we describe in the Introduction—
as one of its primary methods for preventing identity thieves from
filing false claims. However, EDD confirmed that it continues to
implement fraud detection tools that require claimants to verify
their identities even after successfully completing ID.me verification,
essentially requiring claimants to verify their identities twice.
During a single day in November 2020, for instance, one of its other
fraud detection tools flagged 352 claims for identity verification.
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Figure 8
EDD Has Convoluted Its Fraud Prevention and Detection Approach by Spreading Key Efforts Among Its Different Units
INVESTIGATION DIVISION
CRIMINAL INTELLIGENCE UNIT ENFORCEMENT OPERATIONS UNIT
Reviews reports of fraud from EDD’s online Investigates allegations of fraud to pursue
fraud reporting tool. Determines whether to: criminal charges against impostors. May
1. Close the report without further action. request that the Integrity and Legislation Unit
mark claims as suspicious in database.
2. Forward to Enforcement Operations Unit.
3. Route to the Integrity and Legislation Unit Also, the Investigation Division may inform the
for administrative action. Benefit Claims Section when it identifies
impostor claims.
UI Support Division UI Integrity and Accounting Division
INTEGRITY AND LEGISLATION UNIT IDENTITY VERIFICATION AND
TECHNICAL SUPPORT SECTION
Reviews reports of potential fraud
Reviews identity documentation from
UNEMPLOYMENT INSURANCE BRANCH
forwarded by the Criminal Intelligence
potentially fraudulent claimants to resolve
Unit and by field offices and forwards
whether it can establish their identity.
those reports for identity verification.
Assesses whether an impostor filed a
Assesses whether an impostor filed a
claim; reports to Benefit Claims Section.
claim; reports to Benefit Claims Section.
UI FIELD OFFICES BENEFIT CLAIMS SECTION
Generally monitor for suspicious activity Assigns new unique identifiers to
and forward weekly reports of those claims that other units have
potentially fraudulent claims to the reported to it as likely fraudulent. This
Integrity and Legislation Unit. Staff may process also removes the claim from
stop payment on claims and require the the compromised SSN that the
claimants to provide identity information impostor used to file the claim in order
for the Identity Verification Unit to to protect the true owner of the SSN.
review.
Source: Review of EDD’s organizational chart, EDD’s policy and procedure documents, and interviews with EDD staff.
36 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
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When we asked EDD why it continued to require secondary identity
verification even after implementing ID.me, staff asserted that ID.me
may have verified an individual’s identity, but that individual may
have exhibited indicators of fraud that ID.me was not designed to
detect. However, as of mid‑November 2020, EDD stated that it had
not performed any analyses to determine whether this secondary
verification step detects fraud that ID.me missed. Further, this
secondary verification tool initially requires claimants to provide
identity information similar to what they used for ID.me before EDD
then further evaluates their eligibility. As such, EDD’s secondary tool
may delay payments to legitimate claimants by requiring them to
verify their identities twice.
During our review, EDD asserted that it was taking steps to improve
coordination between the different units that take action to prevent
and detect fraud. In mid‑November 2020, EDD hired a new deputy
director to oversee its Policy, Accountability, and Compliance Branch.
This deputy director has been tasked with establishing a fraud working
group across the department. However, as of December 30, 2020, this
group had not yet held its initial meeting or fully formed a charter
to define its purpose. Because best practices for fraud prevention
and detection suggest that government agencies should have a
dedicated unit to identify fraud risk and determine the activities that
the agency will engage in to mitigate that risk, we have concerns that
EDD’s approach does not seem headed in this direction. The U.S.
Government Accountability Office (GAO) recommends that fraud
prevention units have sufficient authority, be the central repository
for knowledge about the agency’s fraud prevention activities, and be
the central coordinator of those activities. EDD’s new working group
may be an improvement to its current approach to preventing fraud,
but it would be an even greater improvement for EDD to centralize
fraud prevention into a single unit with proper authority to adopt and
manage a fraud prevention strategy. Although the scope of our review
was limited to fraud prevention practices within the UI program, it
would be consistent with GAO guidance and efficient use of resources
for EDD to centralize its fraud mitigation efforts in one unit for all of
its major programs.
