Prison Bankers Cash in on Captive Customers
by Daniel Wagner
Pat Taylor doesn’t believe in going into debt. She keeps her bills in a freezer bag under her bed, next to old photo albums, and believes in paying them on time religiously. For Taylor, living within your means is part of being a good Christian.
Lately, Taylor, 64, has felt torn between that commitment and her desire to be a loving, supportive mother for her son Eddie.
Eddie, 38, is serving a 20-year prison sentence at Bland Correctional Center for armed robbery. He’s doing his time at a medium-security Virginia state prison located 137 miles northwest of Johnson City, across the dips and valleys of the Blue Ridge Mountains here in the heart of Appalachia. The cost of supporting and visiting Eddie keeps going up, so Pat makes trade-offs.
“I would send him money even if it broke me, because I do go without paying some bills sometimes to go see him,” Pat says.
Between gas to make the trip and overpriced sandwiches from the prison vending machine, visiting Bland costs about $50, a strain on her housekeeper’s wages. So she alternates, visiting Eddie one week and sending him money the next.
To get cash to her son, Pat used to purchase a money order at the post office for $1.25 and mail it to the prison, for a total cost of less than $2. But in March of last year, the Virginia Department of Corrections informed her that JPay Inc., a private company in Florida, would begin handling all deposits into prisoners’ accounts.
Sending a money order through JPay takes too long, so Taylor started using her debit card to get him funds instead. To send Eddie $50, Taylor must pay $6.95 to JPay. Depending on how much she can afford to send, the fee can be as high as 35 percent. In other states, JPay’s fees approach 45 percent.
After the fee, the state takes out another 15 percent of her money for court fees and a mandatory savings account, which Eddie will receive upon his release in 2021, minus the interest, which goes to the Department of Corrections.
Eddie needs money to pay for basic needs like toothpaste, visits to the doctor and winter clothes. In some states families of prisoners pay for toilet paper, electricity, even room and board, as governments increasingly shift the costs of imprisonment from taxpayers to the families of prisoners.
“To give him $50, I have to send $70 off my card,” says Taylor, who moved to a smaller apartment on the outskirts of Johnson City in part because of the rising cost of supporting Eddie.
“They’re punishing the families, not the inmates.”
Price of prison
JPay and other prison bankers collect tens of millions of dollars every year from prisoners’ families in fees for basic financial services. To make payments, some forego medical care, skip utility bills and limit contact with their imprisoned relatives, The Center for Public Integrity found in a six-month investigation.
Prisoners earn as little as 12 cents per hour in many places, wages that have not increased for decades. The prices they pay for goods to meet their basic needs continue to increase.
By erecting a virtual tollbooth at the prison gate, JPay has become a critical financial conduit for an opaque constellation of vendors that profit from millions of poor families with incarcerated loved ones.
JPay streamlines the flow of cash into prisons, making it easier for corrections agencies to take a cut. Prisons do so directly, by deducting fees and charges before the money hits a prisoner’s account. They also allow phone and commissary vendors to charge marked-up prices, then collect a share of the profits generated by these contractors.
Taken together, the costs imposed by JPay, phone companies, prison store operators and corrections agencies make it far more difficult for poor families to escape poverty so long as they have a loved one in the system.
Shifting costs to families
“It’s not just the money transferthat’s the problem, it’s the system it enables to shift costs onto families,” says Lee Petro, an attorney who helped litigate for a national cap on some prison phone rates. Without companies like JPay, he says, “it would be much harder to take money from families and make families of inmates pay their own keep.”
In 12 years, JPay says it has grown to provide money transfers to more than 1.7 million offenders in 32 states, or nearly 70 percent of the prisoners in U.S. prisons.
For the families of nearly 40 percent of those prisoners, JPay is the only way to send money to a loved one. Others can choose between JPay and a handful of smaller companies, most of them created by phone and commissary vendors to compete with the industry leader. Western Union also serves some prisons.
