New audit reports find that Employment Security Department failed to protect against fraud

Three audit reports released by the State Auditor’s Office on Tuesday concluded that the state Employment Security Department failed to take certain fraud prevention measures, making it more vulnerable to an attack that plagued the department last year, and potentially leading to greater fraud losses than previously believed.

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The audits found that total losses to the department could top $1 billion, including not just the nearly $650 million known to have been paid to scammers in last year’s attack, but also another $460 million in “questionable payments” that the Auditor’s Office said the ESD has not yet investigated.

The ESD responded to those audits shortly after they were released, calling the $460 million figure “deeply flawed,” and noting that it included tens of thousands of claims that were found to be legitimate, or that were being investigated and had seen payments stopped. The ESD also noted that even if the numbers outlined in the audits were accurate, that would put improper payments “at less than 5%” of all benefits paid out last year, which is below the federal baseline of 10% for improper payments.

The ESD has since recovered more than $350 million of the $647 million stolen in the fraud attack.

The audits noted that certain factors made ESD a target for fraud, such as emergency federal legislation that bypassed certain security steps, the lack of a “proactive anti-fraud unit” at the department before the pandemic, and the fact that some of its fraud-prevention tools weren’t working, such as checking identities with state prison registers before sending payments.

A financial audit released by the State Auditor’s Office in December found that an automated process that flags suspicious claims was out of commission during the time that much of the fraud attack took place.

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The reports also found that ESD has only been able to answer a small percentage of phone calls from claimants about their cases and from business owners asking about unemployment insurance.

“Our goal as auditors was to establish the facts surrounding a massive fraud that targeted our unemployment insurance system,” State Auditor Pat McCarthy said in a statement. “Together these reports paint a detailed picture. There are fraud prevention techniques Washington’s program could have used to lessen the impact of these schemes, but the agency’s resources also were overcome by circumstances truly beyond its control.”

The performance audit report stated that since the attack, ESD has made changes to guard more strongly against fraud, such as hiring staff for a dedicated anti-fraud office.

“We make no additional formal recommendations, but strongly encourage ESD to continue its efforts to address these issues,” the report said.

The ESD responded to this audit more favorably, stating that the department “greatly appreciates the work done in this audit and agrees that, while there have been significant challenges and lessons learned over the course of the crisis, the steps the agency has and continues to make are effective in combatting fraud and improving customer service.”

Another audit on ESD’s technology will be published later this month.

The auditor’s office is doing a separate review investigation into potential misappropriation by ESD employees.

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