EDD Has Not Determined the Effectiveness of Its Fraud Prevention and
Detection Methods
Although EDD employs a variety of tools to prevent and detect
potential fraud—such as matching claims against employment
records and death records—it has not conducted any analysis of the
effectiveness of these tools to determine how well they detect fraud.
State law requires EDD’s director to periodically review its policies
and practices to identify, in part, those that provide little or no value
in preventing fraud or abuse in the UI program. However, EDD could
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not demonstrate that it had performed any such reviews since it
reported the results of its first review to the Legislature in 2015. State
law also requires EDD to report to the Legislature annually on its
fraud detection and deterrence efforts, which it has done. Because
of these two requirements, we expected that EDD would measure
the effectiveness of each of its fraud prevention and detection
tools to ensure that it is balancing its need to provide prompt
payments to legitimate claimants with its need to prevent fraudulent
payments. Although EDD annually reports on its fraud detection
and deterrence efforts to the Legislature, it has not determined how
reliably its tools and methods actually detect fraud. EDD’s lack of
a single unit with the authority to oversee its fraud prevention and
detection activities may be one of the reasons that no one at EDD
has measured or assessed these tools’ effectiveness.
Understanding the effectiveness of its fraud detection tools is
paramount to EDD’s success at balancing timely payment of benefits
with reduced risk of fraud. For example, if EDD knew that most
of the claims one tool flagged were indeed fraudulent, it would be
reasonable for EDD to continue to rely on that tool. However, if
another tool flagged many potentially fraudulent claims that turned
out to be legitimate, it would be advisable to alter or remove it since
the tool would delay payments to real claimants without detecting
actual fraud as well as perhaps wasting valuable EDD resources.
No one at EDD has measured or assessed
its fraud detection and prevention tools’
effectiveness.
EDD’s chief information officer asserted that EDD has collaborated
with other departments, such as the California Department of
Technology, to assess the effectiveness of EDD’s fraud prevention
efforts. However, EDD was unable to provide any evidence of such
an analysis or of any efforts to comprehensively understand the
effectiveness of EDD’s fraud prevention and detection efforts. Such
an analysis is critical to informing and continuously improving
EDD’s approach. By evaluating outcomes of UI claims it identifies
as having increased fraud risk, as well as identifying claims it did
not flag as suspicious but later learned to be fraudulent, EDD can
assess the frequency with which individual fraud detection efforts
are successful. This will allow the department to update its fraud
prevention strategy to prioritize the tools and techniques that prove
most effective at stopping fraud and reduce or eliminate those that
cause claimants unnecessary delays and yield little benefit.
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EDD recently received additional federal funding to bolster its fraud
prevention and detection efforts. In September 2020, the Department
of Labor awarded EDD $2.4 million in grant funding to prevent and
detect fraud in the UI programs implemented in response to the
pandemic. Guidance associated with the grant provides examples of
uses for these funds, including data mining and analysis. The guidance
also suggests the use of the National Association of State Workforce
Agencies’ Integrity Data Hub, a centralized, multistate data system that
allows states to perform cross‑matches of claims, provides a national
fraud alert system, and supports data analytics on multistate claims. In
December 2020, EDD developed a draft spending plan with possible
uses for the $2.4 million grant. Regardless of what it decides to do with
the newly allocated funds, EDD must ensure that its fraud prevention
and detection approach aligns with best practices. Until it does so, it
cannot ensure that it appropriately protects the funding intended for
qualified unemployed Californians from those who would defraud
the State.
