Empire built out of crisis at border
Texas nonprofit’s spending of $1.7B to house migrant kids questioned
Juan Sanchez grew up along the Mexican border in a two-bedroom house so crowded with children that he didn’t have a bed. But he fought his way to another life. He earned three degrees, including a doctorate in education from Harvard, before starting a nonprofit in his Texas hometown.
Sanchez has built an empire on the back of a crisis, casting himself as a socialjustice warrior. His organization, Southwest Key Programs, now houses more migrant children than any other in the nation.
Southwest Key has collected $1.7 billion in federal grants in the past decade, including $626 million in the past year alone. But as it has grown, tripling its revenue in three years, the organization has left a record of sloppy management and possible financial improprieties, according to dozens of interviews and an examination of documents. It has stockpiled tens of millions of taxpayer dollars with little government oversight and possibly engaged in self-dealing with top executives.
Showing the ambition that brought him from the barrio to the Ivy League, Sanchez seized the chance to expand his nonprofit when thousands more unaccompanied children began crossing the border
during the Obama era. When the Trump administration needed to house migrant children it had separated from their parents, Sanchez took them in.
As immigration intensifies as a flash point of the Trump presidency, Sanchez is central to the administration’s plans. Southwest Key can now house up to 5,000 children in its 24 shelters, including a converted Walmart Supercenter. The system is nearing a breaking point, with a record 14,000 minors at about 100 sites — a human crisis, but also a moneymaking opportunity.
Though Southwest Key is, on paper, a charity, no one has benefited more than Sanchez, now 71. Serving as chief executive, he was paid $1.5 million last year — more than twice what his counterpart at the far larger American Red Cross made.
Southwest Key has created a web of for-profit companies — construction, maintenance, food services and even a florist — that has funneled money back to the charity through high management fees and helps it circumvent government limits on executive pay.
The organization, sitting on $61 million in cash as of last fall, has lent millions of dollars to real estate developers. It has opted to rent shelters rather than buy them, an unusual practice that has proved lucrative for shelter owners — who include Sanchez and the charity’s chief financial officer.
Marcus Owens, the former head of tax-exempt organizations for the Internal Revenue Service under both Republican and Democratic administrations, reviewed Southwest Key’s tax returns for The New York Times. Regulators, he said, seemed to be “asleep at the switch.” Describing the financial dealings of Sanchez and his colleagues, he said, “I think the word is ‘profiteering.’ ”
Sanchez defended his charity. It had to move fast at times, he said in an interview. But every act, he added, has been to help children.
“There are all these kids, they’re at the border, they’re in detention,” Sanchez said. “How do we get this thing done as quickly as we can so we can start serving those kids?”
Mistakes admitted
Jeff Eller, a spokesman for Southwest Key, said Tuesday that the charity was closely examining its management practices after questioning from the Times and that there was “general acceptance” that the charity had made mistakes.
“Could we have done things better? Yeah. And should have? Yeah,” Eller said. “But there wasn’t a desire to game the system.”
Because of the substantial growth of migrant shelters, the federal government hired an accounting firm this year to review shelter grant recipients, said Mark Weber, a spokesman for the Department of Health and Human Services. He added that the department’s Office of Refugee Resettlement had also created a new division to monitor shelters’ spending.
Separately, the FBI is looking into another shelter provider, International Educational Services, for possible misuse of federal money, according to two people informed of the inquiry. The nonprofit’s founder, Ruben Gallegos, said he had no comment on the investigation.
Gallegos’ charity — which Sanchez helped create but cut ties with years ago — lost its federal contracts in February for renting shelters owned by charity officials and paying those officials well above the government salary cap from migrant-shelter grants.
Last year, Southwest Key paid eight people more than the federal salary cap of $187,000. In addition to Sanchez, they included his wife, Jennifer, who earned $500,000 as a vice president, and Melody Chung, the chief financial officer, who was paid $1 million.
Robert Carey, a director of the Office of Refugee Resettlement under the Obama administration, said he found the salaries “appalling.” He acknowledged that his office was focused on providing adequate care for the children and had not examined Southwest Key’s finances. “When you think of how those funds could be used and should be used,” he said, “it doesn’t sit well.”
Eller said the charity had not done anything improper, adding that the federal government had prohibited the organization from discussing executive pay.
In recent months, Southwest Key has come under scrutiny after a series of abuse allegations.
In July, a worker at a Phoenix shelter was accused of molesting a teenage girl. In September, an HIV-positive worker was convicted of sexually abusing seven teenage boys at another Arizona shelter. Southwest Key, which has relied on temporary workers to staff facilities as it has ratcheted up operations, then blew a deadline to submit proof of employees’ background checks in Arizona. (Sanchez called the missed deadline a “very small, minor thing.”)
