Kansas Legislative Division of Post Audit, Evaluating the Kansas Department of Labor's Response to COVID-19 Unemployment Claims (Part 1) (R-21-003, February 2021)
Summary
A performance audit report, Evaluating the Kansas Department of Labor's Response to COVID-19 Unemployment Claims (Part 1), Report Number R-21-003, dated February 2021, from the Kansas Legislative Division of Post Audit, presented to the Legislative Post Audit Committee. The report states that the committee authorized the audit at its September 2, 2020 meeting, and that this part answers the question of what types of unemployment claims fraud schemes the Kansas Department of Labor is aware of and how they are being addressed. It states that the department's fraud detection process was not designed to detect the large-scale, nationwide fraud campaign that occurred during the COVID-19 pandemic. The report includes a response letter from the Deputy Secretary of Labor and an appendix of cited references.
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“Kansas Legislative Division of Post Audit, Evaluating the Kansas Department of Labor's Response to COVID-19 Unemployment Claims (Part 1) (R-21-003, February 2021).”
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KANSAS LEGISLATIVE
DIVISION of
POST AUDIT
A Performance Audit Report Presented to the Legislative Post Audit Committee
Evaluating the Kansas Department
of Labor’s Response to COVID-19
Unemployment Claims (Part 1).
February 2021
Report Number: R-21-003
Introduction
The Legislative Post Audit Committee requested this audit and authorized it at its
September 2, 2020 committee meeting.
Objectives, Scope, & Methodology
The audit request included three questions. For reporting purposes, we divided
those three questions into two separate audit reports. This audit report answers
the following question:
1. What types of unemployment claims fraud schemes is the Kansas
Department of Labor aware of and how are they being addressed?
To answer this question we spoke to officials with the Kansas Department of Labor
(KDOL), the U.S. Department of Labor’s Inspector General, the Federal Bureau of
Investigation, and the National Association of State Workforce Agencies to
understand the types of fraud schemes that occurred nationally and in Kansas in
2020. We also interviewed KDOL officials and surveyed KDOL fraud staff to
understand their process to detect fraudulent unemployment claims. We reviewed
KDOL weekly reports and information they provided on fraudulent claims identified
in Kansas to estimate how much unemployment fraud occurred in Kansas in 2020.
There was very limited information on the amount of fraud that occurred both in
Kansas and nationally in 2020. That’s because states and the federal government
were still assessing the extent of fraud that occurred in 2020. We worked with KDOL
officials to estimate how much fraud occurred in Kansas in 2020. However, our
estimate is only intended to provide a general scale of the fraud that likely occurred
in Kansas.
Several members of this audit team were either victims of unemployment fraud or
knew someone that was a victim. We concluded these events did not constitute an
actual impairment to the team’s independence or ability to objectively complete this
audit.
More specific details about the scope of our work and the methods we used are
included throughout the report as appropriate.
Important Disclosures
We conducted this performance audit in accordance with generally accepted
government auditing standards. 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 our audit objectives. Overall, we believe the
evidence obtained provides a reasonable basis for our findings and conclusions
based on those audit objectives.
1
The Kansas Department of Labor’s fraud detection process was
not designed to detect the large-scale, nationwide fraud
campaign that occurred during the COVID-19 pandemic.
Unemployment Insurance Program Background
The Regular Unemployment Insurance program is administered by the Kansas
Department of Labor (KDOL) and gives financial aid to unemployed individuals.
• The Regular Unemployment Insurance program is a joint program between
federal and state governments. Although there are broad federal guidelines
over the program, states establish their own criteria for who is eligible for
Regular Unemployment insurance. States also decide the amount and
duration of Regular Unemployment benefits.
• In Kansas, individuals must meet several criteria to qualify for Regular
Unemployment benefits. For example, individuals must have met a minimum
duration of employment and left work through no fault of their own (e.g.,
medical emergency, hostile workplace, layoffs, etc.).
• Generally, Regular Unemployment Insurance benefits are funded entirely by
employer contributions in each state. Kansas employers contribute to the
state’s unemployment insurance trust fund, which is used to pay weekly
benefits to unemployed individuals for 16 to 26 weeks depending on the
state’s unemployment rates. Based on state law, employers fall into two
general categories:
o A contributing entity is a private company or public employer that pays
KDOL a quarterly unemployment tax before claims are made. This tax
helps fund Kansas’ unemployment trust fund. Contributing entities receive
an annual statement summarizing their past year’s charges. Charges occur
when a company’s former employee receives Regular Unemployment
benefits. A company’s future tax rate is based in part on their past charges.
For example, a company with high prior-year charges could also see
higher future taxes rates.
o A reimbursing entity is a public employer, not-for-profit, or tribal entity that
pays KDOL after claims are paid. They do this instead of paying a quarterly
tax. Reimbursing entities are charged quarterly for any unemployment
funds used. Typically, these entities are responsible for paying 100% of
funds used. However, under the CARES Act, half of these employers’
unemployment costs are reimbursed with federal funding. This is a
temporary arrangement under the CARES Act, set to expire March 14, 2021.
• Kansas employees do not contribute any money to the trust fund.
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In 2020, the federal government created three temporary unemployment
insurance programs to help individuals who lost their jobs due to COVID-19.
• The COVID-19 pandemic significantly increased the unemployment rate
nationally and in Kansas. Before the pandemic, the national unemployment
rate was about 4% in January 2020 (about 3% in Kansas). By April 2020, the
national unemployment rate rose to about 15% (about 12% in Kansas).
• In March 2020, Congress passed the CARES Act to help individuals negatively
affected by the pandemic. The act included funding for three new
unemployment insurance programs.
• The new programs differed from Regular Unemployment Insurance in a few
ways. For example, the new programs were funded entirely with federal
funds. Additionally, all the new programs were temporary and have either
expired or are scheduled to expire in 2021.
• The new programs expanded unemployment benefits to include more people
who lost their jobs due to COVID-19. For example, the Pandemic
Unemployment Assistance program extended benefits to several new classes
of workers. This included the self-employed (e.g., independent contractors)
and gig workers (e.g., Uber drivers). Under this program, individuals not
eligible for Regular Unemployment Insurance could receive up to about $500
per week for 39 weeks (a maximum of about $19,500) under the terms of the
original CARES Act in 2020. The Federal Pandemic Unemployment
Compensation (FPUC) program also gave an extra $600 per week to anyone
already receiving unemployment benefits, for a period from late March
through late July 2020. FPUC was renewed at a level of $300 per week in late
December 2020 and will now run through Mid-March, 2021
• Benefits paid out for the temporary federal unemployment programs are paid
with federal money and do not come from the state’s unemployment trust
fund.
There were two main types of unemployment fraud alleged nationally and in
Kansas during the pandemic.
• We reviewed claims reports from KDOL for both the state’s Regular
Unemployment program and the federal Pandemic Unemployment
Assistance (PUA) program. That’s because these programs have been
specifically targeted by fraudsters during the past year. Figure 1 shows claims
filed from February 2020 through January 2021.
• COVID-19 created a massive spike in PUA claims in the summer 2020. As
Figure 1 shows, PUA claims spiked during the summer of 2020 but have
steadily decreased since September 2020. It is possible the federal program
saw an initial spike as individuals who needed PUA benefits applied for them
for the first time. The PUA program has also been the focus of unemployment
3
fraud nationally and in Kansas. It is likely some portion of these claims reflect
that fraud. PUA fraud is discussed in more detail in the following section.
Figure 1
Initial claims for the Regular Unemployment Program increased again in late 2020. (a)
--- Initial Claims - Federal PUA
150,000 --- Initial Claims - State Regular U.I.
134,448
125,000
102,954
100,000
80,308
75,000
65,404
57,648
50,000 52,588
35,023
26,308
25,000 30,309
22,905
17,749
8,896 6,772
0
(a) Monthly totals for initial claims only. This figure does not include continuing claims filed by
claimants already receiving benefits.
Source: 2020 and 2021 KDOL Weekly Claims Reports (Unaudited).
• COVID-19 also created a massive spike in Regular Unemployment initial
claims during the spring of 2020. As Figure 1 shows, claims for the state’s
Regular Unemployment program increased from about 8,900 initial claims in
February 2020 to about 103,00 initial claims in April. That’s roughly a 1,060%
increase.