As we describe throughout this report, EDD’s approach to fraud
prevention and detection demonstrates the weaknesses caused by
its poor planning and program management. Had it implemented
a centralized fraud unit responsible for overseeing its overall fraud
approach, it would not have needed to rely on its several units to
balance the decision‑making process and modifications it made early in
the pandemic. It would have already had a dedicated unit responsible
for advising it about and implementing those program changes to
bolster its approach. Similarly, in nonpandemic times, this unit could
likely have ensured that EDD’s approach to fraud was informed by
evidence of effectiveness, which would provide greater assurances to the
public and Legislature that delays in payments to legitimate claimants
were appropriate delays. However, because EDD neglected to employ
these best practices to mitigate fraud, its weaknesses in detecting and
preventing fraud have been exposed during the pandemic. To address
these weaknesses, EDD will need to take strategic and urgent steps to
coordinate and strengthen its approach moving forward.
Recommendations
Legislature
To ensure that EDD effectively protects the integrity of the UI
program, the Legislature should amend state law to require EDD to
do the following:
• By January 2022 and biannually thereafter, assess the effectiveness
of its fraud prevention and detection tools and determine the
degree to which those tools overlap or duplicate one another
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 39
January 2021
without providing any additional benefit. EDD should then
eliminate any fraud prevention and detection approach for
which it lacks clear evidence of effectiveness. It should include
this assessment in its annual report to the Legislature on fraud
detection and deterrence efforts.
• By July 2021, provide the Legislature with an update on its
progress in performing this analysis.
EDD
To ensure that it maintains a robust set of safeguards against fraud,
EDD should do the following:
• By March 2021, designate a unit as responsible for coordinating
all UI fraud prevention and detection. EDD should assign that
unit sufficient authority to carry out its responsibilities and align
the unit’s duties with the GAO’s framework for fraud prevention.
• By May 2021, develop a plan for how it will assess the
effectiveness of its fraud prevention and detection tools.
We conducted this performance audit in accordance with generally accepted government auditing
standards and under the authority vested in the California State Auditor by Government Code 8543
et seq. Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on the audit objectives. We
believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.
Respectfully submitted,
ELAINE M. HOWLE, CPA
California State Auditor
January 28, 2021
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APPENDIX
Scope and Methodology
State law authorizes the California State Auditor (State Auditor) to
establish a program to audit and issue reports with recommendations
to improve any state agency or statewide issue that we identify
as being at high risk for the potential of waste, fraud, abuse, and
mismanagement or that has major challenges associated with its
economy, efficiency, or effectiveness. In August 2020, we issued a
report that designated the State’s management of federal COVID‑19
funds as a high‑risk statewide issue in California. Because EDD
administers the UI program and specifically the CARES Act federal
funding related to COVID‑19 unemployment, we performed an
audit of EDD’s oversight of these funds. The objective of this audit
was to evaluate EDD’s recent fraud prevention efforts related to its
UI program. In conducting this audit, we interviewed staff at EDD,
reviewed public and confidential documents related to EDD’s efforts
to detect benefit and impostor fraud, and collected documentation
from EDD pertaining to the steps it has taken to address increased
fraud during the pandemic, including fraud issues raised by the
public. To assess how EDD communicates reports or allegations
of fraud internally, we selected five fraud reports from EDD’s fraud
reporting portal and evaluated documentation about the resolution
of these reports. We also reviewed a selection of claims in EDD’s
internal database to assess whether the fraud detection tools EDD
described to us had effectively detected fraud and stopped payments
to those claims. In addition, we reviewed payment information to
assess the amount of benefits paid on potentially fraudulent claims
as a result of actions taken by EDD. Last, we reviewed guidance and
best practices published by the Department of Labor and GAO to
inform efforts that EDD should take in developing a comprehensive
approach to fraud prevention and detection.
Assessment of Data Reliability
The GAO, whose standards we are obligated to follow, requires us
to assess the sufficiency and appropriateness of computer‑processed
information that we use to support our findings, conclusions, or
recommendations. In performing this audit, we relied on electronic
data files that we obtained from EDD’s UI and IT branches. To evaluate
the data, we reviewed existing information about the data, interviewed
staff knowledgeable about the data, and assessed documentation to
validate general details about the data. Because we performed only
limited testing of the data, we found them to be of undetermined
reliability. Although we recognize that this determination may affect
the precision of the numbers we present, there is sufficient evidence in
total to support our audit findings, conclusions, and recommendations.
