LAW OFFICES OF THOMAS K. CROWE, P.C.
LEGAL ALERT
Clients and
Interested Parties:
Recently, the Federal Communications
Commission (“FCC”) levied a financial
penalty for Universal Service Fund (“USF”)
violations that represents its largest to
date. Global Crossing North America, Inc.,
and two of its subsidiaries (collectively,
“Global Crossing”) apparently failed to
make timely required USF contributions.
Based on its enforcement investigation,
the Commission proposed a $10 million
penalty or forfeiture for the violations.
The proposed forfeiture dwarfs the vast
majority of financial penalties issued by
the FCC to date for USF violations.
In addition to the unprecedented Global
Crossing Notice of Apparent Liability (“NAL”),
the FCC also released NALs against Compass
Global, Inc. (“Compass Global”), a
wholesale provider which packaged its
services as a platform for prepaid calling
card providers, and Telrite Corporation (“Telrite”),
a toll reseller. Each of these proposed
forfeitures approached $1 million.
The FCC concluded in each of these three
enforcement proceedings that the
forfeitures it has issued to date have not
created a sufficient incentive for
providers to make timely USF payments. The
FCC takes non-compliance with USF
obligations seriously since such
violations are a threat to the integrity
of the USF system and because violators
obtain a competitive advantage compared
with other providers that fulfill their
USF obligations. As a result, beginning
with these three NALs, the FCC has
drastically changed its methodology for
calculating penalties in a way that will
significantly increase financial
liability. Given the agency’s clear
frustration with USF violations, even
larger and greater numbers of USF
forfeitures are likely in the future.
New Methodology
In prior investigations, forfeitures were
based solely on violations that began in
the year prior to commencement of the
FCC’s investigation. However, the FCC is
now basing its proposed forfeitures on
“not only violations that began within the
last twelve months, but all violations,
whenever they began, unless they were
cured more than one year ago.” An
outstanding balance, no matter how old,
can be subject to an enforcement action
for a year after the violation is cured.
In addition to prosecuting all obligations
uncured during the prior year, the FCC
continued to propose a base forfeiture of
$10,000 for each month in which a carrier
has failed to fully pay required universal
service contributions and $20,000 for each
month in which a carrier has failed to
make any required universal service
contribution, plus an upward adjustment of
one-half of the largest USF contribution
that was not fully paid. Although this
aspect of the forfeiture calculation
remains consistent with prior enforcement
actions, total potential forfeiture
liability is now greatly increased.
Global Crossing
USF: According to the NAL, Global
Crossing, a major provider of interstate
telecommunications, showed a “pattern of
delinquency” by failing to make on-time
USF contributions. The company would remit
USF contributions to USAC, according to
the Commission, only before being referred
to the Department of the Treasury for
collection. According to the FCC, these
large “catch-up” payments caused a
substantial strain on the USF system
because the stream of revenue failed to be
constant and circumvented normal debt
collection procedures. Global Crossing,
according to the NAL, did not make any USF
payments in 15 months and only remitted
partial payment in 16 months of the period
covered by the NAL.
TRS: In addition to USF,
Telecommunications Relay Service Fund (“TRS”)
invoices are generated from the FCC Form
499-A. Global Crossing, according to the
NAL, failed to submit on-time payments for
TRS on four occasions during the same
period. The Commission also found that the
company violated this obligation.
Liability: Applying the forfeiture
calculation method to Global Crossing’s
violation, the FCC proposed a base
forfeiture amount of $20,000 for each
month in which Global Crossing failed to
remit any contribution (a total of 15
months) and $10,000 for each month in
which Global Crossing failed to remit the
full amount invoiced by USAC (a total of
16 months). As with other enforcement
actions in the past, the company’s
proposed forfeiture was also subject to
the upward adjustment. Given the magnitude
of Global Crossing’s largest unpaid
balance, these exceeded $9 million
dollars. The FCC also proposed a
forfeiture amount for unpaid TRS
contributions with a similar upward
adjustment, totaling $579,291. In sum, the
overall proposed forfeiture was
$10,518,013.
Compass Global
Compass Global was investigated for not
filing annual FCC Forms 499-A since it
first provided service in 1998 (however,
the NAL only covered the period from
January 2005 onward). In response to the
FCC’s investigation, the company presented
several arguments that its products should
not be treated as regulated services, and
would therefore not be subject to USF
filing and related contribution
requirements. As described below, the FCC
rejected each of these arguments.
“IP-in-the-middle”: Compass Global
argued that it only provided an IP
backbone and that it receives and
transmits communications exclusively in
Internet Protocol. However, the FCC
rejected this argument because, according
to prior FCC decisions, “the fact that
Internet Protocol is used exclusively as
transport for the traffic has no bearing
on whether these voice and data services
are appropriately considered
telecommunications service.” The services
are not linked with information-processing
capabilities, but are primarily used for
the basic transmission purposes and
therefore will be considered
“telecommunications services” subject to
FCC regulation.
