Revenue Collections and Payments: Treasury Has Used Financial Agents in Evolving Ways but Could Improve Transparency
Released: 2017-02-24T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Under the National Bank Act and other statutes, Treasury is authorized to designate certain financial institutions as depositaries of public money and financial agents of the federal government. Treasury uses financial agency agreements to designate financial agents. In 2004, Congress provided Treasury with a permanent, indefinite appropriation to reimburse financial agents for their services, which replaced its use of non-appropriated funds.

GAO was asked to review Treasury's use of financial agents. This report examines (1) how Treasury's use and compensation of financial agents has changed as it has modernized its payment and collection systems and (2) Fiscal Service's process and related internal controls for selecting and designating financial agents. GAO examined documents on Treasury's programs using financial agents; budget and other data on financial agent compensation; and laws and regulations governing the use of financial agents. GAO also reviewed Fiscal Service's FASP guidance and internal records supporting its selection and designation of five financial agents between 2010 and 2015. GAO interviewed Fiscal Service officials about its FASP and its use of financial agents.

section_title: What GAO Found
paragraphs: The Department of the Treasury's (Treasury) use of financial agents has evolved as it has moved from paper to electronic transactions in response to changes in technology and new laws. Treasury has a long history of using financial agents to support its core functions of disbursing payments and collecting revenue. Since the 1980s, Treasury has used agents to move from paper to electronic transactions as it has modernized its systems. For example, Treasury began using financial agents to collect tax revenue electronically in response to a 1984 law and to make payments electronically in response to a 1996 law. Such changes have continued since Congress enacted a permanent, indefinite appropriation in 2004 for Treasury to reimburse financial agents, after which Treasury began including in its annual budget the total amount paid to financial agents. Compensation to financial agents has grown from $378 million in fiscal year 2005 to $636 million in fiscal year 2015, partly due to increases in the number of debit and credit card payments made to federal agencies that are processed by financial agents. While Treasury discloses in its annual budget the total amount paid to financial agents, it has not fully disclosed in a central location information about individual agents, including their compensation and services provided. Treasury officials said they are not required and have not determined a need to publicly disclose compensation under each financial agency agreement. According to an Office of Management and Budget directive on open government, transparency promotes accountability by providing the public with information about government activities. Greater disclosure and transparency could enhance the accountability of Treasury's use of financial agents by informing the public and Congress about how much and for what purposes it is spending federal funds to obtain services from financial agents.

The Bureau of the Fiscal Service (Fiscal Service)—the largest user of financial agents within Treasury—developed its financial agent selection process (FASP) guidance to document the steps and internal controls that its program offices generally are expected to follow in selecting and designating financial agents. The guidance provides assurances that a FASP is effective and efficient, documents key information, and complies with applicable laws and regulations. The guidance directs program offices to maintain an administrative record of key documents generated during a FASP. GAO selected five financial agents designated between 2010 and 2015 to review their administrative records but could review only four because the record for one was not created. None contained all the documents listed in the guidance, but three contained the majority. For example, the record for my RA®, a new retirement savings program using a financial agent to provide custodial services, contained 6 of 11 key documents—missing, for example, certain planning and approval documents. As a result, the records varied in the extent to which they complied with Fiscal Service's guidance, including controls. In November 2015, Fiscal Service revised its guidance to require not only program offices to deliver an electronic copy of their administrative records to the Bank Policy and Oversight (BPO) Division but also BPO to use a checklist to ensure that the records are complete. The 2015 guidance was not in effect for the records GAO reviewed. However, BPO's implementation of the new procedure should provide assurances that future designations are in compliance with the FASP guidance, including controls.

section_title: What GAO Recommends
paragraphs: GAO recommends that Treasury publicly disclose in a central location information about its financial agents, including their compensation and services provided. Treasury agreed with GAO's recommendation and provided technical comments, which were incorporated as appropriate.

section_title: Letter
paragraphs: The National Bank Act and other statutes provide the Department of the  Treasury (Treasury) with the authority to designate certain financial  institutions as depositaries of public money and financial agents of the  federal government. Financial agents commonly accept and process  deposits of public money on behalf of the federal government and provide  services essential to the collection and disbursement of and accounting  for public monies. Treasury uses financial agency agreements to  designate financial institutions as financial agents. Once designated by  Treasury, a financial agent is subject to the agreement’s terms and  certain other requirements. Additionally, the agreements generally state  that the financial agent owes a fiduciary duty of loyalty and fair dealing to  the United States. Before 2004, Treasury used compensating balances to  reimburse financial agents for their services. However, as we previously  reported, a combination of circumstances, including declining interest  rates and the need to stay under the debt limit, made compensating  balances inefficient and disruptive for Treasury. In 2004, Congress  provided Treasury with a permanent, indefinite appropriation with which to  reimburse financial agents for their services.

Within Treasury, the Bureau of the Fiscal Service (Fiscal Service) is  responsible for the department’s basic functions of collecting and holding  federal taxes and other revenues and making federal payments. Fiscal  Service (and its predecessors) has a long history of using financial agents  to help support these functions, and Fiscal Service currently has financial  agency agreements with nine financial institutions. According to Fiscal  Service officials, by using financial agents, the department is able to  leverage the existing banking infrastructure and avoid the expense of  creating a separate government banking system to provide these basic  services. Treasury compensates Fiscal Service’s financial agents using  the permanent, indefinite appropriation, and in fiscal year 2015 Treasury  paid Fiscal Service’s financial agents $636 million.

In light of the combination of Treasury’s authority to use financial agents  and its permanent, indefinite appropriation to reimburse financial agents,  you asked us to examine Treasury’s use of financial agents, including its  process for selecting and designating financial agents. In particular, this  report examines  1.  how Treasury’s use and compensation of financial agents has  changed as it has modernized its payment and collection systems,  and  2.  Fiscal Service’s process and related internal controls for selecting and  designating financial institutions as financial agents.

To address our objectives, we reviewed federal statutes, regulations, and  directives that have guided or authorized Treasury’s use of financial  agents and Treasury documentation, including annual budget documents  and materials describing its payment, collection, and other programs. We  also reviewed relevant audit or similar reports issued by GAO, Treasury’s  Office of the Inspector General, and others. We used budget data for  fiscal years 2004 through 2015, the most recent data available at the time  of our review, to analyze the total amount paid to financial agents since  enactment of the permanent, indefinite appropriation. We also obtained  data from Fiscal Service on the amount of fees paid to each of its  financial agents in fiscal years 2014 and 2015 to conduct a more in-depth  analysis of the total amount of fees paid to them for payment, collection,  and other services. We assessed the reliability of the data by interviewing  knowledgeable officials, conducting manual testing on relevant data fields  for obvious errors, and reviewing a recent audit. Based on these steps,  we found the data to be sufficiently reliable for the purposes of our  analyses. We reviewed Fiscal Service’s policies and procedures for  selecting and designating financial institutions as financial agents. We  used the standards for internal control in the federal government to  assess Fiscal Service’s process and related controls for selecting and  designating financial agents. We also reviewed internal records that  Fiscal Service generated to document key decisions made in its selection  and designation of five financial agents between January 2010 and  December 2015 to assess compliance with Fiscal Service’s policies and  procedures. We compared these records to the types of documentation  listed in Fiscal Service’s policies and procedures. Finally, we interviewed  officials in various units within Treasury that are involved in the selection  and designation of financial agents, including Fiscal Service and the  Office of the Fiscal Assistant Secretary. Appendix I contains more detail  on our scope and methodology.