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January 11, 2021
Elaine M. Howle, CPA*
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle:
Thank you for working with our team to complete a thorough review of the
challenges EDD has faced since the COVID-19 pandemic. We appreciate the
recommendations offered, as this has been a public health and economic event
without precedent in American history. EDD is prepared to implement all seven of
the fraud recommendations put forward in the audit report.
Like many states, California was unprepared for the impact the COVID-19
pandemic had on both unemployment claims and fraud. California went from
record employment rates to record unemployment rates -- seemingly overnight.
The new federal Pandemic Unemployment Assistance (PUA) program presented
particular challenges, as it did not have the same safeguards as California’s
unemployment program. While in a September letter from the Department of 1
Labor acknowledged that the new program is a “target for criminal enterprises
and other bad actors deploying advanced technologies, stolen or synthetic
identities, and other sophisticated tactics,” the Trump Administration provided
insufficient support to states to address the aggressive attacks by domestic and
international criminal syndicates.
In 2010, the worst full year of the Great Recession, EDD paid $22.9 billion in benefits
on 3.8 million processed claims. Since March 2020 more than $112 billion in
unemployment benefits has been paid on 18.8 million processed claims. Of the 2
$112 billion in benefits paid out, the state has identified $10.4 billion as fraudulent
of which approximately 92% of which are PUA claims. EDD has put new 3
safeguards in place flagging an additional $19.5 billion as suspicious, triggering
stop payments and outreach to more than 1.2 million claimants to verify identity
and over 150,000 to verify other eligibility criteria. In addition, during that same
time frame, EDD successfully identified 1.6 million claims as potentially fraudulent
PO Box 826880 • Sacramento, CA 94280-0001 • edd.ca.gov
* California State Auditor’s comments begin on page 51.
44 Report 2020-628.2 | C ALIFO R N IA S TAT E AUD I TO R
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Ms. Howle
January 11, 2021
Page 2
and stopped them from proceeding. Based on an average weekly benefit
4 amount and the average number of weeks of benefits, this represents $7 billion in
average fraudulent payment prevented to date, which does not take into
account PEUC or Fed-Ed extensions or the Lost Wages Assistance program ($17.4
billion - $10.4 billion)).
In the face of such a drastic increase in claims and unprecedented fraud, EDD
undeniably struggled to timely distribute benefits to the millions of newly
unemployed Californians and simultaneously prevent fraudulent claims.
This year, EDD took additional steps to detect and prevent fraud including:
5 Stopping 1.6 million fraudulent claims before being paid; identified through
EDD’s manual identity verification process.
Stopping the automatic backdating of PUA claims in September 2020 – an
action the Trump Administration later advised all states to take.
Worked with the California Cybersecurity Integration Center to adopt
additional cybersecurity protocols.
Deploying a Strike Team to look at recommendations and solutions to
transform the customer experience of applying for and receiving UI benefits
with a focus on addressing the backlog of claims.
o One of the top recommendations of the Strike Team, launched ID.me
a third-party identify verification program that helps stop 30% identity
fraud at the beginning of the process and helps process claims more
quickly compared to the previous manual verification process.
3 Working with a contractor, initiated additional fraud detection criteria to
weed out fraudulent claims which have flagged 1.4 million claimants as
high risk for fraud.
Creating a new task force led by the Governor’s Office of Emergency
Services (Cal OES) that includes the State’s District Attorney’s, the US
Attorney’s Office, the Employment Development Department, the
California Department of Corrections and Rehabilitation (CDCR), the
California Department of Justice focused on investigating fraud, holding
people accountable and identifying resource needs including:
C ALIFO R N IA S TAT E AUD I TO R | Report 2020-628.2 45
January 2021
Ms. Howle
January 11, 2021
Page 3
o Data sharing agreements between EDD and the Departments of 6
Corrections and Rehabilitation and State Hospitals.
o $5 million to support and enhance investigative efforts of the regional
District Attorney task forces.
o Collaborating with the California Cybersecurity Integration Center to
leverage the State cyber security threat intelligence, big data
analysis and threat assessment capabilities to support investigative
efforts.
