Gov. Kelly orders outside audit of fraudulent claims paid out by KDOL

For many Kansans, problems persist with trying to file for unemployment benefits on the Kansas...
For many Kansans, problems persist with trying to file for unemployment benefits on the Kansas Department of Labor's website.(KWCH 12)
Published: Feb. 24, 2021 at 1:45 PM CST|Updated: Feb. 24, 2021 at 5:02 PM CST
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TOPEKA, Kan. (WIBW) - Governor Laura Kelly has ordered an external audit regarding fraudulent claims paid out by KDOL.

Governor Laura Kelly says she has ordered an external audit of fraudulent claims paid out by the Kansas Department of Labor due to the discrepancies between the Post Audit and KDOL’s audit.

Feb. 24, 1:45 p.m.

Post Audit report estimates KS Dept. of Labor paid $600M in fraudulent claims

A new report from the Kansas Legislative Post Audit Division puts a much higher dollar figure on the potential fraudulent claims paid by the Kansas Dept. of Labor than the agency estimate.

The audit report, released Wednesday, states an estimated $600 million of the roughly $2.6 billion Kansas paid in state and federal unemployment benefits in 2020 could have been fraudulent. The amount is about 24 percent of the total. In its own statement Tuesday, KDOL put the figure at $290 million.

The audit report states KDOL officials told them, as of December 2020, about 157,000 - or 24 percent - of the roughly 650,000 claims filed were fraudulent. According to the report, the auditors used this fraud rate to determine the dollar value of the fraud. However, they caution this is a preliminary estimate.

Read the full Legislative Post Audit report.

KDOL officials dispute the $600 million figure. They say it is incorrect to state 24 percent of the total money paid was in error because a majority of cases flagged for fraud were stopped before money was paid. In addition, KDOL says the percentage should not be applied to both the regular unemployment and PUA programs equally, because of the differences in eligibility, and checks and balances.

“LPA could have taken the list of claimants with fraudulent codes placed and cross-referenced that with the list of payments made, then provided a margin of error,” KDOL wrote in a statement. “However, LPA did not use the data available to them and instead chose to use a flawed methodology that fundamentally misunderstands KDOL’s fraud prevention process.”

The LPA report states the second part of their audit will include a more in-depth analysis, but they still believe their estimate will likely exceed KDOL’s $300 million figure.

The post-audit report notes KDOL’s process “was not designed to detect the large-scale, nationwide fraud campaign that occurred during the COVID-19 pandemic.” They note that KDOL, FBI and U.S. Dept. of Labor’s Inspector General mention a large-scale, nationwide identity theft campaign targeting the newly-created Pandemic Unemployment Assistance program, which was designed to assist people who were self-employed or not previously eligible for regular unemployment. According to the audit, fraudsters realized they could apply for PUA benefits without supporting documents. They then obtained personal information which had been stolen in previous large-scale data breaches, such as the 2017 Equifax breach, to apply for PUA benefits in other peoples’ names. From there, fraudsters directed a debit card to be mailed to an address they specified or money deposited into an account they chose.

“Once they had access to the benefits it became difficult for government agencies to track or recover those funds,” the audit report states.

The audit further notes that the way the PUA program was federally structured made it easier for scammers to get around KDOL’s existing methods of detecting fraud. In addition, many of KDOL’s fraud-detection systems were manual, making it difficult to be effective as the numbers of claims soared.

According to the audit report, KDOL noticed a rise in fraud cases related to the state’s regular unemployment system in November 2020. While it is not clear how it happened, KDOL officials speculated scammers tried to overwhelm the state’s system.

“Kansas was clearly not well prepared to address either (the spike in claims or implementation of a new program),” the LPA’s report states. “The combined effect has been significant fraud within the federal program and some fraud almost certain to affect the state’s program.”

In their statement, KDOL takes issue with the post-audit report’s implication the agency’s systems were at fault.

“This type of identity theft in unemployment claims is a nationwide problem. The Audit needs to provide the national context 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,” KDOL wrote. “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.”

The audit report also makes note that the fraud is of concern for employees and employers, due to the potential tax consequences of being the victim of a fraudulent claim.

The report notes the balance of the state’s unemployment trust fund dropped 75 percent last year, from about $1 billion in January 2020, to $247 million as of Jan. 25, 2021.

KDOL has since updated its fraud detection methods. In January 2021, the agency implemented a two-factor verification system. They also hope to have broader access to multi-state checks by the end of February 2021.

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