How California Found Itself at the Center of a Perfect Storm for Unemployment Fraud

After hearing from frustrated viewers about problems with the California Employment Development Department, the NBC4 I-Team looked at what went wrong.

Data breaches, hacking and identity theft have come full circle during the coronavirus pandemic as unemployment reached unprecedented rates, creating a perfect storm for unemployment fraud in California.

The agency that pays out unemployment insurance to millions in the nation’s most populous state said losses due to fraud during the pandemic might climb as high as a staggering $10 billion. 

How did we get here? 

The NBC4 I-Team has heard from frustrated viewers since March who say the Employment Development Department has left them hanging. They report confusing applications, jammed phone lines and payments that never arrived because scammers ended up getting the money. 

NBC4 I-Team reporter Randy Mac explains what happened in a five-part series.

Part 1: How Big Is the Problem?

Here's an in-dept look at what went wrong and the fraud disrupting EDD. Randy Mac reported on NBC4 News on Monday, Jan. 25 2021.

Blake Hall is CEO of ID.me, the identity verification company hired in September by California’s EDD to help stop unemployment insurance fraud. He’s the person in charge of stopping what might be one of the crimes of the century.

What kind of challenge is he facing? 

Since starting ID verification for EDD, Hall said they’ve found 30 percent of claims filed in California to be fraudulent. And, in a state of 40 million, there’s plenty of room for fraudsters to hide in a system looking to quickly get money into the hands of people in need. 

Part 2: The Many Forms of Eligibility Fraud

Randy Mac takes a look at the fraud that has hurt Californians attempting to receive unemployment benefits during the pandemic, on NBC4 News on Tuesday, Jan. 26, 2021.

Eligibility fraud can be a major headache for Californians who actually qualify for unemployment benefits. And, there are several methods fraudsters have tried to obtain benefits that they don't deserve.

Investigations have been launched at assisted living centers where caregivers used patients in video chats with ID.me in an effort to claim benefits. 

People have even tried masks to impersonate someone else. Others are more sophisticated, using computer-generated printouts. 

Some have tried to dupe the system from behind bars. Investigators say infamous killers and other criminals are among the prison inmates whose names are implicated in cases of eligibility fraud. 

"That also increases the wait time for legitimate folks," said Hall.

Part 3: The Global Reach of Identity Theft

Unemployment fraud is costing California billions of dollars. How the state became a target for criminals in SoCal and around the world. Randy Mac reports for the NBC4 News on Wednesday, Jan. 27, 2021.

Eligibility fraud still only makes up about 3 percent of the fraud caught by ID.me. Identity theft is the biggest drain. It’s a global problem with California in the bullseye because of skyrocketing unemployment and billions being spent on benefits.

“They try to convince a young person that they are getting a job or an elderly person that they’re going to win prize money, and these individuals unwittingly give them all their person information and their identity documents,” Hall said. 

In addition to international criminal gangs, there are those right here in SoCal accused of trying to take advantage of the system. In September, the I-Team reported on dozens of Beverly Hills arrests involving stolen identities used to apply for and receive millions in unemployment insurance.

Those arrested include a rapper who made a video, widely seen on YouTube, in which he bragged about defrauding the EDD. According to a federal criminal complaint obtained by the I-Team, he and others fraudulently applied for more than $1.2 million in pandemic unemployment benefits. The money was mailed to homes rented in several LA communities.

Investigators tell the I-Team that some people were so good at navigating the application process, they were getting cash in three to four days. 

Part 4: What’s Being Done?

How Id.me Confirms Identities -- and why it’s taking so long. Randy Mac reports for the NBC4 News on Thursday, Jan. 28, 2021.

For the second time in three days, the state has released a scathing report about the failures of the employment development department.

Thursday's audit says the EDD's system to prepare and respond to fraud was riddled with weaknesses. The ongoing scamming of the agency could end up costing taxpayers tens of billions of dollars.

I actually had like three panic attacks because I did not know what to do. I didn’t know how to pay my rent this month, I didn’t know how to help my family.

Yolanda Machado

It's taking a lot of work and a lot of time to unravel this colossal are seeing some relief.

Yolanda Machado is one of the 1.4 million Californians whose unemployment benefits suddenly stopped before Christmas. 

“I actually had like three panic attacks because I did not know what to do,” said Yolanda Machado. “I didn’t know how to pay my rent this month, I didn’t know how to help my family.”

Jeff Gordon was warned by the state that he had been overpaid. He and Machado were stuck in a loop, trying to prove they were legitimate EDD recipients and not imposters. 

They’re not alone in trying to unravel a mess. 

Part 5: Fraud Beyond the EDD System

Randy Mac looks at the way the money was paid out posed a security risk and the quick fix that could help get money safely into people's hands, for the NBC4 News on Friday, Jan. 29, 2021.

The fraud doesn’t end at stealing from the system. Even when recipients get their debit cards, scammers have found ways to take that money out of their hands. 

Fraudsters continue to steal money from unemployed Californians, by swiping it from their EDD debit cards. This is leaving people who need the money most - often penniless. But one lawmaker says she has a simple solution that could prevent a lot of this fraud, while lawyers are demanding change right now.

The account was totally empty. I couldn't even get $30 out of it.

Amanda Bailey

Amanda Bailey has been living off savings since she lost her job back in April, and let her unemployment benefits accumulate on her EDD debit card. So she was stunned when she recently tried to withdraw some money from her debit card.

"The account was totally empty," said Bailey. "I couldn't even get $30 out of it." Bailey said $16,000 had disappeared.

And she's not alone. The I-Team's been hearing stories like Bailey's for months. Security experts tell us they believe the cards, issued by Bank of America, are getting hacked, because they contain a magnetic stripe instead of a more secure chip. Bank of America told the I-Team the cards don't contain chips because the state didn't ask for them. But attorney Brian Danitz says that doesn't matter.