Coordinating with other states through the National Association of State
Workforce Agencies (NASWA) for a unified voice in Washington DC and
contracting with NASWA’s UI Integrity Center to identity, detect and
prevent fraud.
EDD will use all seven fraud related recommendations provided by the State
Auditor to continue making improvements and strengthening protection of our
unemployment system. We look forward to implementing these
recommendations, providing updates as requested, and our continued
collaboration.
Sincerely,
Rita Saenz
Director
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Public Release Date: January 28, 2021
CSA Audit: EDD Significant Weaknesses in EDD’s Approach to Fraud Prevention Has Led
to Billions of Dollars in Improper Benefit Payment
CSA (JLAC) Recommendations – Fraud Report 2
Recommendation #1
To ensure its recession planning encompasses its fraud prevention efforts, EDD should
develop an evaluation of the fraud prevention efforts that it can adjust during periods of
high demand for UI benefits. It should ensure that it accounts for all probable
consequences of the adjustments, and design procedures that appropriately balance
the need to provide prompt payment during a recession and the need to guard against
fraud in the UI program.
EDD Response to Recommendation #1:
The EDD agrees with this recommendation.
During the COVID-19 pandemic, EDD has experienced unprecedented attacks on the
unemployment programs– including from domestic and international crime rings. These
7 attacks primarily targeted the federal PUA program In response to the significant fraud,
the EDD has initiated additional fraud prevention and detection efforts, such as the
implementation of ID.me in October 2020 and cross matching CDCR and DSH inmate
and patient records, as well as contracting with Thomson Reuters to review EDD data
against industry-standards fraud measures in December 2020. EDD will continue to
evaluate, monitor, and if needed implement new tools as fraud continues to evolve. It is
the goal of the EDD to be proactive and nimble as necessary to stop fraud before claims
are paid while also continuing to investigate fraud that has occurred. EDD is also
committed to applying lessons learned during the pandemic to the future.
Recommendation #2
To prepare to respond to victims of identity theft who receive incorrect tax forms, EDD
should, by mid-February 2021, provide information on its website and set up a separate
email box for such individuals to contact EDD and receive prompt resolution.
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EDD Response to Recommendation #2:
The EDD agrees with this recommendation and is confident that we will meet the
proposed mid-February 2021 date. In preparation for calls related to the tax form that
claimants receive (Form 1099G) and mailings related to potential fraud, the department
is updating the EDD website and enabling the ability for customers to submit a question
online through the public-facing Ask EDD portal and on their UI Online account. The
EDD will also temporarily increase staffing in the Integrity and Accounting Division (IAD)
contact center by 300 agents by February 1, 2021.
In addition, all UI Contact Center agents will receive training regarding 1099G calls. Any
reports of fraud will be identified and analyzed through the Identity Verification process,
ID.me and Thomson Reuters tools, or elevated to the Investigations Division. Claims
with reported identity theft that are identified and confirmed as imposters will have re-
computations completed and an amended 1099G will be provided. Additional hiring is in
place to build resources in the Identity Verification and Re-computation areas to meet
the increase in workload.
Additionally, the EDD is committed to ensuring victims of identity theft in our benefit
programs are provided information and resources to assist them in reporting fraud and
dealing with the aftermath of identity theft. Customers who wish to report fraud visit our
EDD public website at https://edd.ca.gov/ and select “Report Fraud” under our Ask EDD
link.
The EDD is committed to reviewing our online services to improve the customer
experience, especially during the unprecedented outbreak of fraud associated with the
federal Pandemic Unemployment Assistance program.
