Is fraud like a snowflake, and every one is unique? Not really. There is, however, an increasing number of methods and schemes that show up and expand the range of issues we need to look for every day. To celebrate International Fraud Awareness Week this year, I'm going to spend some time diving deeper into Unemployment Insurance fraud and abuse. With federal estimates that improper payments in unemployment sit at 9.3%, or $6.2 billion annually, and tax evasion likely equaling that, this is a problem worth our attention.
Working while drawing - A worker is laid off, and legitimately earning unemployment for a period of time, but has returned to work and failed to report that and cease drawing benefits. New Hire Registers at the state and federal level are one of the easiest tools to help prevent this, as evidenced by New York State's recent press release showing they saved $409 million just from matching claims versus New Hire.
Faking job search - There are requirements to keep receiving unemployment benefits, ranging from being "available for work" (aka, not on vacation in Hawaii!) to job search requirements. In this scheme, the claimant is lying or faking their compliance with one or more of those requirements.
Collusion with employer - The employee wasn't really laid off at all, or goes back to work at the same employer under the table. Typically, this involves splitting the value of the benefits, or a lowering of the wages paid while the unemployment is also being collected.
Identity theft schemes - These are spreading as a method of using stolen identities, often because it takes much longer for the victim to become aware, as it won't appear on a credit report. There are many different variations, and some of the more interesting ones have involved theft of identities of prisoners to file claims, or the case that showed up in Florida where many identities stolen were those of other state employees.
Fake businesses - This is an intriguing approach as it actually involves paying taxes that aren't owed. Businesses are formed solely for the purpose of filing fake reports of employment and wages paid for workers that will subsequently be "laid off" and file for unemployment. The benefits gained will exceed the taxes paid, and the business will go under.
Many people fail to think about the other side of unemployment fraud. Businesses owe unemployment tax for their workers, and are motivated at times to undertake schemes of tax evasion or fraud.
Cash payment under the table- This truly is the oldest scheme in this particular book. Workers are simply paid off the books, and none of the employment is reported. The variations range from businesses that are avoiding virtually all laws and licensing requirements, to ones that are attempting to appear legitimate, and have registered. Some of the latter also report a portion of their employees to further the image of legitimacy.
Shaving wages - Similar to the scheme of keeping workers off the books, in this approach, the workers are all reported but their wage rates are reported at a lower rate than what employees were actually paid. At times, this is used in conjunction with keeping a portion of the workforce off the books completely.
SUTA-dumping - Businesses that have experienced tax rate increases based on layoffs are incentivized to form "new" business entities to take over operations with a lower tax rate, which is against the law if they fail to declare it. SUTA (State Unemployment Tax) dumping involves that illegal transfer of employees and tax reporting between two or more entities to lower the tax rate.
Independent contractors - This issue has been around for many years, but it wasn't very prevalent when I was doing tax compliance activities 20 years back or more. Now, all industries are seeing an increase in the misuse of independent contractor designations for individuals that are nothing more than an hourly or piece-work employee. While especially prevalent in industries like construction, landscaping, janitorial and delivery, I've seen surprising cases where restaurants claimed their waiters and waitresses are independent.
Manipulation of employee leasing/PEOs - Professional Employee Organizations (PEOs) and employee leasing companies provide ways to have a workforce level that can easily ramp up or down, and offload administrative elements of employment, from hiring and HR to payroll and tax withholding. However, this relationship has been manipulated to avoid the costs of layoffs and avoid increases in tax rates for organizations that lay off employees.
SO NOW WHAT?
This is just the tip of the iceberg in terms of the schemes and issues, which are multiplying annually. Proper use of data-sharing and analytics can significantly help the issues on both the claims and tax sides of the house. Cuts in staffing have hit unemployment agencies hard, affecting program integrity efforts. Ensuring that they are using data from New Hire registers, incarceration data, and matching with other programs ranging from workers' compensation to income and sales tax can dramatically impact results. Shifting from approaches that rely almost exclusively on complex rules and utilizing analytics, ranging from predictive models on past cases to peer comparisons for anomalies, can reduce false positives and increase detection of complex schemes.
May you enjoy your International Fraud Awareness Week 2014, and help spread the word. Check out what the SAS Security Intelligence team has planned for the rest of the week. Next time, I'm going to take a look at cyber threats and what can be done to protect businesses and government. In the meantime, follow me on Twitter @CarlHammersburg