• Regular Unemployment claims have spiked again in January 2021. KDOL
officials told us that’s because fraudsters began targeting the state’s Regular
Unemployment program in late 2020. Regular Unemployment fraud is
discussed in more detail later in the report. It is possible that legitimate
seasonal unemployment claims also contributed to this increase.
4
Federal Unemployment Program Fraud
Nationally, fraudsters targeted the new Pandemic Unemployment Assistance
(PUA) program because of weaknesses in its application process.
• We spoke to officials with KDOL, the Federal Bureau of Investigation, the U.S.
Department of Labor’s Office of Inspector General, and the National
Association of State Workforce Agencies. We spoke to these officials to
understand what fraud schemes occurred nationally and in Kansas during
the COVID-19 pandemic. According to those officials, fraudsters used a large-
scale identity theft campaign to target the Pandemic Unemployment
Assistance (PUA) program specifically.
• Because of how it was set up federally, fraudsters could easily falsify claims to
get approved for PUA. Individuals must file a claim with KDOL to apply for
and potentially receive unemployment benefits.
o Fraudsters recognized they could apply for PUA benefits as “self-
employed.” Self-employed individuals were eligible for benefits under the
new PUA program. Because there is no employer, states are limited in
what they can do to verify the claim. This created an incentive for
fraudsters to apply for PUA benefits.
o Fraudsters could apply for PUA benefits without submitting supporting
documents. To apply for PUA benefits, individuals must self-report their
personal information and prior earned income. Generally, the PUA
application process did not require applicants submit proof of prior
income (e.g., pay stub, W2, invoices, etc.) to receive benefits. Because no
documents were required, it was easy for fraudsters to file as self-
employed.
• Fraudsters relied on large-scale identify theft to exploit weaknesses in PUA’s
application process. Fraudsters likely obtained stolen personal information
from past large-scale data breaches. This could include the 2014 eBay data
breach and the 2017 Equifax data breach, for example. In both cases,
criminals stole the identities of over one hundred million people (e.g., names,
addresses, social security numbers, etc.). Using this data, fraudsters could
apply for PUA benefits in other peoples’ names, usually in mass quantities.
• Unemployment funds are typically disbursed on debit cards or sent via direct
deposit, making them easy to convert into cash. Like other unemployment
programs, PUA benefits could be loaded on debit cards or deposited through
direct deposit Fraudsters could use stolen names and social security
numbers to apply but have the debit cards mailed to an address they
specified. They could also have the funds deposited directly to an account of
their choosing. Once they had access to the benefits it became difficult for
government agencies to track or recover those funds.
5
• Once eligible for PUA, fraudsters could also receive additional benefits under
the Federal Pandemic Unemployment Compensation program or the Lost
Wages Assistance program.
Many of KDOL’s existing processes were not effective to identify PUA fraud
because of how the program was structured by the federal government.
• Before the pandemic, KDOL’s fraud detection process was focused on the
Regular Unemployment Insurance program. That program is used by
employees who have an employer (e.g., not self-employed individuals). KDOL
largely relied on a visual review of claims data and public assistance to identify
fraud. Prior to benefits being paid, KDOL officials told us they reviewed state
and federal wage reports to confirm claimants were recently employed. Claim
notices were also sent to former employers, giving them a chance to contest
the claim as potentially fraudulent. KDOL told us they also reviewed claims
data for trends that might indicate fraud, including suspicious log-in
credentials and duplicated fields. Claims were approved for payment if no red
flags were raised during this process.
• Because of how the program was federally structured, the PUA program
made it possible for fraudsters to circumvent KDOL’s existing process for
verifying potentially fraudulent claims with employers.
• Moreover, many of KDOL’s other fraud detection methods were manual and
not effective against the high number of claims filed during the pandemic.
Unemployment claims for both Regular Unemployment and PUA increased
dramatically during the pandemic in 2020. KDOL officials told us their fraud
staff at the time were overwhelmed and did not have time to do a detailed
review (e.g., comparing claims to wage reports or new-hire reports) on all
claims during this time.
• During the pandemic, KDOL implemented two anti-fraud measures in
addition to their existing processes.
o In July 2020, KDOL put a 72-hour hold on all PUA claims before benefits
could be paid out. They told us that KDOL staff reviewed PUA claims data
during this time to identify suspicious information that could indicate
fraud. KDOL staff put holds on any suspicious PUA claims, preventing
payment.
o KDOL also started a public campaign in August 2020 to ask individuals to
report cases of identity theft and unemployment fraud. KDOL staff could
then stop payment associated with those claims.
• KDOL officials told us that as of December 2020, about 157,000 claims were
identified or reported as fraudulent. That’s about 24% of the roughly 650,000
claims filed during that time. It wasn’t clear to KDOL at the time of the audit
how many of the fraudulent claims were related to the Regular
6
Unemployment program and how many were related to the temporary
federal unemployment programs.
KDOL officials told us they are in the process of upgrading their fraud detection
process to better identify PUA and other unemployment fraud.
• In December 2020, KDOL officials told us they partnered with a private
company to improve its data analytic capabilities. KDOL officials hope this
arrangement will give them access to new automated tools. These include
programs that automatically flag claims data as suspicious, machine learning
to identify new fraud trends, and a consistent way to score a claim’s risk for
fraud. These new automated tools could help make KDOL’s fraud detection
process more effective and efficient. KDOL officials hope to have these tools in
place by early 2021.
• In January 2021, KDOL implemented an identity verification system that could
help combat cases of identity theft and unemployment fraud. Under the new
system, all claimants are sent to a third-party site and asked to answer a series
of questions to help verify their identify. The system uses a claimant’s credit
history to generate questions that only they should know. The claimant must
successfully answer the questions in order to apply for benefits. This system
could help reduce identify theft and fraudulent claims in Kansas.
• KDOL officials hope staff will have broader access to multi-state checks by
February 2021. During the pandemic KDOL gained access to a data integrity
hub that allows states to cross-check their unemployment claims data to
better identify suspicious claims. However, IT limitations prevented all KDOL
staff from having access to these tools in 2020.
• KDOL officials plan to document these and other new fraud detection
procedures in the near future. Prior to the pandemic KDOL officials did not
have a documented policy for their fraud detection process. A lack of a
documented process could lead to inconsistencies in how KDOL staff look for
fraud. KDOL officials understand the need to document their process and told
us they plan to do so after they finish upgrading their process.
• KDOL fraud staff reported mixed reviews of KDOL’s fraud detection measures.
We surveyed all 36 KDOL fraud staff for their opinion on issues related to
KDOL’s fraud detection process. Figure 2 shows the results of the survey. As
the figure shows, of the 25 staff that responded (69% response rate) only one
respondent said KDOL’s process was effective to identify PUA fraud at the
beginning of the pandemic. 13 respondents said KDOL’s process to detect
PUA fraud was effective as of December 2020. However, 9 staff still said the
fraud detection process was ineffective in December 2020.
7
Figure 2
KDOL staff had mixed opinions on the
effectiveness of KDOL's fraud detection process
How Effective Were KDOL's Procedure and Tools to
Identify PUA Fraud During the Pandemic?
Respondents
13 13
11
9
1
Beginning of the Pandemic December 2020
n
3
Effective Ineffective Don't Know (a)
(a) 13 respondents said they did not know how effective KDOL's procedures or tools
were at the beginning of the pandemic. KDOL hired additional fraud staff as the
pandemic continued. It is possible these staff were not employed or just recently
employed at the beginning of the pandemic.
Source: LPA survey of KDOL fraud staff.
State Unemployment Fraud
Fraudsters targeted the state’s Regular Unemployment program beginning in
late 2020.
• According to KDOL officials, around November 2020 there was a rise in
reported fraud cases targeting the state’ Regular Unemployment program.
• KDOL officials could not tell us how many of the Regular Unemployment
claims filed during this time were fraudulent, or how this fraud occurred. They
speculate that fraudsters filed for Regular Unemployment in mass quantities
to try and overwhelm the state’s system. It is unclear at this time to what
extent Regular Unemployment systems in other states were also targeted.
