Unemployment Claims, Time Tax, Archegos, and Internships
A ProPublica investigation reveals that much of the fraud has been organized — both in the U.S. and abroad. Fraudsters have used bots to file online claims in bulk. And others, located as far away as China and West Africa, have organized low-wage teams to file phony claims.
In addition, the fraud has been enabled by a burgeoning online infrastructure, whose existence has not previously been reported in the mainstream press. Much of it is geared toward exploiting aging or obsolete state unemployment systems whose weaknesses have drawn warnings for decades.
I’m less interested in criminal fraud rings in other countries than how and why our systems are so broken. Unemployment fraud is likely as old as the unemployment system itself, but the Internet made identity theft much easier and as far back as the late 90s government agencies were warning of weaknesses in the system.
In the US, unemployment claims are processed and paid out at the state level. The Labor Department has repeatedly tried to fix glaring problems in the system:
At least twice during the Obama administration, the Labor Department proposed reforms to Congress to address some of these inadequacies, primarily by boosting information sharing among states and federal agencies. Both times these efforts went nowhere. President Donald Trump included similar reforms in each of his four budget proposals to Congress. They, too, were never enacted.
Meanwhile, states continued to cut budgets:
Meanwhile, states’ funding for unemployment insurance administration was falling, largely because the economy strengthened and unemployment fell. At the start of the pandemic, funding for states’ unemployment insurance administration stood at a 30-year low, according to the National Association of State Workforce Agencies.
High profile data breaches over the last decade have given criminals access to huge databases full of PII - names, Social Security numbers, dates of birth. Before the pandemic, unemployment fraud was already on the rise, along with tax return fraud and other byproducts of identity theft.
So what happened last year? The Pandemic Unemployment Assistance - PUA - payments Congress hastily put in place to combat the widespread unemployment in the spring didn’t require basic identity and employment verification:
But in its urgency to get cash to people with no work, Congress chose not to require such verification in the PUA program. It requested only self-certification of eligibility and no proof of income or identity. And successful applicants could get the extra $600 weekly payment, too.
With its loose application requirements, PUA instantly drew throngs of scammers. California state authorities have said that 95% of its confirmed fraudulent UI payments originated in PUA claims. Pennsylvania’s agency estimated that nearly 84% of its PUA claims were phony.
Ahhhhhhhh, great. So the federal government - which had failed for over a decade to make any meaningful reforms to the unemployment systems - dumped a huge amount of money into the pipeline and didn’t require any sort of verification to get it. Scammers, who were already sitting on millions of stolen identities, flooded the system with fraudulent claims, meaning real people didn’t get much of the aid, if any. State agencies, already overwhelmed by non-PUA claims after the initial waves of job losses, didn’t have the resources to perform standard checks:
Amid the surge in claims, databases frequently froze up or slowed to a crawl, according to the Labor Department’s inspector general. States also reported not having the mainframe capacity to perform cross-matches for the large volumes of claims they were getting.
The result was that many cross-checks simply didn’t happen. Twenty states did not perform all the required database cross-matches, and 44 states did not perform all recommended ones, the inspector general found.
So, scammers could file claims for the same person in multiple states, exponentially increasing the amounts they could steal. It had real world consequences for the actual jobless:
In 2020, consumers filed nearly 400,000 complaints claiming their identities were stolen and used to claim government benefits. That was up more than 2,900% from about 13,000 such complaints in 2019, according to Federal Trade Commission data.
Many, like the violinist in the story, had their unemployment payments frozen because scammers filed on their behalf elsewhere. Victims were at the mercy of the overwhelmed state unemployment offices, many of whom weren’t even answering the phone during the worst of it.
The good (?) news is the Biden administration has promised billions of dollars to modernize state and federal systems, and implement more effective fraud screening measures. The bad news is the damage done is going to be very bad when we get a final accounting of the size of the theft:
“From my experience, when this is all said and done, we are going to be counting in the hundreds of billions of dollars, not the tens of billions,” said Jon Coss, who heads a unit within Thomson Reuters that is helping states detect fake unemployment insurance claims.
