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States fiddle while defrauders steal

States lag in investing in systems to detect fraud, which will cost the public big-time, warns SurePayroll President Michael Alter.

More than 9 million American consumers fall victim to identity theft each year. But the most underpublicized identity theft crime is one in which thieves defraud state governments of payroll taxes by filing fraudulent unemployment claims.

It can be a fairly lucrative scheme, too. File a false unemployment claim and you can receive $400 per week for 26 weeks. Do it for 100 Social Security numbers and you've made a quick $1.04 million. It's tough to make crime pay much better than that.

The victims in this crime--the state work force agencies that tirelessly oversee our unemployment insurance programs and the U.S. Department of Labor--are reluctant to discuss this topic for obvious reasons.

The net result of this fraud is that unemployment taxes are going up.

While credit card companies invest extraordinary amounts of money to detect identity fraud, state governments are lagging behind on investing in systems that could detect and deter fraud. Moreover, some federal IT initiatives that could slow down unemployment insurance claims fraud are moving at a glacial pace.

The slow response of state and federal agencies is quickly threatening the integrity of the unemployment insurance system. It turns out that crime is a very efficient market and word spreads quickly. Got a stolen Social Security number? You can more easily turn it into money by defrauding the government than by defrauding the credit card companies.

The net result of this fraud is that unemployment taxes are going up, and that makes it that much harder for small businesses and big businesses to do business. Even more, higher payroll taxes slow down economic growth because they make it more expensive to hire new employees.

Clearly, companies that have sensitive data must take the proper steps to protect the data. But it's public awareness and governmental systems that ultimately will save the day. Here's what needs to happen:

Admitting the problem
Kathy Moore, chief of the Employment Security Office of Special Investigations for Washington state, has started talking publicly about the amount of fraud making its way through the system. Other states need to follow suit and acknowledge that unemployment fraud is hurting small- and big-business economics. Discussing the problem will help rally the allocation of funds needed to adequately address the problem.

Investment in fraud detection software
Software is available on the market that is specifically designed to detect and prevent unemployment insurance fraud, including individual fraudsters and organized fraud rings. Most states have not yet invested in this software. They need to do so--fast.

Accelerating National New Hire Database plan
The soon-to-be-released National New Hire Database will put a dent in individual unemployment frauds. Currently, if a crook works in Illinois and makes unemployment claims in Michigan, it's unlikely the crime will be detected. The new database will make it easier to cross-match new hire data with unemployment claim data to catch those crooks who falsely claim they are unemployed while collecting a paycheck for their job. Let's pick up the pace on this initiative. We've been working on it for far too long.

A national stolen Social Security database
An unemployment claim that is fraudulently made on a stolen Social Security number would be easier to detect if there were a national database of stolen Social Security numbers. At the current time, this initiative isn't even being discussed in the halls of Congress, even though it should be near the top of their agenda. If and when a database is created, the only caveat is that it must possess airtight security features.

A business-as-usual approach by state and federal government agencies won't get the job done.
Increase fraud penalties
If a criminally minded individual is contemplating defrauding state and federal government, he or she needs to know punishment will be swift and severe. A slap on the wrist is not a helpful deterrent.

More federal funds for state agencies
The ability of state agencies to fight unemployment insurance fraud is constrained in large part by the funding they receive from the federal government. State work force agency directors and employees have the skills and talent to fix this problem. What they don't have are enough funds. The Bush administration's 2006 budget includes both funding requests and a set of legislative proposals that will strengthen the integrity of the unemployment insurance system. Approval of these welcome initiatives needs to happen sooner, rather than later.

These problems are fixable. Everyone benefits from making it tough to commit unemployment insurance fraud. But a business-as-usual approach by state and federal government agencies won't get the job done. It's true that the government is being mauled by unemployment insurance fraud, but let's not blame the victim. Working together, we can stop fraud dead in its tracks.