JPay handled nearly 7 million transactions in 2013, generating well over $50 million in revenue. It expects to transfer more than $1 billion this year. (The company declined to provide any financial details; those included in this article are culled from public records and interviews with current and former employees).
“We invented this business,” said Ryan Shapiro, 37, the company’s founder and CEO, in a phone interview in June. “Everyone else tries to imitate what we did, and they don’t do it as well.”
Shapiro says working with corrections includes extra costs for security and software integration. He says he charges only as much as he must to maintain a razor-thin profit margin.
But others provide similar services for less.
NIC Inc., a competitor that helps states set up their websites, charges a flat fee of $2.40 in Maine to send money to prisoners. Until recently, Arkansas charged 5 percent to send money through the state’s own web portal. Floridians pay a fee of 3.5 percent to handle traffic tickets online.
Despite its kudzu-like growth, JPay so far has avoided scrutiny by consumer regulators.
In response to questions for this story, however, the New York Department of Financial Services’ consumer division is reviewing the company’s practices, according to a person familiar with the matter. The person spoke on condition of anonymity because he is not allowed to discuss active investigations.
JPay’s rapid rise stems in part from the generous deal it offers many prison systems. They pay nothing to have JPay take over handling financial transfers. And for every payment it accepts in these states—prisoners typically receive about one per month—the company sends between 50 cents and $2.50 back to the prison operator. These profit-sharing arrangements, which vendors offer as deal-sweeteners in contract negotiations, are known in the industry as “commissions.”
JPay’s payments to Illinois last year came to about $4,000 a month, according to documents obtained under the state’s open records law. [Ed Note: Tennessee’s prison system received $60,789 in JPay prison money transfer commissions in fiscal year 2013-14].
Jails often deduct intake fees, medical co-pays or the cost of basic toiletries first, leaving the account with a negative balance. This prevents prisoners from buying “optional” supplies like stationery or sturdier shoes until they have paid down the debt.
Such charges levied by jails for common items are not new. The practice began prior to the rise of JPay, mainly with phone companies and operators of prison stores. But by automating the process, prison bankers make it a lot easier.
Negative account balances discourage cash-strapped people from helping relatives, says Linda Dolan, 58, a manager for a defense contractor in California. Last year, when her son was sentenced to 20 days in jail in St. Lucie County, Florida for reckless driving, Linda wanted to buy him a second pair of underwear and socks. But the county’s intake fee and daily “rent” already had put the account about $70 in the red. Linda and her husband both were out of work and couldn’t afford to pay $100 for a pair of underwear.
“If relatives are putting money on somebody’s books while they’re an inmate, it’s to help them buy necessities,” Linda says. “I didn’t think it was right that the county was stealing the money.”
Capt. William Lawhorn of the St. Lucie County sheriff’s office said that prisoners are charged a $25 initial booking fee, $3 a day for “subsistence” and medical co-pays, all of which can result in a negative balance. He said nobody is denied any type of needed service or care, and when prisoners do have money, it’s used for candy and other junk food. Prisoners in the county receive payments through Touchpay, a JPay competitor that often partners with foodservice giant Aramark.
Funding prisons out of the pockets of families and prisoners has non-financial costs too, says Brian Nelson, who spent 28 years in an Illinois state prison for murder. Nelson says he has “become an asset to society” since he was released four years ago because he stayed in touch with family and priests even when he was in solitary confinement. When prisoners can’t afford to maintain contact with the outside world, he says, they are less equipped to transition smoothly to civilian life.
The effect on poor families is especially harsh, Nelson says: “It’s a wife that has three children at home, and her husband is in jail, so now she has a choice: Do I send money to him so he can afford to stay in touch with the kids, or do I feed the kids?”
Prisoners’ need for money is inescapable, Nelson says. Those in northern Illinois are not issued cold-weather clothes, he says, leaving them vulnerable to frostbite unless they can get money to pay for prison-approved long underwear and boots.
