Fraud still plagues the FCC’s Universal Service Fund

The Federal Communications Commission’s Universal Service program has created controversy where none should exist.

The FCC’s Universal Service Fund’s provides financial support aimed at lowering the cost of purchasing telecommunication services in unserved areas. But waste, fraud and abuse in the program results in subsidies being sent to some who don’t need them at the expense of others who really do need help, and that is reprehensible. Examining the program to make sure providers are actually providing what they say they will should not cause a stir.

{mosads}A recent tizzy over the commission halting Lifeline subsides (a program that falls under the USF) to 9 companies, 8 of which do not yet have customers, was puzzling. This pause in distributing funds is reasonable. The government should not hand out taxpayer money without checking up on who is receiving it and how they are using it.

FCC fraud prevention has gotten much better in recent years. The process of improvement should not stop. Careful review at the outset is another layer that makes sure fraudsters don’t get in the way of people who really are disconnected.

Unfortunately, there was not a big to-do over Sandwich Isles Communications, a company that purposefully inflated and inaccurately reported costs in order to receive about $250 million dollars over 13 years at the expense of taxpayers and those intended for support.

The case of Albert Hee, owner of Sandwich Isles Communications

In 2010 the FCC became aware of $6.5 million fraudulently obtained by Sandwich Isles Communications owner, Albert Hee, from the USF’s High Cost program.  But the agency waited 4 years to take action. During the FCC’s inaction, more than $100 million in taxpayer dollars meant to help the disconnected lined the pockets of Albert Hee.

When the FCC finally decided to investigate Hee’s dealings it wasn’t initiated because the FCC was keeping a watchful eye, but provoked by public outcry after Hee, was indicted by a District of Hawaii grand jury in 2014 on six counts of criminal tax fraud and one count of impeding an investigation of the Internal Revenue Service. 

The investigation found that Hee purportedly spent $5 million more on corporate expenses than similar sized companies, often for fees and services commissioned within the web of other corporations that he and his family members owned. Hee canceled a $1.9 million leasing contract with an independent undersea cable network in favor for a $15 million leasing contract with Paniolo LLC, owned by private trusts of his three college-age children.

The company’s revenue became “a personal piggy bank” for real estate, college tuition and family vacations.  Items written off included $90,000 to a personal masseuse, $55,000 in family vacations, and a $1.3 million Santa Clara, Calif. home.

Even though an order probing Hee’s activities went out in 2010, he continued to profit from self-dealing because the FCC stopped short.  

In December 2016 the FCC finally penalized Sandwich Isle’s fraud for $27 million in misappropriated funds, as well as a $50 million forfeiture for misconduct. The combined amount of $77 million owed, however, is only a fraction of the $250 million in total FCC funds provided for Sandwich Isles from 2002 to 2015.

Ajit Pai, then a commissioner and now agency chairman, noted in his statement that it “shouldn’t take a criminal conviction to spur a federal agency to protect the public purse.” The FCC must maintain effective internal processes to prevent the further misuse of taxpayer funds. It must ensure all telecom carriers are properly monitored while receiving subsidies and must act swiftly against the misuse, or suspected misuse, of taxpayer funds and suspend them accordingly.

Commissioners Mike O’Rielly and Mignon Clyburn jointly noted the unfortunate cases of a few bad recipients, and also expressed their concern. They agreed that that commission should initiate a proceeding to reevaluate the decades old rules and ensure that “scarce consumer dollars are targeted to only costs directly related to deploying and providing service.”

The FCC must actively prevent waste, fraud, and abuse in the distribution and allocation of taxpayer funds. The cost of fraudulent companies and their subsequent, lengthy investigations detracts from funds specifically designed for assisting low income Americans in accessing communications technology.

It is far better to evaluate plans before moving ahead or to reevaluate at the outset than to act hundreds of millions of dollars later. 

Katie McAuliffe is executive director of Digital Liberty and Federal Affairs Manager at Americans for Tax Reform.

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