Recommendation #3
To ensure that it provides appropriate assistance to victims of identity theft who report
fraud through its online fraud reporting portal, EDD should, by March 2021, establish a
working group to coordinate the work needed to resolve each complaint of identity theft
and make decisions about staffing levels necessary and add staffing to accomplish the
work.
EDD Response to Recommendation #3:
EDD agrees with this recommendation. An enterprise Fraud Workgroup has been
formed with representation of all benefit program areas of the EDD. The purpose of this
workgroup is to document and evaluate current fraud prevention processes and fraud
policies, including how individuals can report and resolve identity theft related to a
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benefit program. As part of the Fraud Workgroup, a subcommittee will be established to
evaluate the resources and expertise needed to resolve complaints of identity theft and
make recommendations to accomplish the work.
Recommendation #4
To ensure that it provides legitimate claimants with benefits but does not pay benefits
related to fraudulent claims, EDD should immediately obtain from Bank of America a
comprehensive list of claimants’ accounts that are frozen and unfrozen. EDD should
immediately thereafter evaluate the list—including considering using ID.me to verify
claimants’ identities—to identify accounts that should be unfrozen or frozen. By March
2021, it should direct Bank of America to take action to freeze or unfreeze accounts as
appropriate.
EDD Response to Recommendation #4:
The EDD agrees with this recommendation. The EDD remains committed to ensuring
that legitimate UI claimants timely receive the benefits for which they are eligible.
EDD has been working with Bank of America to determine appropriate actions on lists
of frozen accounts received from Bank of America. As the vendor for the prepaid debit
cards, Bank of America has its own obligations to prevent fraud. Bank of America has
access to cardholders’ transactional history data, which is an additional fraud detection
tool. Because EDD and Bank of America have different tools and information for
identifying fraud, we have engaged in many conversations to understand how to
leverage each set of tools to enhance our collective fraud detection efforts. These
communications continue.
EDD is in the process of reconciling all of the lists it has received from Bank of America
8 to date. A centralized tracking tool has also been created to track action taken on each
of the frozen cards and the status of the account. To ensure accountability and
completion in review of these lists, procedures have been documented with specific
roles and responsibilities and completion timeframes. EDD is also in the process of
contacting claimants whose accounts were flagged for identity verification through a
separate data cross-match, to verify their identity through ID.me for any claim filed prior
to October 1, 2020, including those who may have a frozen debit card.
Recommendation #5
To ensure it reviews each claim that Bank of America reports to it as suspicious or
potentially fraudulent, by February 2021, EDD should establish a centralized tracking
tool that allows it to review and stop payment to claims, as appropriate. EDD should use
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this tool to monitor its own internal decisions and track whether the claimant responds to
its requests for identity information and should, therefore, have their account unfrozen.
EDD Response to Recommendation #5:
EDD agrees with this recommendation and in December 2020, the Information 8
Technology Branch created a central repository to store, track and maintain the lists
provided to and from the Bank of America. These lists and their status will be updated
regularly to enable EDD to track the appropriate action taken on each account and the
outcome of each claim. To ensure accountability and completion in review of these lists,
procedures have been documented with specific roles and responsibilities and
completion timeframes.
Recommendation #6
By March 2021, designate a unit as responsible for ensuring coordination of all UI fraud
prevention. EDD should assign that unit sufficient authority to carry out its
responsibilities and align the unit’s duties with the GAO’s framework for fraud
prevention.
EDD Response to Recommendation #6:
The EDD agrees with the recommendation in principle and will explore how best to 9
address this recommendation through the Fraud Workgroup. Part of the Fraud
Workgroup’s charge will be to identify opportunities and provide recommendations to
centralize fraud prevention efforts, where appropriate, including the creation of a unit
whose duties are aligned with the U.S. Government Accountability Office’s framework
for fraud prevention.
Recommendation #7
By May 2021, develop a plan for how it will assess the effectiveness of its fraud
prevention tools.
