California’s Employment Department Listed as ‘High Risk’ by State Auditor After Losing $20 Billion to Fraud

People walk past the California Employment Development Department (EDD) in Sacramento, Calif., on April 18, 2022. John Fredricks/The Epoch Times

California’s employment department, which provides job services and unemployment aid to thousands of Californians each year, has been listed as a “high-risk” agency, according to a state audit released on Aug. 24.

The state auditor is required by law to present a report to the governor and state legislative leaders identifying and addressing high-risk statewide issues and agencies.

The Employment Development Department (EDD) made the high-risk list because of its inadequate fraud prevention and claims services and a high rate of overturned eligibility decisions in its unemployment insurance program, California State Auditor Grant Parks found.

“EDD is a high-risk agency because of its mismanagement of the [Unemployment Insurance] program,” Mr. Parks wrote in the report. “Specifically, EDD is unable to reliably estimate improper payments under the [Unemployment Insurance] program, thus adversely affecting the State’s financial statements as well as impairing efforts to independently evaluate the efficacy of EDD’s own fraud prevention activities.”

The department needs to improve customer service for residents seeking unemployment insurance and take steps to ensure that its eligibility decisions aren’t frequently overturned on appeal, Mr. Parks said.

According to Mr. Parks, the employment department’s mismanagement of its unemployment insurance program has resulted in a “substantial risk of serious detriment” to the state and its residents.

In the report, the state auditor also found that the EDD hadn’t taken adequate steps to prevent improper denials of unemployment benefits, citing that about half of the appeals claimants filed between 2017 and 2022 were overturned in their favor.

Also, the EDD’s customer service during the COVID-19 pandemic resulted in long waits for millions of Californians trying to get their benefits or answers to questions about their claims, and the department continues to struggle to pay claims in a timely manner, the auditor reported.

Between January and May, people called the department, on average, between three and eight times per week to try to get help on claims, Mr. Parks said.

The California State Auditor’s Office also recommended that the EDD allow it to perform a high-risk audit of its systems to help identify fraudulent or improper claims and develop recommendations.

The management of COVID-19 funds continues to present a significant risk to California and its residents, according to Mr. Parks.

Only $2 Billion Recovered From Fraud

At least 14 state agencies have received pandemic funds since 2020, and the EDD was one of the largest recipients, using a significant portion to provide unemployment benefits.

However, during the pandemic, the EDD reported massive fraud as unemployment claims skyrocketed. The agency estimated that it paid out about $20 billion in unemployment to domestic and international criminals, according to The Associated Press.

So far, only $2 billion in stolen funds has been recovered, an EDD spokesperson told The Epoch Times in an email.

The state reported that funds stolen between March 2020 and September 2020 went to foreign crime organizations that filed unemployment claims with stolen identities and used “money mules” in the United States to pick up the debit cards sent out by the employment department.

Hundreds of millions of dollars in unemployment payments went to prison and jail inmates, many of whom weren’t held in California, according to a law enforcement task force led by the state’s district attorneys.

Part of the problem was that the department’s unemployment program didn’t block addresses that filed high numbers of claims, and the EDD removed a safeguard preventing payment to those who had unconfirmed identities, according to the state audit.

However, the EDD pointed out that the department took several actions to combat fraud when identity thieves attacked new federal benefit programs nationwide during the pandemic, according to an EDD statement to The Epoch Times.

In October 2020, the department implemented new identity verification techniques, including the use of ID.me, a secure digital online identity network.

“These have all worked well for us,” the EDD’s spokesperson said.

California's Employment Development Department paperwork in Irvine, Calif., on April 2, 2021. John Fredricks/The Epoch Times

The department’s director, Nancy Farias, pushed back against its high-risk designation, saying the COVID-19 pandemic overwhelmed every state unemployment insurance system in the country and that all were affected by fraud.

The department has made several significant changes since then and has implemented internal fraud prevention measures, stopping nearly $43.5 billion in fraudulent payments from being made, she wrote in a response letter.

“EDD has accomplished significant advancements in fraud detection and prevention through transformative policy and program changes, new tools and technology, and vital public-private partnerships,” Ms. Farias wrote.

Mr. Parks responded to the EDD’s statement, saying the department still can’t effectively measure the effects of steps it has taken to prevent fraud because “it is unable to determine how many improper payments it has made.”

Financial reporting standards require the department to determine the total amount of ineligible payments made, whether or not they were fraudulent, he wrote.

The state audit’s findings were expected, according to state Assemblyman Tom Lackey, a Republican and a member of the Assembly’s Budget Committee.

“It comes as no surprise that EDD is high-risk because their fraud prevention efforts were makeshift and held together with duct tape during the pandemic,” Mr. Lackey told The Epoch Times. “The agency has known about these issues for years but [only] made efforts to address them when faced with public scrutiny. As attention is focused elsewhere, the department will flourish as a safe haven for fraudsters. We need all eyes focused on EDD because that’s our money being pillaged.”

The EDD was one of three state departments to be labeled high risk this year; the California Department of Technology and the state’s Department of Health Care Services were the others.

Other agencies were removed from the state’s high-risk list, including the California State Teachers’ Retirement System, the California Department of Public Health, and the California Department of Corrections and Rehabilitation.

The California State Auditor’s Office reported that these agencies were removed from the list because of changes in circumstances and significant progress toward mitigating risk factors.