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Below is an abbreviated version of the article published on May 29, 2023, by Kate Berry of American Banker Magazine. This is a good synopsis of the fraud and corruption within the US Treasury Department and Comerica Bank.

You can find the full article at Comerica in ‘serious violation’ of Treasury’s Direct Express program

Internal communications obtained by American Banker indicate that bank officials were concerned about the legality of the bank’s third-party vendor relationships retained as part of its contract with the Treasury Department to operate Direct Express, a public benefits payment system. Bloomberg News

 
Comerica Bank officials privately acknowledged significant compliance failures in their operation of a Treasury Department program that provides federal benefits on prepaid cards to millions of unbanked Americans, according to internal documents obtained by American Banker.

A Comerica executive said the Dallas bank faced a “serious contract violation” for allowing fraud disputes and data on Direct Express cardholders to be handled out of a vendor’s office in Lahore, Pakistan, the documents show.

Personally identifiable information on veterans, Social Security and disability recipients were routinely shared and handled by i2c Inc., a vendor based in Redwood City, Calif., with an office in Lahore, Pakistan — in violation of the government contract, the Comerica executive said. The Treasury’s agreement with the bank states that all services provided “shall be performed in the United States or its territories.”

Paul Lawrence, who served as undersecretary for benefits in the Department of Veterans Affairs from 2018 to 2021, said he was in “complete shock and disgust” after being told of the information contained in the internal Comerica documents.

“All of these government contracts basically say you have to be in the U.S. and the program has to be run by U.S. citizens,” Lawrence, a longtime government consultant, said in an interview. “This has all the makings for a really, really bad situation.”

The internal documents, in addition to court documents filed in a class action last year, paint a broader picture of the $91.2 billion-asset Comerica’s strategy and third-party oversight of Treasury’s Direct Express program, which serves 4.5 million Americans.

Comerica has been mired in litigation and years-long disputes over Direct Express, which it has operated under a contract with the Treasury since 2008. Direct Express deposits roughly $3 billion a month electronically on prepaid cards to millions of federal government beneficiaries who do not have a bank account. The program is part of a government effort to reduce potential fraud and costs by weaning people off paper checks.

Comerica has contracted out the day-to-day operations of Direct Express to two vendors: i2c and Conduent Inc., a publicly-traded conglomerate based in Florham Park, N.J.

“It was a clear violation of the contract Comerica held with the Department of the Treasury to locate the vendor in a foreign country when part of the consideration for them being awarded this federal contract was to use American employees and vendors,” said Weber, who served as special counsel for enforcement for more than 10 years at the Office of the Comptroller of the Currency.

“Separate and aside from contract fraud, it is inappropriate for a federally-insured depository institution to locate third-party service provider activities in a foreign nation without informing their regulator, and locating the operations in a country in which there are questions about rule of law, which would make supervisory and exam activities as well as protections of American consumers questionable.”

Comerica was paid $151 million in 2020 to operate Direct Express, and received roughly $770 million in total gross revenue over a six-year period, from 2015 to 2020, to run the program, Albert Taylor, a Comerica senior vice president and director of National Bankcard Services, said in court documents.

Conduent declined to comment. Executives at i2c declined an interview but instead provided a written statement disputing allegations it had violated its contract.

“As a global provider of banking and payment services, we naturally employ a global workforce. One that spans more than six countries — a fact that we are proud of and that our partners are actively made aware of and accept,” i2c said.

The Treasury’s Bureau of Fiscal Service did not return calls seeking comment. The Treasury’s Office of Inspector General said it had no comment.

Inadequate fraud reporting

Last year, a federal judge certified a class action against Comerica and Conduent brought by  Direct Express cardholders who claimed their accounts were drained of thousands of dollars from 2015 to 2022 due to fraud. The class action, filed in the U.S. District Court for the Western District of Texas, alleges that Comerica and Conduent denied refunds to cardholders who alleged fraud on their accounts.

The Treasury’s Office of Inspector General issued reports in 2014, 2017 and 2020 that were critical of compliance, chargeback and dispute processing at Direct Express, which Comerica manages, in addition to the bidding process for the government contract. The OIG investigates waste, fraud and abuse in the agency and programs it oversees.

“The unbanked people already are more vulnerable than ordinary bank customers because they don’t have the skill set or financial acumen to know what their rights are, and it’s compounded when they are victims of fraud,” Weber said. “At the end of the day, federally insured depository institutions are required to have appropriate third-party risk management processes in place, and it isn’t new to prepaid cards or benefits.”

VA finds a way out

The myriad problems in the Direct Express program, which Comerica manages, forced the Veterans Administration to devote resources to helping veterans find an alternative. By 2019, the VA helped create the Veterans Benefit Banking Program, a consortium of banks and credit unions that offer free checking accounts so veterans can receive their monthly payments via direct deposit.