EDD Response to Recommendation #7:
The EDD agrees with this recommendation. Despite challenges, the EDD was able to
prevent a significant amount of fraudulent benefits from being paid in 2020. During the 5
year EDD successfully identified 1.6 million claims as potentially fraudulent and stopped 4
them prior to payment which represents an estimated $7 billion in fraudulent payments
prevented (using an average of 16.1 weeks and an average benefit amount of $282.39,
plus $600 in Federal Pandemic Unemployment Compensation for a third of the weeks,
minus the $10.4 billion paid out). Additionally, based on an independent review of all
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3 9.7 million unique claims in December 2020, EDD put a stop payment on 1.4 million
claims that were flagged for high probability of fraud.
7 Throughout this pandemic EDD has taken additional steps to detect and prevent fraud
using a layered approach including:
Launching ID.me – a third party identity verification tool that helps stop fraud at
the front door.
Contracting with a vendor to assess and apply industry standard fraud criteria to
EDD claims.
Entering into MOUs with CDCR and DSH to share and crossmatch identifying
information.
These are new tools initiated in response to the unprecedented fraud seen over the
course of the pandemic. EDD is currently evaluating the inventory of these, and other,
tools and organizational resources to align our efforts in improving reporting metrics
through benchmarking and continual analysis, including historical analysis and trending
reports that can provide quantitative analysis of the effectiveness of our fraud
prevention tools. Our goal is by May 2021, to have developed a plan on how to assess
the effectiveness of our fraud prevention tools.
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COMMENTS
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE
RESPONSE FROM EDD
To provide clarity and perspective, we are commenting on EDD’s
response to the audit. The numbers below correspond to the
numbers we have placed in the margin of its response.
EDD does not acknowledge earlier warnings about potential fraud 1
and its own failure to respond quickly to those warnings. We note
on page 9 how the Department of Labor warned states about fraud
in the early months of the pandemic and reminded states to take
reasonable and customary precautions to deter and detect fraud.
On the same page we also note that in May 2020, the Department
of Labor’s Office of the Inspector General warned EDD that—based
on fraud trends in the UI program—California was likely to see at
least $1.2 billion in potential fraud from 2.9 million new claims that
EDD had received in March and April 2020. Further, on page 26 we
describe how in July 2020 Bank of America shared with EDD a list
of almost 66,000 potentially fraudulent accounts. However, because
EDD did not take prompt action to enhance its safeguards against
fraudulent benefit payments, it paid about $10.4 billion for claims
from March through December 2020 that it has since determined
could be fraudulent.
To clarify, we requested that EDD analyze its data to determine very 2
specific information about the total paid to potentially fraudulent
claims. EDD did not attempt to determine this amount until we
asked about it. Absent our request, it is not clear whether EDD
would have identified this amount. EDD did not provide us with
support for its claim that 92 percent of the $10.4 billion was for
PUA claims, and therefore we do not opine on that figure.
This action is indicative of EDD’s slow approach to bolstering its fraud 3
detection efforts during the pandemic. EDD states that it has placed
new safeguards in place that have flagged an additional $19.5 billion
in claim payments going to over 1 million claimants as suspicious
and clarifies later in its response that it identified these claimants
by working with a contractor. However, EDD did not take action to
identify these claims as potentially fraudulent or stop payment to them
until December 2020—almost eight months into the pandemic and
four months after EDD asserts it observed an increase in fraudulent
PUA claims. That EDD identified so many claimants as potentially
fraudulent only after paying them $19.5 billion in benefits is troubling
and a sign that EDD’s fraud prevention approach was lacking the rigor
it needed at the start of the pandemic.
