[Senate Hearing 115-359]
[From the U.S. Government Publishing Office]
S. Hrg. 115-359
FCC'S LIFELINE PROGRAM: A CASE STUDY OF GOVERNMENT WASTE AND MANAGEMENT
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HEARING
before the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 14, 2017
__________
Available via the World Wide Web: http://www.fdsys.gov/
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
29-656 PDF WASHINGTON : 2018
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
RON JOHNSON, Wisconsin, Chairman
JOHN McCAIN, Arizona CLAIRE McCASKILL, Missouri
ROB PORTMAN, Ohio THOMAS R. CARPER, Delaware
RAND PAUL, Kentucky JON TESTER, Montana
JAMES LANKFORD, Oklahoma HEIDI HEITKAMP, North Dakota
MICHAEL B. ENZI, Wyoming GARY C. PETERS, Michigan
JOHN HOEVEN, North Dakota MAGGIE HASSAN, New Hampshire
STEVE DAINES, Montana KAMALA D. HARRIS, California
Christopher R. Hixon, Staff Director
Gabrielle D'Adamo Singer, Chief Counsel
Brooke N. Ericson, Deputy Chief Counsel for Homeland Security
Margaret E. Daum, Minority Staff Director
J. Jackson Eaton, Minority Counsel
Laura W. Kilbride, Chief Clerk
Bonni E. Dinerstein, Hearing Clerk
C O N T E N T S
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Opening statements:
Page
Senator Johnson.............................................. 1
Senator McCaskill............................................ 2
Senator Peters............................................... 9
Senator Heitkamp............................................. 17
Senator Daines............................................... 20
Prepared statements:
Senator Johnson.............................................. 29
Senator McCaskill............................................ 30
WITNESSES
Thursday, September 14, 2017
Seto Bagdoyan, Director, Forensic Audits and Investigative
Service, U.S. Government Accountability Office................. 4
Honorable Ajit V. Pai, Chairman, Federal Communications
Commission..................................................... 6
Vickie S. Robinson, Acting Chief Executive Officer and General
Counsel, Universal Service Administrative Company.............. 8
Alphabetical List of Witnesses
Bagdoyan, Seto:
Testimony.................................................... 4
Prepared statement........................................... 32
Pai, Hon. Ajit V.:
Testimony.................................................... 6
Prepared statement with attachments.......................... 46
Robinson, Vickie S.:
Testimony.................................................... 8
Prepared statement........................................... 138
APPENDIX
Olga Ukhaneva Report............................................. 151
Letters submitted by Senator Peters.............................. 189
Letter submitted by Senator Harris............................... 213
Statements submitted for the Record:
Cellular One................................................. 214
National Grange.................................................. 237
Navajo Nation.................................................... 239
Responses to post-hearing questions for the Record:
Mr. Pai...................................................... 250
Ms. Robinson................................................. 255
FCC'S LIFELINE PROGRAM: A CASE STUDY OF GOVERNMENT WASTE AND
MISMANAGEMENT
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THURSDAY, SEPTEMBER 14, 2017
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:17 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Ron Johnson,
Chairman of the Committee, presiding.
Present: Senators Johnson, Daines, McCaskill, Carper,
Tester, Heitkamp, Peters, and Hassan.
OPENING STATEMENT OF CHAIRMAN JOHNSON
Chairman Johnson. Good morning. This hearing will come to
order.
I want to welcome the witnesses, thank them for their time
and their testimony. The hearing's title is ``FCC's Lifeline
Program: A Case Study of Government Waste and Mismanagement.''
I would ask consent that my written remarks be entered in the
record.\1\
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\1\ The prepared statement of Senator Johnson appears in the
Appendix on page 29.
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I will not steal anybody's thunder. There are a lot of
facts, there are a lot of figures, there are a lot of
assumptions. I want to quote Ronald Reagan. He said this, I
think, a number of times, but this is the quote that I have:
``No Government ever voluntarily reduces itself in size.
Government programs, once launched, never disappear. Actually,
a government bureau is the nearest thing to eternal life we
will ever see on this Earth.''
