Tackling the biggest fraud in US history – pandemic relief
| Washington; and Taft, Calif.
Out of more than $3 trillion distributed through the three main pandemic aid programs, estimates indicate that as much as $560 billion, or nearly 20%, was stolen, likely making it the biggest fraud in U.S. history.
A range of individuals and groups, from international criminal syndicates, to federal prisoners applying under fake names like “Poopy Pants,” to U.S. citizens posing as other people – including someone pretending to be California Sen. Dianne Feinstein – partook in the illicit pandemic gold rush.
Why We Wrote This
Hundreds of billions of taxpayer dollars were stolen during the pandemic, as Congress rushed to aid small businesses and individuals. Now the U.S. is trying to claw some money back – and fix vulnerabilities in the system.
Now Congress is investigating. And the White House is asking lawmakers to allocate $1.6 billion to bolster investigation and prosecution of pandemic fraud, as well as improving identity verification and other tools to prevent such theft going forward.
“I will be the first to say all three of those programs did enormous good for tens of millions of people,” says Gene Sperling, the White House coordinator of the $1.9 trillion American Rescue Plan, enacted in spring 2021.
“But I would hope that when people look back, they realize that there were guardrails that were taken down at the onset of the pandemic, where the differential in speed was not worth this degree of massive fraud it led to,” he adds, referring to decisions taken by the Trump administration in 2020.
A New Jersey man donning a curly orange wig defrauded California and the federal government of more than $1.67 million in pandemic relief funds. They finally caught up with him nearly three years after opening the floodgates of cash.
Next Monday, Eric Michael Jaklitsch is scheduled to be sentenced in two related cases, according to the Department of Justice.
Nearly as extraordinary as the scale of the fraud Mr. Jaklitsch attempted is the degree to which he succeeded. Of the at least $1,280,680 he sought in loans from the Small Business Administration, he was approved for all but $140. And California apparently failed to notice that the same man had filed at least 78 different claims, authorizing Bank of America to mail out dozens of debit cards loaded with unemployment benefits to addresses under his control.
Why We Wrote This
Hundreds of billions of taxpayer dollars were stolen during the pandemic, as Congress rushed to aid small businesses and individuals. Now the U.S. is trying to claw some money back – and fix vulnerabilities in the system.
With estimates indicating that as much as $560 billion, or nearly 20%, was stolen out of more than $3 trillion distributed through the three main pandemic aid programs, Mr. Jaklitsch’s case illustrates the twin challenges now facing states and the federal government as they grapple with what is likely the biggest fraud in U.S. history.
First, they are racing to catch those who committed fraud, particularly the sophisticated criminals and syndicates who saw outsize opportunity in the rapid, massive flows of pandemic relief funds. And second, they are seeking to address long-standing vulnerabilities in government benefit systems that such cases have brought into stark relief.
A range of individuals and groups, from Chinese, Nigerian, and Russian criminal syndicates, to federal prisoners applying under fake names like “Poopy Pants,” to U.S. citizens posing as other people – including someone pretending to be California Sen. Dianne Feinstein – partook in the illicit pandemic gold rush. Many did so using identity theft, buying individuals’ personal data for pennies in dark corners of the internet and circumventing traditional identity verification techniques.
Now Congress is investigating in earnest. And the White House is asking lawmakers to allocate $1.6 billion to bolster investigation and prosecution of pandemic fraud, as well as improving identity verification and other tools to prevent such theft going forward.
“We owe it to the American people to get to the bottom of the greatest theft of American taxpayer dollars in history,” said House Oversight Committee Chair James Comer, a Kentucky Republican, as he opened what he said would be the first of many hearings on pandemic fraud on Feb. 1. “We must identify where this money went, how much ended up in the hands of fraudsters or ineligible participants, and what should be done to ensure it never happens again.”
The scope of fraud and how it happened
Benefit fraud has been a persistent problem, but the growth in large-scale identity theft – together with the massive flows of money during the pandemic – has made the problem much worse.
