GAO: Rural Broadband's High-Cost Payment Program Saddled With Too Much Fraud-Risk

A federal watchdog agency this month recommended the FCC stop using one of two reimbursement programs in its rural-broadband program due to its high potential for fraud, a situation that allowed at least three small carriers to charge $34 million in ineligible payments.

Although small rural providers serve only 5% of US households, they receive $2.5 billion, or about 56%, of the $4.5 billion the Federal Communications Commission spends annually on rural broadband via the Universal Service Fund budget. This money is spread across 1,078 regions or "study areas." Small providers, which the FCC calls rate-of-return carriers, can choose payment via the cost-accounting support/high-cost program -- which reimburses them for costs incurred and uses operators' financial statements, receipts and other documentation. Or providers can opt for the 2011 model-based support program -- designed using modeling, industry data and feedback, to eliminate paperwork and receipts -- and intended to encourage investment in future-facing, faster and often costlier broadband technologies. The program worked, with almost 60% of operators using model-based payment.

However, the other portion – about 40% -- were on the accounting-intensive high-cost program that was exposed to fraud risk. According to the General Accounting Office (GAO), some of that fraud risk transformed into reality. Consider:

That Sinking Feeling

Surfing the waves kept its original meaning after Sandwich Isles Communications failed to deploy broadband everywhere it was contracted, using at least $1.3 million for a residence -- not infrastructure -- the FCC charged. (Image source: Oliver Sjöström from Pexels)

Amid legitimate invoices for fiber-optic cable, antennae and splicing tools, a few operator executives "hid" humongous, ineligible bills that (somehow) were approved. Taxpayers shelled out at least $27 million in ineligible costs to Sandwich Isles Communications of Hawaii for items such as owner Albert Hee's $1.3 million home and $43,000 vehicle. Additionally, Sandwich Isles claimed to deliver broadband to areas of Hawaii where nobody lived or worked -- in a pre-IoT age. The alleged scam lasted between 2002 and 2013; ultimately Hee and his ISP were fined $50 million and Hee was sentenced to 46 months in federal prison on tax charges.

In August 2018, FCC's Office of Inspector General (OIG) reported a rate-of-return carrier claimed about $80,000 in ineligible expenses -- including family travel, tuition reimbursement and donations -- between 2012 to 2015 for reimbursement. The provider stopped receiving support from the high-cost program in 2015 and the FCC "recovered the improper payments through offsets to the support the carrier otherwise may receive," the commission told GAO.

In another case, a rate-of-return carrier self-reported to NECA and USAC its purported costs of providing services. A subsequent FCC OIG investigation determined the operator included costs for a nonregulated, commercial mobile radio service in this information; ultimately, the FCC figured out it had overpaid the provider almost $7 million between 2005 and 2010. Today, a petition for reconsideration is pending, the GAO said. For each dollar spent on services that are not part of USF or Connect America Fund, that's a dollar that does not go toward operators truly delivering on the promised service.

These are only the instances that were found, according to the GAO.

"These cases came to FCC's attention only after the carriers had already been improperly receiving high-cost support for years, and FCC's OIG staff said that skilled bad actors may remain undetected. FCC has adopted reforms in recent years intended to improve the accountability of rate-of-return carriers' funding," the watchdog agency reported.

But with each audit taking about 1,000 hours, the GAO's recommendation that the FCC eliminates the high-cost reimbursement program could garner traction, especially during an election year.

Related posts:

• New FCC Fraud Division Focuses on USF Programs
• US Digital Divide Shrinks a Lot, Says FCC – Really, Though?
• USDA Sows $152M Crop of Rural Broadband Funds

— Alison Diana, Editor, Broadband World News. Follow us on Twitter or @alisoncdiana. Like what you read: Sign up for our weekly newsletter.

(Home page image source: t4hlil from Pexels)