• KDOL officials told us they were still looking into how exactly fraudsters
penetrated the state’s Regular Unemployment system. KDOL officials
speculated fraudsters attempts to overload the unemployment system could
have impeded employers’ ability to report fraudulent notices. Employers have
10 days to contest a claim from the time they receive a claim notice. Claims
are processed for payment if not contested by an employer within 10 days. We
were unable to determine whether these claims were sent timely as part of
this audit.
8
• Additionally, KDOL’s fraud detection process was fairly manual. It is possible
overloading the system with claims made it difficult for KDOL staff to review
claims for fraud.
The state’s unemployment trust fund balance has declined 75% in one year.
• The state’s unemployment trust fund is used to pay Regular Unemployment
claims. Most companies and public organizations pay KDOL a quarterly
unemployment payroll tax to support the fund. Other public entities
reimburse the trust fund for unemployment funds used to pay claims for their
employees. Benefits paid out for the temporary federal unemployment
programs do not come from the state’s unemployment trust fund.
• Figure 3 summarizes the monthly balance of the state’s unemployment trust
fund. As the figure shows, the balance of the state’s unemployment trust fund
dropped from about $1 billion in January 2020 to about $247 million as of
January 25, 2021. That’s about a 75% decrease. This is largely because January
2020 was the last month the fund had a positive net contribution. This means
unemployment benefits paid out of the fund have exceeded tax contributions
into the fund since February 2020.
Figure 3
The state's unemployment trust fund has declined 75% in one about one year (a).
$1,200 Trust Fund Balance (b)
$1,000
$1,000 $973
$862
$800
$687
Millions $600 $540
$453
$400
$247
$200
$-
(a) Trust fund balances through January 25, 2021.
(b) Trust fund balances are month-end balance.
Source: KDOL regular unemployment trust fund data. 2020 and 2021. (Unaudited)
9
• It was unclear at the time of this audit how much of this decrease was related
to fraudulent claims. Both legitimate and fraudulent unemployment claims
could be depleting the state’s unemployment trust fund. As Figure 1 showed,
there were a significant number of claims filed for the Regular
Unemployment program, both early in the pandemic and beginning again in
November 2020. Both legitimate and fraudulent benefits would negatively
affect the balance of the state’s trust fund.
• Employer tax rates were adjusted to help replenish the state’s unemployment
trust fund. According to KDOL officials, employer tax rates are based in part on
the state’s unemployment trust fund balance. Historically, employers’ tax rates
were discounted up to 0.5% when the fund was in a surplus. This discount
effectively reduced some companies’ contribution rates to zero. However,
KDOL officials told us they had to remove this discount per state law as the
trust fund diminished last year. It is possible that alternative funding solutions
may be needed to help replenish the state’s trust fund.
Estimated Unemployment Fraud
Of the roughly $2.6 billion in state and federal unemployment benefits paid in
Kansas in 2020, we estimated about $600 million (24%) could have been
fraudulent.
• There was little information on how much fraud occurred in Kansas in 2020.
Each year the U.S. Department of Labor reviews a sample of unemployment
claims in each state to determine an estimated fraud rate. However, the U.S.
Department of Labor did not have a complete 2020 fraud rate available at
the time of this audit. KDOL officials reported about 157,000 potentially
fraudulent claims were reported or identified from March 2020 (when the
pandemic began) through the end of November 2020. However, KDOL
officials had not yet assigned a dollar value to those claims at the time of this
audit.
• As a result, we developed a preliminary estimate of how much fraud could
have occurred in Kansas in 2020. We determined the 157,000 potentially
fraudulent claims were about 24% of the roughly 650,000 initial claims filed
from March through November 2020. We applied this estimated fraud rate
to the total state and federal benefits paid out in 2020. This is meant to be a
preliminary estimate only. We will use KDOL claims data to provide a more
precise fraud estimate in part two of this audit.
• We estimated about $600 million in state and federal funds paid out in
Kansas in 2020 could have been fraudulent. In total, KDOL reported
expending about $2.6 billion on state and federal unemployment funds.
That’s comprised of about $970 million in state funds and $1.6 billion in
federal funds. Applying our 24% fraud rate, we estimated
10
o about $200 million in fraud in state funds
o about $400 million in fraud in federal funds
• In its response, KDOL estimated about $300 million in unemployment
benefits were paid on claims they identified as potentially fraudulent in 2020.
Our analysis in part two of this audit will include a similar analysis. In addition,
we also hope to use KDOL claims data to estimate how much in
unemployment benefits were paid that KDOL did not identify as potentially
fraudulent. For that reason, our estimate will likely exceed KDOL’s initial
estimate of $300 million.
Our fraud estimate is subject to some key assumptions and limitations.
• We included unemployment funds expended through Kansas’ and the
federal unemployment programs in 2020. Although it appeared PUA, and
federal programs tied to PUA, were targeted during the pandemic, it is likely
the state’s Regular Unemployment program was also attacked to some
degree in 2020. During our fieldwork, KDOL could not estimate how many of
the 157,000 fraudulent claims it identified were related to the state’s
unemployment program versus the federal unemployment programs. Given
this uncertainty, we applied our 24% fraud rate evenly between state and
federal funds expended in 2020.
• Our estimate was based on the 157,000 total claims KDOL identified as
potentially fraudulent. It is likely that more fraudulent claims occurred that
KDOL did not catch. This would understate our estimate. For that reason, it is
possible the actual amount of fraud that occurred in Kansas in 2020 was
much higher.
• Not all of the 157,000 cases KDOL identified as potential fraud will be
fraudulent. These claims were flagged and stopped by KDOL staff as
suspicious but need to be investigated by KDOL law enforcement to
determine fraud. It is likely not all 157,000 cases will end up being fraud. This
would overstate our estimate.
• Our estimate included some Regular Unemployment benefits that were paid
in January and February 2020, which could be considered pre-pandemic.
However, given the relatively low number of claims filed during this time it is
unlikely to significantly affect our estimate.
Impacts on Kansas Employees and Employers
If not reported to or stopped by KDOL, Kansas employees could owe taxes on
benefits they never filed or received because of fraudulent claims.
• According to KDOL, benefits received under both the state’s Regular
Unemployment program and the temporary federal programs are considered
taxable income. Claimants that received benefits in tax year 2020 will receive a
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1099-G form from KDOL showing taxable benefits. Claimants need to include
those benefits when filing their income taxes, which will likely increase their
tax liability.
• Victims of unemployment fraud may receive 1099-G forms for unemployment
benefits they never received. KDOL officials told us they attempted to flag,
amend, and prevent 1099-G forms tied to known fraud cases from ever being
mailed out. However, individuals still received 1099-G’s for unemployment
benefits they did not file or receive.
• KDOL officials were not able to provide the number of 1099-G forms that were
sent in error. KDOL officials told us some forms were sent before the claim
was identified as fraud. In other cases, the form may be tied to a fraudulent
claim that KDOL never identified.
• KDOL officials told us anyone who received a 1099-G in error should contact
them to amend it. If the individual does not report the fraud to KDOL, those
individuals could be responsible for paying taxes on the fraudulent benefits.
Individuals need to file an unsworn statement with KDOL attesting the form
was sent in error. This should eliminate any taxes owed related to fraud. KDOL
officials urge anyone who received a 1099-G form in error to contact the
department’s Tax Call Center at 785-575-1461 or by calling toll-free at 1-888-
499-0063 to fill out this form. Individuals can also complete the form online by
visiting www.UIAssistance.GetKansasBenefits.gov. There is no deadline for
protesting a fraudulent 1099-G.
If not appealed or stopped by KDOL, private and public employers could be
financially responsible for fraudulent claims filed under the state’s Regular
Unemployment program.
• Generally, an employer either pays for unemployment funds as a contributing
entity or a reimbursing entity. Employers either contribute payroll taxes to the
fund before claims are made (contributing) or pay no tax upfront but
reimburse the fund after claims are made (reimbursing). Employer tax rates
are based on a number of things including how long the employer has been
in business, the employer’s industry type, and their past payment experience.
• If not appealed in time, contributing and reimbursing entities could be
financially responsible for fraudulent claims tied to the state’s Regular
Unemployment program.
o Because contributing entities’ tax rates are based on past charges,
fraudulent charges against their account could increase their future tax
rates.
o Because reimbursing entities are responsible for paying KDOL back for
benefits paid out, these organizations could be responsible for paying
KDOL back for fraudulent claims. However, under the CARES Act, the
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federal government repays reimbursing entities half of their
unemployment costs. This could help reduce the employer costs
associated with fraudulent claims by 50%. This provision of the CARES Act
is set to expire March 14, 2021.
