‘Those funds are overseas now’: Tens of millions of dollars from state unemployment fraud likely won’t be recovered

It took a matter of weeks for criminals to steal nearly $650 million in state and federal jobless benefits from Washington during the chaotic opening stages of the pandemic in 2020.

It has taken almost two years for the state to recover around $380 million, or nearly 60% of those funds. And while that recovery percentage appears to put Washington well ahead of other states hit by similar fraud, newly disclosed state data and recent court cases suggest that much of what Washington hasn’t recovered won’t be retrieved.

Earlier this month, the state Employment Security Department disclosed the banks and other financial institutions where the agency had sent $577 million, or around 90%, of the fraudulent benefits it paid on thousands of bogus unemployment claims in the spring of 2020. (The other 10% were spread among several thousand other banks, state officials say.)

The banking data, provided after several requests by The Seattle Times, offers a glimpse into the financial mechanics of a multibillion-dollar crime spree that blindsided Washington and other states — and delayed benefits to tens of thousands of Washingtonians left jobless by the pandemic.

The list shows that criminals sought to have benefits wired to tens of thousands of accounts at institutions ranging from JP Morgan Chase, the largest U.S. bank, which was sent $42.5 million in allegedly stolen ESD funds, to Washington’s own Boeing Employees Credit Union, which was sent nearly $1.2 million.

Even KeyBank, the Cleveland-based bank that handles ESD’s financial transfers to other financial institutions, apparently wired itself about $18.3 million in allegedly stolen ESD benefits, state records show.

As important, the list details just how much of that money has come back, and where missing funds might still be found.

A little more than half of that $577 million sent to the 75 financial institutions has been returned to ESD, voluntarily, by banks, agency records show.

But while more funds are potentially retrievable, additional recoveries could stretch out for years, and are likely to generate significantly smaller returns, state and federal officials say.

Much of what the state has recovered came back relatively quickly. In some cases, federal investigators were able to warn financial institutions to refuse suspicious benefits transfers from ESD and to return the funds to KeyBank. In other cases, suspicious ESD transfers appear to have tripped the financial institutions’ own fraud-detection systems, leading them to freeze suspected accounts. All 75 institutions have returned some portion of the transfers, state records show.

Early recovery efforts also benefited from the existence of a veritable fraud mother lode: Nearly half of the recovered funds came from Green Dot, an Austin-based prepaid debit card company, which has returned around $182 million of the $266 million ESD sent it, according to state records.

Going forward, the pickings will be much slimmer. The state Attorney General’s Office is focusing on 37 of the 75 financial institutions that are believed to still have ESD unemployment benefits in thousands of accounts used by suspected criminals, according to ESD and the state attorney general’s office.

But financial institutions typically won’t turn over deposits without a court order and a complicated legal process known as forfeiture — in part to avoid getting sued by account holders, banking officials said. That has required the attorney general’s investigators to, among other things, document that funds in each of thousands of suspect bank accounts were fraudulently obtained from ESD.

There’s no shortage of evidence: on many suspect bank accounts that received unemployment benefits, for example, the account holders’ name, Social Security number and other data don’t match what’s on the unemployment claim. (The investigations are sure to resurface questions as to why so much public money was sent to accounts with so many red flags.) But the investigations are also time-consuming. So far, the attorney general’s office has filed three forfeiture actions.

One big question — how much retrievable money remains in all 37 financial institutions — won’t be clear until the forfeiture cases are completed, according to ESD and the attorney general’s office. But the three cases filed so far suggest the total could be relatively small.

Last week, for example, the attorney general’s office filed a forfeiture action in King County Superior Court for $6.7 million in allegedly stolen unemployment benefits at JPMorgan Chase. That follows a case against Wells Fargo in December for $7.4 million and one against and New Jersey-based TD Bank in October for nearly $500,000. Wells Fargo was sent $42.9 million in suspect benefits from ESD, state records show; TD Bank was sent around $6.2 million.

All three banks say they’ll comply with the court order. A JPMorgan spokesperson said the bank was “eager to return the money” once the legal process concludes. State officials say they have no reason to expect any of the banks will fight any court-ordered forfeiture.

But that only highlights a bleak fact of fraud in the digital age. Even banks eager to return suspect funds can’t send back what they no longer have.

Even after JPMorgan Chase, Wells Fargo and TD Bank comply with the forfeiture orders, nearly two thirds of the $91.7 million in fraudulent funds initially sent by ESD to these three banks will be missing, and could well remain that way, according to state records and state officials.

In the case of TD Bank, the attorney general’s office acknowledged in October that the missing funds — about $4.2 million — were probably withdrawn by scammers before the suspect accounts could be frozen. Asked whether outstanding funds sent to Wells Fargo and JPMorgan Chase Bank also were likely withdrawn, Dan Jackson, spokesperson for the attorney general’s office, said it was “fair to say the same assumptions likely apply, but we are in different stages of investigation on each bank.”

If those assumptions hold, that means about 80% of the unrecovered funds are no longer at those three banks.

It’s not yet clear whether that percentage will hold up for the rest of the 37 financial institutions, state officials say. “Each individual bank investigation will ultimately determine what is recoverable through these forfeiture actions,” Jackson said.

But if the current percentage holds, it’s possible that about $210 million, or around a third of the total theft from 2020, is no longer at those financial institutions.

Recovery efforts will continue even after forfeiture, state and federal officials say. Funds that are no longer at the banks may be the target of separate federal investigations, officials in the attorney general’s office have said. “We are really dedicated to trying to get back every dollar we can,” said ESD spokesperson Nick Demerice. “But it will be a lengthy process.”

However, state and federal officials also acknowledge the difficulty of tracking down withdrawn funds. Even in the cases where federal investigators have identified suspects — such as two Nigerian citizens charged in the ESD fraud — stolen funds often have been moved in ways that make them difficult to retrieve.

“Law enforcement has been able to trace some funds moving to financial institutions overseas, but much of the money is withdrawn from domestic bank accounts and laundered in many complex ways,” noted Emily Langlie, a spokesperson for the U.S. Attorney’s Office in Seattle in a recent emailed statement.

These include “the purchase of luxury goods or vehicles that are then shipped overseas, conversion to cryptocurrency, or the funding of debit cards or gift cards to quickly disperse the stolen funds,” Langlie’s statement said.

Private fraud experts also aren’t optimistic about recovering withdrawn funds.

Unless criminals transferred the withdrawn funds to other traditional financial institutions, “the money is gone,” warns Jason Kratovil, a fraud expert at SentiLink, which provides anti-fraud and identity verification services to financial firms.

In the case of funds stolen by suspected fraud rings from other countries, “you have to assume that a lot of those funds are overseas now,” Kratovil said.

Still, in purely financial terms, Washington may have gotten off relatively lightly.

Michigan, for example, paid out $3.9 billion to fraudsters, according to the federal Pandemic Response Accountability Committee. California paid out $20 billion, according to media accounts.

All told, states’ unemployment fraud losses during the pandemic may account for a “significant portion” of the $87 billion of the “improper” unemployment payments that federal officials have projected for the pandemic period, according to a Jan. 3 summary by the U.S. Labor Department’s Office of the Inspector General.

Washington, which was among the first to be hit by the fraud, also appears ahead in recoveries.

Labor Department officials were unable to provide an official estimate of how much of the unemployment benefits stolen nationally during pandemic have been recovered.

But the summary by the Labor Department’s Office of the Inspector General notes that it has recovered or helped states and other federal agencies recover just $790 million in fraudulent unemployment benefits.