We conducted this performance audit from January 2016 to January 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Treasury Is Authorized to Use Financial Agents
paragraphs: Treasury is authorized to use financial agents under several statutes,  including the National Bank Acts of 1863 and 1864. Treasury is  authorized to employ financial institutions as financial agents of the  government to perform all reasonable duties as may be required of them.  Treasury may designate various types of financial institutions as financial  agents. Treasury also has issued regulations governing its designation of  financial agents. Treasury designates financial institutions as financial  agents through financial agency agreements. Financial agency  agreements entered into by Treasury do not constitute procurement  contracts under the purview of Federal Acquisition Regulations.  According to Treasury officials, the department uses financial agents to  provide only financial services, and it uses a separate procurement  process to acquire commercially available goods and equipment. In 2004,  Congress provided Treasury with a permanent, indefinite appropriation to  reimburse financial agents, and Treasury uses that appropriation to pay  financial agents supporting Fiscal Service’s revenue collections,  payments, and other programs.

Treasury received additional authority to use financial agents under the  Emergency Economic Stabilization Act of 2008 and the Small Business  Jobs Act of 2010, which were passed in response to the financial crisis.  The Emergency Economic Stabilization Act established the Office of  Financial Stability within Treasury and provided Treasury with the  authority to purchase and guarantee certain types of troubled assets  under the Troubled Asset Relief Program to stabilize the economy and  financial system. The Small Business Jobs Act established the Small  Business Lending Fund and State Small Business Credit Initiative  programs within Treasury to stimulate job growth, among other things.  Both acts provide Treasury with the authority to designate financial  institutions as financial agents to perform all such reasonable duties  related to the acts. These acts also provide Treasury with the authority to  designate more types of institutions as financial agents than other general  statutes, including, for example, security brokers or dealers. The financial  agents designated to support these programs are paid from  appropriations provided pursuant to those acts.

section_title: Four Units within Treasury Currently Use Financial Agents
paragraphs: As shown in figure 1, four units within Treasury’s Office of Domestic  Finance use financial agents.

Fiscal Service, among other things, provides central payment services  to federal program agencies; operates the federal government’s  collections and deposit systems; issues, services, and accounts for all  Treasury securities; and manages the collection of delinquent debt.  According to agency officials, Fiscal Service uses financial agents  more extensively than the other Treasury units and has designated a  number of banks as financial agents to provide a variety of specialized  financial services for its revenue collections, payments, and other  programs.

The Office of Fiscal Assistant Secretary, according to Treasury  officials, manages the programs created under the Housing and  Economic Recovery Act of 2008, such as the Agency Mortgage  Backed Securities Purchase Program. Treasury has designated  financial institutions to provide custodial and asset management  services.

The Office of Financial Stability manages the Troubled Asset Relief  Program created under the Emergency Economic Stabilization Act of  2008. Treasury has designated banks, security brokers or dealers,  and other entities as financial agents to support the act’s  implementation.

The Office of Small Business, Community Development, and  Affordable Housing Policy coordinates policy on, among other issues,  small business finance and development, housing policy, and  community and economic development. The office also oversees the  Small Business Lending Fund, created by the Small Business Jobs  Act of 2010, for which Treasury has used financial agents for custodial  and asset management services.

section_title: Fiscal Service Uses Financial Agents in Four Program Areas
paragraphs: Within Treasury, Fiscal Service (and its predecessors) is responsible for  conducting Treasury’s basic functions of collecting and holding federal  taxes and other revenue and making federal payments. As shown in table  1, Fiscal Service currently manages 20 programs that use financial  agents under 26 financial agency agreements to provide services in four  areas: (1) revenue collections, (2) payments, (3) debt collection, and (4)  Treasury securities. Its financial agents include some of the largest  financial institutions in the country, and some of them serve as financial  agents for multiple collections and payments programs.

Of the four types of Fiscal Service program areas that use financial  agents, revenue collections programs use the largest number of agents.  Revenue collections programs use financial agents to collect federal  revenue from individuals and businesses, including for taxes, student loan  repayments, and customs duties. Payments programs use financial  agents to help Fiscal Service disburse payments to individuals and  businesses on behalf of federal agencies, such as benefit payments  made by the Social Security Administration and the Department of  Veterans Affairs and payments to businesses for goods and services  provided to the federal government. The debt collection program uses a  financial agent to operate a centralized service to assist federal agencies  with the management of their accounts receivable. Fiscal Service’s  Treasury securities program area manages the issuance and sales of  Treasury’s marketable and nonmarketable securities. One Fiscal Service  securities program uses a financial agent to provide custodial and related  services for the myRA program, which offers retirement savings accounts  for individuals without access to an employer-provided retirement savings  program and which invests in a U.S. retirement savings security.

section_title: Congress Has Used Reporting Requirements and Other Mechanisms to Oversee Treasury’s Use of Financial Agents
paragraphs: Congress has used reporting requirements and other mechanisms to  oversee Treasury’s use of financial agents. Although the National Bank  Act and other statutes authorize Treasury to use financial agents, they do  not require Treasury to report to Congress on its use of such agents.  However, the Check Clearing for the 21st Century Act of 2003 required  Treasury to submit (1) a report annually to Congress on its use of  compensating balances and appropriations and (2) a final report following  the transition from the use of compensating balances to the use of  appropriations to pay financial institutions for their services as  depositaries and financial agents. For the final report, Treasury was  directed to analyze the transition cost, direct costs of the services being  paid from the authorized appropriations, and the benefits realized from  the use of direct payment for such services rather than the use of  compensating balances. Treasury sent the final report to Congress in  2004 and thereafter has reported annually the amount of permanent,  indefinite appropriations used to pay financial agents each fiscal year in  its President’s budget submission.

Unlike Treasury’s other authorities, under the Emergency Economic  Stabilization Act and Small Business Jobs Act, Congress imposed  reporting requirements on Treasury for, among other things,  compensation paid for its use of financial agents in the programs created  under those acts, and it imposed audit or related mandates on GAO and  others.

Under the Emergency Economic Stabilization Act, Treasury is  required to report to Congress every 30 days on, among other things,  a detailed financial statement on the exercise of its authority under the  act, including all agreements made or renewed and its operating  expenses, including compensation paid to financial agents. The act  also includes a provision for GAO to conduct oversight and report on  its oversight of the Troubled Asset Relief Program’s activities and  performance, including agents and representatives, every 60 days.  On one of the reports in response to that mandate, we assessed  Treasury’s approaches to acquiring financial agent and other services  in support of the program. In addition, the act established the  Congressional Oversight Panel to review the state of the financial  markets and regulatory system and submit various reports to  Congress. The Congressional Oversight Panel investigated and  reported on Treasury’s use of contractors and financial agents in the  Troubled Asset Relief Program.

Under the Small Business Jobs Act, Treasury is required to report to  Congress semiannually on, among other things, all operating  expenses, including compensation for financial agents, and all  transactions made by the Small Business Lending Fund. That act also  included a provision for GAO and the Treasury Inspector General to  audit the Small Business Lending Fund program at least annually and  semiannually, respectively.

section_title: Treasury’s Use of Financial Agents Has Evolved in Response to Changes in Technology and New Laws, but Treasury Does Not Disclose in a Central Location How It Uses or How Much It Pays Each Agent
paragraphs: Since the 1980s and continuing today, Treasury has been using financial  agents to modernize its systems and keep pace with technological  changes in providing financial services to the public. For example,  Treasury has used financial agents to reduce the number of paper-based  collection and payment transactions by moving them to electronic  systems. Since 2008, Treasury also has undertaken several  modernization efforts that have affected its use of financial agents. The  total amount (outlays) that Treasury has paid Fiscal Service’s financial  agents has increased from $378 million in 2005 to $636 million in 2015,  partly in response to increased transactions and services. Although  Treasury discloses in its annual budget the total amount paid to financial  agents, it has not publicly disclosed in a central location information about  Fiscal Service’s individual financial agents, including their compensation  and services provided.
subsections: section_title: Treasury’s Traditional Use of Financial Agents Has Evolved to Promote Electronic Collections and Payments
paragraphs: While Treasury historically has used financial agents to physically hold  and disburse public money, its use of financial agents began to evolve in  the mid-1980s as it sought to reduce the number of paper-based  collection and payment transactions by moving them to electronic  systems in response to technological advancements, new laws, and other  factors. Subsequently, Treasury, through Fiscal Service, has continued to  promote electronic transactions for its revenue collections and payments  programs, including information systems for tracking those transactions,  through various efforts to increase efficiency, reduce fraud, and promote  transparency.