Information service: Compass
Global’s second argument was that its
services were not “telecommunications
services” but rather an unregulated
“information service” because it offers
only IP-based wholesale products. However,
the Commission rejected this argument
because Compass Global does not claim that
its services enabled end-users to
generate, acquire, store, transform,
process, retrieve, utilize or make
available information, which would be
required to be classified as an
information service.
Wholesale: Finally, Compass Global
argued that, as a wholesale provider, it
cannot be regulated as a provider of
telecommunications services.
“Telecommunications services” are services
that are offered “for a fee directly to
the public or to such classes of users as
to be effectively available to the
public.” Since the company does not offer
services directly to the public, it
argued, this definition did not apply.
However, the Commission rejected this
argument, noting that Compass Global
failed to argue that its services were not
offered indiscriminately to all companies
seeking to provide prepaid calling cards.
The Commission therefore concluded that
Compass Global can be regulated as a
provider of telecommunications services.
USF:
As a result of the FCC’s rejection of the
arguments listed above, Compass Global has
been required to file the FCC Form 499-A
and make contributions on assessable USF
revenues since 1998, when it began
providing service. It did not register at
that time, nor did it make contributions
based on its revenues which should have
been classified as telecommunications
services. Thus, it failed to comply with
the FCC’s USF registration, reporting, and
contribution requirements.
TRS, NANPA, LNP, and Regulatory Fees:
The company also failed to make
contributions to TRS, Local Number
Portability cost recovery mechanisms (“LNP”),
North American Numbering Plan
Administration cost recovery mechanisms (“NANPA),
and FCC regulatory fees. Each missed
payment is considered a separate
continuing violation.
Liability: Compass Global was
subject to the same calculation method.
The Commission proposed a forfeiture of
$20,000 for each of the 22 months it did
not make USF contributions plus an upward
adjustment of $79,503. Similar to Global
Crossing, the FCC proposed a forfeiture of
$249,100 for unpaid TRS obligations, with
upward adjustment. In addition to USF and
TRS forfeitures, the Commission added a
$10,000 forfeiture for each failure to
make NANPA, LNP, and regulatory fee
payments (totaling $40,000). Compass
Global’s total liability was $828,613.
Telrite
USF: According to the FCC, Telrite
greatly underreported its USF assessable
revenues on the FCC Forms 499-Q from
November 2005 through May 2007 as well as
on the FCC Forms 499-A covering the years
from 2005 and 2006. In turn, the company
paid each USAC invoice in full. However,
USAC’s invoices significantly understated
the size of the contribution due because
the invoices were generated from
inaccurate information. Unlike the other
recent NALs, the FCC went out of its way
to underscore the importance of reporting
accurate information. This is “especially
critical because the Commission does not
audit each carrier’s filing” and companies
must be deterred from submitting
“deceptive and inaccurate” revenue
information.
TRS, NANPA, LNP, and Regulatory Fees:
By underreporting its revenues, Telrite
also did not make full contributions to
the other funds associated with the FCC
Form 499-A. As a result, it underpaid TRS,
NANPA, LNP and regulatory fee
contributions.
Liability: Applying the new
calculation method, the FCC proposed a
forfeiture of $10,000 for each of the 23
months in which the company did not fully
contribute to USF and $20,000 for each of
the four months where the company made no
payments at all, totaling $310,000. This
was also subject to an upward adjustment
of $417,438. Unlike the other recent NALs,
the FCC also imposed a fine of $100,000
for filing inaccurate FCC Forms 499-A
misreporting revenues for 2006 and 2007.
In addition to USF and TRS forfeitures,
the Commission added a $10,000 forfeiture
for each failure to make NANPA, LNP, and
regulatory fee payments (totaling
$50,000). Telrite’s total liability was
$924,212.
These recent FCC enforcement actions
underscore the importance of filing the
required FCC Forms 499-A and Q; remitting
USF, NANPA, LNP, and regulatory fee
contributions on a timely basis; as well
as accurate reporting of
telecommunications revenues. Particularly
in view of the FCC’s new forfeiture
computation methodology, failure to
fulfill any one of these mandatory
regulatory obligations can lead to
potentially high monetary forfeitures.
Please feel free to contact us if you have
any questions or if we can be of
assistance.
Thomas K. Crowe, Principal "firm@tkcrowe.com"
Christopher Gotterba, Regulatory
Specialist
Law Offices of Thomas K. Crowe, P.C.
1250 24th Street, N.W.
Suite 300
Washington, D.C. 20037
(202) 263-3640 (voice)
(202) 263-3641 (fax)
www.tkcrowe.com
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