Severity of Michigan's alleged unemployment fraud exposed as purported Kardashian got paid
No one questioned whether Kimberly Kardashian and Kylie Jenner were actual Michigan residents before they received thousands of dollars in Michigan unemployment benefits in May 2020.
Kardashian, who filed May 13 from an address in Traverse City, received eight weeks of backdated unemployment pay — more than $7,000 — before the state’s fraud management software flagged the claim on May 15 as needing additional identity verification.
Jenner, who was one of several claimants to file under the same bank account number as Kardashian, filed a day after Kardashian with much the same result.
The payments to claimants filing under the reality stars’ names were processed before the state’s software investigators could flag them as suspicious, a failing in the early days of the pandemic that was “much more than an aberration,” according to Unemployment Insurance Agency emails obtained by The Detroit News.
An early software error allowed for the payment of a majority of fraudulent claims in Michigan but, in other cases, the agency lowered security protocols intentionally and despite employee concerns to speed the processing of a crush of claims.
The agency, in one instance, released thousands of claims, knowing that 7% to 8% of them were fraudulent, according to emails. It did so because sorting the fraudulent claims from the legitimate ones would have held up payments to claimants in legitimate need of state help, employees indicated in emails.
“The pressure to get the money out of the door was enormous,” said Liza Estlund Olson, the agency’s acting director since November. “And everybody was looking at ways to figure out how to do that and continue to fit within the parameters of what we normally do.
"The staff totally and completely understands that our job is to pay claimants if they’re eligible to be paid."
An independent audit released in November identified the failings in the state's technology and policies that made it easier for people to submit fraudulent claims, estimating the total paid in fraudulent claims to be in the "hundreds of millions."
Emails obtained by The News provide more details on those issues, and indicate at least three employees expressed misgivings to then-Director Steve Gray about the changes potentially exposing the department to fraud.
Gray resigned in November and received an $85,872 separation agreement that required he and the state "maintain confidentiality" regarding his employment and his departure.
The U.S. Attorney has charged at least 13 people with scheming Michigan's unemployment system during the pandemic, and Attorney General Dana Nessel’s office is investigating another dozen cases associated with unemployment fraud.
The Unemployment Insurance Agency has fired 10 employees for suspected fraudulent behavior — five full-time workers and five contract workers.
The agency isn’t alone in the hard calls it had to make early in the pandemic as it balanced a tidal wave of claims with the implementation of new federal unemployment benefits and an influx of bold, sophisticated attempts at defrauding the system.
In Michigan, fraudsters went so far as to submit copies of a fake ID containing a photo of "The Office" actor John Krasinski and called lawmakers in an attempt to speed up the receipt of benefits.
“It was like a cascading of problems, so you would expect states to have difficulties,” said Gary Burtless, an economist for the Brookings Institution in Washington, D.C.
“I don’t know if we’re ever going to know the full dimensions of this. But if we ever face problems like this again, I think it would be good to know what went wrong and what states did better handling this.”
In Michigan in the early days of the pandemic, a sequencing error in the state’s fraud management software was responsible for the payment of a majority of fraudulent claims, a state audit found in November.
The error was introduced accidentally by a system developer when the agency removed 10-day holds on unemployment payments and extended backdating allowances at the beginning of the pandemic, according to the audit.
The Fraud Manager software error essentially delayed automatic fraud scans of new unemployment claims so that it was possible for a claim to be filed, certified and paid on the same day before the Fraud Manager was able to flag it for potential fraud. The error existed in the state system from March 31, 2020, through May 19, 2020.
UIA employees appeared to have become aware of the issue in mid-May. That’s around the time Timothy Kolar — the agency’s head of investigations who was reassigned from late March through May to a "special project" related to data for the Department of Labor and Economic Opportunity — alerted several agency leaders that pandemic unemployment assistance payments were being made “without being put through fraud manager first.” He cited the Kardashian filing as an example.
“On May 13, a PUA claim was filed, backdated to week-ending March 21 (8 weeks), all those weeks were certified for and payments were released all in the same transactions,” Kolar wrote on May 18 of the Kardashian claim. “Fraud manager identity verification request opened on May 15.”
Once the sequencing error was identified, the agency was able to stop much of the organized attacks, including 100,000 imposter claims in a single weekend, Estlund Olson said. Over the past year, the state has worked with financial institutions and law enforcement officials to track down fraudsters gaming not just Michigan but other states as well, pulling back more than $84 million from the bank accounts of suspect claimants.
By fall, when a second state shutdown closed restaurants and schools, the state was more prepared for the fraud onslaught.
“Were people still trying to commit fraud? Absolutely,” Estlund Olson said. “But we had put all the things in place, so we believe that we stopped the bulk of the masses of fraud that were trying to come in.”
The staff continues to work mandatory overtime more than 16 months into the pandemic, yet continues to be deluged by negative coverage and criticism, Estlund Olson said.
