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NEC Subsidiary Admits to E-Rate Fraud

A subsidiary of NEC America agreed Thursday afternoon to pay $20.6 million to settle criminal charges involving the company's participation in the federal E-Rate program, the nation's $2.25 billion initiative to help schools and libraries connect to the Internet.

Under the agreement reached in San Francisco, NEC Business Network Solutions (BNS) pleaded guilty to one count of wire fraud and one count of antitrust violation. The company agreed to pay $15 million in fines and restitution in addition to providing $5.6 million in ongoing maintenance, equipment and services to school districts that are customers of BNS through the E-Rate program.

"We made mistakes with E-Rate. We've acknowledged and accepted responsibility for those mistakes, cooperated fully with the government, and taken action to ensure that these problems can't happen again," Gerald P. Kenney, general counsel of NEC America, said in a statement.

BNS was accused of defrauding the San Francisco Unified School District and several other school districts around the country through rigged bids and bribery. According to a civil lawsuit filed in 2001, BNS was part of a scheme to convince the school districts to purchase more equipment than they needed.

Kenney said the corruption primarily involved a small E-Rate sales team within BNS, which was subsequently dissolved.

"E-Rate was a very small, very new part of BNS business," Kenney said. "These bids and contracts were the company's first major foray into this type of federal contracting, and the sales team was inexperienced with this type of complex procurement. But that's no excuse for bad judgment or the failure of our internal controls to identify problems."

The E-rate subsidy was added to telephone bills in 1997 under the Clinton administration and has been dubbed the "Gore tax" for former Vice President Al Gore's enthusiastic support. The Federal Communications Commission (FCC) oversees the program, but outsources administration to the Universal Service Administrative Company (USAC), a private, nonprofit. Nearly 90 percent of U.S. schools and libraries receive subsidies from the fund.

Under the program, telecom companies or contractors provide eligible equipment and services to schools and libraries at a discount, and the federal government covers the difference through the E-Rate fund.

A favorite target of Republicans, the House and Energy and Commerce Committee began investigating the program last year following a January 2003 report by the Center for Public Integrity, a non-profit "public service journalism" organization, that claimed the E-Rate program was "honeycombed" with fraud.

The study is based on FCC audits as well as independent interviews. The audits allege abuses ranging from simple paperwork and reporting errors to false billing.

The House committee originally planned to hold hearings into the fraud allegations in February but delayed the proceedings after the unexpected retirement of then chairman Billy Tauzin of Louisiana. Committee staff members confirmed to internetnews.com new hearings will begin in a "few weeks."

The BNS case is the largest example yet uncovered of E-Rate improprieties. In August of last year, Duane Maynard, a former employee of a Fresno, Calif., electrical contracting firm, pleaded guilty to federal bid rigging in order to obtain multi-million contracts to install computer networking equipment and Internet access for the West Fresno Elementary School District.

Tauzin said in January his committee's probe was centering on approximately $5 million of equipment supplied by telecom carrier SBC to the Chicago school system that is still sitting in a warehouse. SBC is the project manager for the City of Chicago Public Schools (CPS), which is deploying Internet-related equipment and Local Area Networks (LAN) for schools throughout the system.

One E-Rate funding requirement is that equipment must be purchased, delivered and installed in the same E-Rate year that it is funded by the program to prevent schools and libraries from stockpiling equipment.

SBC responded to Tauzin's announcement with a statement that the company "voluntarily brought this matter to the attention of the FCC" and to the staff of the Oversight and Investigations Committee.

"SBC determined that a portion of the telecommunications equipment it purchased for the city of Chicago Public Schools LAN project was not installed by the deadline in two funding years," the SBC statement reads. "In addition, one of SBC's distributors who supplied equipment purchased with E-rate funds over-billed SBC and gave us a credit."

The SBC statement added, "During these E-rate funding years, CPS received a discounted funding commitment from SLD (SBC's Schools and Libraries Division) of approximately $114 million dollars. The value of the equipment and credit at issue is $8.8 million, of which $3 million in equipment was installed in subsequent funding years."