Homeland watchdog warns most states did not report COVID-19 lost wage fraud

Most state workforce agencies did not report potential unemployment fraud to the federal government as required, leaving as much as $1.5 billion in losses off the books, according to a new report from the Department of Homeland Security's Inspector General.

Up to $44 billion was set aside in August 2020 from the Federal Emergency Management Agency's COVID-19 Disaster Relief Fund for states and territories to distribute as part of a Lost Wages Assistance (LWA) program. The funding provided up to $400 a week in "supplemental lost wages payments" to people who received unemployment benefits.

More than $38 billion had been granted to the 49 states and 5 territories that participated in the LWA program as of November 2021, the inspector general stated in a report released this week.

FEMA approved 38 out of the 54 LWA plans that did not include the requirement to report possible fraud, according to the report. One FEMA official told the inspector general that the LWA program template originally given to states did not include the requirement, and FEMA later updated the template. 

The 38 already-approved state plans without the fraud reporting requirement were not forced to change, and officials told the inspector general "they do not follow up with the SWAs to reinforce the requirement," the watchdog's office stated.

Because the fraud was not reported, it will be more difficult for FEMA to recover the money for future disaster responses and "fraud is likely to persist or increase in the program and FEMA will continue to miss opportunities to combat fraud," the Inspector General said.

Ten state agencies, five of which were required to report fraud, identified more than $1.5 billion in potential fraud to the Office of the Inspector General. $1.2 billion of the identified suspected fraud was discovered by the five agencies that have reporting requirements.

The office recommended for FEMA to alert state workforce agencies about the fraud reporting requirements and ask them to report possible fraud.

The DHS Inspector General's Office stated that FEMA was responsive to the recommendations and the matter is considered "resolved and closed."

Similar unemployment fraud problems during the COVID-19 pandemic were detailed in the Labor Department Inspector General's semiannual report to Congress in December. Of the $872 billion in federal unemployment benefits, the agency found that at least 10% was improperly paid, "with a significant portion attributable to fraud." This means that at least $87 billion was lost due to fraud or improper payments.