• Contributing entities receive “charge statements” annually and reimbursing
entities receive them quarterly. These statements could alert them to
fraudulent behavior. KDOL officials told us any private or public organization
needs to contact KDOL to protest fraudulent charges. Depending on the
circumstance, KDOL told us employers have 15 to 20 days to protest a
statement once mailed. Otherwise, they could be responsible for the financial
impact of the fraud. It is important to note that annual charge statements for
contributing agencies are based on fiscal years. As such, fraud that occurred
between July 1, 2020 and June 30, 2021 won’t be reflected until 2021’s
statements. Those statements won’t be mailed until October 2021.
• KDOL officials were unable to determine how much private and public
organizations were charged due to fraud. KDOL officials told us they
attempted to stop statements associated with claims flagged as fraud.
However, it is possible some statements went out before the claim was
flagged. Other statements might be associated with fraudulent claims KDOL
never identified. For these reasons, KDOL officials told us they could not
determine how much organizations were charged due to fraud.
• It is important to note this issue only applies to fraud within the state’s
Regular Unemployment program. Public and private employers would not be
affected by fraud within the temporary federal unemployment programs,
such as PUA.
KDOL reported potentially fraudulent cases to federal agencies for investigation
but focused its investigative resources on stopping fraudulent claims during the
pandemic.
• KDOL’s special investigations unit is responsible for the criminal investigation
of potentially fraudulent claims. At the time of this audit, the unit consisted of
five licensed law enforcement officers and one special investigator.
• KDOL officials told us they prioritized stopping fraudulent claims over
pursuing criminal charges. Officials told us the special investigations unit was
reassigned during the pandemic to help identify and stop potentially
fraudulent claims.
• KDOL officials told us they are in the process of working with federal agencies
to investigate potentially fraudulent claims. These agencies include the
Federal Bureau of Investigation and the U.S. Department of Labor’s Office of
Inspector General for investigation. It is possible that out-of-state or out-of-
country cases could be turned over to those offices for investigation.
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Conclusion
The COVID-19 pandemic created a unique opportunity for fraudsters across the
nation. It resulted in a massive spike in unemployment claims that would challenge
even the most adept unemployment systems. It also resulted in a new federal
Pandemic Unemployment Assistance program with far fewer verification
requirements than the state’s program. Kansas was clearly not well prepared to
address either situation. The combined effect has been significant fraud within the
federal program and some fraud almost certain to affect the state’s program.
Recent trends suggest that the state’s unemployment system is now being targeted
by fraudsters. This could have significant consequences for some Kansas employers,
especially nonprofits, government entities, and tribal organizations that chose to
reimburse the state instead of making unemployment contributions. That is
because these employers are currently responsible for covering the costs of these
claims unless they can successfully appeal them. Moreover, Kansas taxpayers are
hurt by fraud at both the federal and state level. Not only because their identities
have been stolen, but because they may face a tax liability if they don’t report
fraudulent benefits they never received.
Recommendations
We did not have any recommendations for part 1 of this audit but will be considering
recommendations for part 2.
Agency Response
On February 16, 2021 we provided the draft audit report to the Kansas Department of
Labor. The Department raised a number of concerns with the report findings and
our fraud estimate. The agency's full response is below. We carefully reviewed the
information agency officials provided, but ended up only making minor changes to
our findings.
14
Phone: (785) 296-5000, ext. 7305
Kansas Department ofLabor
Fax: (785) 368-6294
401 SW Topeka Boulevard Departm ent of' Labor Email: brettflachsbarth@ks.gov
Topeka, KS 66603-3182
Ojjice ofthe Secretcoy do I.ks.gov
Amber Shultz, Acting Secrela!y Laura Kelly, Governor
February 19, 2021 CONFIDENTIAL
Matt Etzel
Legislative Division of Post Audit
800 SW Jackson St., Suite 1200
Topeka, KS 66612
RE: Audit Objective 3 of the Kansas Department of Labor's COVID-19 Unemployment
Claim Response
Dear Mr. Etzel:
On behalf of the Kansas Department of Labor (KDOL), I welcome the opportunity to
respond to the above-referenced audit (the Audit). While KDOL recognizes Kansas
Legislative Division of Post Audit's (LPA' s) cooperation in exchanging data for the Audit,
KDOL is disappointed that the data was not used to provide a credible estimate of the extent
of unemployment insurance fraud in Kansas.
LPA's estimate of $600 million in potential fraud is flawed in both its underlying
assumptions and methodologies, and for the reasons laid out below, KDOL requests LPA
withdraw this estimate as insufficiently supported. Critically, KDOL believes LPA
misunderstands how fraud is distinct between the new federal unemployment insurance
programs and the existing state unemployment insurance system. Addressing
unemployment insurance fraud is of paramount importance to the state of Kansas and the
nation. We hope this response clears up some confusion that may have adversely affected
the Audit's findings.
Since the passage of the CARES Act, international and domestic fraudsters have acted in a
highly coordinated effort to defraud state unemployment trust funds across the nation and the
federal Pandemic Unemployment Assistance program. According to conservative estimates
from the United States Department of Labor (USDOL), this fraud totals at least $360 billion.
Sources further indicate that this is an issue being faced by all 50 states, Washington D.C., and
United States territories.
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Executive Swnmary:
The Audit suffers from three major flaws, which have permeated the entire audit. First,
LP A's estimate of fraud at the state and fe deral level has not been reliably generated. There
are errors in the underlying assumptions. KDOL's chief concern is the completely
nnsupported assumption that there was a uniform fraud rate between the state and federal
unemployment programs. Even LP A acknowledges the limitations of its assumptions,
including the uniform fraud rate. This estimate should be withdrawn because it is not
sufficiently supported. Second, LP A misunderstands imp01tant distinctions between the
new federal pandemic unemployment insurance programs and the existing state
unemployment insurance program. For example, LPA fails to understand the consequences
surrounding USDOL's guidance on the Pandemic Unemployment Assistance (PUA)
program that states are prohibited from asking claimants to provide documentation to prove
eligibility and the impact it has on KDOL's ability to combat fraud. This issue was even
publicly debated between USDOL's internal watchdog, the Office of Inspector General
(OIG), and Employment and Training Administration (ETA), but ETA doubled-down that
PUA claimants were not required to provide documentation to prove eligibility. Congress
resolved this vulnerability in the PUA program and amended the law on December 27,
2020. Third, LPA misunderstands KDOL 's measures to combat fraud. KDOL's fraud
detection processes comply with federal guidance, and if LP A had examined the efficacy
of these processes, LPA would have recognized that many of them- even if automated-
would not have rapidly and proactively prevented, detected, and investigated fraudulent
activity in the PUA program.
I. The estimate of $600 million in potential fraud is flawed and should be
withdrawn.
LP A estimated the level of potential fraud by taking the nwnber of claims KDOL identified
as fraudulent (157,000), dividing by the total number of initial claims filed between March
through November of 2020 (650,000), to arrive at an estimated fraud rate of 24%. LPA
then applied this fraud rate to the total paid out in federal and state benefits ($2.6 billion)
to arrive at an estimate of $600 million.
There are several issues with this analysis, which LPA acknowledges as limitations when
discussing its assumptions. First, not all of the 157,000 identified potential fraud claims
paid out. This number represents those claims that were flagged as potential fraud, and in
many cases stopped before funds were paid on the claim. LP A notes this limitation on page
11, and states that this issue would overstate LP A's estimate. Further, LP A notes that the
157,000 potentially fraudulent claims are just those identified by KDOL, and that the actual
number may be higher for the potentially fraudulent claims KDOL did not catch. Thus,
LP A acknowledges there is both potential to overestimate and underestimate, but LP A does
not, nor would it be prudent to do so, suggest the potential overestimate and underestimate
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counterbalance such that there is an appreciable degree of confidence in the overall
estimate.
