Over the past several years, our firm has witnessed a major shift in the way the Federal Communications Commission’s (“FCC”) Enforcement Bureau: (A) uncovers possible violations of the Communications Act and FCC Rules and (B) develops the evidentiary records used to trigger a Notice of Inquiry and support eventual Notices of Apparent Liability for Forfeiture and other enforcement actions. Historically, FCC enforcement actions were initiated in one of two ways, either through an Enforcement Bureau initiated investigation on its own motion or in response to a complaint. In recent years, however, the Enforcement Bureau has increasingly relied upon outside agencies and governmental agents to “dig up” the proverbial “dirt.” The two primary excavators are Team Telecom and the Universal Service Administrative Company (“USAC”).
We believe that industry awareness of this developing trend is important. Knowing, in advance, that the disclosures your company may be asked to disgorge during a USAC audit or Team Telecom national security review (when seeking a 214 Authorization or approval of a merger / sale of assets) could lead to potentially significant fines & forfeitures from the FCC’s Enforcement Bureau will help companies that are already in the market avoid making careless mistakes. For new companies considering entry into the regulated telecom, VoIP and non-interconnected VoIP industries, awareness that the FCC’s Enforcement Bureau is watching through the eyes of other governmental agents will dissuade unlawful operations and actions, prior to receipt of all necessary FCC authorizations.
USAC – You can run, but you can’t hide…
USAC is an independent non-profit company designated to administer Universal Service Fund (“USF”) programs. The Internal Audit Division, responsible for identifying areas of non-compliance with the Universal Service Fund program, issues final audit reports that are automatically referred to the FCC. The FCC often uses the information gathered during the course of USAC audits and documented in USAC’s audit reports to open up parallel investigations of possible Communications Act and FCC rule violations. What is unearthed during a USAC audit will often times be used as the evidentiary foundation of a Notice of Apparent Liability for Forfeiture (“NAL”).
In July 2009, for example, USAC referred a report to the FCC “for potential enforcement action,” alleging that “Globalcomm had failed to comply with the Commission’s rules requiring Telecommunications Carriers to contribute to the USF.” The FCC soon after issued a Notice of Apparent Liability against Globalcomm for violating FCC rules. Globalcomm ultimately entered into a consent decree with the FCC, agreeing to pay a voluntary contribution to the Treasury Department for $537,127. USAC-referred investigations and enforcement actions will continue, and it is important to be aware of the risks and expenses associated with such actions. Non-compliance with USF rules may result in an unfavorable USAC audit, which can easily be converted into an enforcement action at the FCC.
But you don’t have to be audited by USAC before you find yourself standing before the FCC’s Enforcement Bureau staring at an NAL. As detailed in our Client Advisory, USAC recently adopted a policy that is certain to ferret out companies that have operated unlawfully prior to registering with USAC (which, eventually, all service providers find themselves doing).
USAC’s Form 499-A Initial Registration (and Filer ID procurement) process has always required service providers to: (A) disclose the month and year in which they first provided telecommunications or interconnected VoIP services and (B) certify the truthfulness of the information contained in Form 499-A under penalty of perjury. Until very recently, USAC would issue a Filer ID even if the service provider disclosed a “start date” prior to the current year.
Under the new policy, however, USAC will no longer issue Filer IDs in these circumstances. Instead, USAC will withhold issuance of a Filer ID pending the applicant’s submission of 499-As for all prior reporting periods. And, of course, evidence of prior period illegal operations will be reported by USAC to the FCC’s Enforcement Bureau.
To avoid these adverse consequences, we urge all companies considering entry into the U.S. telecommunications, VoIP and non-interconnected VoIP markets to ensure registration with the FCC and USAC prior to beginning operations.
“An ounce of prevention” really will save your company a “pound of cure.”
Not that this point needed to be driven home any harder, but FCC Commissioner Michael O’Reilly’s reaction to the recent decision on E-Rate funding should send shivers up your spine. It is signal that the FCC’s majority is willing to sit back as the Bureaus and USAC lead the way on expanding the USF contribution base through creative interpretations of existing regulations and laws:
“Last and most infuriating, the item delegates so much authority to the Bureaus and USAC to do almost whatever they would like, whenever they would like to do it. This is not a criticism of our professional staff, who are dedicated and hardworking, but rather I worry this mechanism is a way to remove accountability and bury decisions that should be made more public.”
