Fraudsters bilk Kansas unemployment system for up to $600M, audit concludes

Kansas Department of Labor disputes findings

Rep. Kristey Williams, R-Augusta, says the Kansas Department of Labor's efforts to detect and stop fraud were "absolutely inadequate." (Jan. 26, 2021, photo by Sherman Smith/Kansas Reflector)

TOPEKA — A report issued Wednesday by the Legislature’s auditing division estimates up to $600 million in fraudulent unemployment claims may have been paid out during the pandemic.

The estimate is based on 157,000 initial claims flagged in the past 12 months by the Kansas Department of Labor as possible fraud. The agency disputed the audit’s methods and conclusions.

Republicans questioned whether the agency acted quickly or effectively enough to respond to fraud warnings as unemployment claims drained 75% of the state’s trust fund.

“Whatever actions or tools or identity verifications were done were absolutely inadequate,” said Kristey Williams, a Republican from Augusta who serves on the Legislative Post Audit Committee. “I’m not arguing with efforts. I’m arguing with outcomes.”

Auditor Matt Etzel delivers a report on unemployment fraud to lawmakers during a hearing Wednesday at the Statehouse. (Screen capture by Kansas Reflector)

Auditor Matt Etzel said the federal Pandemic Unemployment Assistance Program was attractive to fraudsters because it involved claims that didn’t require the typical employer verification. The PUA program made cash assistance available for the first time to gig workers, contract laborers and individuals who are self-employed.

Through the PUA program, individuals could receive up $500 per week for 39 weeks in state benefits, and the federal government added as much as $600 per week.

“You combine the fact that it was relatively easy for fraudsters to get approved for PUA with the potential for large payouts, and all of a sudden you have a lot of incentive for a large-scale national fraud scheme, which is exactly what we saw,” Etzel said. “And fraudsters are smart. They didn’t just file one PUA claim. They gathered enough stolen personal information to apply for benefits in mass quantities.”

Etzel said not every claim flagged as risky by the Labor Department would turn out to be fraud, but it also is likely some cases of fraud went undetected. The flagged claims represent 24% of the total initial claims filed in the past year, so auditors reasoned that 24% of the $2.6 billion in total benefits processed by the Labor Department could be fraud. About $200 million of the potential fraud came from state funds, while the other $400 million in fraud would be from federal funds.

Auditors plan to take a closer look at the impact of fraud on the trust fund, and the Labor Department’s efforts to detect fraud, during the second phase of their study.

Earlier this week, the Labor Department said it had referred 50,000 cases of fraud to law enforcement. The agency’s fraud estimate is $290 million.

Gov. Laura Kelly said in a news briefing Wednesday at the Statehouse that her administration “based our numbers on data that we have,” and that she was ordering an independent audit to take another look.

Efforts to combat fraud were complicated by the agency’s archaic IT system, staffing problems, an unprecedented volume of claims, and a primary focus of getting benefits out to Kansans who need assistance.

Brette Flachsbarth, deputy secretary of the Kansas Department of Labor, says there is a “delicate and laborious” balance between making sure Kansans get the benefits they need and detecting fraud while keeping “our hodgepodge system up and running.” (Screen capture by Kansas Reflector)

“This was a thousand-year flood in many instances,” said Brett Flachsbarth, deputy secretary for the Labor Department. “The department from day one of the pandemic has been focused on the issue of fraud.”

Republicans on the Legislative Post Audit Committee said the agency should have done more to install identity check protections in September after receiving $1.7 million in federal funding specifically for that purpose. Rampant fraud continued to drag down the system until it was taken offline for three days in late January.

“We discussed fraud all year long,” said Rep. Sean Tarwater, R-Stilwell, “and the federal government warned us and warned us.”

The U.S. Department of Labor’s Office of the Inspector General issued an alert Wednesday flagging more than $5 billion in fraudulent unemployment claims nationwide. The fraud include $3.5 billion from multi-state claimants, $2 billion from connected to suspicious email accounts, $58.7 million for Social Security Numbers of people who are dead, and $98.3 million from federal prisoners.