Over the past 18 years, the improper payment rate for unemployment insurance claims ranged from 9% to 13%. During the pandemic, that rate jumped to 21%, according to a report from the Department of Labor’s Inspector General Office. Many outside experts see that estimate as conservative.
Indeed, one of the major challenges at this stage is accurately estimating the total amount of fraud in the expanded unemployment insurance (UI) as well as the two main programs for businesses: the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL).
A year ago, the Department of Labor’s inspector general estimated UI fraud at $163 billion, and told Congress it would likely turn out to be higher. Cybersecurity and identity verification company ID.me, which more than two dozen state workforce agencies have hired to help weed out fraudsters, estimates it at $400 billion.
PPP fraud has been estimated at $80 billion of $800 billion distributed, NBC reported. And the Small Business Administration’s inspector general estimated that $78 billion of the $378 billion distributed through EIDL may have been fraudulent, although that was two years ago, while the agency was still plowing through a huge backlog of complaints about potential fraud.
California, which ranks among the world’s top five economies by gross domestic product, was the hardest hit by UI fraud.
At the end of the day, both the federal government and states share responsibility for the scope of fraud, says McGregor Scott, special counsel for California’s fraud investigation.
He says Congress passed legislation “in a panic” in the spring of 2020 that was well intentioned but essentially created whole new categories of people eligible for UI overnight – and significantly increased the amount of benefits available per individual.
“It created wide lanes for fraudsters to drive down,” says Mr. Scott.
U.S. Department of Labor, U.S. Government Accountability Office
Prior to the pandemic, employers vouched for claimants’ identity and employment. When the federal government expanded unemployment coverage to include self-employed workers, they were able to self-assert that information without any additional verification. Similarly, applicants seeking loans for their businesses under the $800 billion PPP self-certified their applications.
“No one can walk into a bank today and get a loan and say, ‘No, no, really, I’m this person, give me the money’ – but that’s what was going on,” said DOJ Inspector General Michael Horowitz, who chairs the Pandemic Response Accountability Committee, at the Feb. 1 Oversight hearing.
In the early months of the pandemic, there was an understandable urgency to getting relief funds to individuals and businesses. But some protections that could have easily been utilized were bypassed. For example, PPP loans were not cross-checked with “do not pay” databases, which would have flagged 57,000 loans worth $3.6 billion by August 2020, according to the White House. In addition, the legislation passed by Congress in the spring of 2020 was interpreted by many to discourage using businesses’ tax records to verify their loan applications, a practice that the Biden administration reinstated in 2021.
“I will be the first to say all three of those programs did enormous good for tens of millions of people,” says Gene Sperling, the Biden administration’s coordinator of the American Rescue Plan, a $1.9 trillion pandemic relief package enacted in spring 2021. “But I would hope that when people look back, they realize that there were guardrails that were taken down at the onset of the pandemic, where the differential in speed was not worth this degree of massive fraud it led to,” he adds, referring to decisions taken by the Trump administration in 2020.
“Strike force teams” to catch criminals
Mr. Jaklitsch was apprehended thanks to the work of one of three “strike force teams” set up by the Department of Justice in September 2022. The teams, based in California, Florida, and Maryland, combine the firepower of multiple agencies to investigate and prosecute large-scale pandemic relief fraud, including multistate and transnational schemes.
The California strike team, supported by U.S. attorney offices in both Sacramento and Los Angeles, also led to the sentencing of Daryol Richmond, a former gang member who got five years in jail after pleading guilty to his role in a scheme to submit up to $25 million in fraudulent claims, $5.5 million of which were paid out.
“I’m hopeful that we see the strike team concept expand to other districts,” says Phillip Talbert, U.S. attorney for the Eastern District of California, whose office is part of the California team.
Indeed, the White House has recommended tripling the number of strike teams as part of its $1.6 billion pandemic anti-fraud proposal, pending funding approval from Congress.