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4 On the day EDD’s response to our draft report was due, it shared its
estimate that it had prevented an estimated $7 billion in potential
fraud. After reviewing EDD’s estimate, we determined that the
method we used to develop a $12.8 billion estimate was preferable
because it allowed for a direct comparison to the amount EDD
paid to potentially fraudulent claims. We shared our estimate with
EDD after it submitted its response and it agreed that it should
be reflected in the report. Further, we explain on page 17 that we
expect the $10.4 billion that EDD has paid to potentially fraudulent
claims to continue to grow as EDD performs additional work to
verify questionable claimant identities. As we note on page 15,
analysis of the effectiveness of EDD’s fraud prevention approach
should compare the amount paid to potentially fraudulent claims
to the amount of improper payments prevented. Accordingly,
EDD cannot know at the time whether it stopped more potentially
fraudulent payments than it issued because it is still accounting for
all potential fraud.
5 Although EDD identified 1.6 million potentially fraudulent claims
before paying those claimants, its fraud prevention efforts failed
to stop payments totaling $10.4 billion to about 597,000 claims,
as we explain on page 15. Further, we state on page 17, and as EDD
acknowledges in its response, EDD has flagged an additional
1.2 million claimants to whom it has already paid $19.5 billion in
benefits as suspicious. It is unlikely that EDD will verify the identity
of all of these claimants. Therefore, although the 1.6 million claims
represent some level of success, it cannot yet be compared to the
rate at which EDD failed to prevent fraud because it is still verifying
the identities of some claimants it has already paid, leaving open
the possibility that the number of claimants with unconfirmed
identities to whom EDD paid benefits will grow.
6 EDD cites its partnership with CDCR as a positive step it took to
combat fraud during the pandemic. However, it is troubling that
EDD failed to implement a cross-match between claim data and
incarceration data well before the pandemic began. We describe on
page 29 how EDD spent months during the pandemic negotiating
access to CDCR’s state prison data. However, we note a national
survey showed that 35 states were cross-matching unemployment
claims with state prison data in as early as 2016. Further, EDD has
reported to the Legislature that it was “considering” new options
for obtaining incarceration data since at least 2018. Finally, as we
state on page 30, the CDCR partnership is dependent on the State
Attorney General determining that EDD has a compelling need for
the information. Because of EDD’s fraud prevention deficiencies
that we discuss in this report and because EDD must rely on other
entities such as CDCR to provide inmate data, legislative action
is necessary to ensure that EDD can regularly access and use data
from state and local correctional facilities to prevent future fraud.
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Had EDD taken action before the pandemic, as many other states
had done, this critical safeguard would have already been in place
and would have prevented some of the $810 million in fraudulent
payments in claims associated with incarcerated individuals.
EDD describes the actions it took to combat the “unprecedented 7
attacks” on the UI program. However, EDD began taking the
actions it describes in October 2020, more than six months into the
pandemic, despite earlier warnings about this fraud. Further, these
steps—though laudable—evidence how unprepared EDD was to
combat fraud at the outset of the pandemic as each of these steps
would have reasonably benefited EDD in the years before 2020
and better prepared it to respond to the pandemic-related surge
in claims.
EDD describes actions it is in the process of implementing. We 8
expected that, before our audit began, EDD would have a method
for comprehensively tracking the status of benefit accounts that
have been frozen. However, as we note on page 26, during our
review EDD did not appear to know the status of all of the claimant
accounts that have been frozen and confirmed that it did not have
a centralized tracking process for the status of these accounts. EDD
now asserts that it has established a centralized way to track these
matters. We look forward to reviewing its progress as part of our
regular recommendation follow up process.
EDD indicates that it will use its recently formed work group to 9
explore how to implement our recommendation. EDD should act
quickly to address the problems we highlight in Figure 8 on page 35
where we show the fragmented responsibility for fraud prevention
at EDD. Because EDD’s approach does not align with best practices
for fraud prevention, we recommended that it centralize fraud
prevention responsibility and authority in a single entity. Moreover,
as we note on page 36, the working group had not yet held its
initial meeting or fully formed a charter to define its purpose as
of December 30, 2020. Therefore, its progress in exploring our
recommendation to date has been minimal. We look forward to
seeing the progress EDD makes in addressing our recommendation
as part of our regular recommendation follow up process.
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