It was very much a good thing that Congress took unprecedented action to try to get money into the hands of the jobless and needy when the pandemic hit. Unfortunately, because it had to travel through our fractured and desperately underfunded state unemployment systems, a huge chunk of it either ended up in the hands of scammers, or never made it to the people who needed it.
While we’re discussing unemployment claims, Annie Lowrey ponders the perverse ways our government inconveniences us:
Government programs exist. People have to navigate those programs. That is how it goes. But at some point, I started thinking about these kinds of administrative burdens as the “time tax”—a levy of paperwork, aggravation, and mental effort imposed on citizens in exchange for benefits that putatively exist to help them. This time tax is a public-policy cancer, mediating every American’s relationship with the government and wasting countless precious hours of people’s time.
The issue is not that modern life comes with paperwork hassles. The issue is that American benefit programs are, as a whole, difficult and sometimes impossible for everyday citizens to use. Our public policy is crafted from red tape, entangling millions of people who are struggling to find a job, failing to feed their kids, sliding into poverty, or managing a disabling health condition.
The same systems that locked out millions of people seeking unemployment during the pandemic restrict access to all sorts of services that shouldn’t be so difficult to take advantage of:
The United States has no unified social security agency. Instead, federal, state, and local offices administer dozens of different programs with different rules and application processes. Some are direct-benefit programs; others are complicated tax expenditures. Some are entitlements, where everyone gets the benefit if they qualify; others are rationed benefits, where submitting an application means spinning a wheel and hoping for the best. Some benefits have easy online applications; others are old-fashioned paper nightmares.
Do you know which government programs you qualify for? Which tax credits or benefits you’re eligible for? I don’t! Here are some sobering statistics about just how poorly resources get distributed:
An estimated 9 million Americans left jobless by the pandemic never got a single unemployment payment.
As for the earned-income tax credit, 22 percent of eligible recipients miss out on the generous benefit because they do not file or misfile their taxes.
Physicians report filling out an average of 37 insurance preauthorization forms a week, and spending twice as much time on clerical work as on patient care.
Our tax system operates on the same “you figure it out” model, one that costs citizens 9 billion hours a year.
Our government was designed by the wealthy and powerful, people who could afford to pay someone else to waste their time doing the mundane administrative tasks necessary to remain in good standing with the authorities. We have labyrinthine networks of insurance to see a doctor, or ensure our house is protected against fires. Anything perceived as a “benefit” is weaponized by cynical lawmakers to deny basic human rights and dignity to the poor or unfortunate. We’ve created a kludgeocracy, and when a crisis puts even a little strain on the system, it slows to a crawl or collapses entirely. The next time you’re debating whether to fill out paperwork to reclaim a small amount of money from your insurance company, or whether to pay a collections claim you don’t owe because disputing it would be a lot of work, remember, the system is designed this way on purpose. The time tax is real.
In this newsletter, I have at different times had different opinions on the Archegos collapse. Initially, I thought Archegos hoodwinked the banks. I wrote:
Which, okay, Hwang may have taken advantage of the fact that each bank was competing for his business, and spread his portfolio around, so the banks didn’t take into account how leveraged up he was with their peers.
Then, when I wrote about it a second time, I still believed that the banks were caught off guard by the collapse. Matt Levine agreed with me! Credit Suisse hired a bunch of lawyers to look into what happened with Archegos, primarily because they lost $5.5 billion dollars on the deal. It turns out both Matt Levine and I were wrong, and Credit Suisse did know about the positions Archegos was taking and how leveraged up it was:
The CRM analyst covering Archegos escalated the same concern that the PSR analyst had elevated to the PSR Head the day before: namely, that Archegos’s concentrated positions with CS were likely also spread across its other prime brokers.
That is from the report, which is long and probably only interesting to a handful of people on the planet. Matt Levine gives a digestible breakdown here. Archegos was so heavily leveraged not because it was hiding what it was doing from the banks, but because - at least with Credit Suisse - it had written itself some advantageous collateral agreements and could pull profits from its accounts without posting more collateral - meaning its initial 20% collateral margin decreased relative to its holdings as they gained in value, and it pulled profits out for itself.