The reason I quote Ronald Reagan is because the Lifeline
program was actually started under Ronald Reagan. And, as I
just go through the briefing materials, you take a look where
we have spent close to $20 billion on this. It is somewhere
around $1.5 to $2 billion per year. Significant evidence of
waste, of fraud, of abuse. The Government Accountability Office
(GAO) reports that 96 percent of low-income Americans actually
have a phone. I am just going to ask some questions. Maybe we
should ask ourselves: Did we achieve the goal of this program?
Should we declare success, should we declare victory? Should we
maybe consider ending it? Or do we still need to try and get
that final 4 percent? Is it even possible? Should we be looking
at reforms and controls?
Now, if we decide to end it, I think the other question
would be: Do we just bank the money? We are $20 trillion in
debt over the next 30 years. At least $100 trillion additional
deficit that spending is projected. Maybe we ought to start
banking some of this money. Maybe we ought to consider ending a
program that worked, that succeeded, and save the money. Or
maybe we could repurpose it to advance into high-speed
broadband in rural areas. The same type of program under the
Universal Service Fund (USF).
So, again, I think those are the kind of questions I am
going to be asking, the questions that were on my mind as I was
reading all the briefing material. I am hoping those are the
kinds of questions this Committee asks during this hearing.
With that, I will turn it over to Senator McCaskill.
OPENING STATEMENT OF SENATOR MCCASKILL\1\
Senator McCaskill. First, I am really grateful, Mr.
Chairman, that you agreed to hold this hearing. It is really
important. I began working, as Chairman Pai will tell you, I
have been working on this for years, and it all began when I
got a solicitation for a free phone at the condominium I live
in in Washington. And, I looked at it, and I thought, ``What in
the world?'' and brought it to work and said, ``What is this?''
And then, I began to dive in and realized how poorly designed
this program was from the get-go. And, you correctly pointed
out that this program began under Reagan. The wireless part of
this program began under President Bush. This program was
actually set up in a way that was fatally flawed under
President Bush, but then these phones became known as the
``Obama phones.'' So, I want to make sure everyone knows there
are lots of parents of this particular program that has gone
awry.
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\1\ The prepared statement of Senator McCaskill appears in the
Appendix on page 30.
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We are going to spend a lot of time today talking about
what has gone wrong with the Lifeline program. I know there are
lots of people who depend on the Lifeline program, and I know
that we need to look at ways we can support them. But the idea
that we can continue a program that is still structurally
deficient, in the same way we have been doing it, is frankly, a
non-starter with me.
The combination of ineffective oversight and the greed of
private carriers has led to hundreds of millions of dollars in
wasted public money. Since 2014, when the GAO began the most
recent audit that I requested, the Federal Communications
Commission (FCC) has identified and pursued several companies
that have fraudulently profited from the Lifeline program.
However, this investigation demonstrates this may only be the
tip of the iceberg.
GAO's multiyear audit found evidence suggesting that
Lifeline may have paid more than $138 million a year in
subsidies for 1.2 million potentially fraudulent accounts. We
are not talking about highly sophisticated fraud here. There
were 1.2 million accounts that were either duplicates of
existing subscribers, or there was no record that the listed
subscriber was actually eligible, or where the subscriber is
dead.
It should not have taken a 3-year GAO audit to spot these
glaring red flags. I am so grateful for GAO's hard work. I
asked them to assess the effectiveness of the 2012 Lifeline
reforms, which began after I received the solicitation in 2011,
and I began hollering about this on the Commerce Committee.
I do not believe any of us could have anticipated the
extent of the problems that GAO would uncover in spite of the
2012 reforms. I would like to personally thank GAO, who spent
more than 3 years on this, and I want to thank the team, your
team, Mr. Bagdoyan, that did this. I know as a former auditor
that there is a tremendous amount of focus and dedication
needed for an audit like this.
I also know the FCC and the Universal Service
Administrative Company (USAC) have taken steps to improve the
oversight. Today we will hear from the FCC Chairman and the
Acting Executive Director of USAC about the efforts underway to
combat the waste and fraud and abuse that have long plagued
this program.
I do not doubt the sincerity of the FCC and USAC and their
desire to address the shortcomings. The reality is these are
not new problems--investigative journalists, the FCC Office of
Inspector General (OIG) and many of my colleagues in Congress
and I have pointed them out time and time again over the last
decade.