In 1984, Congress directed Treasury to provide more electronic services  for collecting payments. As more states took advantage of technological  advances to implement electronic tax collection systems, Treasury began  piloting programs modeled on individual states’ programs that used  financial agents to collect tax receipts electronically. For example, TAX- LINK was an early pilot program that used three financial agents to  explore different concepts for implementing a nationwide electronic tax  payment system. TAX-LINK evolved into the Electronic Federal Tax  Payment System, which is Treasury’s current program for collecting tax  payments from the public electronically. Treasury, through Fiscal Service,  uses a financial agent to operate the Electronic Federal Tax Payment  System and to provide customer support for taxpayers using the system.  As shown in figure 2, the Electronic Federal Tax Payment System  expedites the collection process by collecting tax payments electronically  rather than by paper check.

The Check Clearing for the 21st Century Act of 2003 also allowed the  conversion of paper checks into electronic images, called substitute  checks, which are the legal equivalent of a paper check. As a result,  Treasury developed the Electronic Check Processing program, which  uses a financial agent to operate a web-based platform to convert paper  check payments into electronic transactions, thereby reducing the amount  of time and costs associated with processing paper-based collections.  According to Treasury’s Fiscal Year 2015 Agency Financial Report, Fiscal  Service collected 98 percent of the total dollar amount of U.S.  government receipts electronically in fiscal year 2015.

The Debt Collection Improvement Act of 1996 required that all federal  payments made after January 1, 1999, be made electronically, subject to  exceptions. In response, Treasury developed programs that use  financial agents to help disburse payments electronically, particularly for  programs related to benefits payments. For example, Treasury developed  Electronic Transfer Accounts, which use financial agents to establish low- cost electronic accounts for recipients of federal benefits payments. In an  effort to increase electronic payments in areas where Electronic Transfer  Accounts were not available, in 2008, Fiscal Service developed the Direct  Express program, which uses a financial agent to provide pre-paid debit  card access to electronic benefits payments. In 2010, Treasury launched  an “all-electronic” initiative, in part to further move federal benefit  payments away from paper checks to electronic options. Under the  initiative, Treasury required individuals receiving certain federal benefits  to receive payments electronically, such as through Direct Express cards.  According to Treasury officials, more than 98 percent of federal benefits  payments are currently made electronically as a result of Treasury’s  expansion of its electronic payments programs, thus improving efficiency  and reducing costs and fraud.

Fiscal Service is exploring new ways to use modern payment  technologies to further reduce the amount of paper-based payments  made by the federal government. For example, Fiscal Service is piloting a  program that uses a financial agent to provide the settlement mechanism  for payment services using mobile banking technologies, such as web- based payment systems. According to Treasury’s Fiscal Year 2015  Agency Financial Report, nearly 95 percent of all Treasury payments  were made electronically in fiscal year 2015.

Information Systems for Tracking Electronic Transactions  As a result of increased electronic transactions, Fiscal Service has  developed programs that use financial agents primarily to collect and  report information and data about electronic collections and payments  transactions. For example, it implemented the Over the Counter Channel  Application and the Collections Information Repository, which use  financial agents to gather and store information about revenue collection  transactions. The Over the Counter Channel Application and the  Collections Information Repository do not hold or disburse public money;  rather, they use financial agents to process and account for information  on the collection of public money. For example, the Over the Counter  Channel Application primarily collects data from the electronic processing  of checks and provides a web-based application for federal agencies to  access information on these transactions. The Collections Information  Repository provides a web-based means of tracking, reconciling, and  storing revenue collections transactions. In response to a Presidential  memorandum in 2009 on data transparency, Fiscal Service made data  about revenue collections more accessible to federal agencies through  the Collections Information Repository.

section_title: Treasury Has Undertaken Efforts to Simplify and Modernize Programs That Use Financial Agents
paragraphs: Treasury has undertaken various efforts to modernize or streamline its  collections, payments, and other programs to help increase efficiency and  transparency and reduce costs. Although Treasury’s modernization  efforts primarily focused on how it delivered services through its programs  and not necessarily on its use of financial agents, two of the  modernization efforts involved revenue and debt collection programs that  used financial agents.

In 2008, Treasury initiated its Collections and Cash Management  Modernization effort that was aimed at simplifying and modernizing its  collections and cash management programs and reducing  redundancy. Within Treasury, Fiscal Service used 8 financial agents  to help support its collection programs in 2010 and reduced the  number to 7 financial agents by year-end 2015. According to  Treasury, the effort was designed to reduce the duplication of data,  applications, and interfaces, promoting a more efficient use of  resources.

In 2012, Treasury developed the Centralized Receivables Service to  centralize and improve the efficiency of federal agencies’ collections  of account receivables. To develop the service, Fiscal Service worked  jointly with the Office of Financial Innovation and Transformation,  which was created in 2010 to identify and implement innovative  solutions to help government agencies become more efficient and  transparent in federal financial management. Before the development  of the service, many agencies operated their own account receivables  programs, which Treasury noted were fragmented and inefficient. The  Centralized Receivables Service uses a financial agent to centralize  receivables collections services across agencies. According to  Treasury, the service has increased the collection of receivables and  reduced agency costs.

section_title: Increased Transactions and Services Provided Have Partly Driven Growth in Financial Agent Compensation since Fiscal Year 2004
paragraphs: Since Treasury received the permanent, indefinite appropriation to  reimburse financial agents, the total amount (outlays) that Treasury has  paid Fiscal Service’s financial agents has increased steadily from  approximately $378 million in fiscal year 2005 to approximately $636  million in fiscal year 2015 (see fig. 3). As discussed previously, Treasury  paid its financial agents through compensating balances—non-interest- bearing cash balances—before it received a permanent, indefinite  appropriation. Prior to receiving the appropriation, Treasury did not report  the amount of such compensation in its annual budget submissions.  Treasury officials told us that they did not have data on the compensation  paid to financial agents before April 2004 and could not determine the  amount that the financial agents were paid through those compensating  balances. Treasury did not create any new programs in fiscal year 2004  that used financial agents, and according to Treasury officials, the  compensation to financial agents would have been similar for fiscal years  2003 and 2004.

The increase in the amount of total compensation to financial agents  between fiscal years 2004 and 2015 was driven partly by increases in  transaction volumes and an expansion in the scope of certain financial  agent services. For example, the Card Acquiring Service, the largest  revenue collections program in terms of cost, uses a financial agent to  process debit and credit card payment transactions at federal agencies.  The financial agent’s compensation is based largely on the number of  transactions it processes, and the increase in card transactions by the  public has led to an increase in its compensation. According to Fiscal  Service officials, the financial agent processed over 65 million  transactions in fiscal year 2007 and over 133 million transactions in fiscal  year 2015. Treasury compensated the financial agent $101 million in  fiscal year 2007 and $172 million in fiscal year 2015.

