The Clock Is Running Out for Covid Fraud Investigations
A bill to allow more time to track down and file charges for these massive fraud schemes is languishing in the Senate.
For all of the five-year remembrances of Covid-19, few have paused to recall the cyber smash-and-grab that hoovered billions of dollars out of state unemployment offices. Inmates in California grabbed thousands of dollars from prison library computers. Government-aligned Russian and Chinese crime gangs did the really heavy lifting, making off with billions more. The Government Accountability Office estimates total state and federal losses to be between $100 billion and $135 billion. Outside experts say that number could run as high as $400 billion. Because of the complexity of the crimes, very little has been recovered.
It’s probably childish to wish that the nation’s lawmakers were governed by something like the MPAA’s Hays Code provision requiring movies to show that crime never pays. But the five-year statute of limitations is ticking down on the greatest criminal fraud in the nation’s history, and neither the president nor the Senate seems eager to identify and prosecute the perpetrators.
The House did its job in March, when members approved the Pandemic Unemployment Fraud Enforcement Act (HR 1156), giving investigators another five years to track down and file federal criminal charges related to the fraud. Their 295–127–10 vote was a rare instance of bipartisanship in the Capitol, and it came just two weeks before March 27, the date in 2020 on which the first crimes took place.
“This is a must-pass bill,” the bill’s author, Ways and Means Committee Chairman Jason Smith (R., Mo.), said during debate. “The statute of limitations for these investigations starts to run out in 16 days, on March 27. If we don’t extend it, the criminals who stole money from the pockets of taxpayers — and continue to do so to this day will get away. . . . A no vote is a vote to allow these criminals to keep what they stole.”
The bill arrived in the Senate one day later but has languished ever since. Its prognosis is grim. Multiple Capitol Hill sources said that Senate Majority Leader John Thune (R., S.D.) fears that Democrats, unable to filibuster the budget bill passed by the House last week, will instead filibuster HR 1156. That could block any public debate on the budget. They say the House bill will likely die without ever getting a floor vote.
That is some good news — for America’s enemies.
Where It All Started
When Covid hit the U.S. in March 2020, the makeshift masks went up and the government-mandated closures came down hard. Suddenly out of work, Americans took to their state unemployment offices for aid. As demand for assistance overwhelmed state unemployment trust funds, frantic local officials begged for federal action.
To backstop the cratering state agencies and what their failure may portend for the economy and society, President Trump signed off on $50 billion in federal loans, including $20 billion for California’s Employment Development Division (EDD) alone.
That’s when Covid, already terrifying for the then-mysterious nature of the virus, became a financial and national-security crisis.
California was the setting for the worst crimes. Julie Su, then the state’s labor secretary, had ignored years of warnings about vulnerabilities in the state’s unemployment-benefits system. She claimed that the tougher ID verification standards recommended by state auditors would disproportionately hurt black and brown Californians. When the federal cash poured in, Su’s Employment Development Division was unprepared. Throughout the spring and into that summer, Su lost some $32 billion to fraudsters, including those Chinese and Russian criminal gangs.
In a move that might provide evidence of his failing mental acuity, President Biden airlifted Su out of that mess, nominating her to run the federal Department of Labor. She used her new position in a failed attempt to hide California’s embarrassing losses. At the same time, back in Sacramento, Governor Gavin Newsom, who had appointed Su, declined to repay the federal loan. That triggered an automatic hike in the rate that California employers pay in federal withholding taxes. That tax hike will ratchet upward annually until the entire debt is paid. A state auditor told National Review that, given California’s chaotic economy, his agency can no longer say when California employers will be able to pay off the state’s federal debt.
HR 1156’s supporters argue that this is precisely why extending the statute of limitations is essential. Financial fraud cases are complex, they say. They require a very particular set of skills — for one, knowledge of foreign criminal gangs, such as China’s government-connected Advanced Persistent Threat, as well as familiarity with forensic accounting, foreign banking regulations, cryptocurrency, and digital technology.
Catch Them If You Can
“The staggering fraud committed against California’s EDD during the pandemic is alarming, but the real danger lies in what those stolen billions are now funding,” said Paul Eckloff, a retired U.S. Secret Service special agent who now works to thwart fraud at LexisNexis Risk Solutions. “Nation-states and transnational criminal groups are using this money to fuel illicit narcotics, human trafficking and activities that actively undermine our financial institutions and national security.”
“Even more alarming, these groups haven’t stopped — they’re continuing to target state programs across the country, promoting terror, crime, and undermining the rule of law,” he said.
If the Senate’s Republican leaders bring HR 1156 to the Senate for a vote, it’s likely Democrats there would take the opportunity to prove their anti-Trump credentials. That’s how it played out in the House. There, the Democrats who voted against HR 1156 were unmoved by evidence of bad foreign actors or the recovery of billions of dollars. California Representative Judy Chu used her moment in the spotlight to attack the firing of Inspector General Larry Turner, noting that Turner “had recommended that Congress extend the statute of limitations in the first place. It is outrageous that Republicans now want to act on the IG’s recommendation but refuse to address the illegal firing of IG Turner and 18 other nonpartisan inspectors general across the Federal Government.”
Other Democrats raised precisely the sorts of concerns that led to the California catastrophe five years ago. It’s possible that extending the statute of limitations will lead to the prosecution of individuals who inadvertently received overpayments, some said. Others, discovering fiscal conservatism for perhaps the first time, worried about the impact on the federal budget. The most consistent theme was that Trump cannot be trusted.
California Representative Kevin Kiley, a Republican who called out California’s ham-fisted response to the heist from his seat in the State Assembly, cut through the opposition’s arguments.
“What do you think [the fraudsters] are going to do with the money?” he asked House Democrats. “Give it to charity? No. They are going to use it for further criminal activity.”
Failure to identify and punish the fraudsters means there’s likely worse news ahead: Those who benefited most from the unemployment-insurance fraud scandal have learned “an important lesson,” said a state investigator who requested anonymity when speaking with National Review.
“They’ve learned that American governments are an easy mark because you won’t get caught. What we have unfortunately seen is that more and more of these transnational crime groups [are] targeting US governments,” capitalizing on “antiquated tools and technology in government.”
Those international crime groups may also capitalize on something else: Americans don’t seem determined to catch them. According to the state’s tracker, California officials report that “over 2,000 investigations have been opened, hundreds of suspects have been arrested, and many have been criminally charged and convicted.” They claim to have recovered approximately $6 billion.
But that $6 billion represents just 11 percent of the $55 billion that California estimates it lost to scammers. And that number hasn’t changed in over a year. That’s a sign, perhaps, that, as usual in California, there’s no one manning the transparency desk.
This outcome might have been clear from the beginning: Speaking about the challenge of tracking transnational crime groups in 2022, California’s lead investigator predicted that no matter how hard he worked, “at the end of the day it’s all going to be pennies on the dollar because most of it is long gone.”
It could also be a symptom of the state’s waning interest in justice or in Hollywood endings of the sort once required under the aforementioned Hays Code, like that moment in White Heat when James Cagney, surrounded by police in a natural-gas storage facility in Long Beach, Calif., shouts, “Made it, Ma! Top of the world!” and then gets vaporized in a mushroom cloud. This time, it’s Americans everywhere who will pay the price for official indifference.
Will Swaim is president of the California Policy Center and co-host with David Bahnsen of National Review’s “Radio Free California” podcast.
This article originally appeared in NRO.