California unemployment fraud could ‘grow exponentially’ without more state action, DAs say

Prosecutors across California blasted the Employment Development Department again Thursday, saying the department still hasn’t stopped a massive pandemic assistance fraud scheme that it has known about for months.

In a new letter, a coalition of nine district attorneys urged Gov. Gavin Newsom to use emergency powers if necessary to stop payments that they think the state is still sending to prison inmates.

The DA’s have said the scheme, which they announced last week, involves tens of thousands of inmates and outside accomplices who bilked the state out of as much as $1 billion in federal funds meant for Californians who lost jobs and income due to COVID-19.

The state has paid out about $400 million on 21,000 fraudulent claims filed on behalf of state inmates, but has frozen payment on only about 3,700 debit cards used to make the payments, according figures from Labor and Workforce Development Agency spokeswoman Crystal Page.

Newsom said in a letter to the DA’s this week that EDD noticed an increase in pandemic unemployment insurance claims in July and August and took action in September.

Yet the DA’s said Thursday “the fraud has continued” and could worsen. The letter includes a reference to “unverified information” DA’s have received suggesting the department has distributed at least $1 billion to out-of-state claimants.

“We are deeply concerned that the fraud will continue to grow exponentially,” they wrote.

The DA’s also took issue with the administration’s contention that it has been hobbled by legal restrictions.

Newsom’s administration has said California law prevented the Department of Corrections and Rehabilitation from sharing inmates’ Social Security numbers with EDD — a key step that the DAs believe could have halted the problem much sooner.

In their letter Thursday, the prosecutors said the state’s Unemployment Insurance Code allows the sharing of that information. The DA’s couldn’t get corrections department data on the EDD claims until Nov. 12, when the federal Department of Labor provided it, according to the letter.

The EDD had the data earlier but wouldn’t share it with the prosecutors, the prosecutors said. Even if there is a legal impediment, Newsom should use emergency powers to get around it, the DA’s said.

“There is perhaps no greater need to protect the resources of the state than to immediately prohibit payment (of) unemployment benefit claims made in the names of state, federal and local inmates,” their letter said.

Page said the Labor agency was working with Bank of America — whose debit cards are used to pay claims — to “take appropriate next steps on the other fraudulent claims.”

Prosecutors say the scheme was relatively straightforward: Using contraband cell phones, inmates supplied girlfriends, wives and other outsiders with prisoners’ Social Security numbers and other personal information. The outsiders then obtained benefits on the prisoners’ behalf, in the form of checks or prepaid BofA cards mailed out by EDD, Page said. The accomplices cashed out the payments, took a cut for themselves, and arranged for the rest to be sent to the prisoners.

“There are thousands of contraband cell phones in the prisons,” Fresno County DA Lisa Smittcamp said in an interview.

Responding to a crisis that has proved increasingly embarrassing, Newsom told the DA’s coalition earlier this week that state officials acted quickly. “In early September, EDD implemented security procedures to deter and eliminate fraudulent claims,” he said in a letter to the prosecutors.

That apparently referred to a two-week “reset” in which the state stopped taking new unemployment claims, canceled payments in which multiple claims were filed from the same address, and began installing a verification system called ID.me.

At a press conference Thursday, Newsom continued to defend the administration’s response. He said the Pandemic Unemployment Assistance program, where most of the fraud occurred, was established with “a presumption of eligibility” that made it easier to commit fraud.

He said the state had to undergo “a constant balancing act” between determining eligibility and getting money paid quickly to help as many people as possible.

The prosecutors have been particularly critical of California’s failure to routinely cross-match inmates’ identities with unemployment claims — a practice that many other states follow. The California Department of Corrections and Rehabilitation, which runs the prisons, believed it couldn’t share Social Security numbers and other identifying data with agencies outside the sphere of law enforcement. After the federal government subpoenaed the inmates’ data, the DA’s were able to cross-match the prisoners with the unemployment claimants, revealing the extent of the fraud.

The scheme unfolded even as California received multiple warnings from the U.S. Department of Labor about the likelihood of fraud as Congress approved hundreds of billions of dollars in aid to counter the economic effect of COVID-19. An unrelated cybercrime scheme, unveiled in May, siphoned more than $500 million in pandemic assistance from Washington state’s unemployment system.

So far only 21 people have been charged, all in a case uncovered by San Mateo County prosecutors. But more charges are imminent. In an interview, Monterey County DA Jeannine Pacioni said her office is preparing to charge 30 county jail inmates with fraud totaling at least $700,000.

Pacioni said additional inmates are likely to be charged, raising the dollar total higher; it appears 600 inmates at two state prisons in Monterey County filed fraudulent claims totaling about $2.5 million.

A member of the DA’s coalition, she faulted Newsom’s administration for doing too little to respond to the crisis and for keeping it quiet.

“He isn’t taking responsibility for something he knew about and I think the public has a right to know that the Governor’s Office was aware of this fraud going on and did nothing to stop it at the time when they found out,” she said.

Pacioni said statewide coordination would be critical because inmates often are housed in prisons far from home — making it hard to connect them to phony unemployment claims filed by their friends and family.

Another member of the coalition, Riverside County DA Michael Hestrin, also was highly critical of EDD. “It looks to me like there were little or no safeguards,” he said in an interview. “You signed up, you got a debit card.”

After San Mateo officials filed charges in mid-August, “we all started looking” for similar patterns, Hestrin said. “That’s when the dam broke. We got on the phones and the chat lines and compared notes.”

But as the DAs began investigating, they say they got little or no cooperation from the state.

“EDD was slow to react, though they’re getting it now. At first management of EDD pledged their support, but they didn’t get back to us. We didn’t get information we needed,” Hestrin said. “We needed records from EDD to see who was getting benefits. They were slow to get back to us.”

This story was originally published December 3, 2020 at 2:55 PM with the headline "California unemployment fraud could ‘grow exponentially’ without more state action, DAs say."