“We take a huge beating, but we are actually far ahead of most other states in terms of how we’re trying to identify and stop fraud,” Estlund Olson said. “... We kicked out such an enormous amount of work; nobody could have kept up with what we did."
Changes prompt concerns
Though it allowed for most of the fraud, the sequencing error did not exist in a vacuum.
It was preceded and followed by policy decisions within the Unemployment Insurance Agency to lower security protocol to speed the payment of benefits, according to the audit.
Ahead of the sequencing error, in late March the agency eliminated 10-day holds on claims on the premise that employers needing to verify an employee's departure within that 10-day window wouldn’t be in their office because of the state shutdown.
The agency also reduced its investigation group, reassigning some to the call center, and obtained permission from the federal government to suspend its benefits accuracy measurement investigations.
On March 16, 2020, Whitmer signed an executive order extending claim backdating to 28 days. Backdating was extended twice more by the agency in April.
Between April 14 and May 22, the state also relaxed review criteria in its Fraud Management program so that fewer false positives were flagged by the system. And between June 5 and July 28, the agency resorted to ID verification over the phone instead of through official forms, according to the audit.
It was the latter two changes that appear to have sparked concerns from employees, according to state emails.
On June 8 and 9, the agency’s interim head of finance and data, Debbie Ciccone, and Collections Manager Tina Alagna expressed concerns about over-the-phone verification and the suspension of a rule that would require the claimant to fill out an identity verification form. Alagna noted some of the information being requested was easily available online.
“If they don’t have it (the ID verification form), our staff is just asking three very generic questions — and not requiring the claimant to upload the documents,” Ciccone said. “Why would we not require them to provide documentation to support their identity?”
Kolar responded at the behest of Gray and explained the agency had “absolutely no faith in the programming” that had flagged legitimate claims and created a high “false positive rate.” The goal and focus, Kolar said, of the temporary procedures was “getting real claimants paid their needed benefits.”
“If a criminal is going to go so far as to call our agency, where in this example, we know the difficulty claimants are having contacting us, but is spending that time to get through, and then is able to speak to someone and pass all the identity questions and be deemed reasonable by our staff, I am comfortable with that risk and that occurrence on that claim potentially being paid,” Kolar said.
Kolar later told the UIA's special fraud adviser, Jeff Frost, that he had opposed the changes, but noted agency leaders had made the decision “to accept a certain level of fraud in order to sweep or batch process claimants held up that needed to have their account reviewed.”
In the same June 30 email, Kolar told Frost the agency had accepted 7% and 8% fraud rates in claim batches of 71,000 and 40,000 so that the 92% and 93% of legitimate claims wouldn’t get held up in the review.
A national issue
The decision to sacrifice the review of some fraudulent claims in order to speed the process was one faced by agencies throughout the nation during the pandemic, said Stephen Wandner, senior fellow at the National Academy of Social Insurance and former U.S. Department of Labor employee.
“There had to be a decision made,” Wandner said. “There were an incredible number of people who didn’t get benefits on time because they were flagged. Different states did different things to address that.”
Federal officials last year said, on average, 3% of unemployment benefits nationally are paid out to fraudulent claimants, part of an average of 10% of claims that are considered improper payments.
They expected that number to increase during the pandemic because of the increase in claims and new, temporary provisions allowing self-employed, gig and part-time workers to “self-certify” for pandemic unemployment assistance.
While the fall audit has estimated the state’s losses to be in the “hundreds of millions,” the state still is unsure what the total number of fraudulent claims is and estimates it could take months to figure out the total.
Michigan has paid out about $37 billion in unemployment aid since March 15, 2020, to 3.35 million claimants. Of the 5.2 million claims paid in that time period, 1.9 million were filed by gig or self-employed workers.
New unemployment claims in Michigan spiked the highest in spring 2020, when the state's average weekly claims went from 5,000 prior to the pandemic to nearly 384,000 in the first week of April.
"Never before has the number risen as far and as fast," said Burtless of the Brookings Institution.
The majority of fraudulent activity during that time appeared to originate outside the country with some early alerts indicating fraudulent activity coming from Nigeria, Wandner said.
Groups seemed to concentrate on some states more than others and took advantage of years of stolen data from credit card companies, online services and even state and federal agencies, he said.
"In many cases, they have enough information from me on my credit card to apply for benefits in my name," he said.
"That’s the problem," facing unemployment agencies, Wandner said. "The question is, how do you check that?”
No agency was truly prepared for the onslaught of fraud experienced in the early months of the pandemic, he said.
“There’s always fraud on a small scale but it's never been like this because it’s never been as easy to commit fraud and commit it on a large basis,” he said.
Despite the fraud and delays, unemployment agencies across the nation pulled off a "humanitarian and economic achievement," Burtless said. "It served a function of keeping up people’s ability to pay their bills. And I think it has helped account for the speed of the recovery.”