MCI faces fraud inquiry

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 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 GSA.

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

WorldCom settled its $11 billion fraud case with the Securities and Exchange Commission by agreeing to a $750 million fine.

World Com competitors and congressional critics to saidthe company got off too easily.

Gov't Halts Contracts With MCI

Thursday, July 31, 2003

WASHINGTON — The General Services Administration (search) suspended federal business with telecommunications giant MCI on Thursday after an investigation concluded the company lacks necessary internal controls and ethics.

MCI's government contracts are valued at more than $1 billion each year. The company said it would not challenge the GSA decision.

"Today's announcement will not affect MCI's existing contracts with state and federal government customers who can continue to count on us to provide the industry's best service and support," MCI Chairman Michael Capellas said. "We are in the process of rebuilding our ethics program and understand that there is still more work to do." (Jim's comment: Capellas said that with a straight face. LOL!)

After WorldCom was driven into bankruptcy by an $11 billion accounting scandal, it adopted the name of its MCI (search) long-distance division in a bid to clean up its image. A bankruptcy court is considering efforts by the company to emerge from Chapter 11 bankruptcy protection (search).

MCI, once among the fastest-growing and most aggressive players in the telecom and Internet boom, is accused of falsifying balance sheets to hide expenses and inflate earnings. Its collapse and bankruptcy wiped out up to $200 billion in shareholder wealth.

Critics and competitors have said the government has been too lenient with the company by continuing to award it work, including hiring MCI to build a wireless phone network in Iraq.

"It is important that all companies and individuals doing business with the Federal government be ethical and responsible," GSA Administrator Stephen Perry said.

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