As another example, a financial agent operates a specialty lockbox  program to process passport applications and fees. According to  Treasury, the costs for the passport lockbox program increased steadily  after the passage of the Intelligence Reform and Terrorism Prevention Act  of 2004, which required passports or other accepted documents for travel  into and out of the United States from Canada, Mexico, and the  Caribbean. Treasury reported that its financial agent has hired hundreds  of new employees and invested in infrastructure to handle the increased  application volume, which grew from 10.8 million applications in fiscal  year 2006 to 12.4 million applications in fiscal year 2015. In fiscal year  2015, the compensation to the financial agent for the passport lockbox  program was $62 million, 10 percent of all compensation paid to financial  agents.

As shown in figure 4, revenue collections programs, which include the  Electronic Federal Tax Payment System, the Card Acquiring Service, and  various lockbox programs, among others, accounted for $583 million (92  percent) of all financial agent compensation in fiscal year 2015.  Compensation for payments programs, $37 million, accounted for 6  percent of total financial agent compensation in fiscal year 2015.

section_title: Treasury Does Not Fully Disclose in a Central Location Information on Fiscal Service’s Financial Agents
paragraphs: Although Treasury publicly discloses the total amount of compensation  paid to Fiscal Service’s financial agents in its annual budget submissions,  it does not provide more detailed information about these financial agents  in a central location, such as on its website. For example, Treasury does  not fully disclose in a central location the number of Fiscal Service’s  active financial agency agreements, the types of services provided to  Fiscal Service under the agreements, and the amount of compensation  paid to each financial agent for its services. Treasury officials told us that  it is not required to and has not determined the need to publicly disclose  Fiscal Service’s financial agency agreements on its website. In contrast,  Treasury’s Office of Financial Stability has provided on its public website  copies of the 27 financial agency agreements that it entered into to  manage the Troubled Asset Relief Program and the amount obligated to  compensate each agent. According to Treasury officials, the Office of  Financial Stability made its financial agency agreements available to the  public based on a policy decision to promote the Troubled Asset Relief  Program’s transparency.

According to the Office of Management and Budget’s directive on open  government, transparency promotes accountability by providing the public  with information about government activities. Because Treasury does  not fully disclose in a central location information about Fiscal Service’s  use of financial agents, including the types of services provided and  compensation paid under each agreement, the public and Congress may  not know how much Treasury is spending to obtain services from financial  agents or what those services are and, thus, may be less able to hold  Treasury accountable for such spending. In addition, by improving how it  publicly discloses information about its use of financial agents, Treasury  would allow the public and Congress to better understand, assess, and  appreciate the scope and value of federal investments.

section_title: Fiscal Service Has a Process for Selecting and Designating Financial Agents and Recently Revised Its Guidance to Improve Documentation Fiscal Service Has Established a Process and Related Internal Controls for Selecting and Designating Financial Agents
paragraphs: Fiscal Service has established a process, which includes internal  controls, for selecting and designating its financial agents. While Fiscal  Service did not fully document compliance with its process, including  controls, for financial agents designated between 2010 and 2015, it  adopted new procedures in November 2015 to provide greater assurance  that its documentation will be complete.

According to Fiscal Service officials, the decision of whether to perform a  program in-house or through financial agents does not often arise  because Fiscal Service does not frequently create new programs that use  financial agents. Many factors influence the agency’s decision on whether  to use a financial agent, including statutory authority, costs, the  availability and expertise of Treasury staff versus other providers, and the  nature and complexity of the services. The decision to use a financial  agent for a new program or to renew or amend an existing financial  agency agreement is made formally by the assistant commissioner  responsible for the particular program, with approval by the Fiscal Service  commissioner. Moreover, Fiscal Service’s Office of Chief Counsel  typically is involved in all phases of the process, including in advising on  whether a financial agent may be used for a particular project.

Fiscal Service has developed a financial agent selection process (FASP)  that it uses internally to guide its selection and designation of financial  agents. It has documented the process in its FASP guidance, a 2010  version of which was updated in November 2015 but, according to Fiscal  Service officials, has existed in written form since 2005. The guidance  divides the process into four phases: (1) initiation of the FASP, (2)  publication of a financial agent solicitation, (3) selection of the best  proposal submitted by a financial institution, and (4) designation of the  financial institution as a financial agent. In addition to documenting the  steps in the process, the 2015 FASP guidance incorporates internal  controls that generally are applicable to Fiscal Service’s program offices  or selection teams in selecting and designating financial agents. The  FASP process and related controls help provide reasonable assurance  that the selection and designation process is effective and efficient,  documents important information, and complies with applicable laws and  regulations.

The initiation phase includes all of the steps that Fiscal Service’s program  offices must complete before drafting and publicizing a financial agent  solicitation. The first steps include obtaining approvals to use a financial  agent. Such steps and related internal controls include Fiscal Service’s  program offices taking the following actions:  consulting with the Office of Chief Counsel as to whether designating  an agent is acceptable for the particular project, obtaining approval from the appropriate assistant commissioner to  designate a financial institution to provide the services, and  creating appropriate governance documentation, including a business  case or alternatives analysis, to justify the need for a particular  service, which is reviewed by the Investment Review Board for a new  program, or the assistant commissioner for an existing program  selecting a new financial agent.

In addition, the FASP guidance highlights the need for program offices to  consider as early as possible the portability of the financial agent  services—that is, the ability to transfer services from one agent to another  with minimum difficulty. According to the guidance, portability helps to  ensure that a program can continue without interruption if services need  to be transferred to another agent and promotes competitive pricing and  high-quality service.

The next steps and related controls focus on planning and include Fiscal  Service’s program offices taking the following actions: developing and documenting a FASP high-level strategy that outlines  the services needed and process for obtaining them, such as a  solicitation open to all or a limited number of financial institutions;  forming a selection team that consists of representatives, as needed,  from various areas; working with the Office of Chief Counsel to draft a financial agency  agreement using the model agreement as a starting point; drafting and updating, as needed, a FASP project plan, which is a  schedule of activities, action items, and expected time frames for  completion; and  specifying the criteria that will be used to evaluate and select financial  agents.

The FASP guidance also discusses two other internal controls in this  phase. First, employees involved in selecting or designating the financial  agent should complete ethics training before their involvement in the  FASP. Second, program offices are to prepare, assemble, and maintain  throughout the process an administrative record comprised of documents  that describe and support the decisions made in each phase.

The solicitation phase generally involves the selection team, in  collaboration with the Office of Chief Counsel, writing the financial agent  solicitation; publishing the solicitation to notify eligible financial institutions  about the FASP; and holding information sessions with eligible financial  institutions, if needed. Internal controls discussed in the guidance include  that (1) the selection team should have the solicitation’s content approved  by an assistant commissioner before it is distributed and (2) the  solicitation should, among other things, state that interested financial  institutions must submit a proposal to be considered and, by submitting a  proposal, are agreeing to the FASP approach under which the selection  will be conducted.

The FASP guidance notes that a financial institution should describe in its  proposal its ability to perform the work, which may include its experience in providing the same or similar services, ability to meet security requirements, personnel and infrastructure capabilities, and private sector and government references.

The selection phase spans the receipt of proposals from financial  institutions to the selection (but not designation) of the financial institution  as a financial agent. According to the 2015 FASP guidance, employees  involved in selecting or designating the financial agent should sign a  conflict-of-interest statement before evaluating proposals. Other key steps  and related controls during this phase include the selection team taking  the following actions: having its members independently rate proposals of financial holding individual information sessions with financial institutions  determined to be the best able to meet the needs identified in the  solicitation and requiring them to sign an acknowledgment form  indicating that they, if selected, will accept the terms of the financial  agency agreement, subject to negotiation of services and other terms; using the selection criteria and scoring methodology previously  created to determine which financial institutions are least qualified to  perform the required services; notifying financial institutions that were least qualified to perform the  required services that they were not selected; asking the remaining financial institutions to produce a “best and final”  offer and evaluating them against the selection criteria; and negotiating with the financial institution that submitted the best overall  offer to obtain the best possible level of service, price, or quality that is  required.