Team Telecom – National security (and a whole lot more)…
The second group of governmental agents used by the FCC’s Enforcement Bureau to investigate unsuspecting service providers is known as “Team Telecom.” Team Telecom is a joint task force comprised of agents from the Department of Defense, Homeland Security, and the FBI. It is responsible for conducting national security reviews of foreign-owned (10% or greater foreign ownership) telecom providers and providers of international services or infrastructure. A Team Telecom review is triggered if a company applies for a 214 License or seeks Transfer of Control / Asset Sales approval from the FCC and an applicant is directly or indirectly owned by a non-U.S. citizen or foreign company.
The core purpose of Team Telecom’s reviews remains squarely focused on national security issues. However, over the past several years it is impossible to ignore the increasingly broadened scope of Team Telecom’s fact gathering and investigative peering, often times into areas that bear little resemblance to national security concerns. Inquiries into a service provider’s Customer Proprietary Network Information (“CPNI”) procedures, Communications Assistance for Law Enforcement (“CALEA”) compliance, questions about unlicensed operations, and even digging into issues such as marketing practices, consumer protection, and false advertising have now become part of the process! It’s hard to conceive of a legitimate national security concern that is associated with a business’ marketing practices. The only reasonable explanation for fact-gathering and investigation into marketing is that Team Telecom is being used by the FCC’s Enforcement Bureau to perform investigations on its behalf, to make the Bureau’s job simpler and more efficient, and – of course – to save the FCC money in the process.
Team Telecom coordinates and communicates with the FCC during the review process, so it should not be surprising to find out that much of the information collected by Team Telecom is shared with the FCC – in real time. Why share information about possible violations of FCC rules if the purpose isn’t, ultimately, to pursue enforcement against the alleged violator?
What makes Team Telecom’s investigations troubling is the lack of public rules governing the scope of the task force’s authority. Team Telecom does not have specific authority from Congress and instead acts under the broad umbrella of the Executive Branch’s “national security” apparatus. There is very little transparency associated with its investigative process; and without transparency and without procedural rules, it is a very real possibility that Team Telecom can stymie market entry and create delays that interfere with your ability to engage in M&A activity.
A word to the wise – when entering the “black hole” that is Team Telecom, be confident in your ability to safely navigate your way out. And the best way to be confident is to make certain you are compliant with applicable rules, regulations and laws.
Wireless Resellers… VoIP Resellers… Beware!
A common misperception in the telecommunications industry is that a “reseller” of another carrier’s services is not required to directly comply with the FCC’s licensing, registration and compliance reporting obligations if they are paying fees & taxes to their supplier. It is unclear where this false impression got started or how the lie continues to be propagated, but the stark truth is that, in the eyes of the law, a “Reseller” is treated no differently for regulatory purposes than its underlying provider. Indeed, the regulatory and tax duties of a reseller can be even greater where the reseller is also the retail provider of services to end-user customers.
At the FCC, there is clear FCC precedent that the Enforcement Bureau and agents, like USAC, apply when evaluating the compliance shortcomings and otherwise determining the fate of an un-licensed, unregistered reseller.
For example, in a 2007 NAL and Forfeiture Order, the FCC fined wireless reseller, InPhonic, nearly $820,000 for failing to register with USAC, obtain a 214 license, and comply with the USF, TRS and other federal programs. The FCC explained the importance of these rules:
“We view InPhonic’s apparent failure to register for over two years as a serious dereliction of its responsibilities under the Act and our rules. A carrier’s compliance with the Commission’s registration requirement is critical to the administration of the USF and TRS programs, and accomplishment of Congress’ objectives in sections 254(d) and 225(b)(1) of the Act. …[A] carrier’s duty to register upon entry, or anticipated entry, into interstate telecommunications markets is essential to the fulfillment of the USF and TRS program missions because it identifies the company to the various program administrators and brings the company within the purview and oversight of those administrators. If a carrier never identifies itself as a telecommunications provider by properly registering under the Commission’s rules, then neither the Commission nor the various program administrators can ascertain whether that carrier has fulfilled other regulatory obligations, including the requirement that carriers file Worksheets and contribute to USF, TRS, and other regulatory programs.”
More recently in May of 2013, provider of fixed wireless and resold VoIP services, Believe Wireless Broadband (“Believe Wireless”), found itself appealing USAC’s assessment of over $8,000 in late filing fees, resulting from late-filed Form 499s. In its appeal letter, Believe Wireless states it was under the disillusion that its payment of Universal Service Fund fees that were invoiced to the Company by its underlying supplier of Interconnected VoIP services were sufficient to ensure its own compliance with FCC Rules:
“When we first started offering VoIP service we were just reselling another company’s VoIP service and on the bill of the company all of the required fees were charged to us for the service. It was our erroneous understanding that by paying the fees, we were in compliance.”