Another thing the report does indicate, though, is that Archegos knew it had risky positions, and was actually taking cash out right before everything fell apart:
Moreover, during the several weeks that Archegos was “considering” this dynamic margining proposal, it began calling the excess variation margin it had historically maintained with CS. Between March 11 and March 19, and despite the fact that the dynamic margining proposal sent to Archegos was being ignored, CS paid Archegos a total of $2.4 billion—all of which was approved by PSR and CRM.
So as one department of Credit Suisse was writing memos about how they needed to collect more collateral from Archegos, Archegos was calling in $2.4 billion dollars’ worth of margin from the same bank, who approved the transfers. Some of that money went into new positions, but some didn’t, near as we can tell. Did Archegos make off with a billion dollars from Credit Suisse right as its portfolio was blowing up? Maybe! It’s hard to be too upset that a bunch of banks wrote some dumb contracts with a hedge fund run by a guy who’d done financial crimes and then lost billions of dollars when those deals blew up, because they knew what was going on and their bankers didn’t want to listen to their risk teams because they might lose a big client. That said, Credit Suisse has had to fire a bunch of people, claw back bonuses, and reorganize their business, so while it’s easy to point and laugh at the dumb bankers, losses of this size do have downstream consequences.
Most internships, I am told, are some combination of boring, stressful, or humiliating. We’ve all heard the horror stories - interns expected to work long hours, or fetch a boss’s dry cleaning, or be subjected to abuse or harassment on the job. All for very little (or no) money, recognition, or practical experience.
What if, though, your internship was to be the right hand man of a really rich guy? Meet Matthew Grimes:
…he flew on private planes to international destinations, lived on a $15 million estate and even partied at the inauguration of former President Donald Trump.
Grimes was living in the guest house of a $15 million home that Barrack owns in Aspen, Colorado, according to a person familiar with the matter. He took at least 50 international trips with his boss over five years…
This all sounds very cool! What a great internship! His boss was none other than Tom Barrack, who was arrested last month along with Grimes, who, as Bloomberg cheekily put it, has gone from intern to co-defendant.
Grimes was listed as the managing director of a family office - investments - that Barrack created and had a million dollars in a bank account at the time of his arrest. This is all quite impressive for a 27-year-old who’d only ever had one other job - intern! - since college.
In addition to carrying Barrack’s bags or serving cheese plates on his private jet, Grimes was also doing international conspiracies with foreign governments:
Grimes was a “trusted intermediary between Barrack and Al Malik, often at the direction of UAE government officials,” prosecutors argued in court papers seeking his detention. He also agreed to “take direction from UAE government officials” and act on their behalf, the U.S. said.
According to prosecutors, Grimes solicited Emirati input for an opinion article by Barrack supporting the UAE. He attended a meeting in Morocco where Barrack laid out what he could do to further the UAE’s foreign policy goals in the U.S. He helped coordinate discussions on major issues including the UAE’s desire to have the Muslim Brotherhood designated as a terrorist organization. He was also involved in the UAE’s effort to push their pick for U.S. ambassador and on U.S. support for the blockade of Qatar.
No matter how cool your internship may seem, it is probably a good idea to ask your boss whether you need to register as an agent of a foreign government before you do things like arrange for secure, encrypted messaging between your boss and some Emiratis.
America Prospect - “Summers has been diligently laundering his reputation on behalf of “fintech” lenders, real estate startups, and Bitcoin plays, including several businesses that would benefit from an economy that values lower inflation over full employment.”
MIT Tech Review - “In the end, many hundreds of predictive tools were developed. None of them made a real difference, and some were potentially harmful.”
The Verge - “Along with Google, Facebook is examining several privacy-enhancing techniques to deliver personalized ads without knowing anything about the specific individuals who view them. That’s an about-face from how ad targeting has worked online to date.”
Tips, thoughts, or time tax refunds to firstname.lastname@example.org