The second issue with LP A's methodology is that it used a uniform fraud rate of 24% in
estimating potential fraud in both state and federal progran1s. As discussed in more detail
below, the PUA program, one of the new temporary federal programs, was rife with fraud
because of how the federal legislation was drafted and because it was an entirely new
unemploym ent insurance system for which traditional anti-fraud measures used in the state
unemployment insurance system were not readily adaptable.
LPA acknowledged this limitation in the audit, but referred to it as an "uncertainty" on page 11;
despite this uncertainty, LP A forged forward to provide estimates of potential state and federal
fraud. Additionally, LP A did not use the data provided by KDOL to develop an estimate rooted
in more realistic data. For example, LPA could have taken the list of claimants with fraud codes
placed and cross-referenced that with the list of payments made. That relatively simple analysis,
similar to what KOOL is performing and fmalizing internally, would have produced numbers
with at least some basis in reality, such as the below (which was developed with exactly the data
provided to LPA by KDOL):
Amount Paid to Claimants
with Fraud Codes, by Program
EB $ 689,587.00
PEUC $ 5,056,403.00
PUA $ 42,040,362.00
UIREGULAR $ 137,401,838.00
FPUC $ 105,537,476.00
Unfortunate ly, the inlpact of the uncertainty on LP A's estimates with the methodology utilized
in the audit carmot be ignored and has not been quantified. KOOL respectfully requests these
estinlates be withdrawn as insufficiently supported and encourages LP A to use the data provided
to develop more realistic estiniates.
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II. LPA oversimplifies, neglects, and misstates the laws and requirements
regarding state unemployment insurance.
The state unemployment insurance program is a joint program between federal and state
governments. However, there is more to the state unemployment insurance program than
LPA's simplification of "broad federal guidelines" as described on page 2. State
unemployment insurance programs are governed in part by Sec. 303 of the Social Security
Act (SSA). 1 Sec. 303 of the SSA specifies what states must include in their unemployment
insurance laws. T11is entails, just to name a few of the federal requirements, how the state
can use money from their state unemployment insurance trust fund and what information
claimants are required to disclose. 2
And while the states do establish criteria for who is eligible for state unemployment
insurance, they do not have free reign to do whatever they want. States have limited
flexibilities for establishing their own eligibility criteria subject to compliance with
federally-mandated eligibility requirements.
LP A misunderstands certain unemployment insurance eligibility requirements when it
stated that Kansas employees must meet "a minimum duration of employment." State law
requires individuals to be monetarily entitled to receive unemployment insurance, meaning
they must have received wages from insured employment in two or more quarters of their
base period, and have total base period wages equaling at least 30 times their calculated
weekly benefit amount. 3
LPA misstates the law once again and says funding of the Kansas ' unemployment
insurance program falls exclusively on Kansas employers. LP A's generali zation is not only
overly simplistic, but it is also misleading. There are several funding mechanisms that
contribute to administering the entire state unemp loyment insurance program, such as
federal government grants and public employment services programs. 4
What LP A should have clarified is that the state unemployment insurance trust fund that
pays unemployment insurance benefits to claimants is funded by employer contributions.
Employers are charged only for state unemployment insurance benefits paid to claimants
who are eligible and qualified. As LP A pointed out, the state unemployment insurance
program is a joint program between federa l and state governments, meaning the federal
government helps fund the administration of a state's unemployment insurance laws and
Kansas employers fund the state unemployment insurance trust fund.
1 42 US. C. 503, et seq.
2 42 USC. 503, et seq.
3 KSA 44-705(e).
4 See 20 C.FR 601.6.
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To be clear, none of the employers described below will be charged for benefits paid
out under any of the federal unemployment insurance programs created in response
to the COVID-19 pandemic.
• A Contributing Employer is any employer other than a reimbursing employer. 5
A contributing employer is required to report total wages paid each employee
during each qua1ter, but pays taxes based upon a taxable wage base as defined in
K.S.A. 44-703(0)( 1). l11e quarterly tax funds the Kansas unemployment trust fund.
Contributing entities receive an annual statement of their pro rata share of
unemployment benefits which were charged to their account. The benefit charges
will be used in the computation of the annual contribution experience rate. 6
Contributing employers will not be charged if KDOL finds that one of their
employees ( 1) was discharged for misconduct, (2) left work voluntarily, or (3) was
discharged from an employer directly impacted by COVID-19. 7 Contributing
employers will not be charged for clainis KDOL determines are fraudulent.
• A Reimbursing Employer is only available to nonprofit 50l(c)(3) organizations,
governmental entities, or tribal entities. 8 With this option, the employer reports
total wages paid each employee each quarter, but pays no tax at the time. Instead,
the law requires the employer to reimburse the fund 100 percent for any benefits
paid to their former employees with quarterly statements. 9
LP A is correct that under the CARES Act, the federa l government allowed KDOL
°
to reduce reimbursing employer' s contributions by 50%. 1 Congress had many
opportunities to amend the CARES Act and allow the states to reduce reimbursing
employer' s contributions by 100%, but decided to leave it at 50%. ReimbUI"sing
employers will not be charged for claims KDOL determines are fraudulent.
• A Rated Governmental Employer may elect to make payments to the
Unemployment Insurance Trust Fund as a contributing employer, reimbursing
employer, or a rated governmental employer. 11 If a rated governmental employer
choses to make payments as such, then they report and make benefit cost payments
based upon total wages paid during each calendar quarter. Rated governmental
employers eligible for a contribution rate make quarterly payments at a calendar
'KSA 44-703(y).
6 See KSA 44-71 0(b).
7 KSA 44-710(c)(2)(A).
8 KSA 44-?IO(e).
9 KSA 44-710(e)(2).
10 Sec. 2103(b) of the CARES Act, as amended by the Protecting Nonprofits from Catastrophic Cash Flow
Strain Act of 2020, Pub. L. 116-151, as amended by Sec. 202 of the Continued Assistance for Unemployed
Workers Act of 2020.
11 KSA 44-710d.
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year rate determined by the experience of all rated governmental employers and the
individual employer's experience.
Rated governmental employers are not charged if KDOL finds that one of their
employees was discharged for misconduct, left work voluntarily, or were
discharged from an emp loyer directly impacted by COVID-19. 12 Rated
governmental employers will not be charged for claims KDOL detennines are
fraudulent.
III. LPA oversimplifies, neglects, and misstates the laws and requirements
regarding the federal unemployment insurance programs Congress has
created in response to the COVID-19 pandemic,
A. LPA fails to understand the consequences surrounding the PUA
program's requirement that claimants do not need to provide
documentation to prove eligibility and the impact it has on KDOL's
ability to combat fraud.
LPA briefly mentioned that fraudsters have targeted the PUA program because they do not have
to submit supporting documentation to prove eligibility. However, LP A ends the analysis there.
What LP A fails to recognize is that requiring claimants to provide documentation is an anti-
fraud tool. KDOL was prohibited from requiring claimants to provide documentation to
establish their eligibility because of federal law and guidance, until recently.
As explained in further detail below, PUA is a federal unemployment benefit program created
on March 27, 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act
of2020 that provides benefits to individuals who are either ineligible or have exhausted all their
rights to regular unemployment insurance, PEUC, and other federal and state unemployment
insurance programs. USOOL has referred to PUA as a "benefit of last resort. " 13 To be eligible
for PUA, claimants only have to self-certify that tl1ey are otherwise able and available to work
within the meaning of state unemployment insurance law, except that they are unemployed,
partially unemployed, or unable or unavailable to work due to one of the COVID-1 9 related
reasons identified in the CARES Act. 14
Due to an influx of questions from the states on implementing this brand new program, USDOL
issued additional guidance to address the states ' questions on April 27, 2020. 15 In this new
guidance, USDOL stated that PUA claimants do not need to provide "proof of employment
12 KSA 44-710(c)(2)(A).
13 UIPL 16-20, Change I, Attachment!, 1-8 Q 33.
14 Sec. 2102(a)(3)(A)(ii)(I) of the CARES Act.
15UIPL 16-20, Change I, Coronavirus Aid, R elief, and Economic Security (CARES} Act of2020 - Pandemic
Unemployment Assistance (PUA} Program Reporting andlnstmctions and Questions and Answers, available
at https://wdr.doleta.gov /directives/attach/UIPL/UIPL _ 16-20_Change_ l .pdf
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or self-employment to qualify for PUA, nor does PUA take into account the individual's
principal source of income as part oft.he self-certification process."16
Kansas was very concerned with this guidance, as proof of employment and wages are two key
tools that states use to combat fraud. This guidance even prompted USOOL-OIG to publicly
voice its concerns to USOOL-ETA on May 26, 2020 that, "state's reliance on self-certifications
alone to ensure eligibility for PU A will lead to increased improper payments and fraud." 17 For
exan1ple, USDOL-OIG stated that, "An individual could continue to receive an average of$775
per week based solely on an initial undocumented self-certification statement that one of the
COVID-19 related reasons were met; and by acknowledging any intentional misrepresentation
to obtain PUA benefits constitutes fraud." 18 Applying the FPUC program to USDOL-OIG's
scenario, this hypothetical payment could be increased to $1,375 per week. USOOL-OIG
provided USOOL-ETA with its interpretation and argued that states have the authority to
require claimants to submit documentation to substantiate employment and wages, so that only
legitimate claimants would receive PUA funds.
