EDD failed to implement anti-fraud measures until it was too late, says state auditor

SACRAMENTO, Calif. (KGO) -- The state auditor released a second report Thursday blasting the EDD's handling of a surge in unemployment claims during the pandemic, this time saying the agency ignored signs of massive fraud and paid billions of dollars to criminals. The report identified at least $10 billion in payments to fraudsters, but said the amount is probably much higher. In fact, the EDD itself admitted on Monday as much as $31 billion was paid in either confirmed or potential fraud.

7 On Your Side previously reported a story on inmates filing false claims from behind bars - and folks all over the country receiving EDD letters addressed to complete strangers. It was all fraud the EDD all but ignored.

RELATED: '80s computer technology delays EDD benefits for millions of Californians

Thousands received mail from EDD addressed to complete strangers - it turned out fraudsters were using their addresses to file phony claims. All of the letter recipients 7 On Your Side interviewed tried to report the suspicious mail to the EDD.

But Thursday's audit says EDD didn't notice the pattern until September - seven months into the pandemic.

"We now have two audits that I think shows EDD was a rat's nest of incompetence. They brought the fraud on," said Assemblyman Jim Patterson (R - Fresno).

The EDD finally shut down 344,000 suspicious accounts... but it swept thousands of legitimate workers into the crackdown.

The auditor also found that EDD -- in a rush to pay claims last spring and summer -- failed to verify eligibility and identities for millions of claims, opening the way to fraud.

WATCH: DA explains how inmates at San Mateo County jail, including convicted murderers, got $250K in EDD benefits
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While a million workers still can't get unemployment benefits, EDD paid out a quarter million dollars to jail inmates running a scheme behind bars.

It also failed to cross-check claims with the Department of Corrections, and jail inmates were filing phony claims from behind bars, collecting at least $810 million dollars in benefits.

"EDD was so overwhelmed it didn't have a system to catch this type of a fraud," said San Mateo County District Attorney Steve Wagstaffe.

The report says EDD had only two staffers assigned to manually inspect reports of suspected fraud.

To correct problems, the EDD froze thousands of accounts to weed out fraud. But that swept many legitimate claims into the mix - leaving many honest workers with no income.

RELATED: Bank of America addresses freezing accounts, fraud in state assembly hearing

"They were failing on both fronts. Lots of fraud and lots of people not getting legitimate benefits. The system, the agency is obviously broken and needs to be rebuilt," said California State Senator Scott Weiner (D - San Francisco).

The EDD said the Trump administration is partly responsible for failing to offer support for fraud prevention. The EDD received about $40 million in federal unemployment money - so if it turns out $30 million went to scammers - that means three-quarters of all that money went to criminals.

Read the EDD's full response to 7 On Your Side below.

The EDD appreciates the work of the state auditor and is prepared to implement all recommendations from both reports - on top of what we are already doing to further fortify our fraud fighting capabilities.

According to information-security industry leader ID.me, approximately 35% of unemployment applications submitted across the nation have been determined fraudulent. Working with ID.me, Thomson Reuters, and our own fraud prevention techniques, the EDD estimates we've prevented up to $60 billion in payments to fraudulent claims.

Of California's confirmed fraudulent payments, 95% are associated with the PUA program, which the U.S. Department of Labor previously noted was particularly susceptible to fraud. While the Trump administration did not properly support states in fighting organized criminal attacks on unemployment systems, we are looking forward to having a partner in the federal government and are thankful to leaders like Senators Feinstein and Padilla and Speaker Pelosi for calling for federal support.

With more advanced tools, processes, and partnerships in place at the federal, state and local level, the EDD is well poised to proceed in 2021 protecting the unemployment benefit programs and better serving Californians truly in need - modernizing EDD systems to expedite claims and improving the EDD customer experience.

WATCH: Former California cybercriminal reveals how easy it is to fool the EDD
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As over a million of unemployed workers in California are frozen out of their unemployment benefit accounts, a cybercriminal reveals just how easy it is to get the documents to fool the EDD.

Read full report below:

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Take a look at more stories and videos by Michael Finney and 7 On Your Side.

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