Megabanks have prison financial services market locked up

Introduction

Editor’s note: This is the second in a two-part series examining how financial companies impose high costs on the families of prison inmates. Part One, which ran on Tuesday, focused on the explosive growth of JPay Inc., a private company that performs money transfers for 70 percent of U.S. offenders.

On Wall Street, Bank of America plays a perpetual second fiddle to JPMorgan Chase & Co., the only U.S. bank that holds more assets.

A few blocks north, however, at the New York Metropolitan Correctional Center, there exists a market that Bank of America has locked down, literally. For the 790 federal prisoners incarcerated at MCC, Bank of America controls the provision of money transfers, e-messaging and some telephone services.

The bank’s monopoly extends across the federal Bureau of Prisons system — 121 institutions housing 214,365 inmates. Since 2000, Bank of America has collected at least $76.3 million for its work on the program.

When inmates are released, JPMorgan steps in, issuing high-fee payment cards to distribute money from their prison accounts, which include earnings from jobs and money their families send them.

The banks’ exclusive deals came not from the Bureau of Prisons, but from the U.S. Treasury.

The agency awarded the contracts using a 150-year-old authority that allows it to sidestep the oversight, transparency and competition typically required for federal contracting. That means that for 14 years, Bank of America has never been required to compete with other vendors who might do the work better or for less money, according to Treasury documents obtained under the Freedom of Information Act.

JPMorgan’s no-bid deal to issue debit cards for various federal agencies began in 1998, was extended in 2008 and eventually expanded to include cards for federal prisons. Fees from former inmates make up most of the bank’s compensation for these cards, documents show. A separate Treasury document from 2013 said that about 50,000 released prisoners had been issued cards and listed fees of $2 for withdrawing money from an ATM and $1.50 for leaving an account inactive for three months.

JPMorgan, Treasury and the Bureau of Prisons declined to provide a current fee schedule for the cards. Bank of America, JPMorgan and the Bureau of Prisons all declined numerous requests to discuss the banks’ deals inside U.S. prisons.

The documents show how Treasury has expanded the scope of Bank of America’s contract — originally focused on managing accounts for inmates and tracking inventory at prison stores — to include an array of services for the nation’s largest prison system, from providing e-messaging to supplying the prison system with handheld scanners. The deal allows Bank of America to subcontract with other prison vendors, positioning it as a hub of prison services that are procured outside any government bidding process.

The contract has been amended 22 times in the past 14 years.

Lubricating the system

Across the country, jails and prisons are hungry for ways to shift their operational costs onto inmates and their families. Inmates need money to pay for essentials like toiletries and court fines as well as extras like higher-quality food than what is served in prison cafeterias. Their families often pay high fees to send them the money. Inmates, in turn, pay marked-up prices for items sold at prison stores.

The oil that lubricates this entire system is supplied by the prison bankers, vendors that collect all the inmates’ money in a pipeline of cash from which payments and fees can be pulled. Bank of America’s lock on federal prisons makes it a major player among prison bankers, many of which provide a range of high-cost financial services to inmates and their families and share their profits with the prison systems they work for.

Providing services inside prisons is a growing business, but it’s not new. The first accounts for federal inmates were set up in 1930. Inmates’ families could no longer bring them food and clothing, the government decided, but instead would be allowed to send money into individual accounts. Until the early 2000s, most deposits were made by mail using postal money orders, a process that was nearly cost-free. Before Bank of America’s contract, the Treasury Department held inmates’ funds.

Bank of America’s prison contract is an example of how the Treasury Department leans on a power granted during the Civil War to pick and choose its own bankers and allow other agencies to avoid procurement rules that might force a competitive bidding process.

By hiding these deals from the public, Treasury “invites opportunities for waste and fraud,” said Neil Barofsky, who provided independent oversight of Treasury’s $700 billion bailout program after the 2008 financial crisis. He said Treasury’s expansive use of the authority reminds him of what he saw while working with the agency.

“The reaction from Treasury when dealing with banks was to find a way to say no to being transparent,” said Barofsky, now a partner with the law firm Jenner & Block LLP.

Treasury’s power to award the deals, known as financial agency agreements, was created in 1863 to support the nation’s first national banking system, around the time the greenback was introduced. Since then, the department’s broad use of this power has drawn criticism from lawmakers, auditors with the Government Accountability Office, federal appeals court judges and the department’s own inspector general. Treasury has said the selection process is competitive enough and the contracts are handled responsibly.

In a 1975 report, however, government auditors said Treasury was reimbursing banks operating on overseas military bases for office parties and club dues, leaving them with “little or no incentive to operate the facilities profitably or efficiently.”

Twenty years later, the U.S. Court of Appeals for the District of Columbia overturned Treasury’s selection of Citibank as a financial agent to deliver electronic benefits like Social Security, calling it “arbitrary.”