Following its selection of the financial institution, the selection team must  prepare a recommendation memorandum explaining the reasons for  recommending the financial agent and a selection decision memorandum,  which the assistant commissioner signs to indicate his or her approval of  the final selection. According to the 2015 FASP guidance, except in an  exigency, no designation of a financial agent should be made without  being preceded or accompanied by a recommendation memorandum and  selection decision memorandum. Fiscal Service officials said that before  approving the selection, the assistant commissioner should obtain the  approval of the deputy commissioner, and the approval of the  commissioner on a case-by-case basis.

The designation phase involves designating the selected financial  institution as a financial agent and closing out the process. The financial  agency agreement is used to designate a financial institution as a  financial agent, and the agreement is signed by authorized  representatives of the financial institution and Fiscal Service.

The 2015 FASP guidance directs the program office responsible for  designating the financial agent to provide Fiscal Service’s Bank Policy  and Oversight (BPO) Division with an electronic copy of its administrative  record. In turn, the guidance directs BPO to use a checklist to provide  assurance that the necessary documents for the administrative record  have been created and delivered.

Unlike the 2010 FASP guidance, the 2015 FASP guidance includes a  two-part addendum that provides guidance on financial agent  compensation. Part one seeks to establish consistent compensation  policies across Fiscal Service’s financial-agent-related business lines. It  discusses different pricing methodologies that can be used to  compensate financial agents and instructs that the selected methodology  should be based on (1) the financial agent’s ability to minimize the  government’s costs under normal and changing conditions but provide  the highest possible quality of service and (2) the degree to which the  prices of the financial agent services can be compared to the prices of  similar or identical financial industry services as a way of gauging cost  containment. Part two seeks to reduce the need for specialized  compensation policy negotiations by delineating Fiscal Service’s  compensation policies. In brief, it generally specifies the conditions under  which Fiscal Service will compensate a financial agent for severance pay,  retention pay, overhead, leased real property, owned real property, and  equipment.
subsections: section_title: Disclosure and Other Requirements Help Address Conflicts of Interest
paragraphs: All Treasury employees, including Fiscal Service employees, are subject  to the same conflict-of-interest requirements that apply to all executive  branch employees. For example, employees meeting certain criteria must  file financial disclosures, which are reviewed internally by attorneys, and  take annual ethics training. In addition, Fiscal Service has an employee  conduct policy, which addresses outside activities, gifts, and other topics  relevant to conflicts of interest. As discussed previously, the 2015 FASP  guidance requires employees involved in selecting or designating a  financial agent to complete ethics training before their involvement in a  FASP and sign a conflict-of-interest statement before evaluating financial  agent proposals.

According to Fiscal Service officials, Fiscal Service has no specific  conflict-of-interest rules that apply to financial agents that provide  services for Fiscal Service programs. However, financial agency  agreements generally state that financial agents owe a fiduciary duty of  loyalty and fair dealing to the United States, and require them to certify  annually that they are not delinquent on any federal tax obligation or other  debt owed to the United States. Fiscal Service officials also told us Fiscal  Service takes steps to identify and mitigate potential conflicts of interest in  drafting the financial agency agreement. For example, Fiscal Service did  not want the myRA program’s financial agent using myRA data to sell or  cross-market its own financial products to myRA account holders. To that  end, the agreement specifies that the agent may use any confidential  information received in connection with the agreement for the purposes of  fulfilling its duties under the agreement and not for its own commercial  purposes or those of a third party.

In contrast, as required by the Emergency Economic Stabilization Act of  2008, Treasury issued regulations to address and manage actual and  potential conflicts of interest that could arise under the act, including from  financial agency agreements. The regulations require, among other  things, prospective financial agents to provide Treasury with sufficient  information to evaluate any organizational conflicts of interest and plans  to mitigate them. For example, an existing or potential financial agent  under the Troubled Asset Relief Program that provides advice or asset  management services to clients that own certain assets under the  program would be required to disclose that fact. Fiscal Service generally  does not face such conflicts of interest because it uses agents primarily to  provide payment and collection services rather than services related to  the acquisition, valuation, disposition, or management of assets.

Financial agency agreements generally state that the agent, once  designated as a financial agent, owes Treasury a fiduciary duty of loyalty  and fair dealing when acting as a financial agent of the United States and  agrees to act at all times in the best interests of the United States when  carrying out its responsibilities under the agreement. Fiscal Service  officials said that if a financial agent faced a conflict of interest under its  agreement, the agent would have a duty to disclose and address that  conflict. Based on a recommendation recently made by the Treasury  Inspector General, Fiscal Service amended its model financial agency  agreement to include a provision requiring the financial agent to notify the  Inspector General if it becomes aware of any possible violation of federal  criminal law regarding fraud, conflict of interest, bribery, or illegal  gratuities affecting services performed under the financial agency  agreement.

section_title: Administrative Records for Financial Agents Designated between 2010 and 2015 Were Not Complete, but Recently Adopted Internal Controls Are Designed to Address the Deficiency
paragraphs: Between 2010 and 2015, Fiscal Service created three new programs  (Centralized Receivables Service, myRA, and the Non-Traditional  Alternative Payments Service) and selected a financial agent for each,  according to Treasury officials. For the Centralized Receivables Service,  a pilot program that federal agencies use to manage accounts receivable,  officials told us that they evaluated providing the service in-house but  instead used a financial agent to take advantage of the expertise of  commercial banks in receivables processing and collection and to start  the program as quickly as possible. Similarly, Treasury officials said they  decided to use a financial agent for myRA, a retirement savings program,  because Fiscal Service (1) had not been qualified to act as a Roth IRA  custodian under IRS rules, (2) had not yet established the necessary  infrastructure to operate a Roth IRA program, and (3) could implement  the program more quickly by using a financial agent. For the Non- Traditional Alternative Payment Services, which offers recipients  alternative ways to receive federal payments, Fiscal Service officials said  that they needed a financial agent to maintain a settlement account and  process payments.

Fiscal Service also selected financial agents to provide traditional banking  services for several existing programs, including the Stored Value Card  Funds Pool and the Navy Cash Open-Loop Program. For the Stored  Value Card Funds Pool and the Navy Cash Open-Loop Program, which  provide electronic payment alternatives to cash, Fiscal Service officials  said that they needed financial agents to maintain settlement accounts  and, in the case of Navy Cash, issue prepaid cards and process  transactions for existing transactions.

As previously discussed, the FASP guidance requires, as an internal  control, Fiscal Service’s program offices to prepare and maintain an  administrative record—a compilation of documents generated during a  FASP that describes and supports the decision making. According to  Fiscal Service officials, the administrative record’s purpose is to provide  Treasury with a basis of defense in the event of litigation, to memorialize  the decisions made during the FASP, and to document Fiscal Service’s  compliance with the FASP guidance, including key controls.

We requested copies of the administrative records for the five financial  agents selected between 2010 and 2015, and Fiscal Service provided us  with copies of four of the records. Fiscal Service officials said that an  administrative record may have existed for the agent designated in 2010  for the Stored Valued Card Funds Pool, but they could not locate it. For  the four records we received, we reviewed each administrative record to  assess the extent to which it (1) contained the documents listed in the  2010 FASP guidance and, in turn, (2) documented compliance with Fiscal  Service’s internal controls set forth in the 2010 FASP guidance. We used  the 2010 FASP guidance as our criteria because that was the guidance in  effect at the time. The most recent FASP guidance was not issued until  November 2015 and, thus, was not in effect at that time. The 2010 FASP  guidance lists 11 types of documents normally included in every  administrative record.

