By JOHN SCHWARTZ
The $2.25 billion E-Rate program has helped connect thousands of schools and libraries to the Internet, but it may also be enriching unscrupulous contractors, according to a report released yesterday.
The program is ‘‘honeycombed with fraud and financial shenanigans,’’ said the report from the Center for Public Integrity in Washington.
The report is in large part based on investigations by the Federal Communications Commission. ‘‘They found problems everywhere they’ve looked, and they haven’t looked very hard at this point,’’ said Bob Williams, the author of the report.
E-Rate, created in 1996 by Congress, offers subsidies of 20 percent to 90 percent for buying telecommunications services like Internet connection fees and wiring classrooms.
Under the program, paid from fees on telephone bills, the highest rates go to the poorest schools. The Universal Service Administrative Company in Washington runs program for the F.C.C. The company also administers programs to develop phone service in rural areas and impoverished communities.
The Center for Public Integrity issued its report after the announcement of the first criminal case related to E-Rate. Last month, federal prosecutors in New York accused an Internet service on Staten Island and three employees with conspiring to steal millions of dollars. Prosecutors said the defendants, who worked for Connect2 Internet Networks Inc., offered free service and equipment to many poor schools by lying, saying the schools had paid their share of the costs when they had not.
In this way,’’ the complaint said, ‘‘the defendants were able to sell almost limitless quantities of E-Rate eligible goods and services to schools across the New York City area, with little or no control on the price they charged, and impose the entire cost on the government.’’
The prosecutors added that from 1998 to 2001, Connect2 received more than $9 million under E-Rate.
A report released last fall by the inspector general of the F.C.C. found that E-Rate was ‘‘subject to unacceptably high risk of malfeasance through noncompliance and program weakness’’ and called for more money for auditing and oversight.
The inspector general’s office assigns two full-time auditors to the program, the report stated, and although other auditors move in and out of assignments, ‘‘this staffing is hard pressed to support our current workload.’’
Previous efforts to audit E-Rate have uncovered problems, but those efforts were limited in scope. A review of 22 schools by the Arthur Andersen accounting firm in 2001 found several million dollars in ‘‘inappropriate’’ payments and unsupported costs. Efforts to formulate a more thorough review were hampered by the collapse of Andersen after the Enron scandal.
A spokesman for the communications commission said officials were taking the inspector general’s report seriously.
The F.C.C. is looking hard at the resource issue,’’ the spokesman said, ‘‘and is going to be taking all steps necessary to deal with any problems.’’ At Universal Service Administrative, a spokesman, Mel Blackwell, said problems were showing up precisely because the company and the commission had been reviewing contracts that they believed were high risk and that dated from the early days of the program.
Most people are honest,’’ Mr. Blackwell said. If someone is dishonest, he said, ‘‘do we look the other way? No.’’ From the beginning, E-Rate has been unpopular with many Republican lawmakers, who called it the ‘‘Gore tax,’’ and phone companies. Supporters of the program said scandals should be seen in the broader context.
Any waste or abuse should be thoroughly investigated and prosecuted to the fullest extent possible,’’ said Lynne Bradley, director of government relations for the American Library Association.
The program, Ms. Bradley added, has faced such exacting scrutiny from its critics that its rates of fraud and abuse would probably turn out to be less widespread than the Center for Public Integrity suggested.
The full picture isn’t going to look like this sampling,’’ she predicted. A commissioner of the Federal Communications Commission, Michael J. Copps, said: ‘‘If there is fraud and abuse, root it out. But let’s not ignore the benefits that this program has brought to our children, our communities and our nation.’’