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Alleged cost-saving scheme makes MCI subject of federal probe

Posted on: Monday, 28 July 2003, 06:00 CDT

WASHINGTON - A possibly illegal cost-saving scheme by MCI is the subject of a federal investigation and could intensify questions over its contracts for work throughout the U.S. government and in Iraq, lawyers and others with the probe said Sunday.

The fraud investigation involves MCI's alleged avoidance of charges it is supposed to pay local phone companies.

MCI said in a statement that "access charges between local and long-distance carriers have existed for decades and are routine in the industry. As always, we take all inquiries by the U.S. attorney's office very seriously and will cooperate fully with any investigation."

This development came in the past eight to 10 weeks when a former MCI employee called the FBI and disclosed an MCI project known as "Canadian Gateway," according to two lawyers familiar with the events.

In this arrangement, MCI phone traffic is allegedly routed north of the U.S. border and then dumped onto the network of AT&T, which ends up paying charges that MCI should pay.

The whistle-blower also contacted Verizon and informed that company of an alleged MCI practice dating to the mid-1990s called "Project Invader," said the lawyers, speaking on condition of anonymity. MCI, before it became part of WorldCom, teamed with six to nine small companies that allegedly enabled MCI to disguise long- distance calls as local calls, thus avoiding paying access charges.

Separately, San Antonio-based SBC Communications has been looking into evidence of MCI allegedly employing methods to bypass local access charges, the lawyers said.

The New York Times first reported on the investigation in Sunday's editions.

"We were shocked at the scope of these scams that are ongoing today and we are cooperating with the major crimes section of the U.S. attorney's office" in New York City, said William Barr, executive vice president and general counsel of Verizon and an attorney general in the first Bush administration.

The allegations are raising questions on Capitol Hill about the fate of MCI's federal contracts.

"To the extent that these allegations prove true, they raise additional troubling questions about WorldCom's business ethics and practices," said Sen. Susan Collins, R-Maine, chairman of the Senate Governmental Affairs Committee.

The latest disclosure "may have an impact on MCI's suitability" as a federal contractor "and to that extent we will look at it," said Michael Bopp, the staff director of the committee, which is investigating why MCI has continued to receive government contracts.

Regarding federal contracting, "it's critically important to be shutting the door to entities that pervasively commit misdeeds," said Rep. John Sweeney, R-N.Y., a member of the House appropriations subcommittee overseeing the General Services Administration.

Citing massive accounting irregularities, WorldCom filed for bankruptcy in July 2002. It settled its $11 billion fraud case with the Securities and Exchange Commission by agreeing to a $750 million fine.

David Drabkin, deputy associate administrator for acquisition policy at the GSA, said "it's way too early to tell" whether the investigation by prosecutors in Manhattan "will have any impact" on MCI's government contracts.

In mid-May, MCI received a government contract worth a reported $45 million to set up a mobile network in Iraq. MCI does more than $1 billion a year in business with the government.

The GSA earlier renewed the company's contract to provide communications services for several government agencies, including the departments of Defense, Commerce and Interior. The company also has a seven-year deal to provide satellite links for the National Oceanic and Atmospheric Administration.

MCI says competitors, some of whom it beat out for government business, are behind all the criticism.

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