Based on our review of the four administrative records and in light of the  missing administrative record, we found that the completeness of the  records varied. None contained all of the documents listed in the 2010  FASP guidance, but three contained the majority. For example, the record  for myRA, a new retirement savings program using a financial agent to  provide custodial services, contained 6 of 11 key documents—missing,  for example, certain planning and approval documents. As a result, the  documents comprising the administrative records varied in the extent to  which they complied with Fiscal Service’s internal controls set forth in the  2010 FASP guidance. More specifically, we found the following in our  review of the administrative records (excluding the missing administrative  record).

Initiation Phase. Two of the four administrative records included a  FASP plan that outlined the services needed and process for  obtaining those services, but the other two did not. One of the four  administrative records included documentation of the assistant  commissioner’s approval to designate a financial institution as a  financial agent, but the other three did not.

Solicitation Phase: Three of the four administrative records included  the solicitation announcing the FASP, but one did not. However, the  one missing the solicitation covered a financial institution that was  directly designated as a financial agent. According to the FASP  guidance, a solicitation is not required under a direct designation. The  three administrative records with solicitations also included  documentation of the proposals submitted by the financial institutions  and other correspondence between Fiscal Service and the financial  institutions. Finally, the three records included the criteria that Fiscal  Service planned to use to evaluate and select the financial institutions  as financial agents.

Selection Phase: None of the four administrative records included  acknowledgment forms signed by the financial institutions indicating  that they would, if selected, accept the terms of the financial agency  agreement. Three of the four records contained (1) Fiscal Service’s  analyses of the financial institutions’ proposals based on the selection  criteria and (2) the selection decision memorandums that were signed  by an assistant commissioner. The other record did not contain such  documentation. Finally, two of the four records included  documentation of meetings between Fiscal Service and the financial  institutions, but the other two did not.

Designation Phase: All four of the administrative records included the  financial agency agreements signed by Fiscal Service and the  financial institutions. However, one included an amended agreement  and not the original agreement.

The missing administrative record and incompleteness of the other  records highlight the lack of compliance with internal controls, which  provide reasonable assurance that the agency achieves its objectives,  and could undermine Treasury’s ability to defend itself against litigation.

According to Fiscal Service officials, any legal protest likely would arise  soon after a financial agent decision was made, so they could collect any  needed documents from the program office. Importantly, no assurances  exist that program offices will be able to produce any missing documents.  For example, consistent with our findings, a report issued by the Treasury  Inspector General in 2015 disclosed instances where Fiscal Service was  unable to produce requested documents concerning its use of financial  agents. In response to the finding, the Inspector General recommended  that Fiscal Service ensure that the selection process for financial agents  is documented and that the documentation is maintained through the life  of the financial agency agreement. Fiscal Service agreed with the  recommendation and noted that it was revising its FASP guidance and  expected to complete the revisions by year-end 2015. As discussed  earlier, Fiscal Service issued its revised FASP guidance in November  2015.

Although none of the administrative records that we reviewed were  complete and one was missing, Fiscal Service’s revised 2015 FASP  guidance includes new procedures designed to address the deficiency.  Unlike the 2010 guidance, the 2015 guidance instructs not only Fiscal  Service’s program offices to provide BPO with an electronic copy of their  administrative records at the end of a FASP, but it also instructs BPO to  use a checklist to ensure that the necessary documents have been  created and electronically delivered to BPO. BPO developed a checklist  of 18 of the 19 types of documents listed in the 2015 FASP guidance as  examples of documents to be maintained in the administrative record and  incorporated fields to check to verify whether each document was  provided. In addition, the checklist includes fields to document the  reviewer’s name, date of the administrative record’s review, and  comments on the administrative record. According to Fiscal Service  officials, BPO trained Fiscal Service’s program offices on the revised  2015 FASP guidance. Moreover, BPO’s training slide presentation included a copy of the checklist and examples of the documents to be  maintained in the administrative record. As noted, the 2015 FASP  guidance was not in effect for the administrative records that we  reviewed. However, by conducting its checklist review in future FASPs,  BPO should be able to better ensure that the administrative records are  complete. Such actions should provide reasonable assurance that Fiscal  Service is complying with its FASP guidance, including key controls to  provide reasonable assurance that it achieves its objectives.

section_title: Conclusions
paragraphs: Treasury has expanded its use of financial agents through its Bureau of  the Fiscal Service to modernize its systems and keep pace with  technological changes in providing financial services to the public.  However, Treasury has not publicly disclosed in a central location  information about Fiscal Service’s individual financial agency agreements,  such as a description of services provided under each agreement and the  amount paid to each agent for its services. Without such information, the  public and Congress are less able to hold Treasury accountable for such  spending. In addition, by publicly disclosing more information about its  use of financial agents, Treasury would allow the public and Congress to  better understand, assess, and appreciate the scope and value of federal  investments.

section_title: Recommendation for Executive Action
paragraphs: To promote transparency and accountability of federal spending, the  Commissioner of the Fiscal Service should make basic information about  Fiscal Service’s use of financial agents publicly available in a central  location, including compensation paid to each financial agent under its  financial agency agreement and a description of the services provided.

section_title: Agency Comments
paragraphs: We provided a draft of this report to Treasury for review and comment. In  its written comments (reproduced in app. V), Treasury concurred with our  findings and recommendation regarding transparency and accountability.  It said that Fiscal Service will make basic information about its financial  agents publicly available, including information about compensation and  services rendered. In addition, Treasury provided technical comments on  the draft report, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of the  Treasury and appropriate congressional committees. In addition, the  report will be available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or ClementsM@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix VI.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) how the Department of the Treasury’s  (Treasury) use and compensation of financial agents has changed as it  has modernized its payment and collection systems and (2) the Bureau of  the Fiscal Service’s (Fiscal Service) process and related internal controls  for selecting and designating financial institutions as financial agents.

To examine how Treasury’s use and compensation of financial agents  has changed as it has modernized its payment and collection systems,  we reviewed federal statutes, regulations, and directives that have guided  Treasury’s use of financial agents; Treasury’s annual budget documents;  documentation on current and former Treasury programs using financial  agents, including compensation data and descriptions of services  provided by financial agents; financial agency agreements and  amendments to those agreements; audit or similar reports issued by  GAO, Treasury’s Office of the Inspector General, or others; and  congressional testimony from a Treasury official. We used Treasury’s  budget data for fiscal years 2004 through 2015, the most recent data  available at the time of our review, to analyze the total amount paid to  financial agents since enactment of the permanent, indefinite  appropriation. We also obtained compensation data from Fiscal Service  on the amount it compensated each of its financial agents in fiscal years  2014 and 2015 to conduct a more in-depth analysis of the total amount of  compensation for collection, payment, and related services. We assessed  the reliability of the data by interviewing knowledgeable officials,  conducting manual testing on relevant data fields for obvious errors, and  reviewing a recent audit. Based on these steps, we found the data to be  sufficiently reliable for the purposes of our analyses. Finally, we  interviewed officials in various units within Treasury involved in the  selection and designation of financial agents, including Fiscal Service and  the Office of Financial Stability.