Razor thin margins
JPay founder Shapiro is eager to tell his company’s story and how he believes it helps families. It’s not just about faster payments. Once a prisoner gains access to the money, JPay offers several ways to spend it, including pay-per-page e-messaging, music downloads and MP3 players. When prisoners in some states are released, they receive their remaining money on Jpay-branded payment cards that carry higher fees than those on most consumer payment cards.
Shapiro says that if his fees were any lower, his company would lose money. He declined to make the company’s financial details available and would not say how much he is paid.
Shapiro serves on the board of a foundation that advocates for prisoners and carries full-page ads for JPay in its newsletters. The foundation received an $85,400 gift directly from JPay’s corporate treasury in 2009.
He lives on a tiny harbor island near the northern tip of Miami Beach in a home he bought for about a million dollars. Last year, through a company he controls called El Caballero LLC, Shapiro bought a custom powerboat, dubbed Sea Block, that retails for a half-million dollars.
Heading to the company’s headquarters one July morning, he stopped first for CrossFit, a military-style training regime that he enjoys because it brings out his competitive side, then for daily prayer.
Families who use JPay love the company, he says. He boasts of its well-trafficked web forum and of the 174,000 “likes” on its Facebook page, where its marketers post cheery articles about incarceration. “The Jail Cats program at Gwinnett County Detention Center in Georgia is rescuing kittens and helping to rehabilitate incarcerated women,” one recent post read.
“We go out of our way to make sure that they feel comfortable—that, you know, you’re spending money with a company that cares about you,” Shapiro says.
If people don’t want to pay his fees, Shapiro says, they can always mail a money order, except in the “couple of states” that now charge fees for them.
Nearly 400,000 people are imprisoned in states where there is no free deposit option, a fact Shapiro was unaware of during a series of interviews this summer.
“When it’s up to us, it’s absolutely free,” he says.
Slow-moving money orders
For the first 14 years of Eddie’s sentence, Pat Taylor mailed money orders directly to the prison at no charge beyond the cost of the money order and a stamp. Then last year, she was instructed to make the money order out to JPay and send it to a Florida post office box. The company would credit it to Eddie’s account.
Under the new system, she says, it would take weeks for Eddie to see funds sent via money order. So Pat, like nearly everyone else she knows, gave in and began paying $6.95 to send the money from her debit card.
Across the country, delays and other obstacles make the “free option” inaccessible to many families, The Center for Public Integrity found. More than a dozen families in five different states said that money orders have been credited much more slowly since JPay took over.
Shapiro says he is “absolutely shocked” by the complaints that money orders are delayed because he had never heard of such problems before. Most money orders are processed within two to three days, he said, unless the person sending money fails to fill out the form properly. He said Virginia is especially efficient and processes money orders within 24 to 48 hours.
“We are not slowing it down, there is no conspiracy,” he said.
He said JPay does “want people to convert from a money order customer to a digital customer, absolutely,” but only because electronic payments are more efficient. “We’re not trying to make an extra dollar everywhere we can,” Shapiro said.
Before JPay, Virginia prisons credited money orders to prisoners’ accounts in roughly three days, families say. Today, money orders can take more than a month to reach a prisoner’s account, Marvin Rodriguez-Barrera, a prisoner at Virginia’s high-security Red Onion State Prison, wrote in a letter to prisoners’ rights advocates in February.
Faster to Guatemala
“I am from Central America, and it is cheaper for my family, and easier, to send money to Guatemala than for my family to send me money from this very state!” Rodriguez-Barrera wrote. “The old way of using money orders was cheaper, easier and in many instances faster.”
Those seeking to avoid the fees by sending a money order must print and fill out a Jpay-provided form whose instructions are dwarfed by large print barking at them to “Put down your pen! Put away your car keys!” because “There’s a faster way to send money, go to JPay.com and sign up now!”
The aggressive marketing has worked. One former marketing director for the company lists as a key accomplishment on his LinkedIn profile that he “Converted 78 percent” of money order users to online users, boosting the company’s annual revenue by $985,000.
