Comerica Bank violated Treasury contract: American Banker

American Banker Reporter Kate Berry joins Yahoo Finance Live to discuss the allegations facing Comerica Bank for violating its contract with the Treasury by operating part of its Direct Express program outside of the United States and inadequately reporting fraud.

Video transcript


- Comerica Bank has been the financial agent behind the Treasury Department's Direct Express program, distributing monthly benefit payments to about 4 and 1/2 million veterans and social security recipients since 2008. Now it's facing a series of class action lawsuits over alleged mishandling of fraudulent transactions. Joining us now is one of the reporters following the situation, Kate Berry, American Banker reporter. Kate, thanks for taking the time here with us this morning. So help us just set the scene and lay out the story, what are some of the allegations that have come forward?

KATE BERRY: So some of the allegations have to do with the way Comerica and its vendor dealt with data on these social security's veterans and disability recipients. The Comerica outsourced the operation of the program to two vendors.

One of the vendors had shared data and was doing fraud disputes out of an office in Lahore, Pakistan, which goes against the contract with Treasury. The contract with Treasury says they have to operate within the United States. And Comerica executives knew this and had internal documents talking about the serious violations of the contract, but that they didn't have the ability to do anything about it.

- Why not? Why wouldn't they have the ability to do anything about it?

- That's a good question. I think part of this has to do with oversight of third-party contractors. What oversight that there is and how the government can see what they're doing if a company is operating outside of the United States. Bank examiners don't have a lot of insight into what they're doing. So that's really one of the issues outstanding.

- What is-- I guess kind of further in the issues outstanding, what is wrong about the way that perhaps they were contracting or at least working with this international partner overseas? And in the requests, where was the violation of the service level agreement, or the agreements more generally, that they had been kind of acting on for years?

- So there have been problems with the program mostly as it relates to fraud. So these are very vulnerable Americans-- veterans' social security recipients, disability recipients who do not have a bank account. And Treasury created the program, Direct Express, to wean people off paper checks, so they get their monthly benefits on a prepaid card. And prepaid cards do have a problem with fraud. And the bank and the vendors knew that there was a problem with fraud.

But what happens is the bank is really required to follow certain laws, and it's unclear whether they were relaying that to the vendor and whether the vendor was actually treating customers in the way that they should be treated.

- Kate, I'm curious the genesis of this in the first place. In other words, understanding that this is a breach of contract, but why are these vendors require to operate in the US?

- Well, that's a requirement for Treasury contracts. I don't know that I can answer that, I think it's really because the government-- the federal government expects its contractors to operate in the United States. I think what you have here is a bank being required to conduct oversight, and whether that oversight is actually happening.

And again, this is a very vulnerable population of people who don't have bank accounts. So what would happen is people thought these were bank accounts and would have $30,000, $10,000 in their accounts and when fraud hit, the account was completely wiped out of any money. And when they called the vendor to say their account was hit by fraud, the vendor would not necessarily tell them what they could do about it or if they would be reimbursed for the money. And some were not actually reimbursed. So I think it's unclear how many people this affected and what kind of data the bank actually had to determine how many people were affected.

- Wow. So that's the scope then of this problem potentially. Kate, thanks for breaking it down for us and thanks for the scoop. Kate Berry, American Banker reporter, I appreciate it.

- Thank you.