To examine Fiscal Service’s process and related internal controls for  selecting and designating financial institutions as financial agents, we  reviewed federal statutes and regulations authorizing or governing  Treasury’s use of financial agents; Fiscal Service’s policies and  procedures and related documentation for selecting and designating  financial agents, including financial agency agreements, financial agent  solicitations, and selection decision memoranda; and audit or similar  reports issued by GAO, Treasury’s Office of the Inspector General, or  others. We assessed Fiscal Service’s 2010 and 2015 financial agent  selection process (FASP) guidance, which documents its process and  related internal controls for selecting and designating financial agents  against the standards for internal control in the federal government. In  addition, we reviewed internal records that Fiscal Service officials  generated to document key decisions made in their selection and  designation of five financial agents between January 2010 and December  2015 to assess compliance with Fiscal Service’s policies and procedures.  We compared those records to the types of documentation listed in Fiscal  Service’s 2010 FASP guidance, which was in effect for the five FASPs we  reviewed, to assess Fiscal Service’s compliance with its FASP guidance,  including key controls. We interviewed officials in various units within  Treasury involved in the selection and designation of financial agents,  including Fiscal Service and the Office of the Fiscal Assistant Secretary.

We conducted this performance audit from January 2016 to January 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

section_title: Appendix II: Programs Established in Response to the Financial Crisis That Are Administered by the Department of the Treasury and Use Financial Agents
paragraphs: Between 2008 and 2010, Congress passed several laws that established  or led to the establishment of a number of programs designed to promote  U.S. financial stability and address other effects of the financial crisis. The  Department of the Treasury (Treasury) has designated financial  institutions as financial agents to provide services under the programs.

The Housing and Economic Recovery Act of 2008 (HERA) provided  Treasury with authority to purchase obligations and securities issued  by Fannie Mae and Freddie Mac, the housing government-sponsored  enterprises (GSE). Under its authority, Treasury created the GSE  Mortgage-Backed Securities Purchase Program to help support the  availability of mortgage credit by temporarily providing additional  capital to the mortgage market. By purchasing those securities,  Treasury sought to broaden access to mortgage funding for current  and prospective homeowners and to promote market stability.  Treasury used its existing authorities to designate three financial  institutions as financial agents to provide asset management,  custodian, and other services for the program, and Treasury has one  active financial agency agreement as of October 2016.

The Emergency Economic Stabilization Act of 2008 (EESA)  established the Office of Financial Stability within Treasury and  authorized the Troubled Asset Relief Program, in part to restore  liquidity and stability to the U.S. financial system. Among other  things, EESA authorized Treasury to buy up to $700 billion (later  reduced to $475 billion) in “troubled assets” as defined under the act  and to designate financial institutions as financial agents to perform all  such reasonable duties related to the act. Treasury entered into 27  financial agency agreements with 23 financial institutions, including  banks, security brokers or dealers, and insurance companies, as  financial agents to support the act’s implementation, and Treasury has  four active financial agency agreements as of October 2016. The  Troubled Asset Relief Program, in conjunction with other federal  actions, was designed to help restore stability to the financial system,  including by providing capital to financial institutions and helping  homeowners prevent avoidable foreclosures.

The Small Business Jobs Act of 2010 (SBJA), among other things,  established the Small Business Lending Fund to provide capital to  eligible institutions in order to increase the availability of credit for  small businesses. The Small Business Lending Fund’s purpose is to  address the ongoing effects of the financial crisis on small businesses  by providing temporary authority to Treasury to make capital  investments in eligible institutions in order to increase the availability  of credit for small businesses. As authorized by SBJA, as of October  2016 Treasury has active financial agency agreements with two  financial institutions that it designated as financial agents to provide  asset management and custodian services.

From fiscal year 2009 through fiscal year 2015, Treasury paid financial  agents for their services under the HERA, EESA, and SBJA programs a  total of $1.3 billion. As shown in figure 5, financial agents under the EESA  programs account for the large majority of the total compensation paid to  these financial agents. Financial agents under the HERA programs are  paid with Treasury’s permanent, indefinite appropriation, but financial  agents under the EESA and SBJA programs are paid from appropriations  provided pursuant to those acts.

section_title: Appendix III: The Department of the Treasury’s Bureau of the Fiscal Service Programs Using Financial Agents
paragraphs: The Department of the Treasury’s Bureau of the Fiscal Service has four  program offices that use financial agents: (1) Revenue Collections  Management, (2) Payment Management, (3) Debt Management Services,  and (4) Treasury Securities Services. Tables 2 through 5 below show the  active programs managed by these program offices that use financial  agents, a description of the program, the financial agent, and the effective  date of the current financial agency agreement.

section_title: Appendix IV: Department of the Treasury’s Use of a Financial Agent for the myRA Program
paragraphs: myRA® (my retirement account) is a Roth Individual Retirement Account  (IRA) that invests in a new U.S. Treasury retirement savings bond. It is  designed to facilitate retirement savings for individuals without access to  an employer-provided retirement savings program. In January 2014, the  President issued a memorandum directing the Secretary of the  Department of the Treasury (Treasury) to develop a new retirement  savings security focused on reaching new and small-dollar savers. In  response, Treasury developed myRA and launched the program  nationally in November 2015.
subsections: section_title: Treasury Used Its Existing Authority to Designate a Financial Agent for the myRA Program
paragraphs: Treasury’s Bureau of the Fiscal Service (Fiscal Service) developed the  myRA program and used its authority to designate a financial agent to  administer customer investments in and serve as the custodian for  myRAs. Treasury officials said that they decided to use a financial agent  for myRA because Fiscal Service (1) had not been qualified to act as a  Roth IRA custodian under IRS rules, (2) had not yet established the  necessary infrastructure to operate a Roth IRA program, and (3) could  implement the program more quickly by using a financial agent. Although  Fiscal Service uses Federal Reserve banks as fiscal agents to serve as  custodians for its other savings bond programs, Treasury officials said  that such banks cannot serve as custodians for Roth IRAs.

According to Treasury officials, Fiscal Service attorneys analyzed the  statutory authority for issuing savings bonds under the myRA program  and historical precedent for using a financial agent to help carry out the  myRA program. Treasury officials stated that Fiscal Service found  examples of programs similar to myRA in Treasury’s annual reports.  Treasury officials told us this is not the first time that Treasury has used a  fiscal or financial agent to hold securities or maintain accounts for others.  For example, Fiscal Service uses banks as financial agents in payment  programs to allow individuals to receive payments electronically in the  form of prepaid debit cards. It also uses Federal Reserve banks, as fiscal  agents, to maintain book entry accounts for savings bonds and  marketable securities and hold collateral pledged in lieu of surety bonds.

The financial agent for myRA holds a Treasury retirement savings bond  on behalf of each individual accountholder.

Fiscal Service Generally Followed Its Financial Agent Selection Process  for the myRA Financial Agent but Did Not Fully Document Its Process  Fiscal Service generally followed its 2010 financial agent selection  process (FASP) guidance in selecting and designating Comerica Bank as  financial agent for the myRA program. The guidance documents the  FASP steps, including related internal controls, in initiating the process,  soliciting proposals and evaluating submissions, and selecting and  designating a financial agent. The following is a summary of Fiscal  Service’s selection and designation process for the myRA program based  on the administrative record provided by Treasury.

Fiscal Service formed a selection team to review the applications and  recommend which applicant to designate as the financial agent. The  team consisted of six employees chosen to bring a breadth of  expertise to the selection process.

Fiscal Service developed a cost estimate for the services to be  provided by a financial agent under the myRA program.

In February 2014, Fiscal Service notified approximately 10,000  financial institutions about its financial agent solicitation through  announcements distributed through the Federal Reserve’s bank  communication system and American Banker, a news periodical on  banking and finance.

