ANALYSTS: NEW ALLEGATIONS COMPEL GSA TO TAKE CLOSER LOOK AT MCI

“Before the new allegations, I thought they would be able to get by without becoming a debarred contractor,” said consultant Warren Suss: “These new allegations I think may tilt the balance in the other direction.”

AT&T told the U.S. Bankruptcy Court, N.Y., Mon. that MCI’s reorganization plan, if confirmed, would deprive AT&T of the ability to file racketeering and fraud charges against its rival, which it planned to do (CD July 29 p1). It alleged that MCI had rerouted some higher cost long distance calls through Canada and onto AT&T lines, which essentially shifted hundreds of millions of dollars in access charge costs to AT&T. Other accusations entailed concerns that MCI rerouted local calls to avoid paying access charges to Verizon, SBC and perhaps others. The Justice Dept. is probing the alleged scheme and the FCC confirmed Wed. it also planned to investigate (CD July 30 p1).

Some industry analysts said the latest allegations pushed to a new level the factors that GSA must evaluate in assessing the company’s status as a “responsible” govt. contractor. But others said that the govt. also must evaluate the extent to which any shift in traffic away from MCI’s contracts would directly benefit some of the competitors that were making the charges.

Before immediately suspending the company from new federal govt. contracts Thurs., the GSA had begun a formal review whether MCI should receive govt. contracts in a “suspension proceeding” (CD July 1 p1). Last July, the U.S. govt. said it would probe the ability of the company to sign future contracts with federal agencies. Current contracts include the Federal Telecom Service (FTS) 2001 contract for long distance service, which MCI shares with Sprint after beating out AT&T in 1999 (CD Jan. 13/99 p1). AT&T and Sprint had provided long distance services to the federal govt. for more than a decade under the first FTS contract. In Nov., the GSA had extended its FTS contract with MCI for another year, exercising the first of 4 one-year contract options through Jan. 2004. The contract carries a minimum revenue guarantee of $750 million to MCI, which hasn’t yet been met, sources said. The House last month finalized a $17-million contract with MCI, extending a pact to furnish high-speed data offerings between Washington and the offices of members in their home states. MCI also holds a $450 million contract for the Defense Research & Engineering Network.

Several sources said that because secure govt. calls routinely were encrypted, they were dubious that any security breaches had occurred, even if routing to Canada did occur in some cases. But others said that while Canada wasn’t a country of concern in terms of security, the allegation over routing to a 3rd country could raise other questions. As for the “Canadian Gateway Project,” AT&T told the bankruptcy court a “substantial” number of diverted domestic calls were placed from govt. agency offices and received by AT&T from Canada for call termination, including calls from the State Dept., a member of Congress and the U.S. Agency for International Development. When pledging an internal review of fraud allegations, MCI said Tues. it was confident secure govt. calls were handled properly and national security wasn’t compromised through its network.

“I think that there is a point in terms of national security that if we know about Canada, what’s there that we don’t know about,” said Lisa Bruch, a federal telecom contracting consultant and former head of AT&T’s FTS 2000 program. While Canada doesn’t pose particular security risks, allegations over the call routing, she said, “give one pause simply because it says that some foreign governments have access to things that they ought not. It gets at maintaining and managing the sovereignty of the U.S. government business.”

Recent legislative steps on MCI’s contracting status and the latest wave of allegations “all kind of triangulate around GSA’s neck to take action,” an industry source said. House appropriators last week backed away from an amendment that would have barred the GSA from contracting with MCI (CD July 25 p1), instead requiring reports from the GSA and the General Accounting Office on MCI’s federal contracts. Senate Govt. Affairs Committee Chmn. Collins (R-Me.) said this week that if the latest allegations were true, they would undermine MCI claims that fraud at the company was limited to a few officials.

“The Legislative Branch can’t just come in and try to be a super contract administrator. The responsibility really goes to the Executive Branch to administer its contracts,” an industry source said. “To have essentially Congress trying to legislate its way through to force compliance, as opposed to assuming its role as the overseer, that starts to be a funny line.” Another source said FTS contracts contained provisions under which the govt. could find a company in default for failure to perform. Leakage of network traffic could be construed as a failure to perform, the source said. In this case, the govt. could issue a “show cause” letter that would give the company 10 days to demonstrate why it still was a responsible contractor before any decision was made on debarment or suspension, the source said. As for the FTS contract, “Verizon, SBC and of course AT&T could be beneficiaries of GSA being forced to split up that traffic that is currently MCI’s,” the source said.

“Industry is trying to make the argument that this is the straw that breaks the camel’s back, that this latest straw on top of all the other fraud is just too much to take,” Precursor Group analyst Scott Cleland said. “This camel has an awfully strong back.” One factor weighing in MCI’s favor is that the govt. “needs MCI as a viable competitor,” he said. “MCI and AT&T cooperate with the government on national security issues. It is in the government’s interest to have redundant cooperation,” he said.

“No one can defend MCI’s historic fraud,” Cleland said. “But there are no angels in this debate. Telecom has become a game. It’s not a business where the government has put itself in the role of referee and there are enormous incentives to game the system.”

Consultant Suss said earlier this week that it was too early to say what would be the outcome of any possible debarment proceedings against MCI but the new allegations “really touch on the direct transaction costs associated with government contracts, associated with the actual costs that WorldCom charges for their services. So it provides the competitors an angle that they can use to assert that WorldCom won a contract with an unfair advantage.”

Several sources said it was unclear what impact that a ruling that WorldCom couldn’t compete for new contracts would have on the remaining option years for the FTS contract because the minimum revenue guarantee hadn’t yet been met. (MCI officials said late Thurs. that GSA’s latest action wouldn’t affect the FTS 2001 contract). “The government is always permitted to consider the impact on itself in a debarment proceeding,” Suss said. “In this case, the costs of requiring agencies to go through a transition at this point would be substantial and the associated management headaches would be enormous. In the case of the FTS 2001 contract, agencies would have to go through another transition in just a few years again,” when the contract’s option years expire, he said.

The GSA’s action keeps intact the company’s current contracts but examines its ability to hold future contracts. Several sources said existing contracts could be altered if the govt. were to institute a default proceeding on a particular contract, a step that hadn’t been taken. One industry source expressed doubt that the allegations that some network traffic entered Canada to avoid access charges would create a security breach. “It’s a little far-fetched,” the source said. “For secure traffic, the government encrypts the traffic at either end. There’s no more likelihood that there would be a security breach.” Default proceedings typically wouldn’t stem from such issues but from a failure to perform “not associated with fraudulent activities.” Usually such performance issues center on a contractor’s falling behind a schedule or not meeting the promised technical quality of an offering, the source said. - - Mary Greczyn