Veterans bounced by bank error

Hundreds of veterans were unexpectedly slapped with fees and penalties last month when Citibank, one of the nation's largest banks and a government contract holder, refused to honor certain checks issued by the Veterans Affairs Department.

Multiple sources confirmed that the mistake apparently was caused by a Citibank employee who, without VA's knowledge, changed a contract arrangement between the bank and the department, placing stricter limits on the amount of time veterans had to cash government checks for reimbursement of certain expenses.

"Due to a Citibank error, approximately 465 checks which VA had provided to veterans and vendors were not honored when they were presented for payment," VA officials said in a statement. "This resulted in bounced checks and applicable fees and penalties being assessed. As soon as VA became aware of this issue, Citibank was contacted and corrective action was initiated to remedy the situation."

Citibank is in the process of reimbursing fees and penalties to the affected parties and has confirmed it will honor any additional checks presented for payment, VA said, adding it will "continue to work closely with Citibank to ensure all veterans and vendors receive full reimbursement."

The glitch was rooted in the governmentwide transition last year to the new General Services Administration SmartPay2 contract. Under the program, charge cards and convenience checks are provided to federal agencies through master contracts negotiated with major national banks.

Convenience checks are used primarily to pay vendors that do not accept government charge cards. At VA, the checks often are used to reimburse veterans for minor expenses incurred related to their care or support, such as travel and transportation expenses. Veterans are told they have 60 days to deposit these checks, which generally amount to a few hundred dollars.

Citibank was the vendor for VA under the original SmartPay contract, which expired on Nov. 30, 2008. While the bank was chosen as one of three firms to participate in the SmartPay 2 contract, which began Dec. 1, 2008, VA selected U.S. Bank as the primary vendor under the new contract.

In the weeks leading up to the transition to SmartPay2, a Citibank employee, whose identity was not disclosed to Government Executive, apparently altered the terms of the original decadelong contract with VA. The new terms, which were not approved by VA, allowed veterans only 10 days to deposit convenience checks.

Consequently, in late December and early January, hundreds of veterans began depositing convenience checks into their personal bank accounts only to discover that Citibank would not honor the payments.

The veterans were then charged penalties associated with bounced checks or, in some cases, overdraft fees for writing payments with insufficient funds in their accounts.

Affected veterans "were caught completely unaware by this," said a former government official familiar with the problem who requested anonymity. "This is a pretty big hit for their income."

In a statement, Citibank acknowledged the error and said it was working to make amends.

"Citi regrets the inconvenience caused to the Department of Veterans Affairs during its transition from SmartPay1 to SmartPay2 and the related change in providers," the statement said. "During this transition to a new provider, an error resulted in some client accounts being closed prematurely and as a result, some checks were returned when initially presented for payment. Citi has worked closely with the Department of Veterans Affairs to address this matter."

VA has begun the process of reissuing the convenience checks under US Bank to affected veterans and vendors. The department's new contract bank has said it will honor the checks up to 180 days, or longer upon approval from VA that a check is valid.

The department issues more than 140,000 convenience checks per year worth approximately $33 million.