Dozens filed for unemployment after Kentucky Theatre closed. They never worked there.
After the storied Kentucky Theatre temporarily closed its doors in October due to drops in attendance and revenue, the number of unemployment claims began to trickle in.
In the weeks after the well-publicized closing, there were sometimes three or four claims per week.
The problem?
None of the people filing unemployment claims had worked at the Lexington downtown fixture.
“It’s my guess that applicants are gambling that the closed business either has no one left to appeal the claim or that they don’t care since they will not be continuing,” said Howard Stovall, one of the managers of the Kentucky Theatre Group, which had the contract to oversee the management of the movie theater owned by the city.
Stovall, though, was still getting Kentucky Theatre’s mail. He dutifully returned each of the fraudulent claims with a note that the person never worked there.
To date, Stovall estimates he has received at least 25 bogus claims in the past three months.
More than 60,000 claims could be fraudulent
Kentucky state officials who oversee the beleaguered and backlogged unemployment insurance program said during a Jan. 8 press conference that as many as 60,000 of the currently pending 90,000 claims could be fraudulent. To date, the state has received approximately 1.5 million claims.
Amy Cubbage, Gov. Andy Beshear’s general counsel, said the system has stringent identification requirements. The estimated 60,000 people whose claims are likely fraudulent did not meet those identification requirements or have not yet provided the department with identification documents needed to certify the claims.
Cubbage was made point person over the unemployment insurance program last year after it was mired in repeated problems.
“We have had a flood of fraudulent claims,” Cubbage said Jan. 8. “That’s why it’s taken us so long to process some of these claims.”
The Herald-Leader asked state unemployment officials how many people have been prosecuted for unemployment insurance fraud.
The state did not provide any numbers.
The state is focusing on clearing its backlog of legitimate claims, according to a written statement.
“The fraud determinations that have been issued are not related to the large scale fraud identified by the U.S. Department of Labor as we think our stringent ID verification has averted these types of fraud. We continue to actively monitor potential fraud and utilize numerous fraud prevention measures available. Federal fraud funds are being used to add more integrity staff and to update fraud software to further protect Kentucky’s unemployment system against those types of claims,” according to a written statement from state unemployment officials.
In a follow-up email, Kevin Kinnaird, a spokesman for the Kentucky Labor Cabinet, said the department does not comment on specific claims, including the bogus claims connected to the Kentucky Theatre.
“The Kentucky Career Center website provides resources on UI fraud, including instructions on how to report it,” Kinnaird said. “The Office of Unemployment Insurance follows up on all allegations of fraud.”
Kinnaird said a robust black market for stolen identities is likely behind the uptick in fraudulent claims.
“Data breaches that have been reported around the world for years have led to an online marketplace on the dark Web where personal information is bought and sold, and it has been a boon for folks who file fraudulent UI claims,” Kinnaird said.
Kentucky’s unemployment insurance program also had a data breach last year and was criticized after it did not report it for more than a month.
‘Poor internal controls?’
There have been questions about whether the state was doing enough to safeguard against fraud.
In late December, state auditors questioned the internal controls in the unemployment insurance program in the annual audited financial statement.
“The Kentucky Office of Unemployment Insurance had poor internal controls over benefit payments which increased the risk of fraud and undetected material misstatements,” according to the letter by Republican State Auditor Mike Harmon attached to the state’s financial statements. “During the fourth quarter of fiscal year 2020, the Office of Unemployment Insurance, in an effort to expedite unemployment benefit payments, eliminated key internal controls that were in place to reduce the risk of improper payments. As a result, payments were paid to claimants without verification of eligibility. “
Harmon’s office did not provide further details about what internal controls were skipped to expedite payments.
Michael Goins, a spokesman for Harmon’s office, said further details about issues auditors have discovered with unemployment insurance will be released with the annual statewide audit of the state, which will be unveiled in coming months.
Early in the pandemic, the state deemed some people eligible for unemployment benefits who had voluntarily quit their jobs due to concerns about exposure to the coronavirus. Federal authorities later said that was a no-no, and those claimants were later deemed ineligible, according to an October Kentucky Center for Investigative Reporting story. The state has blamed the federal government, which first communicated that those who fear exposure to the virus would be eligible for unemployment and later backtracked. The state is hoping it will not have to collect those overpayments, but to waive them, the Kentucky General Assembly must pass legislation forgiving that debt. It has yet to do so.