As mentioned, Believe Wireless’ belief system regarding the lack of any direct FCC regulatory (and, one might presume, State PUC, State & Local tax and 911 fee) obligations from the Company’s “resale” of a third-party supplier’s VoIP service (or, for that matter, other forms of telecommunications resale, including wireless), is not uncommon. Many small telecommunications businesses enter the telecom market utilizing the “platform” of another service provider, reselling services under their own company or brand name. Because these small businesses (often times lacking even basic knowledge of telecommunications laws and regulations) find themselves paying regulatory fees and taxes to their suppliers, they sometimes make the mistake of concluding that their legal obligations to federal and state governmental authorities are either covered by or handled by their suppliers, i.e., as a consequence of paying the supplier’s invoiced fees, taxes and surcharges.
In reality, resellers of telecommunications and Interconnected VoIP services are subject to a broad array of direct regulatory and tax compliance responsibilities that, by law, can neither be pawned off on nor contracted away to third parties. Furthermore, underlying wholesalers are often powerless under the law to “comply on behalf of” their reseller customers, even if the wholesaler wanted to assume the burdens for its reseller customers.
While it is possible for regulated service providers to outsource certain compliance responsibilities via contract, it is impossible to shed all risk of exposure and liability (financial and even criminal) resulting from compliance failures. Your officers and directors are on the proverbial “hook” and remain exposed to fines, penalties and imprisonment, even if the service provider hired a third party or pays its supplier to comply on behalf of the company.
Important Takeaways
The bottom line is that if your company is a foreign-owned carrier (wireless or wireline) that is either: (A) seeking entry into the U.S. market or (B) looking to sell or buy a 214-licensed carrier or regulated assets, then you must be aware of what’s hidden in your closet before applying. Chances are pretty good that the dirt will come out during the course of a Team Telecom national security review.
If you are a domestic, U.S. provider of telecommunications (wireless or wireline), VoIP or non-interconnected VoIP services or are otherwise required to obtain a Filer ID from USAC, think long and hard before starting up operations in advance of registering with USAC. If you operate under the misimpression that it is “OK” to operate for a year or so before registering with USAC, and that USAC will be forgiving when you do apply, think again. It is a near impossibility to provide telecommunications services in the U.S. without the necessary FCC authorizations and registrations and walk away unscathed financially.
Coming from a lawyer, it might be easy for some readers to dismiss the cautionary warnings in this article as hyperbolic exaggeration. Some might even accuse me of “Crying Wolf” in order to gin up business. But neither could be further from the truth, because both claims ignore the basic economic reality of the legal profession, which is that an “ounce of prevention is worth a pound of cure.” In other words, it is far less costly to comply with the FCC’s licensing & registration requirements than it is to hire a lawyer to clean up a messy enforcement action, engage in other remediation work, or pay off the government late fees, penalties and potential forfeitures & fines (which start in the hundreds of thousands of dollars). Lawyers and law firms derive far more revenue from defending clients in investigations and enforcement proceedings than they do procuring licenses, registrations and regulatory approvals – which is exactly why you will rarely see a lawyer alert prospective clients to the risks of unlicensed, non-compliant operations. They figure you may not be willing to spend a few thousand dollars to ensure compliance now, but when cornered and coerced into compliance remediation by a governmental agency, you’ll be willing to write a blank check.
Don’t get me wrong, I’ll gladly accept a blank check too! But our firm also takes great pride in helping clients obtain the greatest value out of their relationship with our professionals. More often than not we find that this “value” is far greater and more rewarding when our clients succeed and stick around for the long-haul.
A client that comes to a lawyer to get it out of hot water will leave once the water cools (but only after spending a great deal of money to put the fire out under the boiling pot). A client that hires a lawyer to watch over the stove, manage the heat and keep the water from rolling is typically a client for life.
Jonathan S. Marashlian is the Managing Partner at Marashlian & Donahue, LLC, The CommLaw Group, a Washington, DC-area law firm specializing in federal and state telecom and technology matters. Marashlian is the winner of two 2013 and 2014 Lexology/International Law Office (ILO) Client Choice Awards, named overall winner in the Telecommunications Law-US category; his firm was named Leading Customer Service Law Firm of the Year and Best Communications Law Firm in the US by ACQ Awards. Mr. Marashlian can be reached at JSM@CommLawGroup.com or by visiting www.CommLawGroup.com.
