As news of the unimaginable scale of California’s unemployment fraud continues to break, it’s necessary to understand why this state has been so particularly vulnerable to fraud, and what can be done, now, to prevent it from continuing.
On the low end, we may be looking at $11 billion in fraud (already identified), while on the high end, some estimate the fraud could amount to $31 billion. To put that in perspective, that is 10% of the entire budget for the state of California.
Transnational organized criminal groups from China and Africa have made off with billions of dollars while millions of deserving taxpayers have been struggling just to stay afloat.
Beyond the budget-breaking loss to all California taxpayers, each individual whose identity was stolen will now be facing a tax bill, since unemployment benefits are fully taxable as ordinary income. This is not a victimless crime by any means, and now the onus is on each person whose identity was stolen, many of whom are not even aware that benefits were filed in their name, to prove they were not the recipient. If somebody is unaware and doesn’t disclose the income, they may face an audit.
It is well known that the data management systems the EDD uses are built with antiquated programming languages. And because of that, modernizing these systems has become a daunting task that some believe would take considerable time and hundreds of millions of dollars to implement, making any short-term fix impossible. That notion is flawed for two reasons:
1. No cloud-based software and data-management system should cost hundreds of millions of dollars, let alone billions. That may have been true in the 1990s perhaps, but today, so many of the components needed to build a secure platform already exist that it simply won’t cost that amount.
2. Even if overhauling the EDD data-management system and platform did require a monumental capital investment, the identity-verification piece can operate as a stand-alone solution.
To that end, the problem here is identity verification. That’s it. And this is not an insurmountable problem. Digital identity verification is done in the private sector a million times a minute, literally.
Imagine if 10% to 30% of bank withdrawals were fraudulent. The bank would be out of business and subject to class-action lawsuits. With a bank, it’s their money and reputation at risk, and they therefore have secure ways of verifying identity with 99.9% accuracy.
Banks, insurance companies, ecommerce stores, fintech apps, and any merchant that transacts online have identity-verification solutions – and they don’t build these solutions themselves. There are several private-sector companies that specialize in this service including LexisNexis Risk Solutions. Because they have the capability to verify almost anybody’s identity in milliseconds, when criminals see these tools in place, they go elsewhere. The sad reality is that a minimal investment of time and resources could have prevented California’s unemployment catastrophe.
It’s not too late to change course. The state needs to look to entities that do identity verification successfully if they are to find a pathway out, and the people running government agencies that dispense billions of dollars, or tens of billions, should look to experts from the private sector who have experience successfully managing billions of dollars.
California taxpayers deserve nothing less.
Jon Coupal is the president of Howard Jarvis Taxpayers Association. Haywood Talcove is the CEO of the Government Group of LexisNexis Risk Solutions.