Shapiro said the information in the profile, including the former employee’s title, was inaccurate. He said he didn’t have data on how many money order users convert to electronic payments or how much revenue the company gains when they make the switch.
Inside JPay’s secure, fishbowl-like money order processing room, reams of envelopes sit in postal bins on the shelves. Signs around the room remind the handful of workers employed there which states allow them to deduct a fee and which offer the service for free.
In Pennsylvania, the first state where JPay accepted money orders by mail, executives were surprised to see the number of money orders plunge by two-thirds in the first two months, Chief Financial Officer Mark Silverman explained in a brief interview.
Shapiro said that Missouri used to process 30,000 money orders a month before JPay came in.
“With JPay, we drove that down to only 1,000 people sending money,” he says. “And that’s by choice.”
JPay’s marketing materials urge customers to choose the higher-cost option. During her twice-monthly visits to Bland, an isolated work camp nestled between rolling, green hills, Pat Taylor now sees JPay-branded fliers warning of the misery awaiting anyone who tries to use the “free option.”
On one side, a multi-ethnic lineup of models bury their faces in their hands and complain of what a “nightmare” it was to complete the money order, how it got lost or delayed.
“There’s a better way,” the flier promises on the reverse side, which depicts an attractive young woman seated with her laptop computer. For “Faster, Easier, Next-Day Delivery,” families can choose from a menu of high-fee options.
Tequila, cigars and lobbying
To impress state corrections officials and gain their business, JPay spends heavily on industry conventions attended by agency heads with contracting authority. During a 2012 convention of the American Correctional Association, the company threw what it called an “END OF THE WORLD PARTY” at a Denver wine bar that bills itself as “about you, and your inalienable right to the unbridled enjoyment of food and wine.”
The invitation, printed on a disposable beer coaster, promised “a bash, JPay-style: *fuerte* tequila, hand-rolled cigars, a live mariachi band.” Conventioneers could catch a JPay shuttle leaving from the hotel “ALL NIGHT LONG,” it said.
For years, JPay has sponsored an award for former state corrections directors presented by the Association of State Correctional Administrators, paying for the recipient’s trip and a Wexford crystal bowl inscribed with the honoree’s name.
JPay’s outreach extends to state legislatures as well, even though many of the company’s contracts forbid it from using fee revenue to lobby. The company has hired registered lobbyists in at least seven states. Shapiro says JPay’s lawyers approved the use of company funds for that purpose.
In Ohio, it tapped Thomas Needles, a former aide to President George H. W. Bush. Needles gives generously to Republican candidates and also lobbies for for-profit universities. In Maryland, JPay hired Bruce Bereano, one of the state’s best-paid lobbyists, who was disbarred after a 1994 conviction for overbilling his clients and using the money for campaign donations.
The company also sought to lobby Washington for access to the federal Bureau of Prisons’ 216,000 prisoners—what Shapiro has called “the mother ship of all contracts,” which is now held by Bank of America.
It spent $20,000 in 2012 to hire Park Strategies, run by former U.S. Senator Alfonse D’Amato of New York, in an effort to obtain the contract. That effort was not successful.
More prisoners, smaller budgets
JPay was founded in 2002, just as the U.S. prison population neared the apex of a three-decade climb that more than quadrupled the number of prisoners in state prisons. Shortly thereafter, as the economy went into recession, state budgets were squeezed and officials looked more aggressively for ways to cut spending on prisons.
Already, private vendors had stepped in with a solution: They would charge prisoners sky-high prices for phone services, snack foods, hygiene products and clothing, then return a large cut back to the prisons—often 40 percent or more.
Shapiro was the first entrepreneur to see how financial services might provide another stream of revenue. For a fee, he offered to deliver cash in ways that saved time and effort for corrections agencies, and often to give them a portion of the proceeds, just as the phone and commissary companies were doing.