USOOL-ETA agreed with USDOL-OIG that the way the CARES Act is "statutorily
construct[ed] may introduce a degree of risk of fraud" in its response on June 5, 2020. 19
However, USDOL-ETA noted that it is sole arbiter of policy pronouncements and legal
interpretations, and is "singularly charged with providing guidance to the states for
administering the self-certification eligibility process under the PUA statute." 20 USDOL-ETA
doubled-down on its guidance prohibiting states from requiring PUA claimants to submit any
documentation as a condition of eligibility to substantiate (1) employment or self-employment,
(2) why they are unemployed due to COVID-19, or (3) wages. The only instance where PUA
claimants are required to provide documentation is if they want a weekly benefit amount (WBA)
16 UIPL 16-20, Change I, Attachment!, 1-1.
17 Memorandum (i.e. OIG Alert Memorandum) from Elliot P. Lewis, Assistant Inspector General Office of
Audit, OIG-USDOL, for John P. Pallasch, Assistant Secretary of ETA, Subject: Alert Memorandum: The
Pandemic Unemployment Assistance Program Needs Proactive Measures to Detect and Prevent Improper
Payments and Fraud Report Number: 19-20-002-03-315, page I, issued May 26, 2020, available at
https ://www. oversight. gov /sites/default/files/oig-
reports/ Alert%20Memorandum %20The%20Pandem ic%20Unemploym ent%20Assistance%20Program %20
Needs%20Proactive%20Measures%20to%20Detect%20and%20Prevent%20Improper%20Payments%20an
d%20Fraud. pdf
18 OIG Alert Memorandum, page I.
19 Memorandum (i.e. ETA Response Memorandum) from Kate O ' Scannlain, Solicitor, ETA-USDOL and
John Pallasch, Assistant Secretary of ETA, for Scott S. Dahl, Inspector General OIG-USDOL, Subject:
Response to the Office of Inspector General's (OIG) Alert Memorandum : The Pandemic Unemployment
Assistance Program Needs Proactive Measures to Detect and Prevent Improper Payments and Fraud, Report
Number: 19-20-002-03-315, page 3, issued June 5, 2020, available at https ://www morganlewis.com/-
/m edia/files/document/2020/cov id-1 9/Response-to-Office-of-Inspector-Generals-Alert-Memorandum. pdf
20 ETA Response Mem orandun1, page 2. If not, States do not know if they can continue to follow the guidance
ETA provides on all federal -state unemployment insurance program and requirements.
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greater than the minimum. 21 Thus, even if claimants fail to provide documentation to
substantiate a higher WBA, a claimant remains eligible for PUA.
Recognizing that states were hampered to combat PUA fraud, Congress amended the law on
December 27, 2020. The law now requires claimants to provide documentation to
substantiate their employment or self-employment to be eligible to receive PUA. 22 KDOL
now requires all PUA claimants, those who previously received PUA payments and those who
will file new PUA clain1s, to provide employment/self-employment documentation. Failure of
claimants to do so will result in them being ineligible for PUA and possible overpayments.
B. LPA misunderstands the number of federal unemployment insurance
programs that were created under the CARES Act, when they were
created, and how they were created.
First, LP A states that the CARES Act "created funding for six new unemployment
insurance programs." The CARES Act did not create six new unemployment insurance
programs. The CARES Act created three:
1. Pandemic Unemployment Insurance (PUA) provided up to 39 weeks of
unemployment insurance benefits to individuals who have either exhausted their
entitlement to regular UC or are not eligible or qualify for regular UC (i.e.
individuals who are self-employed, have limited recent work history, certain gig
economy workers, clergy and those working for religious organizations). 23 To be
eligible for PUA, individuals must also be otherwise able and available for work
within the meaning of state unemployment insurance law, except that they are
unemployed, partially unemployed, or unable or unavailable to work due to a
specific COVID-19 related reason identified in the CARES Act. 24 The individual
must self-certify to the specific reason why they are unable or unavailable to work
due to COVID-19. 25 Under Sec. 20l(b) of the Continued Assistance for
Unemployed Workers Act of2020 (CAA), which was signed into law on December
27, 2020, PUA was expanded to provide claimants up to 50 weeks of
unemployment insurance benefits to these individuals.
2. Pandemic Emergency Unemployment Insurance (PEUC) provided
unemployment insurance benefits to claimants in the amount of 13 times their
calculated weekly benefit amount if they have exhausted all their rights to regular
21 ETA Response Memorandum, page 7.
22 See Sec. 24 1 of the CAA.
23 See Sec. 2102 of the CARES Act (Pub. L.) 11 6-136.
24 Sec. 2102(a)(3)(A)(ii)(I) of the CARES A ct.
i, Sec. 2102(a)(3)(A)(ii) of the CARES Act.
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unemployment insurance under state or federa l law. 26 Claimants must otherwise be
able to work, available to work, and actively seeking work similar to regular
unemployment insurance claimants.27 Under Sec. 206(b) of the CAA, PEUC was
expanded to provide claimants with benefits in the amount of 24 times their
calculated weekly benefit amount.
3. Federal Pandemic Unemployment Insurance (FPUC) provided an additional
$600 per week to individuals who are collecting at least $1 of unemployment
insurance from either state or federa l programs. 28 The first week this additional
$600 was payable was the week ending April 4, 2020. 29 The FPUC program
expired on July 31 , 2020. 30 Under the CAA, the FPUC program was reactivated,
but now provides an additional $300 per week to individuals collecting at least $1
of unemployment insurance from either state or federal programs. FPUC at $300 is
set to expire the week ending March 13, 2021.
These three programs were the only new federal unemployment insurance programs
created by the CARES Act. Although LP A is correct that these programs are federally
funded, LP A neglects to inform in its Audit that emp loyers will not be charged for benefits
paid under any of these programs.
What LP A should have clarified is that after FPUC expired, the President established the
Lost Wage Assistance Program (LWA) through a Presidential Memorandum, and was a
program administered by the Federal Emergency Management Agency (FEMA). 3 1 LWA
provided claimants who were receiving at least $100 of unemployment insurance from state or
federal programs up to $400 of wage assistance per week, with a $300 federal contribution. The
remaining $100 had to be contributed by the state. Kansas chose to meet its $100 contribution
per claimant with the payments KOOL makes for regular unemployment insurance benefits to
claimants that met the requirement to be unemployed or partially unemployed as a result of
COVlD-19. 32 LW A claimants also had to self-certify that they were unemployed or partially
unemployed because their work or workplace was directly impacted by the COVID-19
26 See Sec. 2107 of the CARES Act.
27 See Sec. 2 I 07 of the CARES Act.
28 Sec. 2104 of the CARES Act.
29 UIPL No. 15-20, Coronavirns Aid, Relief, and Economic Security (CARES) Act of 2020 - Federal
Pandemic Unemployment Compensation (FPUC) Program Operating, Financial, and Reporting
lnstrnctions, page 3, issued April 4, 2020, available at
https ://wdr.doleta.gov /directives/corr_ doc.cfm ?DOCN- 9297.
30 Sec. 2104( e)(2) of the CARES Act.
31 Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus
Disease 20 19, August 8, 2020.