Chairman Pai, you have been among those who have brought
attention to Lifeline's serious weaknesses. During your time as
an FCC Commissioner, you urged the FCC to implement much needed
reforms and called for proactive measures to increase
accountability and more aggressive enforcement. Now that you
are leading the Commission, I am cautiously optimistic about
the possibility of meaningful reform. I know that you are aware
past attempts to increase accountability have fallen woefully
short.
One of the reasons for these past failures is that many of
the weaknesses are deeply entrenched in the basic structure of
the program. You do not tell people that they get to verify
whether or not somebody needs a phone when they are the ones
that are going to make the money if they verify eligibility for
the phone. It will never work because the incentives are in the
wrong place. The incentives are to override the database. The
incentives are to put more people on the program because every
person you put on the program is $9.25 a month to your company.
And, it is just a moneymaker to push the envelope.
It does not take an auditor to tell you it might not be the
best idea to blindly trust the companies that are going to make
the money--who receive $1.5 billion each year from this
program--based on the number of accounts they service.
The FCC has taken the initial step to address this
structural flaw by creating the National Eligibility Verifier
to independently screen eligibility. However, last year's
Lifeline reform order does not require that crucial reform to
be complete until the end of 2019, and there are still
mechanisms to override that the companies can do. So, if we
know the companies are overriding the database now, I have no
confidence they are not going to override and self-certify over
the National Verifier.
We have made progress. I do want to acknowledge that. This
program went from about $800 million per year to $2.2 billion
in breakneck speed. Then we began the reforms and found massive
duplications, and it fell down and it is about $1.5 billion
now. So, we just skimmed the surface and found $600 million.
And, by the way, that is real money. That is a lot of money
that is desperately needed for rural broadband deployment.
I have a lot of questions particularly on the enforcement
end. We have $94 million that has been identified that should
be paid back. The companies that should be paying this back get
over $1 billion a year from this program. And, guess what? They
have not paid us a dime. Not one thin nickel. I do not
understand why we keep paying these companies that owe us
money. And so, be prepared for that question because I need an
answer to that.
Thank you, Mr. Chairman, for the hearing.
Chairman Johnson. Listen, I appreciate your passion on this
thing. I woke up this morning with a stiff neck, and I think it
is because, as I was reading the briefing materials, I was just
shaking my head. So, this will be an interesting hearing, maybe
a frustrating hearing. But, listen, I do appreciate your dogged
pursuit of this waste, fraud, and abuse, and hopefully we can
come up with some solid recommendations about what we should do
moving forward.
It is the tradition of this Committee to swear in
witnesses, so if you will all stand up and raise your right
hand. Do you swear that the testimony you will give before this
Committee will be the truth, the whole truth, and nothing but
the truth, so help you, God?
Mr. Bagdoyan. I do.
Mr. Pai. I do.
Ms. Robinson. I do.
Chairman Johnson. Please be seated.
Our first witness is Seto Bagdoyan. Mr. Bagdoyan is the
Director of Audit Services for the U.S. Government
Accountability Office's Forensic Audits and Investigative
Service mission team. In his role he supervises the team that
reviews the internal controls of government programs and roots
out waste, fraud, and abuse. Mr. Bagdoyan.
TESTIMONY OF SETO BAGDOYAN,\1\ DIRECTOR, FORENSIC AUDITS AND
INVESTIGATIVE SERVICE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Bagdoyan. Thank you. Chairman Johnson, Ranking Member
McCaskill, and Members of the Committee, I am pleased to appear
before you today to discuss GAO's May 2017 report on FCC's
Lifeline program. The program's expenditures total about $1.5
billion annually, covering over 12 million beneficiaries. Given
it scope and scale, Lifeline is inherently vulnerable to fraud.
In this regard, our findings highlight multiple significant
risks involving, for example, the program's financial
management and beneficiary enrollment controls. Accordingly,
today I will highlight two of our report's principal takeaways
regarding these particular risks.
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\1\ The prepared statement of Mr. Bagdoyan appears in the Appendix
on page 32.
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First, FCC and USAC, the not-for-profit corporation which
administers Lifeline, have taken some steps to enhance controls
over program finances. For example, FCC and USAC established
financial and management controls regarding billing,
collection, and disbursement of funds for Lifeline and related
USF programs. However, FCC maintains the USF with a cash
balance of over $7 billion and net assets of about $8 billion
as of June 2017 outside of Treasury in a private bank account.
