Michigan unemployment agency's decisions exposed it to 'hundreds of millions' in fraudulent claims

The state's attempts to speed unemployment payments — including personnel moves, policy changes and technological shortcuts — likely exposed the system to fraud amounting to "hundreds of millions" of dollars, according a report Wednesday.

The review was commissioned in July, after the state's Unemployment Insurance Agency and others across the nation became targets of fraudulent claims while officials tried to process historic numbers of unemployment claims at the height of the pandemic. Deloitte was hired to help with the agency's financial operations and conduct a forensic review of fraudulent activity. 

“While the agency’s previous decisions sought to balance fraud prevention and timely payment to eligible claimants, we strongly agree with the report’s findings that policy, technological and organizational changes increased the agency’s potential exposure to fraud,” said Liza Estlund Olson, acting director for the Unemployment Insurance Agency.

Estlund Olson took the helm at the beleaguered agency early this month after director Steve Gray's resignation.

“By releasing this report, our hope is that the public will better understand the aggressive measures UIA took to address these vulnerabilities," she said. "Our work isn’t done, and the UIA will continue to review our operations and organization to prevent criminals from accessing the unemployment benefits our hardworking families deserve.”

Since March 15, the state has paid out over $26 billion in unemployment benefits to 2.2 million workers and has handled as many claims in seven months as it usually sees in six years. At the peak of claims, 388,000 people filed in a single week. The weekly average of new claims prior to the pandemic was 5,000. 

As those claims poured in, the agency struggled to process them in a timely manner and compromised some security in an effort to do so, the report said. 

In May, the state stopped payment on 340,000 claims that had already been paid and on 300,000 that had not yet received payment until the individuals' identity could be verified. 

At least two Unemployment Insurance Agency employees were charged in relation to alleged schemes to defraud the system during the pandemic. 

Jeffrey Frost, a retired special agent in charge for the U.S. Secret Service, was brought in to help counter the fraud attempts and Deloitte was hired to identify which weaknesses in the agency contributed to the fraudulent behavior.

"A final determination as to magnitude of exposure is unlikely to be available until all instances of high-risk payments and credible reports of fraud are manually investigated," said Susan Corbin, acting director of the Department of Labor and Economic Opportunity, in a letter Wednesday to Tricia Foster, the state's chief operating officer under Gov. Gretchen Whitmer.

Earlier estimates that the losses resulting from fraud were in the "hundreds of millions" appear to be consistent with what's known so far, Corbin said. Much of those losses involved federal CARES Act funds, which have made up $20.5 billion of the $26 billion paid out in Michigan since March. 

Rep. Matt Hall, the Marshall Republican who chairs the Joint Select Committee on the COVID-19 Pandemic, said the report confirmed some of the concerns he had about the agency's culpability in the fraud attempts.

Hall said he's been contacted by residents whose legitimate claims were put "into a holding pattern by the agency" while the state worked to sort through fraudulent claims.

"They need answers for why these decisions, which caused them so much hardship, were made," Hall said in a statement. "And I’m going to keep demanding answers for them." 

Deloitte found that, because of a sequencing issue, the Unemployment Insurance Agency was processing some claims between April and May without running them through a fraud-screening program. Many of the filters on that fraud-screen program were turned off out of concern "that some filters were incorrectly identifying too many legitimate claims for review."

Both issues with the fraud-screening software were corrected between May 19 and 22.

The agency also suspended a 10-day window for employers to verify a claim in an effort to speed turnaround of payments, allowed people to backdate some claims, and allowed people to verify their identity over the phone. All of those changes, corrected between July and September, were an effort to speed payments through the backlogged system but ultimately exposed the system to fraud. 

Finally, the state reassigned people from its investigation unit and hired more than 1,800 contractors to help process claims. The moves resulted in less operational oversight in the Investigations Unit and made it difficult to ensure uniform adherence to state security, supervision and training benchmarks. 

The report came the same day the Michigan Supreme Court ordered oral arguments in a case dating back to false fraud allegations made by the Unemployment Insurance Agency between 2013 and 2015. 

An error-prone computer system meant to identify suspected fraud falsely accused more than 40,000 people of filing fraudulent unemployment claims. 

The state continues to fight the lawsuit seeking millions of dollars in damages, particularly the idea that the issue of money damages would be decided at trial on a constitutional tort claim. 

The Michigan Supreme Court on Wednesday ordered oral arguments on the question.

eleblanc@detroitnews.com