Mr. Sperling says the proposal would better allocate government resources, allowing inspectors general to seek civil remedies in cases of up to $1 million – up from the current cap of $150,000 under the Fraud Civil Remedies Act – while boosting the Justice Department’s ability to tackle more sophisticated cases.
The proposal would not only increase the number of strike force teams but also make them more robust.
When Attorney General Merrick Garland announced the strike force teams in September, he said the Department of Justice had seized more than $1.2 billion and charged over 1,500 defendants across the country. Since then, the strike force teams have led to arrests, charges, and/or sentences in at least half a dozen other major cases in addition to Mr. Jaklitsch’s and Mr. Richmond’s, with many more underway.
“The Justice Department’s COVID Fraud Strike Forces continue to build on the outstanding work being done around the country by our prosecutors and law enforcement partners,” said Michael C. Galdo, the Justice Department’s acting director of COVID-19 Fraud Enforcement, in a statement to the Monitor. “Fraudsters hiding overseas will not stop our prosecutors from working with our law enforcement partners around the globe to bring those to justice who stole from the American people.”
Large-scale identity theft
In May 2022, Yvette Mayfield, city clerk in the oil town of Taft, California, was alerted by her employer that someone posing as her had claimed to have been laid off and was seeking unemployment benefits. She also got a notification from Bank of America that her benefits card was ready – but it went to someone else with another address.
She says the city called California’s Employment Development Department but never heard back, and all she could do was report “her” benefits card as stolen, and Bank of America canceled it. Then the fraudulent applicant managed to order a replacement card. Again, she was able to get Bank of America to intervene, but it left her feeling as if there was widespread fraud – and little that victims of identity theft could do about it.
“Nobody ever told me, ‘We can stop this; we can fix this,’” says Mrs. Mayfield, who now monitors her credit closely.
California initially estimated the state’s UI fraud at $11 billion in early 2021, but revised that estimate to $20 billion before the end of the year. As of June 2022, it had recovered $1.1 billion.
While the losses in California are the most of any state, Blake Hall, CEO of ID.me, credits the state for responding early to fraudulent claims and working to tighten its systems, and for being more transparent than other states.
Mr. Hall says policymakers should have foreseen the potential for such massive fraud, which states – in charge of dispersing UI benefits – were unprepared to deal with.
“It’s very naive for a policymaker to look at that program and to say there’s not going to be rampant fraud when you have billions of dollars that are literally protected by the honor system,” says Mr. Hall. “States did not have adequate funding for just basic protections.”
Next steps
The White House is trying to fix that now. Its proposal would allocate $600 million toward fraud prevention, including tools that would prevent identity theft. It would also put $400 million toward helping victims of identity theft, and $600 million toward investigating and prosecuting major or systemic pandemic fraud.
Haywood Talcove, CEO of LexisNexis Risk Solutions for Government, which works with the government to prevent identity fraud, says zero fraud would be impossible to achieve. But he says a handful of measures – including improved front-end identity verification, comparing names of applicants across states to prevent duplicate payments, and boosting staffing for program integrity – could get the rate of fraud as low as 3%, which he calls a “world-class number.”
Meanwhile, the strike force teams are benefiting from President Joe Biden’s extension of the statute of limitations from five to 10 years for PPP and EIDL fraud, so they can bring to justice the most sophisticated criminals. The White House has proposed likewise giving them a decade to prosecute UI fraud. However, recovering stolen funds is still a race against the clock.
In a case investigated by the Maryland strike force team, Alexander Barabash pleaded guilty last month to wire fraud, after repeatedly lying on PPP loan applications, and will have to pay a money judgment of $1,295,000 and forfeit $504,869.54 in his business bank account, as well as his interest in a Maryland property. But it’s not always possible to recover the funds stolen, or recoup the original value of assets purchased with them.
“We claw back as much as we can,” says Mr. Talbert, the U.S. attorney in Sacramento. “But the longer it takes to identify the fraudster and bring them to justice, the less likely it is that there are assets that we can claw back.”
* Editor's note: A name spelling and a job title in this story were corrected.