In 2005, we recommended that FCC reconsider this arrangement
given that the USF consists of Federal funds. In addition to
addressing any risks associated with having the funds outside
of Treasury where they do not enjoy the same rigorous financial
management practices and regulatory safeguards as other Federal
programs, FCC identified potential benefits of moving the
funds. For example, by having the funds in Treasury, USAC will
have better tools for fiscal management of the funds. In March
2017, FCC developed a preliminary plan to move the USF to
Treasury.
Second, to enhance Lifeline's ability to detect and prevent
ineligible subscribers from enrolling, FCC in 2014 established
a database with a real-time list of subscribers. In 2015, the
agency adopted a rule requiring Lifeline providers to retain
eligibility documentation used to qualify consumers for program
support to improve the auditability and enforcement of FCC
rules.
Nevertheless, we found weaknesses in several key control
areas. For example, the program's structure relies on over
2,000 Lifeline service providers to implement important program
functions such as verifying subscriber eligibility. This
involved internal control environment could actually exacerbate
fraud risk as companies may have financial incentives to enroll
as many customers as possible without sufficient verification.
Accordingly, based on our data matching analyses, we were
unable to confirm whether about 1.2 million individuals of
about 3.5 million we reviewed, also 36 percent, participated in
a qualifying program such as Medicaid as claimed on their
Lifeline enrollment applications. Since we were able to review
only about a third of total subscribers due to methodological
limitations, we believe that this number is actually
understated. In terms of cost, providers would have received
about $137 million in USAC disbursements annually for
delivering Lifeline phone services to these individuals.
To address enrollment control weaknesses, FCC's 2016 order
calls for the implementation of a third-party National
Eligibility Verifier by 2019 to determine subscriber
eligibility. In addition to data analyses, we covertly tested
provider enrollment controls. Specifically, we made 21 attempts
to enroll in Lifeline through 19 different providers using
fictitious identities and documentation, and we were successful
in 12 attempts. Five providers we enrolled through were among
the top 30 recipients of Lifeline disbursements from USAC in
2014, totaling almost half a billion dollars. One of these
providers who did not actually send us a Lifeline phone upon
enrollment collected almost $10 million in such disbursements.
In closing, I would underscore that it is essential for FCC
to place a high policy priority on deploying effective
preventative enrollment and other controls to help mitigate the
risk for potential fraudulent activity in Lifeline, including
the broadband expansion, and safeguard the government's
substantial investment in this program. Fully and timely
implementing our report's seven recommendations in addition to
any other actions FCC is taking independently would be vital in
this regard. To its credit, FCC has agreed to implement all of
our recommendations.
Chairman Johnson, this concludes my remarks. I look forward
to the Committee's questions. Thank you.
Chairman Johnson. Thank you.
Our next witness is the Honorable Ajit Pai. Mr. Pai is the
Chairman of the Federal Communications Commission. He was
originally appointed to the FCC by President Obama in 2012 and
was designated Chairman by President Trump in January 2017.
While serving at the FCC, he has championed numerous innovative
reforms. Chairman Pai.
TESTIMONY OF THE HONORABLE AJIT V. PAI,\1\ CHAIRMAN, FEDERAL
COMMUNICATIONS COMMISSION
Mr. Pai. Chairman Johnson, Ranking Member McCaskill,
Members of the Committee, thank you for holding this hearing
and for inviting me to testify today alongside my distinguished
counterparts, Mr. Bagdoyan and Ms. Robinson.
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\1\ The prepared statement of Mr. Pai appears in the Appendix on
page 46.
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I have often said that the FCC's highest priority is
closing the digital divide--the gap between those who have
access to next-generation technologies and those who do not.
The Lifeline program can play a role in our efforts to bring
digital opportunity to all Americans. But, unfortunately, it
continues to be riddled by waste, fraud, and abuse. This is
doubly destructive: every dollar wasted comes from ratepayers
and does nothing to help low-income families actually in need
of communications services. The FCC owes it to everyone who
contributes to or properly receives benefits from the Universal
Service Fund to make sure the Lifeline program is efficient,
effective, and free of waste, fraud, and abuse.
Prior to becoming Chairman, as Senator McCaskill observed,
I conducted my own investigation of the Lifeline program as a
Commissioner in 2016. The Government Accountability Office
report that we will discuss today confirms some of the issues I
identified and more, and I will briefly highlight some of them.