“When we started, the states were very much saying to us, ‘There’s no need for procurement here because there’s no one else doing what you do,’” Shapiro said in a 2012 interview. Ten years later, he said, all of them were asking companies to submit bids for the work.
That doesn’t mean the door is open to competitors. Most states, including Virginia, now contract with JPay or its main competitor under a master agreement negotiated by Nevada in 2011 on behalf of a multi-state consortium. Participating states can simply sign on to the deal with one or both of the companies without the hassle of separately determining the best company for the job.
JPay is protected from other market forces, as well. When states offer its music players and tablet computers for sale to prisoners, they often confiscate radios that people already own, according to prisoners in Ohio. This leaves prisoners dependent on JPay’s music downloads, which can cost 30 to 50 percent more than the same songs on iTunes, prisoners say.
The profit-sharing arrangements are at the core of JPay’s origin story, Shapiro said in 2012. A couple of years out of college, he spent months driving around upstate New York, pitching JPay to “every sheriff, whether they had five inmates or 100 inmates”—without success.
Then someone in Passaic County, New Jersey suggested that they offer the county 10 percent of their revenue, “so the jail would be less of a tax burden on the community.” The warden signed up on the spot.
Critics including Alex Friedmann, associate director of the Human Rights Defense Center, a prisoners’ advocacy group, say the profit-sharing amounts to a legal kickback. “They charge exorbitant fees then kick back a percentage of their revenue.… The company doesn’t need that for profit,” Friedmann said.
Shapiro says he prefers the term “commission” because “the word kickback has a negative connotation, and it seems like some person is making that money and pocketing it and buying a Chevrolet or something, when in fact it’s going to use for the benefit of inmates—basketball hoops, volleyball, whatever.”
Most states put their share of the cash in an “Inmate Welfare Fund” that is supposed to be used for prisoner benefits beyond what is guaranteed to them by law. As incarceration rates climbed, however, the definition of “inmate benefit” drifted, says Justin Jones, who was director of the Oklahoma Department of Corrections until last year.
“The Legislature allowed us to broaden the definition of inmate welfare and it got to the point, almost anything they would fund through appropriations could now be paid for as inmate welfare,” he says. “It ended up where we started using that money if an inmate went out to medical on an emergency and medical was end-of-year short,” he says. “We bought air conditioners, ice machines, X-ray machines.”
Jones was not a fan of the system. If legislatures want to impose longer prison sentences or “if they create new crimes, then the legislature should appropriate dollars for that,” he says. “I should not have to go in and redefine and stretch the definition of inmate welfare accounts.”
Taken together, JPay and other prison vendors create a system in which families are paying to send the money, and prisoners are paying again to spend it, says Keith Miller, who is serving 21½ years at Bland for a series of drug-related, violent crimes committed in his early 20s. The earliest he may be released is 2021, when his mother will be 87 years old.
“The fact that [my mother] has to pay the fees to send the money and then the fact that [prison agencies] make a certain cut off it seems to me that [the prisons are] double-dipping into the money they’re sending,” he said in an interview at the prison. “It really doesn’t make sense to me that this should be allowed.”
Shapiro is skeptical that JPay’s fees make much of a difference for prisoners’ families. He says companies that provide other services to prisoners, such as phones and commissary, are the real problem.
“Compared to the commissary or phone revenue, we’re just a drop in the bucket,” he says.
That may be changing.
Last year, the Federal Communications Commission dusted off a 12-year-old petition filed by prisoners’ families who argued that prison phone rates were unfairly high, preventing them from maintaining contact with loved ones. The Commission capped rates for many calls under its authority to ensure that pay-phone rates are just, fair and reasonable.
Mignon Clyburn, who was acting chairwoman of the FCC when it passed the rate cap and now serves as one of three commissioners, says the action was necessary because people are “making unspeakable sacrifices to stay in touch with their loved ones.”
Vincent Townsend, president of Pay-Tel Communications, a major provider of phones for prisoners, said his industry “abused the public.”