The Kentucky Center for Investigative Reporting also reported the state got dinged by federal authorities in August for preemptively approving unemployment for self-employed and independent contractors for the state’s minimum weekly amount plus an additional $600 a week in federal money. The state was supposed to determine the total amount workers should have received before starting payments. Instead, the state approved minimum unemployment payments without determining how much those workers should have received.
Fraudsters use prison inmate IDs to game UI systems
There has been wide-scale fraud of unemployment insurance in other states since the pandemic began in March.
One of the boldest was in California, where fraudsters used the identities of prison inmates, including Scott Peterson, to collect unemployment insurance. Sacramento prosecutors believe that the unemployment fraud ring alone could have swindled California out of $1 billion. Peterson was convicted in 2004 of killing his pregnant wife in one of the most well-publicized trials of the past twenty years.
Part of the problem: Outdated computer systems that can’t keep up with the influx of claims, both legitimate and bogus. California’s unemployment system does not automatically cross-check potential claimants against prison records. Fraudsters knew it and took advantage of the system’s weaknesses.
Kentucky’s current unemployment system dates to the 1970s. Beshear and others have repeatedly blamed the ancient information technology system for the state’s backlog of unemployment claims.
“Nearly every state has its own unemployment IT system, and few have invested in upgrades.,” said outgoing U.S. Secretary of Labor Eugene Scalia in remarks before the American Enterprise Institute, a right-leaning think tank, in December. “Some state systems are 40 years old.”
Scalia urged states to upgrade those systems to make it easier to root out fraud and get money to people who need it.
“Technology enhancements would give better protection against improper payments and fraud. States could more effectively track when workers returned to the job and were no longer eligible for payments,” Scalia said.
Kentucky had the opportunity to upgrade its computer system during the recession in 2011 but ultimately balked. By doing so, it gave up $90 million in federal money that would have paid for a new computer system. After the recession, the federal government allowed states to apply for federal money in an effort to drag states’ ancient systems into the 21st Century.
In his current one-year budget proposal, Beshear has asked for $47.5 million to replace the state’s unemployment insurance technology, plus $8.4 million to restore 90 state workers who previously were posted to regional offices to help Kentuckians apply for jobless benefits.
But Beshear’s $12 billion one-year spending plan has received a lukewarm reception in the Republican-controlled House and Senate, which have criticized the Beshear administration’s handling of unemployment claims. It’s not clear if Beshear’s proposal to ditch the antiquated computer system and fund a new one will have support in both chambers.
The House and Senate passed a one-year continuation budget this week, a move designed to get the budget to a conference committee, where House and Senate leaders will hammer out a compromise budget over the next several weeks while the General Assembly is on break.
More than 30,000 claims still pending
Meanwhile, the state estimates there are at least 30,000 pending and likely legitimate claims for which someone’s identity has been verified.
Cubbage said the state is trying to work through that backlog as quickly as possible and at the same time program its antiquated computer system to keep up with new unemployment programs recently passed by Congress in December. Beshear has also proposed additional payments to those people who have applied for benefits but not yet been approved.
“We know these are real people who are properly connected to an employer or are self-employed,” Cubbage said of the approximately 30,000 pending claims.
Still, Beshear said 30,000 people waiting for unemployment assistance istoo many.
One of those legitimate claims was for someone who worked at the Kentucky Theatre.
Stovall said he just got the unemployment paperwork for the theater’s former assistant manager last week. The manager was one of three full-time employees of the movie theater. Stovall said he doesn’t understand how the bogus claims leapfrogged ahead of real jobless workers who need that money now.
“I just wonder how many other closed businesses people are targeting,” Stovall said.
Meanwhile, the fate of the Kentucky Theatre, which first opened its doors in 1922, is up in the air. The city agreed to terminate its agreement with the Kentucky Theater Group so it would no longer have to pay utilities and other costs while the theater is dark. Lexington Mayor Linda Gorton has said the city hopes to reopen the bid to manage the theater when people finally return to the movies, hopefully in the summer or fall.