First, because the Lifeline program lacks adequate
safeguards, it has paid for subscribers who are not eligible to
participate, potentially to the tune of hundreds of millions of
dollars a year. In its investigation, as Mr. Bagdoyan pointed
out, GAO was unable to confirm whether more than 1.2 million
Lifeline subscribers of the 3.5 million sampled actually
participated in Lifeline-qualifying programs that they or their
provider claimed during the enrollment process.
Second, while Lifeline rules only allow one subsidy per
household, loopholes in enforcing the program's one-per-
household rule have allowed providers to enroll hundreds of
subscribers at a single address, including one address that was
associated with 10,000 separate subscribers.
Third, for years, a lack of robust verification procedures
has allowed providers to claim support for ``phantom'' and
deceased subscribers, as well as to unlawfully claim multiple
benefits for other subscribers. Phantom subscribers--that is,
subscribers who do not exist but who still collect a Lifeline
benefit--have numbered in the thousands for multiple providers.
Finally, some Lifeline providers' sales agents' practices
continue to be a key driver of inappropriate enrollments in the
program. This is because agents are often paid based on the
number of new subscribers that they sign up. Not surprisingly,
many are less than scrupulous about who they enroll.
Now, in light of some of these problems, I have directed
USAC to implement aggressive administrative changes to correct
the problems that GAO, my office, and the FCC's Inspector
General (IG) have identified.
Specifically, I have asked USAC to take immediate action to
strengthen its administrative processes and the National
Lifeline Accountability Database (NLAD). Among other measures,
I have asked USAC to review addresses associated with large
numbers of subscribers and to prevent providers from claiming
subsidies for more than their total number of enrolled
subscribers. USAC should also block benefits for dead
subscribers and actively detect and remove duplicative benefits
found for the same household. Moreover, to hold sales agents
accountable, USAC should require them to register with USAC
before using the Lifeline enrollment systems.
Any improper payments that USAC identifies in these
processes will be reported to the FCC's Enforcement Bureau and
the FCC's Office of the Inspector General for administrative,
civil, or criminal action, as appropriate.
Furthermore, to combat eligibility-related waste, fraud,
and abuse, the FCC will launch the Lifeline National
Eligibility Verifier in at least six States this year. The
National Verifier will determine subscriber eligibility, and
this will make it harder for fraudsters to claim ineligible or
duplicate subscribers. The National Verifier will also use
Federal and State data sources to automate eligibility checks.
This will improve accuracy and minimize administrative expense.
Finally, the FCC must consider whether further programmatic
changes are necessary to ensure that Lifeline funds are
efficiently directed to those families who need it most.
To be clear, the challenges in restoring the program's
integrity are significant, but we have to learn from past
mistakes and set the program on the right course.
One last point. The GAO report also raises concerns
regarding universal service funds being held in a private bank
outside of the United States Treasury. The FCC is actively
working with the Treasury Department and with USAC on a plan to
move those funds to the Treasury as soon as possible.
Chairman Johnson, Ranking Member McCaskill, thank you once
again for holding this hearing. I look forward to answering
your questions and to continuing to work with you and your
staff on this important issue in the time to come.
Chairman Johnson. Thank you, Chairman Pai.
Our final witness is Vickie Robinson. Ms. Robinson is the
acting chief executive officer (CEO) and general counsel of the
Universal Service Administrative Company. She has spent nearly
20 years working for and with the FCC on universal service
issues. Ms. Robinson.
TESTIMONY OF VICKIE S. ROBINSON,\1\ ACTING CHIEF EXECUTIVE
OFFICER AND GENERAL COUNSEL, UNIVERSAL SERVICE ADMINISTRATIVE
COMPANY
Ms. Robinson. Thank you, Chairman Johnson. Good morning,
Chairman Johnson, Ranking Member McCaskill, and Members of the
Committee. I appreciate this opportunity to represent the
Universal Service Administrative Company as part of the
Committee's examination of the FCC's Lifeline program. I am
honored to appear here alongside Chairman Pai, and it is my
privilege to work together with him and our colleagues at the
FCC to ensure the goals of universal service and the
expectations of this Congress and the FCC with respect to our
administration of the Lifeline program are not only met but
exceeded.
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\1\ The prepared statement of Ms. Robinson appears in the Appendix
on page 138.
