The Telecommunications Act of 1996 added a statutory objective for the FCC (Federal Communications Commission) to provide advanced telecommunications services to schools and libraries in economically disadvantaged areas. This became known as the "E-rate" program and it provides subsidies ranging from 20 percent to 90 percent of the cost of telecommunications services, internet access, and related equipment. FCC raises about $3 billion per year by tacking on a fee to everyone's phone bill (you've all noticed it, we're sure). Over 30,000 applications from schools and libraries seeking funds under this program are received each year. It's no surprise then that every year, requests exceed the availability of funds.
In order to obtain funds under the E-rate program, education institutions and libraries certify that they are purchasing equipment and services from a private vendor. Schools are required to enter into an open bidding process in order to select a vendor. The schools and vendors are also required to submit a series of certifications that they comply with program requirements. Some schools don't have people knowledgeable in the process of preparing and submitting applications. The program allows them to hire consultants to put together the applications. The only stipulation in hiring consultants to do the work is that the consultants must be independent of the vendors competing to sell E-rate funded equipment and services.
Three billion per year is a lot of money but when you consider the cost of administering the program (it is administered by a contractor for the FCC) and the 50 million or so kids in public schools, it amounts to only $50 per student per year. Obviously that is not going to buy very much technology so it is imperative that the funds are spent wisely.
But, wherever there's Government money to be had, there are also scammers and the Justice Department released yesterday a press release about several individuals who have been indicted on charges of defrauding the E-rate subsidy program. Evidently, these conspirators comprised of vendors, consultants, and school officials were more interested in lining their own pockets than they were helping underprivileged kids.
According to the Press Release, Mr. Klein, his wife, his nephew, and five other individuals have been arrested and charged with a $14 million fraud where they secured funds from the E-rate program but never provided the equipment and services they had promised. One school, a private religious school in New Jersey received over $1 million in E-rate funds for the purpose of paying Klein but those services and equipment were never provided. In another case, E-rate funded $500 thousand for video conferencing and distance learning systems at a pre-school that cared for 2 - 4 year old children. That equipment was never installed at the preschool. There were other purchases of equipment not authorized by the program such as cell phones for personal use.
The conspiracy worked because school officials signed off that they had received the services and equipment. In return, the school officials received benefits, including cash.
Its difficult to establish internal controls that prevent conspiracies - when two or more people conspire to override the controls put in place. We don't know how this particular fraud was uncovered. Perhaps someone stepped forward and blew the whistle. Perhaps the FCC decided to conduct an audit of program expenditures.