And in 2008, the Government Accountability Office said a deal with JPMorgan to provide stored value cards on Navy ships was “at risk of delivering a system solution that falls short of cost, schedule and performance expectations.”

Most recently, Treasury’s inspector general last spring criticized oversight of a program to deliver federal benefits on debit cards issued by Dallas-based Comerica Bank. The inspector general found that officials had failed to keep tabs on fees charged to consumers and did not justify the decision to pay Comerica an extra $32.5 million for work it had promised to do for free. Treasury agreed to rebid the deal, then quietly extended its partnership with Comerica for five years.

Twenty-two amendments, no bidding

Treasury has spent more than $5 billion in the past decade on financial agency agreements with a handful of banks, often without considering whether another company could do the work cheaper or more effectively, documents show.

Consider how Bank of America’s prison deal has swelled in the 14 years since it was awarded.

The original contract to hold and manage inmates’ accounts and track their purchases from prison stores, worth up to $14.4 million, was amended six months later, adding up to another $1.47 million to Bank of America’s compensation. In 2003, officials added telephone service to the deal, boosting the bank’s potential compensation to $25.8 million. Later, the work grew to include e-messaging for inmates.

Bank of America’s contract has been amended 22 times since 2000 and the cost has swollen more than fivefold to $76.3 million, Treasury officials say. They say the Department of Justice, the parent agency of the Bureau of Prisons, has reimbursed Treasury for those costs.

The contracts say these services might help the Bureau of Prisons reduce staff time spent opening letters or entering account deposits manually. Yet they never articulate why the work could not be procured directly by the Department of Justice using typical contracting procedures.

Bank of America and Treasury designated two subcontractors to perform the work: DynCorp International, a major military contractor based just outside of Washington; and Advanced Technologies Group, a Kansas-based technology company that today shares a parent company with Keefe, the biggest operator of prison commissaries.

Neither company would have been eligible to deal directly with Treasury because financial agents must be banks or credit unions that are insured by the federal government.

Mother ship of contracts

The bank’s power to choose which vendors provide money transfers and technology partners has rankled potential competitors including Ryan Shapiro, founder and CEO of JPay Inc., which provides prison banking services to most state inmates. He has called Bank of America’s deal “the mother ship of all contracts.”

Shapiro spent years trying to break through the Bank of America stronghold and offer money transfers to federal prisons — a role explicitly reserved for Western Union and others chosen by Bank of America under the bank’s contracts with Treasury. He spent heavily on lobbying and involved his congresswoman, Rep. Debbie Wasserman Schultz, D-Fla., whose political action committee had received an $5,000 contribution from Shapiro in 2010. Still, he was unable to open the bidding process.

“They hand-pick the vendor,” Shapiro said in 2012. “It’s a veiled way of basically just knighting the company you want.”

The Center obtained contracts that covered the beginning of Bank of America’s deal through mid-2012 through a Freedom of Information Act request. Both Treasury and the Justice Department failed to fulfill more recent requests for records detailing more recent changes to the program.

Bank of America’s role in the system is well hidden, says Jack Donson, a private prison consultant who spent 23 years working for the Bureau of Prisons. He was surprised to learn that Bank of America chooses the subcontractors and ultimately is responsible for systems that he dealt with on a daily basis before he left the agency in 2011.

Programs like those operated by Bank of America don’t always deliver the efficiency they promise, Donson said, because they add a new layer of bureaucracy. “Now the profit is going to two places,” he says. “The profits should not go out to the private sector; it should remain within the agency.”

Trust fund department

The Bureau of Prisons has created a new office to manage inmate services like accounts and e-messaging since the vendors came in, Donson says. When he started in the 1980s, a prison’s inmate finance office was run by one or two people. Today there’s a whole Trust Fund Department. “People have to bid out those contracts, then people have to track those contracts,” Donson said.

The money inmates spend on email and goods from prison stores is plowed back into a so-called inmate welfare fund that is supposed to be used for extra programs to benefit inmates. Yet in the federal system in 2010, more than 75 percent of that money went to inmate wages. About one half of one percent of the money was spent on psychological programs. Nineteen percent went to recreational activities.

Donson said he was not surprised that money earmarked for programs to benefit inmates actually pays for staffing and other costs.

By working with Treasury and Bank of America, the Bureau of Prisons has kept its preferred vendors in place without competition for nearly 15 years, something it could never do under normal contracting rules.

Those rules were designed to prevent agencies from favoring certain contractors and abusing their discretion, said Kathleen Clark, a professor at the Washington University School of Law who studies government ethics. Treasury’s broad use of its authority presents “a risk to fairness,” she said.

“It’s hard for me to understand what the justification is for circumventing these rules,” Clark said, “other than it’s convenient and it’s easier.”

Eleanor Bell contributed to this report.