32 UIPL 27-20, Presidential Memorandum on Authorizing the Other Needs Assistance Program for Major
Disaster Declarations Related to Coronavirus Disease 201 9 (COVID-19)-Unemployment Insurance (UJ) -
Related Technical Assistance for States Administering Lost Wages Assistance (LWA), page 4, issued August
12, 2020, available at https://wdr.doleta.gov/directives/attach/UIPL/UIPL_27-20.pdf
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pandemic. LWA was only available for the weeks ending August 1, 2020 through September
5, 2020 and is funded by FEMA.
The other program that LPA may be referring to is the Federal-State Unemployment
Insurance Extended Benefits (EB) Program. Kansas ' EB program can be found in
K.S.A. 44-704a and K.S.A. 44-704b and provides claimants either 13 weeks or 20 weeks
of unemployment insurance benefits , depending on the state unemployment rate, to
individuals who have exhausted regular unemployment insurance and PEUC. 33
Contributing employers and rated governmental employers are not charged for any EB
benefits paid.34 Furthermore, as authorized by Sec. 2103 of the CARES Act, KDOL is
permitted to reduce the amount of EB benefits charged to a reimbursing employer by 50%.
IV. LPA misunderstands that anti-fraud tools used in the state unemployment
insurance program do not adequately address: (A) fraud prevention in the
federal PUA program as the PUA program did not require individuals to
provide proof of self-employment until Congress created this eligibility
requirement through the recently enacted CAA in late December of2020; and
(B) prevention and detection of imposter claims resulting from identity theft.
In its Audit, LPA concludes that "[m]any ofKDOL's existing processes were manual and
not effective to identify PUA fraud." To support its conclusion, LPA appears to be blindly
relying on their KDOL staff emailed survey rather than doing an in-depth analysis of the
federally-recommended anti-fraud tools that KDOL had in place at the time LPA
conducted the Audit.
A. PUA Fraud
In making this statement, LPA first suggests these fraud-detection processes would have
been effective in identifying PUA fraud had KDOL's implementation of these processes
been automated rather than manual. KDOL disagrees.
Recognizing the historic amount of fraud all the states were experiencing, USDOL issued
guidance on program integrity and listed mandatory and strongly recommended tools the
states should use to combat fraud. 35 KDOL's fraud detection processes complies with
33 UIPL 24-20, Temporary Changes to the Federal-State Extended Bene.fits (EB) Program in Response to the
Economic Impacts of the Coronavirus Disease 2019 (COVID-1 9) Pandemic Emergency, page 3, available
at https ://wclr.doleta.gov /directives/attach/UIPL/UIPL _ 24-20. pelf
34 KS A 44-71 0(c)(2)(C).
"UIPL 23-20, Program Jntegrity for the Unemployment Insurance (UJ) Program and the UI Programs
Authorized by the Coronavirus Aid, Relief, and Economic Security {CARES) Act o/2020 - FederalPandemic
Unemployment Compensation (FPUC), Pandemic Unemployment Assistance (PUA}, and Pandemic
Emergency Unemployment Compensation (PE UC) Programs, available at
https ://wclr.doleta.gov/directives/attach/UIPL/UIPL_23-20.pdf
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USDOL's guidance, and if LP A had examined the efficacy of these processes, LPA would
have recognized that many of them- even if automated- would not have rapidly and
proactively prevented, detected, and investigated fraudulent activity in the PUA program.
• For example, the new hires cross-matching is a fraud detection process used to
compare new hires in the national and state directory of new hires databases to
claimants who continue to file for unemployment insurance benefits after the hire
date is submitted by their employers. Basically, the reports from employers of
recent hires are cross-matched against claimants to see if claimants may have found
new work that they are not reporting on their claims for benefits. However, because
PUA benefits are provided mostly to self-employed claimants, their information
would not appear in these national and state new hires databases. l11is means that
the federally-recommended fraud detection process of new hires cross-matching,
itself, is not an effective tool to identify a majority of PUA fraud.
• Similarly, the quarterly wage cross-matching is a process used to compare
employer quarterly wage reports to claimants who continue to file for
unemployment insurance benefits while receiving wages. Under state law, this
report is due at the end of each calendar quarter. This report reveals claimants that
are employed by certain employers, not self-employed, which means that the
federally-recommended fraud detection process of quarterly wage cross-matching,
once again, is not an effective tool to identify a majority of PUA fraud.
• Likewise, the state information data exchange system (SIDES) is a database
where employers and third party administrators supply information. It is unlikely
that self-employed individuals are reporting their job separation and earnings
verification information to SIDES. Therefore, the use of this federally-
recommended fraud detection process, once again, is not an effective tool to
identify a majority of PUA fraud.
In its Audit, LP A also overlooked the difficulties in maintaining program integrity when
the law sun-ounding the PUA program made the program vulnerable to fraud. As described
in Section III A of this response, this issue was brought up and challenged by USDOL-OIG
against USDOL-ETA regarding USDOL-ETA' s guidance limiting states ' authority to
substantiate PUA claimant eligibility with documentation. In overlooking this
controversial issue between USDOL-OIG and USDOL-ETA, LPA failed to recognize
Congress' recent addition of a new eligibility requirement to the PUA program in the CAA
that essentially combats fraud by requiring individuals to now submit documentation to
substantiate employment or self-employment, or planned commencement of employment
or self-employment within a certain period from the date of application to be eligible for
PUA benefits.
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B. Identity Theft
Second, LPA often mi stakenly applies the strategies of fraud detection to the strategies for
prevention of imposter claims resulting from identity theft. This overlooks the reality that
many traditional fraud management tools and resources are ineffective in preventing
imposter claims resulting from identity theft. For instance, identify verification tools,
such as the Social Security Administration Cross-Match do not prevent or detect imposter
claims resulting from identity theft when fraudsters use valid social security numbers and
valid names- obtained through large nationwide data breaches like Target, Equifax, or
the U.S . Office of Personnel Management-to file for unemployment insurance benefits.
Fraudsters using valid names connected with valid social security numbers allows them to
bypass the checks put in place through fraud-combattin g tools, such as the Social Security
Administration Cross-Match.
Unfortunately, the FBI notes that identity theft in unemployment clain1s is a nationwide
problem. 36 The Audit needs to provide the national contell.i for this issue, and the Audit
should not suggest that KDOL was "clearly not well prepared to address" the spike in
unemployment claims because it suggests some state was. A more apt description is that
KDOL was not sufficiently resourced to be in a position to respond to the demands of the
new federal programs, which are now acknowledged to have been originally drafted with
serious vulnerabilities for exploitation and fraud.
USDOL recognized the need to release additional guidance to assist states in the prevention
and detection of imposter claims from identity theft when it issued additional guidance
on August 31, 2020. 37 This guidance came approximately 5 months after the CARES Act
was signed. USDOL reminded states to follow identity verification measures, including
data analytics that identified shared characteristics among claims that displayed indicators
of suspicious claims activity.
LP A does not make any findings of what preparedness measures KDOL should have taken
in addition to its existing tools and KDOL's additional anti-fraud measures (72-hour holds,
public assistance, and data analytic tools). As identified by LPA in its Audit, KDOL has
implemented data analytics tools by initially reviewing claims for trends of suspicious log-
36 FBI Sees Spike in Fraudulent Unemployment Insurance Claims Filed Using Stolen Identified, FBI National
Press Office, July 6, 2020, available at https://www fbi.gov /news/pressrel/press-releases/fbi-sees-spike-in-
fraudulent-unern ployrn ent-insurance-clairns-filed-using-stolen-identities.
37 UIPL 28-20, Addressing Fraud in the Unemployment Insurance (UI) System and Providing States with
Funding to Assist wilh Efforts to Prevent and Detect Fraud and Identity Theft and Recover Fraud
Overpayments in the Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment
Compensation (PEUC) Programs, available at https ://wdr.doleta.gov/directives/attach/UIPL/UIPL_28-
20.pdf
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February 19, 2021
Page 13 of 16
in credentials and duplicated fields to currently using tools that automatically flag claims
data through machine learning that identifies new fraud trends.
V. LPA's Audit is rife with additional factual errors.
KOOL points out other areas in which LP A's Audit contains additional factual errors:
• Figure 1, pp. 3 to 4. LP A' s selected numbers in Figure 1 are misleading, and it is
unclear what source LP A used to support their analysis. All the regular
unemployment insurance claim numbers do not reflect KOOL's recent revisions
submitted to USOOL-ETA. PUA claims began in May 2020, not June 2020. The
numbers displayed do not represent monthly totals.
