Cracking Down on USF Fraud

FCC_New_LogoLast week the FCC announced what it is calling a USF Strike Force that will be “dedicated to combating waste, fraud and abuse” in the Universal Service Fund (USF). This Strike Force will be headed up by Loyaan Egal who was a former senior assistant US Attorney in the fraud and public corruption section of the US District Attorney’s office for the District of Columbia.

They are not just talking about doing audits and getting refunds of improper charges to the USF. They are going to partner with the FCC’s Office of the Inspector General and the US Department of Justice to prosecute any unlawful conduct they find.

It is, of course, always a good idea for any federal program to make sure that the funds they are handing out are being done so rightfully. But that is not the only motivation in this instance. The FCC recently announced that they were going to dedicate an additional $2 billion over two years towards expanding broadband into schools. This is not new funding, but instead they want to find this money within the existing USF. Part of that funding is going to come from redefining what is eligible for schools to receive out of the Schools and Libraries Fund. For example, some schools today get reimbursed for phone lines and pagers and that is expected to go away. But the FCC hopes to find the rest of the money by aggressively seeking out and ending abuse in the USF.

To put this into perspective, let’s look at the size of the USF in 2013. Last year the fund collected over $8.3 billion. Those funds were used as follows:

  • $4.17 billion – Rural High Cost Program
  • $1.80 billion – Lifeline Program
  • $2.20 billion – Schools and Libraries Program
  • $0.09 billion – Rural Health Care Program
  • $0.07 billion – Pilot Program for Health Care
  • $0.11 billion – Administrative Expense

The FCC probably needs to find $500 million per year in cost savings to fund their school initiative. We don’t yet know the exact number until they put out more detail of the amended reimbursement rules for School and Libraries Program. But in order to find $500 million the investigators will have to successfully determine that 6% of the monies being paid out as USF today are fraudulent. That is a tall order. Do they really think there is that much fraud in the program, and if so, why haven’t they acted before now?

There have been some recent headlines about fraud in the Lifeline Program. This program pays up to $9.25 per month towards a phone for low income customers. Just recently the FCC and FBI announced that three Florida men had defrauded the Lifeline program for $32 million by charging the fund for imaginary customers. One would have to assume that is a multi-year number and it will take finding a slew of additional examples of fraud to uncover $500 million per year.

Anybody who receives USF ought to be nervous by this investigation even if they are following the rules to a tee. One can expect audits and questionnaires to ask you to prove your eligibility for the USF funds. Over the years I have reviewed the USF filings from numerous firms who draw from the USF and it is not unusual to find errors in their filings, due mostly to not understanding the filing rules. The rules for being eligible for USF are complex, particularly in the High Cost Fund, and companies routinely hand this work off to outside consultants. I would be at least a little nervous that an error in my filing could be interpreted as fraud.

I also have one last word of advice to the FCC. Take a look at the $110 million a year it costs to administer these funds. While that is only 1.3% of what is collected, it just seems like this function could be done for a lot less than $110 million per year.

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