By the close of the initial application period in March 2014, Fiscal  Service had received two applications, both from entities that were not  eligible to serve as a financial agent because they were not financial  institutions as defined by the laws governing Treasury’s use of  financial agents. It extended the application period and received an  application from Comerica Bank and a resubmitted application from  an entity previously determined not to be eligible.

Fiscal Service initially reviewed Comerica’s application against the  criteria provided in the solicitation and held a conference call with  Comerica in May 2014 to further discuss Comerica’s application.  Fiscal Service held a follow-up meeting with Comerica, which  subsequently provided Fiscal Service with proposed pricing  information.

Each member of the selection team individually rated Comerica’s  application using the program requirements set forth in the solicitation.  Fiscal Service requested and reviewed references for a firm that was  partnering with Comerica.

Fiscal Service compared its cost estimate to Comerica’s cost estimate  and found the two to be comparable.

The selection team prepared a recommendation memorandum, which  a Fiscal Service assistant commissioner signed in June 2014.

Fiscal Service and Comerica executed the financial agency  agreement in July 2014.

As discussed in the report, we reviewed Fiscal Service’s administrative  records for four FASPs conducted between 2010 and 2015, including the  FASP for the myRA program. Under the 2010 FASP guidance, Fiscal  Service’s program offices were required to maintain an administrative  record comprised of documents generated during a FASP that describes  and supports the decision-making process. We found that the myRA  administrative record contained 6 of the 11 types of documents listed in  the guidance, such as the solicitation, memorandums of meeting with the  financial institutions, the selection decision memorandum, and the  financial agency agreement. While some documents were missing from  the administrative record, changes to the 2015 FASP guidance should  help Fiscal Service provide assurance that documentation is complete, as  previously discussed.

section_title: Treasury Has Controls in Place to Address Potential Conflicts of Interest under the myRA Program
paragraphs: All Treasury employees, including Fiscal Service employees, are subject  to the same conflict of interest requirements that apply to all executive  branch employees, as discussed previously in this report. For example,  employees meeting certain criteria must file financial disclosures, which  are reviewed internally by attorneys, and take annual ethics training. In  addition, Fiscal Service has an employee conduct policy, which  addresses outside activities, gifts, and other topics relevant to conflicts of  interest. The 2015 FASP guidance states that employees involved in  selecting or designating a financial agent should complete ethics training  before their involvement in a FASP and sign a conflict-of-interest  statement before evaluating financial agent proposals.

Under the terms of its financial agency agreement, the financial agent for  myRA owes a fiduciary duty of loyalty and fair dealing to the United  States when acting as a financial agent of the United States and agrees  to act at all times in the best interests of the United States when carrying  out its responsibilities under the agreement. Treasury officials said that if  a financial agent faced a conflict of interest under its agreement, the  agent would have a duty to disclose and address that conflict. Based on a  recommendation recently made by the Treasury Inspector General, Fiscal  Service amended its model financial agency agreement to include a  provision requiring the financial agent to notify the Inspector General if it  becomes aware of any possible violation of federal criminal law regarding  fraud, conflict of interest, bribery, or illegal gratuities affecting services  performed under the financial agency agreement. The financial agency  agreement for myRA includes this provision.

Once myRA accountholders reach a limit of $15,000 in their account or  the account reaches a maturity of 30 years, they are required to roll over  their account into another retirement savings account. Fiscal Service  officials told us that to address concerns that the financial agent would try  to promote its own products to myRA accountholders, the financial  agency agreement includes additional controls that place limits on the  financial agent’s ability to cross-market its own products to  accountholders so that, for instance, the financial agent would not be able  to steer accountholders to its own products when they are required to roll  over their account.

section_title: Appendix V: Comments from the Department of the Treasury’s Bureau of the Fiscal Service

section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Richard Tsuhara (Assistant  Director), Heather Chartier (Analyst-in-Charge), William R. Chatlos,  Jeffrey Harner, Colleen Moffatt Kimer, Marc Molino, Patricia Moye, and  Jennifer Schwartz made key contributions to this report.


Question-summary annotations: questions: question: Why has Treasury's use of financial agents changed?
answer: The Department of the Treasury's (Treasury) use of financial agents has evolved as it has moved from paper to electronic transactions in response to changes in technology and new laws.
child_questions: question: How has Treasury's use of financial agents changed over time?
answer: Treasury has a long history of using financial agents to support its core functions of disbursing payments and collecting revenue. Since the 1980s, Treasury has used agents to move from paper to electronic transactions as it has modernized its systems. For example, Treasury began using financial agents to collect tax revenue electronically in response to a 1984 law and to make payments electronically in response to a 1996 law. Such changes have continued since Congress enacted a permanent, indefinite appropriation in 2004 for Treasury to reimburse financial agents, after which Treasury began including in its annual budget the total amount paid to financial agents.

question: In what way has compensation for financial agents grown?
answer: Compensation to financial agents has grown from $378 million in fiscal year 2005 to $636 million in fiscal year 2015, partly due to increases in the number of debit and credit card payments made to federal agencies that are processed by financial agents.

question: To what extent does Treasury publically disclose compensation to financial agents?
answer: While Treasury discloses in its annual budget the total amount paid to financial agents, it has not fully disclosed in a central location information about individual agents, including their compensation and services provided. Treasury officials said they are not required and have not determined a need to publicly disclose compensation under each financial agency agreement.

question: How does transparency promote accountability?
answer: According to an Office of Management and Budget directive on open government, transparency promotes accountability by providing the public with information about government activities.
child_questions: question: How could greater accountability enhance Treasury's activities??
answer: Greater disclosure and transparency could enhance the accountability of Treasury's use of financial agents by informing the public and Congress about how much and for what purposes it is spending federal funds to obtain services from financial agents.

questions: question: Why did Fiscal Service develop a FASP guidance?
answer: The Bureau of the Fiscal Service (Fiscal Service)—the largest user of financial agents within Treasury—developed its financial agent selection process (FASP) guidance to document the steps and internal controls that its program offices generally are expected to follow in selecting and designating financial agents.
child_questions: question: What guidance does this process provide?
answer: The guidance provides assurances that a FASP is effective and efficient, documents key information, and complies with applicable laws and regulations. The guidance directs program offices to maintain an administrative record of key documents generated during a FASP.

question: What did GAO find in reviewing financial agents?
answer: GAO selected five financial agents designated between 2010 and 2015 to review their administrative records but could review only four because the record for one was not created. None contained all the documents listed in the guidance, but three contained the majority. For example, the record for my RA®, a new retirement savings program using a financial agent to provide custodial services, contained 6 of 11 key documents—missing, for example, certain planning and approval documents.
child_questions: question: What was the result of this variation?
answer: As a result, the records varied in the extent to which they complied with Fiscal Service's guidance, including controls.

question: How has Fiscal Service revised its guidance?
answer: In November 2015, Fiscal Service revised its guidance to require not only program offices to deliver an electronic copy of their administrative records to the Bank Policy and Oversight (BPO) Division but also BPO to use a checklist to ensure that the records are complete.
child_questions: question: How will this revision encourage compliance?
answer: The 2015 guidance was not in effect for the records GAO reviewed. However, BPO's implementation of the new procedure should provide assurances that future designations are in compliance with the FASP guidance, including controls.

questions: question: What is Treasury authorized to do?
answer: Under the National Bank Act and other statutes, Treasury is authorized to designate certain financial institutions as depositaries of public money and financial agents of the federal government.
child_questions: question: How does Treasury designate financial agents?
answer: Treasury uses financial agency agreements to designate financial agents.
child_questions: question: How has Congress altered this process?
answer: In 2004, Congress provided Treasury with a permanent, indefinite appropriation to reimburse financial agents for their services, which replaced its use of non-appropriated funds.