Shortly after, the federal government temporarily shuttered a third Arizona shelter, in Youngtown, after Southwest Key staff members were accused of physically abusing three children. In a recent agreement with Arizona officials, Southwest Key was fined $73,000 and agreed to close that facility and another troubled shelter in Phoenix. Weber, the government spokesman, said there were “numerous red flags and licensure problems” with the two shelters.
“He likes to take chances,” Paula Gomez, a friend of Sanchez’s since childhood, said of him. “Juan’s that way — you can have a couple T’s that aren’t crossed and I’s that aren’t dotted.”
Dubious dealings
Growing up in Brownsville, Sanchez earned money for his family any way he could: selling newspapers, picking fruit alongside migrants from Mexico. He also became a fighter, a top flyweight in state boxing tournaments.
He became the first in his family to go past high school, attending seminary before deciding against the priesthood. He graduated from college in San Antonio, earned a master’s degree at the University of Washington and his doctorate at Harvard.
In 1981, Sanchez, then 33, returned to Brownsville to run the Esperanza Home for Boys, a charity that housed juvenile delinquents. Six years later, he started his own charity to help children stay out of prison. He said he wanted to help kids like those he had known growing up.
“Southwest Key was, in essence, started to help my friends,” Sanchez recalled.
In its first year, the charity raised about $200,000 from a state grant to care for 21 juveniles on parole. Sanchez’s salary was $35,000.
In the late 1980s, a court settlement meant for the first time that migrant children were required to have their own shelters. The federal government asked if Sanchez could take in migrant children, he said. Instead, he helped his former gym teacher and an Esperanza board member, Gallegos, establish a nonprofit to house migrants in Brownsville — International Educational Services, the organization now under federal investigation.
It was not until 1996 that Southwest Key entered the shelter business, opening facilities in Coolidge, Ariz., and El Paso. That year, it pulled in $12.2 million, about $2.5 million more than the year before.
Southwest Key’s shelters transformed the institutional landscape in towns near the Mexican border, replacing a psychiatric hospital, a nursing home, college apartments. Sanchez built the shelter operation on a network of real estate investors. Instead of buying buildings, he engaged in complex rental transactions that charity experts said raised concerns.
Southwest Key asked friendly developers to buy properties to rent to the charity. Sanchez said he did not want to be stuck with empty shelters if children stopped coming.
“It’s just not worth it for us to be purchasing buildings,” he said.
The investors were well rewarded. Over the past five years, a group based out of Mesa, Ariz., has earned more than $28 million in rent for properties that cost roughly $16 million. Others who benefited included a former New Mexico state Cabinet secretary, a former adviser to a Mexican presidential candidate and two brothers who ran gas stations in Matamoros, Mexico.
The charity’s most unusual relationship was with a pair of Brownsville developers, Ryad Bakalem and Rafael Chacon. Sanchez said he could not recall how he met the men, whose companies bought two former medical centers in 2012 and 2013 to rent to Southwest Key. Since then, the charity has lent almost $9 million to the developers’ companies, for two shelters and a charter school.
Though it isn’t illegal, charities rarely lend money for real estate deals. The arrangement — with no government watchdog, no bank — can hide kickbacks or other improprieties because no outsider is monitoring whether the loans are repaid on time and who might benefit.
The biggest of those deals was the shuttered Walmart in Brownsville. Sanchez worked closely with the Obama administration to develop a shelter that could absorb an influx of children.
Southwest Key lent $6 million to a company run by Bakalem and Chacon to buy and renovate the building. Sanchez said that the nonprofit lent money to the developers because bank financing took too long and that it also collected interest on the loans.
The former superstore reopened as Casa Padre in June, capable of housing more than 1,400 children. It was controversial from the start, with advocates calling it unsuitable for children.
Southwest Key pays $5 million a year in rent for the former Walmart.
With the family separations came intense scrutiny, jeopardizing the charity’s future. After Southwest Key failed to submit proof of employee background checks in September, the state of Arizona sent a letter threatening to revoke the organization’s shelter licenses. It accused the charity leaders of “an astonishingly flippant attitude.”
Sanchez dismissed the letter as “pretty dramatic,” calling the failure to submit employee fingerprints a paperwork issue.
But on Oct. 17, Sanchez donated $5,100 to the Arizona Republican Party, which controls the state’s government. His wife gave another $5,100. (Their previous political donations totaled no more than $2,100, made only to Democrats and liberal causes, records show.) A week later, the state agreed to a settlement that kept most Southwest Key shelters open.
Unbowed, Sanchez still wants to expand.
“We would love to be twice as big as we are,” he said, “because then we could serve twice as many kids as we serve now.”