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Tales of Fraud, Abuse in School E-Rate Program

The eight-year-old federal E-Rate program, the nation's $2.25 billion initiative to help schools and libraries connect to the Internet, remains plagued by mismanagement, waste, fraud and abuse, according to a new report issued by the Government Accountability Office (GAO).

In addition, an ongoing federal investigation into the troubled problem has already resulted in several arrests and convictions.

"The mismanagement of the E-rate program seems to know few bounds," U.S. Rep. Joe Barton (R-Tex.), chairman of the Energy and Commerce Committee, said in a statement. "Unscrupulous vendors have fleeced the program while underserved communities and telephone customers are paying the price. The FCC, these merchants and certain schools all must share in the blame for this disgrace."

The Federal Communications Commission (FCC) oversees the program, but outsources administration to the private, nonprofit Universal Service Administrative Company (USAC). Nearly 90 percent of U.S. schools and libraries receive subsidies from the fund.

The GAO report concludes that despite the collection and expenditure of billions of dollars since 1998, the FCC has not developed any measure to track the program's effectiveness and that a weak oversight structure limits the FCC's "management of the program and its ability to understand the scope of any fraud, waste, and abuse within the program."

In one of the most infamous cases, the USAC disbursed $101.2 million from 1998 to 2001 to equip Puerto Rican schools with high-speed Internet access but a later review found a warehouse full of unopened boxes of equipment and that very few computers at its 1,540 schools actually connected to the Internet.

"Now, seven years and billions of dollars later, those in charge can't tell us how rampant the fraud is or how they intend to stop it. Enough is enough. This committee has no choice but to develop legislation to scrap the status quo and apply some common sense to the E-rate program," Barton added.

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.

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. The report recommended the FCC "comprehensively determine which federal accountability requirements apply to E-rate; establish meaningful E-rate performance goals and measures; and take steps to reduce its backlog of appeals."

A favorite target of Republicans, the House and Energy and Commerce Committee began investigating the program 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.

In December, Inter-Tel Technologies agreed to pay a total $8.71 million in criminal fines, civil settlement and restitution for its part in rigging E-rate bids. In a two-count felony charge, Inter-Tel, a subsidiary of Arizona-based Intel-Tel Technologies, Inc., was charged with one count of allocating contracts and submitting rigged bids for E-rate programs in Michigan and California. The company was also charged with one count of wire fraud and aiding and abetting by willfully entering into a scheme to defraud the program in San Francisco.

The illegal practices by Inter-Tel cited by the Department of Justice (DoJ) included inflating bids, submitting false and fraudulent documents to cover ineligible E-Rate items and using fraudulent documents in the DoJ inquiry.

The company joins a subsidiary of NEC America as the first two firms to plead guilty to E-Rate fraud. Under a May plea deal, NEC Business Network Solutions (BNS) agreed to pay $20.6 million to settle criminal charges involving the company's participation in the E-Rate program.

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.

In addition, two Virginia men earlier this year pleaded guilty to fraud charges in relation to 21 E-Rate applications submitted on behalf of schools in the Milwaukee and Chicago areas. According to the DoJ, the men conspired to conduct numerous financial transactions involving the proceeds of the fraud to conceal and disguise the source of the money. These alleged financial transactions include wiring more than $600,000 to Pakistan, purchasing a residence in Kenosha, Wisc., and acquiring several automobiles.

The year-long GAO study was done for the House Energy and Commerce Committee, which has been conducting its own investigation into the program.