New report reveals why Ohio's unemployment benefits system saw fraud amid COVID-19

A new report from Ohio Auditor Keith Faber's office released Thursday dived in-depth into the fraud plaguing the state's unemployment benefits system, pointing to multiple reasons including failure of early action, lack of controls, relaxed verification rules and outdated infrastructure.  

All those factors led to the system allowing for more than $475 million to be paid to criminals while another $3.3 billion in overpayments were made, said the report, which covered the timeframe from March 2020 to February 2021.

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The good news is that many of those issues are on their way to being fixed under new leadership at the Ohio Department of Job and Family Services and with new solutions being implemented.

"This is a problem that I'm glad at least it's getting better," said Faber in an interview. "But it was a problem that occurred in Ohio, and it's our job to point those things out." 

Outdated technology allowed fraud to flourish

When the COVID-19 pandemic hit Ohio and its economy early last year, fraud emerged as aging infrastructure and technology was overwhelmed by the spike in the number of unemployment claims and the rapid addition of pandemic-related benefits programs.

"The system was simply not built or prepared for the mass amount of claims and applicants that came with the pandemic," a summary of the audit said, presenting fraudsters with a prime target.

There were fraudulent applications as well as account takeovers, where criminals gained access to banking or personal information and rerouted benefits to themselves. Such activity is being investigated by state and federal authorities.

But overpayment of benefits also became an issue, likely due to mistakes made by applicants or employers, many of whom were going through the process for the first time, the department said previously.

Little action early on to prevent fraud

The new audit was conducted in response to the result of another audit released earlier this year. Faber said state unemployment officials knew about widespread fraud problems during the pandemic's early months but did not turn over information to the auditor's office. Instead, auditors were told that any fraud was insignificant. 

But that contradicted what former Job and Family Services Director Kimberly Henderson told lawmakers, that she was aware of the fraud as early as June 2020.  

The new audit explains that discrepancy. The department thought auditors were only trying to identify internal or employee-related fraud, not that of benefit recipients. Faber, however, believes his office was clear that all types of fraud were of interest.

Regardless, the audit still accuses the department of not taking early action to combat fraud. In August 2020, a fraud dashboard was launched, but it was not until early 2021, around when director Matt Damschroder took over, that the department launched a project partnering with the private sector to really take the issue head on.

"I'm not going to say that we went in and that we found nothing, that they were just ignoring the fraud," said Faber. "But if they had tried to do that earlier, would they have been as successful? And we see no reason why they would not have been."

Loosened oversight, verification

The other main causes of fraud identified by the report were the lack of checks on the system — some of them on purpose — to make sure money was being doled out properly and correctly.

For instance, auditors found nearly 86,000 instances of payments to incarcerated individuals and 141,000 payments to deceased people. There were many other questionable payments as well.

Approximately $8.1 billion went through that system, and the report found no established procedures to determine if things were operating effectively.

Some of that was because of the department's policy decision to loosen verification requirements, such as having employers verify that an employee was not working, in hopes of expediting claims.  

"When erring between security and getting the money out the door quickly, they wanted... to err on getting the money out as quickly as they could to those in need," said Faber. "However, I think it has been shown they are not mutually exclusive. And that's the discussion."

Costs of benefits fraud to Ohio taxpayers

In addition to the partnership program, Ohio spent hundreds of thousands of dollars on private contractors to help shore up fraud. 

According to the audit, more than 25% of all unemployment payments last fiscal year were either fraudulent or overpaid compared to 3.5% before 2020. A total of $14.2 billion was paid out in 2021, compared to the $900 million paid out the three years before the pandemic. 

The issues of fraud and overpayment still exist, but with the end of the pandemic-related unemployment benefits in September, officials hope there will be less stress on the system.

"We continue to implement new strategies to improve timing of claims processing and safeguarding federal and state taxpayer money,” Damschroder said in a statement in response to the audit. “Much work remains, but we are confident in the improvements we have already made and look forward to utilizing the findings in the audit to inform the future work being planned.”

As of a month ago, Job and Family Services reached out to 3,100 claimants with account activity similar to an account takeover and said approximately 155,000 claimants have applied for a waiver to keep the overpayment.

Some security measures already implemented this year include new verification and fraud scoring methods, new investigative tools for crossmatches, multi-factor authentication and other protocols, the department said.

"Many of the systemic problems with the system will be fixed by going to a more secure, more robust, more efficient and effective system," said Faber. "And it looks like they're in that process."

Titus Wu is a reporter for the USA TODAY Network Ohio Bureau, which serves the Columbus Dispatch, Cincinnati Enquirer, Akron Beacon Journal and 18 other affiliated news organizations across Ohio.