Steve Lepper, a retired U.S. Air Force Major General who is president and CEO of the Association of Military Banks of America, a trade group, worked with the VA to create the program.

Roughly 240,000 veterans have migrated away from Direct Express and now have bank accounts with direct deposit, Lepper said. About 80,000 unbanked or underbanked veterans still receive their benefits on Direct Express prepaid cards or paper checks.

Lepper credited J.B. Simms, an author and private investigator in Brighton, Tenn., who recently published a book titled, “Comerica, Conduent and the U.S. Treasury Betrayed Veterans and Other Victims.” Simms says he first discovered fraudulent charges on his Direct Express account in  January 2017 and a second time later that year. He then sought to help other veterans recover money that was stolen due to fraud, including those in which veterans’ claims were denied.

Alleged violations

Simms and others say Comerica’s failure to address problems with Direct Express should get a public airing.

“The Direct Express cardholders are the most vulnerable population of all Social Security recipients, and most do not have bank accounts and lack the sophistication to challenge any authority,” said Simms. He is one of just eight named plaintiffs in the case.

Some Social Security recipients who reported fraud have lost hope that they will ever be reimbursed for thousands of dollars they say was stolen off their prepaid cards. Some said they have not been notified of the class action or any efforts by the bank to reimburse them.

Cardholders allege in the class action that they were not given provisional credit when errors were reported and were not sent the results of investigations in a timely manner. Regulation E requires that a financial institution investigate fraud within 10 days of being notified by a cardholder, but the bank can take up to 45 days to investigate if they provide provisional credit in the amount of the alleged error.

“Nobody could get through to the call center and most of the time people never filed a claim because they got locked out of their accounts,” said Jackie Densmore, a plaintiff in the class action, who is a caregiver for her brother-in-law, Derek Densmore, a disabled Marine. She  alleged $800 was stolen from his Direct Express card in 2018 and described hours spent trying to get through to Conduent on the phone and being told to submit a claim in writing.

Densmore also switched to paper checks for her brother-in-law, who has post-traumatic stress disorder. Symptoms resurface every month, she said, when he sees the insert from Social Security that states: “Notice of noncompliance. You are required by law to convert your paper check to direct deposit or the Direct Express card.”

An insert included along with beneficiaries’ paper checks indicates that they may be required to enroll in Direct Express despite many beneficiaries’ negative past experiences with the program. Jackie Densmore

“Every month we relive the nightmare from five years ago,” she said. “Since Derek has a medical condition, I have to explain to him every month about the situation that we have gone through with Direct Express and that he is allowed to get a paper check.”

What’s next for Comerica customers?

 Court documents show that in May 2019 alone, Comerica received 15,712 fraud disputes, according to Taylor, Comerica’s director of National Bankcard Services. Taylor said in court documents that Comerica did not have any data to identify cardholders that reported fraud, and the bank didn’t keep track of money refunded or denied for fraud.

“Only those callers who specifically asked for instructions or inquired about the provisional credit process received any guidance,” the Dallas Fed stated in the supervisory letter sent to Joseph, Comerica’s head of corporate compliance.

In addition, Conduent required that cardholders provide documents and a written statement but did not state that cardholders had 10 days to do so or they may not receive provisional credit.

“There is no root cause analysis of complaints to identify systemic issues and trends that warrant immediate correction,” according to the supervisory letter. “Comerica must establish a method of identifying root causes of complaints originating at Conduent and track complaints with serious allegations or high compliance risk, such as [unfair, deceptive acts and practices.]”

A problem of incentives

In its bid for the Treasury contract, Comerica said it is “committed to delivering a low-cost solution, while providing ready access to funds and protecting both the Direct Express cardholder and the overall program.”

Comerica receives fees, interchange revenue, and annual payments from the Treasury that rose to $151 million in 2020, the most recent data available, according to court documents. Of that total, Conduent received $105 million in 2020 from Comerica, Mitch Raymond, a senior director in account management at Conduent, said in court documents.

Comerica also benefits from an estimated $3 billion a month in low-cost, non-interest-bearing deposits from the Direct Express program, sources familiar with the program said. The deposits boost the bank’s liquidity at little cost and can be leveraged, allowing the bank to lend to more customers, sources said.

Simms, one of the plaintiffs in the class action, lays the blame for the problems on shoddy third-party oversight by the Treasury.

“The Bureau of Fiscal Service, as a part of the U.S. Treasury, allowed Comerica Bank to continue violating federal banking laws and endorsed the contract with Comerica knowing inaccurate information was submitted by Comerica to obtain the contract,” Simms said, citing the OIG reports.

Lepper, who helped create the alternative option for veterans, said he didn’t understand why the most vulnerable citizens were not getting the attention of Comerica top executives.

“Why didn’t they make the obvious improvements to their program to avoid all of this?” Lepper said.