Thursday, October 12, 2006
Military personnel aren't paying off credit cards
A multiyear congressional investigation reviewing the bank-issued individual travel cards has found an unusually high number of delinquent cards and a chronic lack of government oversight.
The cards, which work like corporate credit cards, also have been used fraudulently. Congressional investigators found that some cards were used to pay for prostitution, jewelry, cruises and New York Yankees games. The investigators also found that more than 5,000 military personnel submitted bad checks as payment.
"This has been a good example of what can happen when you have breakdowns in control," said Greg Kutz, investigator with the General Accounting Office. "No one is actually responsible for one thing."
The Office of Management and Budget, however, said Thursday that a White House crackdown has reduced personal shopping sprees with government credit cards, including those of the military.
The Defense Department alone is canceling some 400,000 travel cards, nearly 20% of the total issued by the federal government, the OMB said.
Also, a congressional bill would limit the number of accounts issued by the Pentagon to 1.5 million, prohibit issuance of a government card to anyone found not creditworthy and establish procedures for disciplinary actions.
Charlotte-based Bank of America signed the five-year Defense Department contract in 1998 to be the sole provider of travel cards to the Army, Marines, Navy and Air Force.
The bank has issued more than 1 million cards with the stamp "For Official Government Travel Only," meaning the cards are to be used only for travel expenses.
The largest portion of delinquent cards has been traced to lower- level military personnel, who made less than $30,000 annually, and also to those who had bad credit history or no credit history. The cards were routinely given to 18-year-olds fresh out of high school.
In a typical transaction, an individual charges a hotel room or dinner to a travel card and submits vouchers to the government. The government reimburses that individual. The card holder is responsible for paying the balance on the card to Bank of America.
The bank's contract calls for each military branch to monitor its own personnel.
The bank has no control over who receives a card or whether their account is canceled when it isn't paid, but it is left holding the bag on unpaid bills. The bank has written off the $60 million. But it has recovered $20 million of that as the military garnished wages of delinquent card holders, as part of the recent government crackdown.
More delinquencies
Before 1998, the military had a smaller number of travel cards with American Express. Bank of America won the contract after a bid process. Citibank, First National Bank of Chicago, Mellon Bank and U.S. Bank won other accounts with different government agencies.
Investigators say the military contract was the most costly. The monthly delinquencies have been as high as 10% to 18% and, on average, 6 percentage points higher than other federal agencies, according to the General Accounting Office. (For civilians, the average delinquency rate is 3.9% on a personal credit card, according to the American Bankers Association.)
"Many banks of lesser size could not meet these unexpectedly high service levels and sustain these kinds of ongoing losses," Bank of America executive Clifford Skelton told a congressional subcommittee in May 2001.
That year, after bank and the government wrangled over the repeated delinquencies, they renegotiated the contract. The changes included higher fees for cash withdrawals and late charges.
At that time, the program had more than 1.4 million individual accounts, both paid and unpaid, totaling $2.1 billion.
Bank of America spokeswoman Angela Ashley declined to say if the military account is profitable for the bank. She also declined to discuss any other details because the company considers the military a private client.
The bank released a two-paragraph statement saying it provides the military "an easy and efficient expense management tool."
As for renewing the contract next year, Ashley said that only the government can renew or cancel the contract.
Investigator Kutz said he wasn't sure the bank "knew what it was getting into" when it signed the contract four years ago. The Defense Department has historically had problems tracking where it spends its money, he said.
Kutz last month released the latest congressional investigation report, titled "Control Weaknesses Leave Navy Vulnerable to Fraud and Abuse." A similar Army report was issued earlier this year, and the Air Force review comes after Congress reconvenes this month.
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