• Figure 2, pp. 7 to 8. LP A's analysis from its emailed survey identifies, but fails to
highlight, that many of the respondents opined on KOOL' s performance in the
beginning of the pandemic when not employed by KOOL at the beginning of the
pandemic. LPA did not interview any respondents. Rather, LP A relied solely on its
one-time responses from newly-hired staff.
• Last bullet, p. 4. Contrary to LPA's conclusion that the increase of regular
unemployment claims in January 2021 was due solely to fraudsters , KOOL officials
have explained that the recent increase is likely related to multiple factors. There is
usually a seasonal increase in claims for industries like construction, and
manufacturing will sometimes see temporary layoffs around the holidays. There
was also an increase in accommodation and food services, which could be related
to increased community spread of coronavirus. The education industry, particularly
support staff, may have been impacted by the move to remote learning. Although
it is still likely that fraudulent claims are included in these fil es, KOOL has done
its best to filter those out, but they can only be removed if they were identified as
fraud at the time the claim was filed. The new identity verification process that was
implemented at the beginning of February 2021 should help with this issue by
identifying fraud before the claim is even filed.
• Header, p. 4. LPA should clarify that the fraudsters targeted the new PUA program
because of the weaknesses relating to the federal requirements surrounding the
PUA application process, which prohibited Kansas from requiring documentation
to substantiate employment or self-employment, self-certification to why a
claimant was unemployed due to COVIO-1 9, and income.
• First bullet, p. 5. LP A should clarify that fraudsters used a large-scale identity theft
campaign to target the PUA program in all 50 states, Washington O.C., and United
States territories.
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Legislative Post Audit
February 19, 2021
Page 14 of 16
• Last bullet, p. 5. LP A's description that unemployment funds are disbursed mostly
by debit cards is incorrect. Unemployment insurance benefit payments are
distributed by prepaid debit card and direct deposit. Since the onset of the
pandemic, the majority of claimants have selected to receive their payments via
direct deposit. Fraudsters have used both methods to fraudulently receive funds.
KDOL is working with federal and state law enforcement agencies and banks on
recovering such funds.
VI. KDOL does not choose to raise payr·oll taxes.
The tax rates and solvency adjustments are defined in KS.A. 44-710a, and they are a function
of the unemployment insurance trust fund's balance. For calendar years 2019 and 2020, during
a period of low unemployment, employers' tax rates were decreased by up to 0. 5 percentage
points when the fond was in a surplus. However, as the pandemic resulted in a near-overnight
spike in unemployment, the trust fond diminished in 2020, and KDOL was required per statute
and legislation to remove this tax decrease.
The Audit correctly notes that "benefits paid out for the temporary federal unemployment
programs do not come from the state's unemployment trust fund." So the Audit should clarify
in its subsequent statement that "both legitimate and fraudulent benefits would negatively affect
the balance of the state's trust" does not include any legitimate or fraudulent claims in the federal
programs like PUA.
VII. LPA misstates the impact that fraudulent claims will have on Kansas
employees and employers.
A. Tax Form 1099-G
KDOL has expended considerable time and resources to assist identity theft victims who
may have or will receive a tax form 1099-G for unemployment insurance benefits
fraudulently obtained using a stolen identity. This includes not only proactively seeking
guidance from the Internal Revenue Service (IRS) and the Kansas Department of Revenue
(KDOR), bnt also dedicating significant resources in setting up a processes for claimant
communication about the issue and for issuing corrected 1099-G forms and allocating resources
dedicated to those processes. In fact, Kansas was one of the first states to raise this issue to the
IRS.
Despite continued delays from the IRS in issuing guidance on how KOOL should address 1099-
G fonns in cases of fraud, KDOL developed criteria to substantially limit the number of 1099-
G forms that would be sent to the victims of identity theft. KOOL proactively did an audit of
the first 1099-G mailing and identified identity theft victims that should not have been included
in the initial mailing. KDOL then sent out corrected 1099-G forms to these identity theft victims,
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February 19, 2021
Page 15 of 16
and the IRS, instructing them that they needed to take no further actions. Those corrected 1099-
Gs went out the week beginning February 14, 2021.
Due to the volume of claims and fraudulent attempts in tax year 2020, not all fraudulent 1099-
Gs were stopped. However, KDOL did stop many 1099-G fonns from going out that KDOL
knew were due to identity theft. KDOL also created a process for claimants to dispute inaccurate
1099s, began issuing corrected 1099-Gs, and stood up a call center to answer questions related
to the 1099-G process.
It is worth noting that officials in most if not all states have had significant challenges with the
1099-G process because of the tsunami of fraud in the tmemployment system in 2020. For
example, in Vermont significant errors with the 1099-G process resulted in the state' s
Department of Labor recalling all 1099-Gs that were sent out in the state.38 Additionally, every
state has had issues with identify theft victims receiving 1099Gs for benefits they did not apply
for or receive.
B. LPA misstates Kansas employers' fmancial responsibility for
fraudulent claims.
LP A incorrectly stated the impact that fraudulent unemployment insurance payments will
have on employers. KDOL ' s procedures regarding fraudulent claims and employer charges
remain the same. Employers will not be charged if KDOL identifies a state
m1employment insurance claim as fraudulent. Claims that have been identified as
fraudulent, including reported identity theft claims, will not be displayed on any
employer's statement. This applies to all employers regardless of their classification.
If an employer identifies any charges that were the result of a fraudulent claim, then they
are ab le to bring these to KDOL's attention so that they can be removed. As such, KDOL
has removed all charges from employers it is aware of that are related to fraud.
VIII. KDOL is criminally investigating potentially fraudulent claims.
The Audit says KDOL ' s Special Investigations unit had not started criminal investigations
into the 157,000 potentially fraudulent claims it reported. LPA is incorrect. During the
summer of 2020, KDOL referred tens of thousands of potentially fraudulent accounts to
the USDOL-OIG for comparison with other simil ar data collected from other states labor
departments. This included IP addresses/passwords and emai I addresses. The IP addresses
spanned throughout the south and southeast United States. In addition to the US DOL-OIG,
KDOL has referred potentially fraudulent claims to the FBI and the Secret Service and
38 Labor Department issues recall of all I 099s because of mailing error, Vermont Business Magazine. Feb.
2, 2021 , 6: 39pm, available at https ://v erm ontbi z. com/news/2021/fe bruary/01 /labor-department-issues-
recall-all-1099s-because-rnailing-error.
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continues to do so. Federal law strongly encourages states to work with federal law
enforcement, including USDOL-OIG because ofjurisd ictional issues.
LPA also fai led to recognize the distinction between civil fraud and crimes associated with
identity theft and unlawfully receiving unemployment insurance benefits. Not every
potentially fraudulent claim warrants criminal prosecution . Identifying select cases for
criminal investigation and prosecution is a matter involving eva luation by the KDOL law
enforcement officers as well as input from prosecuting authorities.
The Audit does not mention that KDOL has expended considerable time and resources
responding to two large subpoenas from USDOL-OlG, for the stated purpose of collecting
data from each state on claims in the various programs in an eff011 to detect nationwide
fraud patterns and schemes. This is in addition to a data-sharing Memorandum of
Agreement KDOL entered into with USDOL-OIG at the beginning of the pandemic to
share data with them to combat fraud. KDOL has also been working the FBl on similar
data-sharing arrangements.
Thank you again for your stairs work on this report.
Respeclfully,
Brett Flachsbarth
Deputy Secretary of Labor
Kansas Department of Labor
401 SW Topeka Blvd.
Topeka, Kansas 66603-3182
785-296-5000, ext. 7305
brett.tlachsbarth@ks.gov
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Appendix A – Cited References
This appendix lists the major publications we relied on for this report.
1. Kansas Department of Labor Weekly Unemployment Claims Reports
(December, 2020). Kansas Department of Labor.
2. COVID-19: States Cite Vulnerabilities in Detecting Fraud While Complying with
the CARES ACT UI Program Self-Certification Requirement (October 2020.).
The U.S. Department of Labor Office of the Inspector General.
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