March 8, 2006

The Red Cross Katrina Debit Card Fiasco: Fuzzy Math, Weak Controls, and They Could Care Less

Filed under: Corporate Outrage,Economy,Taxes & Government — Tom @ 10:40 am

….. and they like the debit card program sooooo much they’re going to make it a permanent part of all future disaster-relief efforts!
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A subscription-only article at CardForum.com covers a Red Cross official as he sings the praises of the debit card program the charity used to distribute immediate aid to Hurrican Katrina victims. In the process, it reveals so much of what is wrong in the Big Charity mindset (bolds are min):

No Turning Back For Red Cross Relief Cards

The American Red Cross is brushing aside reports of casino gambling, liquor purchases and luxury shopping sprees using its emergency debit cards. The Red Cross is not going back to the old system of supplying emergency relief via handouts of checks and store vouchers.

Indeed, the relief group intends to make the use of prepaid debit cards the central way to get financial relief to people in times of disasters. However, private insurers, which are less likely to be providing emergency funds, are not necessarily going to follow suit.

Noting reports of Red Cross cards being used for what some considered nonessential purchases, Michael Brackney, manager of client services for the American Red Cross, says, “Occasionally, you hear about somebody who makes a bad decision.” The cards were distributed in the aftermath of Hurricanes Katrina and Rita last year.

Brackney told participants at the 2006 Prepaid Card Expo in Orlando, Fla., last week that the Red Cross intends to expand and make permanent the issuance of prepaid debit cards to disaster victims. Although placing restrictions on Red Cross debit card purchases is technically possible, Brackney vowed not to place such restrictions because the recipients, and not the Red Cross, should be making decisions about what they need.

“Those make the news,” Brackney says of some criticized purchases. “But this is about the dignity of the victim. Doing something normal makes you feel normal.”

Brackney notes that such uses of emergency cards as liquor purchases have likely been made in the past using Red Cross checks. But purchases made using cashed checks are not traceable, as are electronic purchases using a debit card, he notes.

The Red Cross distributed 600,000 prepaid cards, issued by its contractor, JP Morgan Chase & Co., after Katrina and Rita. The cards were distributed in 47 states to evacuees who lost their homes.
The Red Cross placed a total of $1.6 billion in assistance on the cards, each of which were worth from $360 to $1,565.

Brackney says the Red Cross cards, which have both signature-based and PIN-debit functions on them, are a superior way of delivering relief during a disaster the size of Katrina, which left hundreds of thousands of victims without access to bank accounts, paychecks or even mail delivery.

The Red Cross plans to enable 600 of its 894 U.S. offices to issue cards on the spot by July. After Katrina, only about 250 Red Cross offices had the instant-issue capability, Brackney says. “This is the biggest change in the Red Cross in the past 90 years,” he says of the adoption of prepaid cards.

Brackney says the Red Cross estimates that it saved about $2 million from not having to cut relief checks or issue paper vouchers.

Chase has set up an emergency issuing system that allows instant-issue capability in Red Cross offices, says Gregory Kerwick, vice president of emerging payment channels for Chase. The system allows Red Cross workers to set up an “account” with Chase through the Web for those applying for relief.

A few key pieces of identification, such as a Social Security number and current address, allow Red Cross workers to give debit cards out instantly, says Kerwick.

Kerwick describes fraud on the cards as “minimal.” However, both Kerwick and Brackney say Katrina exposed a logistical problem in using debit cards for immediate relief. In order to issue the cards on a timely basis, there must be cards available to distribute.

In the days following Katrina, the Red Cross had only a few hundred thousand cards available, and Chase had to scramble to get more manufactured, says Kerwick. In one evening, Chase hired a private jet to deliver 30,000 cards to one location, he says.

As such, the Red Cross now has one million prepaid debit cards positioned around the country, ready to be issued for both large and small emergencies, says Brackney.

Quick points:

  • It would not be that difficult to place restrictions on debit card use (e.g., no ATM transactions over $50, no liquor, etc.); the fact that The Red Cross refuses to do so is an abdication of its stewardship responsibility over donor funds and its responsibility to ensure that recipients are working towards recovery and not beginning a cycle of dependency.
  • I hate to break it to whoever wrote this piece, who is not identified, but the card math is all wrong. $1.6 billion divided by 600,000 cards is $2,667 per card, not “$360 to $1,565.” Early reports indicated that the typical value placed on an issued card was $2,000. I e-mailed the publisher of the magazine that carried this piece about the discrepancy on Monday, and have not received a response.
  • I maintain, as does the government, that much of the money placed on cards was wasted, and that the amounts squandered are far in excess of the $2 million saved through reduced paperwork. Heck, it was so bad that The Smoking Gun even covered what it would normally consider a pretty dull story. The Government Accountability Office (GAO) found major problems with the very program the debit cards were part of:

    The examination of the so-called Expedited Assistance program determined that the Federal Emergency Management Agency failed to take even the most basic steps to confirm the identifies of about 1.4 million people who sought expedited cash assistance, leaving the program vulnerable to ….. “significant fraud and abuse,” the Government Accountability Office intends to report.
    ….. But the report says that FEMA itself had found that 900,000 of the 2.5 million applications for all forms of individual assistance were “potential duplicates.”

After reading such delusional and self-congratulatory pap, I don’t know what else can be said, except that if you don’t think passing out debit cards like candy with no accountability is a good idea, you should stop giving to The Red Cross.
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Selected Katrina Debit Card and Fraud Posts:

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2 Comments

  1. The FEMA $2000 card program (Smoking Gun report) is NOT the Red Cross program. You are seriously mis- or uninformed. You also show a real lack of how the banking indistry works, how ATMS (which may be owned by one of a hundred thousands entities, each operated seperately) work, and you fail to undertand the BASIC MISSION of the Red Cross. Do some homework before bad-mouthing anyone.

    Comment by Bob Abernathy — April 15, 2006 @ 8:43 pm

  2. #1, If the FEMA program was separate from Red Cross, I apologize (though I believe it’s true that Red Cross distributed FEMA cards too). Attempts to follow up with the CardForm writer about the difference between the smaller-denominated RC program and the apparently different $2,000 FEMA program did not lead to a response. Believe me, I know plenty about the banking system.

    The main point of the post is that YOUR representative was talking about relief cards distributed by YOUR folks, and didn’t seem to care about accountability, which is a violation of the fundamental tenets of effective charity, not only for stewardship of donor funds but for true and effective compassion for disaster victims.

    It’s up to YOU to design a responsible card program with controls in it. YOUR representative said in the CardForum.com piece that leads this post that, in essence, you are not interested in monitoring whether relief funds are spent responsibly. As long as that is the case, my wallet is shut to the Red Cross, and open to other, more responsible agencies.

    If you wish to repudiate what your representative said in another comment, be my guest.

    Comment by TBlumer — April 15, 2006 @ 8:57 pm

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