AT&T airing industry's dirty laundry with new MCI fraud allegations

Complying with tariffs that regulate inter-carrier traffic and billing is one of the more unseemly and misunderstood sides of telecom. AT&T’s second objection to MCI’s reorganization plan this week built on new allegations of fraud for allegedly illegally diverting and coding switched traffic across AT&T’s and other’s networks could deal a deadly blow to the discredited carrier if proved true. It also could reveal the less than perfect practices of carriers across the board.

AT&T filed its second objection to MCI’s reorganization by the July 28th deadline accusing MCI of ongoing fraud for carrying out a scheme known allegedly as “Canadian Gateway Project” whereby MCI misdirected hundreds of millions of minutes of calls to rural areas of the U.S., and in doing so misrepresented their true financial position and stuck AT&T with the operating expense of terminating the calls.

AT&T also alleges that MCI defrauded the U.S. government by taking its traffic, including calls from the State Department, outside of the country and placing national security at risk.

“That’s where MCI is most vulnerable,” said Nancy Kaplan, vice president at Adventis. “If they lose a government account, they are going to have serious, serious problems.”

So far, the General Services Administration and other government entities have stuck by WorldCom, but the pressure is mounting.

“There is sufficient public- and telco-generated dismay at the fact that the government has maintained all of its contracts given the original scandal,” Kaplan said. “But there is so much heightened concern and sensitivity these days about corporate misdeeds and security, that the two things are a bad combination right now. The government will be hard-pressed to look at keeping all that money with MCI.”

MCI chairman and CEO Michael Capellas issued a statement yesterday saying that, “If any wrongdoing is discovered you can be certain that we will take appropriate action swiftly.”

However, if the allegations prove true, it would mean that little action was taken since last July when SBC accused then-WorldCom of manipulating the coding on calls in Texas, Missouri and Kansas. AT&T said it just became aware of the suspected fraud two months ago when it was informed by law enforcement and other sources outside the company about possible illegal routing practices. AT&T subsequently conducted tests that showed 30% of the traffic coming to AT&T from Canada for termination in the U.S., originated in the U.S.

AT&T alleges that MCI deliberately programmed its network to route calls destined for rural areas through Canada to avoid paying access charges.

AT&T plans to bring a racketeering and fraud action against MCI to seek redress for past and future injury.

In order to execute such a fraud, some rural LECs or other terminating carriers would have to be complicit, said Kaplan. The New York Times named Minnesota provider Onvoy as a player in the scandal. The company confirmed it had been contacted by the Justice Department, but no former charges have so far been brought.

Although some experts have questioned the timing of the allegations as a last ditch effort to stall MCI’s emergence from bankruptcy, one analyst said, “From a timing standpoint, it seems a little coincidental, but even if it is coincidental it doesn’t take away from the veracity of the allegations.”

Such allegations, however, could be dangerous given the industry’s interwoven billing structures, though.

“When you make an allegation such as AT&T has, you are basically opening your own books for scrutiny and revealing private information that you don’t necessarily want all your competitors to know, so there must be a business reason for doing so,” the analyst said.