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NEC Barred From E-Rate Program

NEC-Business Network Solutions (BNS) faces a six-month ban from participating in the federal E-Rate program, the nation's $2.25 billion initiative to help schools and libraries connect to the Internet.

The subsidiary of NEC America pled guilty two years ago to defrauding the program.

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.

In a separate action, Inter-Tel Technologies, which took a similar plea to NEC's in early 2005, was barred from the E-Rate program for one year.

The company agreed to pay a total $8.71 million in criminal fines, civil settlement and restitution.

Under Federal Communications Commission (FCC) rules, both companies could have faced up to a three-year ban from the program.

According to the FCC, BNS received only a six-month ban because it was the first company to come forward and cooperate with an investigation into the program by the Department of Justice (DoJ).

Inter-Tel's disbarment was also reduced for its cooperation with the DoJ probe.

"A stronger penalty may have been warranted given the importance of the E-Rate program and the severity of NEC's actions," FCC Commissioner Michael Copps said in a statement.

Copps added that while there were mitigating circumstances in the NEC case, "I believe that a six-month debarment period is often times little more than a slap on the wrist for companies engaged in efforts to defraud the E-Rate program.

FCC Commissioner Jonathan Adelstein said in his statement, "In this case, a longer debarment period would have sent a stronger and clearer message that fraud will not be tolerated.

The three Republicans that make up the majority of the five-person FCC did not issue statements.

NEC's E-Rate fraud case began in 1999 when the company agreed to pay a co-conspirator a fee for all the E-Rate business the company brought to NEC.

In early 2000, NEC submitted a bid to the San Francisco Unified School District.

An NEC co-conspirator ran the bidding program and swung the deal to NEC. Overall, according to the FCC, NEC's bid was $26 million higher than other bidders and falsely described some of the equipment to conceal its was not E-Rate eligible.

In addition, NEC also advised the school district it would "donate" computer workstations valued at approximately $7.4 million.

The investigation later revealed NEC planned to use E-Rate funds to offset the cost of the donation.

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

Since its inception as part of the 1996 Telecommunications Act, allegations of fraud and corruption have plagued E-Rate.

In addition to the DoJ investigation, both the Federal Communications Commission, which oversees the fund, and the House Energy and Commerce Committee, have launched their own probes.

To date, 11 individuals and 10 companies have been charged as part of the DoJ's own ongoing investigation into fraud and anti-competitive conduct in the program.

Six companies and three individuals have either pleaded guilty or have entered civil settlements for their roles in defrauding the E-Rate fund.

Those defendants have agreed to pay criminal fines and restitution totaling more than $40 million.

Two of the individuals have been sentenced to serve six years in prison.