“Ethical, right, moral”
Other prison vendors “better pay attention to what’s ethical, right, moral,” he said. “Because if you don’t then some regulator’s going to step in, and you’re going to have to deal with it.”
There is a crucial difference: The telephone industry is closely regulated by the FCC, which has explicit authority to set rates for pay-phone calls. Financial and consumer protection regulators have less power over pricing.
The Consumer Financial Protection Bureau can sue companies for offering unfair, deceptive or abusive financial services. The bureau declined more than a dozen requests to discuss specific issues related to prison financial services.
The Federal Trade Commission, which has consumer-protection authority and the power to ensure that markets are competitive, declined to comment “on specific companies or conduct.”
Regulators in seven states have levied fines totaling $408,500 against JPay for operating without a license. [E.g, see article in this issue of PLN]. The actions were not designed to disrupt its business, according to the Conference of State Bank Supervisors, a trade group that represents these regulators in Washington.
“State banking regulators are concerned with ensuring that businesses operating in their states are properly licensed and with enforcing applicable laws (including consumer protection laws),” the group’s spokeswoman said in an emailed statement.
“Invent a better way”
Shapiro says he understands the challenges faced by poor families of prisoners since JPay’s startup days, when he would spend “hours on the phone with a grandmother, talking about her day at Wal-Mart.”
He says he feels trapped by the structure of the industry he has come to dominate. He wishes the fees were lower, that states didn’t force him to charge more and give them a share and that he could “invent a better way” than asking people’s families to help pay for their imprisonment.
Yet Shapiro says he is satisfied to compete within what he admits is a broken system, even if the system may be punishing some innocent family members.
For many families, JPay has become that system. When Jewel Miller, 80, phoned JPay’s call center last month to ask why her payments are delayed, and why she must submit the same form every time she sends a money order to Keith, the operator hung up on her.
In a series of interviews it became clear that Shapiro was unaware of some of the fees related to his business. He said he did not know, for example, that Florida now charges its own fee for money order deposits after JPay processes the payments.
These fees are spelled out in JPay’s contracts with states, which Shapiro signed. Florida’s says it will charge a 50-cent “Money Order by Mail” fee.
As of July, Shapiro was unaware of JPay’s own $1.95 fee to deposit money orders in Indiana, declaring, “If someone sends $100 with a money order to an Indiana inmate, that inmate gets $100.… I am positive.”
Two days later, he called back to say, “We’re working with the states right now to get some of those fees taken off.”
So far, the fees remain in place. [Ed. Note: On November 12, 2014, The Center for Public Integrity reported that JPay had “eliminated fees for sending money orders to inmates in three states, creating a free deposit option for families of more than 100,000 people incarcerated in Indiana, Ohio and Oklahoma”].
Part II: Megabanks have Prison Financial Services Market Locked Up
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 prisoners. Since 2000, Bank of America has collected at least $76.3 million for its work on the program.
When prisoners 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. Department of the 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 prisoners 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 $2.00 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 prisoners 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 prisoners and their families. Prisoners 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. Prisoners, 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 prisoners’ 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 prisoners 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 prisoners were set up in 1930. Prisoners’ 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 prisoners’ 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 prisoners’ 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 prisoners.
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 prisoners. 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, U.S. Rep. Debbie Wasserman Schultz, D-Fla., whose political action committee had received a $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 for Public Integrity 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 prisoner 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 prisoners 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 prisoners. Yet in the federal system in 2010, more than 75 percent of that money went to prisoner 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 prisoners 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.”
This article was published by The Center for Public Integrity (www.publicintegrity.org), a nonprofit, nonpartisan investigative news organization in Washington, D.C., in a two-part series on September 30, 2014 and October 2, 2014. Prison Legal News provided research assistance to the author. Copyright 2014 The Center for Public Integrity; reprinted with permission, with minor edits.
As a digital subscriber to Prison Legal News, you can access full text and downloads for this and other premium content.
Already a subscriber? Login