Why big banks are stepping back from lending to detention centers

Posted at 10:29 AM, Jun 27, 2019
and last updated 2019-06-27 12:29:41-04

Bank of America is the latest big financial services company to end its business relationships with owners of immigrant detention centers on the border between the United States and Mexico. It’s not alone.

Several companies, including publicly traded prison owners CoreCivic and GEO Group, have come under fire for their work with the federal government, particularly because of reports of poor treatment of immigrants held at the companies’ detention facilities. Democratic presidential candidate Senator Elizabeth Warren has called for private prisons to be banned.

That has Wall Street — and Corporate America in general — nervous about the perception that they are doing business with prison operators who have reportedly engaged in controversial practices, particularly regarding the treatment of migrant children. Companies often face customer and investor scrutiny when they do business with entities that fall out of public favor.

Bank of America isn’t the first to reduce exposure to prisons

JPMorgan Chase announced in March it was cutting ties with the corrections facilities industry.

“JPMorgan Chase has a robust and well established process to evaluate the sectors that we serve,” the company said in a statement. “As part of this process, we will no longer bank the private prison industry.”

Scandal-ridden Wells Fargo also disclosed earlier this year that it’s paring back its relationships with prison companies.

“Our credit exposure to private prison companies has significantly decreased and is expected to continue to decline, and we are not actively marketing to that sector,” Wells Fargo said in a business standards report released in January.

Employees at online furniture retailer Wayfair have been protesting the company’s sales to a government contractor that runs a detention center. Wayfair responded by announcing a $100,000 donation to the American Red Cross.

It remains to be seen if big investment firms also look to distance themselves from the prison industry, similar to what iShares owner BlackRock and several other fund managers did with gun stocks American Outdoor Brands (formerly Smith & Wesson) and Sturm Ruger in the wake of a series of mass shootings in America during the past few years.

Vanguard and iShares are the two largest holders of CoreCivic and GEO. Both stocks are held mainly in passive index funds that mimic indexes such as the S&P Mid Cap 400 and Russell 2000, as opposed to actively managed funds that are choosing to buy the stocks based on the merits of the companies.

“The immigration crisis at the border is deeply saddening, and this troubling issue needs to be solved by our elected officials,” Vanguard said in a statement. “We hope that policymakers come to a swift resolution to ensure the safety and security of these children and individuals.”

Vanguard noted the prison stocks make up a “very modest” portion of the company’s portfolios, and it said eliminating all controversial stocks would be impractical.

“We believe it would be exceedingly difficult to manage our funds effectively and efficiently while seeking to address the many social, political, and environmental concerns of our 20 million clients and the broader global community,” the company said.

BlackRock/iShares did not respond to a comment about whether it would look to exclude the two companies from index mutual funds and ETFs. But both firms also run so-called socially responsible funds that do not own the stocks. For example, iShares has an ETF called the MSCI KLD 400 Social fund which does not hold GEO and CoreCivic.

Prison operators respond to BofA

The prison companies are unhappy about the recent decision made by Bank of America.

CoreCivic said in a statement on its website that “Bank of America’s decision is about politics, not about the company we are.”

“No other company has so vocally declared public support for policies at all levels of government to tackle America’s recidivism crisis,” CoreCivic added, also saying that Bank of America “has misrepresented who we are and misrepresented the conclusions of a process in which we voluntarily engaged.”

GEO also released a statement about the Bank of America decision.

“For over thirty years, we have provided high-quality services to the federal government under both Democrat and Republican administrations,” GEO CEO George Zoley said Wednesddy. “To be clear, The GEO Group has never managed any facilities that house unaccompanied minors, nor have we ever managed border patrol holding facilities.”

Zoley added that the centers GEO runs for the US Immigration and Customs Enforcement division “are not overcrowded and comply with performance-based standards, which were first established under President Barack Obama’s administration.”

Both stocks rallied Thursday but they have been under immense pressure lately due to the scrutiny regarding detention centers. Shares of GEO and CoreCivic have each plunged nearly 10% in the past week.