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Ron Cresswell, J.D., CFE
Research Specialist

In October, the Financial Crimes Enforcement Network (FinCEN) issued an advisory regarding unemployment insurance (UI) fraud during the COVID-19 pandemic. The purpose of FinCEN’s October advisory was to notify financial institutions of the types of UI fraud schemes the bureau has observed during the pandemic, as well as the red flags associated with such schemes.

Common Types of UI Fraud Schemes

For obvious reasons, unemployment claims have surged during the pandemic. According to FinCEN, law enforcement agencies and financial institutions in the U.S. have detected a corresponding surge in UI fraud. The following are the most common types of UI fraud schemes observed by FinCEN during the pandemic.

Fictitious employer-employee fraud: In this scheme, a claimant falsely states that they work for a legitimate or fictitious company. The claimant then supplies fictitious wage records to apply for UI payments.
Employer-employee collusion fraud: In this scheme, an employer pays an employee reduced, unreported wages while the employee receives UI payments.
Misrepresentation of income fraud: In one version of this scheme, a claimant continues to receive UI payments after returning to work and failing to report their income. In another version, the claimant reports higher wages than they previously earned to obtain higher UI payments.
Insider fraud: In this scheme, government employees use their credentials to approve unqualified claimants, authorize improper payment amounts or move UI funds into improper accounts.
Identity-related fraud: In this scheme, claimants submit applications for UI payments using stolen or fake identification information.

10 Red Flags of UI Fraud

The FinCEN advisory lists the following UI fraud red flags for financial institutions:

1. An account held at the financial institution receives any of the following:

UI payments from a state other than the state where the customer reportedly resides or worked
UI payments from multiple states within the same disbursement timeframe
UI payments in the name of a person other than the accountholder, or in the names of multiple UI recipients
UI payments and regular work-related earnings, via direct deposit or paper checks
Numerous deposits or electronic funds transfers (EFTs) that indicate they are UI payments from one or more states to persons other than the accountholder
A higher amount of UI payments in the same timeframe than similarly situated customers received

2. The customer withdraws UI funds in a lump sum by cashier’s checks, by purchasing a prepaid debit card, or by transferring the funds to out-of-state accounts.

3. The customer’s UI payments are quickly diverted via wire transfer to foreign accounts, particularly to accounts in countries with weak anti-money laundering controls.

4. The customer receives or sends UI payments to a peer-to-peer application. The funds are then wired to an overseas account, or withdrawn using a debit card, in a manner that is inconsistent with the spending patterns of similarly situated customers.

5. Individuals quickly withdraw UI payments via online bill payments addressed to individuals as payees (as opposed to businesses), with some payees receiving multiple online bill paychecks over a short time.

6. The IP address associated with logins for an account conducting suspected UI-fraud activities does not map to the general location in the customer’s identity documentation or where the UI payment originated.

7. Individuals direct UI-related electronic funds transfers (EFTs) or deposit UI checks into the accounts of suspected shell or front companies.

8. Multiple accounts receiving UI payments at one or more financial institutions are associated with the same free, web-based email account that may appear in more than one UI application.

9. A newly opened account, or an account that has been inactive for more than 30 days, starts to receive numerous UI deposits. After the financial institution requests additional identification documentation, the customer provides documents that are incorrect or forged.

10. After a financial institution suspects UI fraud and conducts due diligence, it determines that the customer does not have a history of living at, or being associated with, the address to which the UI check or UI debit card is sent, or within the geographical area in which the registered debit card is being used.

Reporting UI Fraud

According to the FinCEN advisory, no single red flag establishes the existence of UI fraud. Financial institutions should consider all surrounding facts and circumstances before concluding that a transaction is suspicious. However, if a financial institution does conclude that a UI-related transaction is suspicious, the institution should file a Suspicious Activity Report (SAR). The advisory states that SAR reporting is crucial to combating UI fraud during the COVID-19 pandemic.

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