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I am also honored to be here today with Mr. Bagdoyan of the
Government Accountability Office. My colleagues at USAC
appreciate GAO's hard work in bringing to light those issues
highlighted in its recent report and believe that the report's
findings directly contribute to our efforts to improve program
performance and root out waste, fraud, and abuse.
I joined USAC in February 2016 after serving in various
positions at the FCC for over 14\1/2\ years. During my time
there, I held leadership roles in the bureaus charged with
universal service policy and enforcement matters. Armed with
that knowledge, I brought to USAC an understanding and
appreciation of the FCC's universal service goals and its
programs, as well as the importance of a strong relationship
between the FCC and USAC. I am committed to building upon that
relationship.
USAC was designated as the permanent administrator of the
Lifeline and other programs in 1998, and as part of this
responsibility, we are charged with managing the day-to-day
operations and overall management of the fund, including
assessing contributions, disbursing funds, and executing
related audit functions. USAC does not establish policy and may
not advocate policy positions.
The GAO's report we will discuss today casts a critical
spotlight on the administration of the Lifeline program. Among
its many findings, GAO expressed concern about efficiencies in
the Lifeline program, program oversight, and the risk of waste,
fraud, and abuse. Today I would like to highlight for you some
of the key efforts USAC is making to improve program integrity
and performance, including actions initiated before and since
the release of GAO's report.
In 2014, USAC executed the FCC's directive to establish a
NLAD, to help eliminate fraud by detecting duplicate
subscribers within the program. It is an essential tool in our
effort to prevent waste, fraud, and abuse in the program, and
it is used to perform name and address verification, duplicate
checking, as well as management of enrollment, de-enrollment,
and transfer of subscribers between Lifeline service providers.
As has been alluded to in previous testimony, NLAD has
drastically reduced instances where subscribers had more than
one connection and were, therefore, violating Lifeline program
rules. Upon initial launch of NLAD in 2014, NLAD detected 2.5
million duplicate subscribers that have since been eliminated.
This in turn led to hundreds of millions of dollars in savings.
Lifeline disbursements have dropped from $2.2 billion in 2012
to $1.5 billion in 2015 following implementation of NLAD.
In 2016, the FCC directed USAC to establish a National
Verifier to authenticate program eligibility prior to
enrollment. We are working closely with the FCC, State and
Federal agencies, program participants, and other parties to
develop a system that will ensure program integrity by placing
under USAC's control responsibility for verification of
subscriber eligibility. The National Verifier is on track to be
completed on time and on budget.
Once complete, the National Verifier, working in tandem
with the NLAD, will comprise a comprehensive system to verify
eligibility and prevent waste, fraud, and abuse, greatly
improving USAC's ability to safeguard Lifeline funds. However,
duplicate detection and eligibility verification are not the
only tools that USAC can use to prevent waste, fraud and abuse.
Building on data analytics and program integrity projects
already underway, as well as the findings in GAO's report and
Chairman Pai's 12- or 18-month-long investigation in his most
recent letter, we have developed the Lifeline Safeguard
Implementation Plan, which aggressively focuses on key areas
for action and increased collaboration with Chairman Pai. We
are implementing this vigorously and developing new tools to
take the NLAD and National Verifier where they cannot be
leveraged. And, as Chairman Pai has alluded to, since the GAO
report was issued, we have taken concrete steps to ensure
accountability for universal funds, reaching agreement with our
private bank to provide the FCC a more explicit role in the
oversight of funds and working closely with the FCC and the
Department of Treasury to transfer funds.
Thank you for the opportunity to testify. I look forward to
your questions.
Chairman Johnson. Thank you, Ms. Robinson.
I am more than happy to hold off on my questioning if,
Senator Peters, you want to go.
OPENING STATEMENT OF SENATOR PETERS
Senator Peters. I appreciate that. Thank you, Mr. Chairman,
Ranking Member McCaskill. First off, I want to thank both of
you for bringing this hearing to us today. This is a very
important topic, and reading the GAO report, I do not think
anyone could read that report and not be very angry.
Senator McCaskill, you have been a real champion, thank
you. Since that first day when you got the notice for the free
telephone, you have really been a champion for this, and I
applaud your efforts. So, it is great to be here with both of
you, and I appreciate the testimony here today.
But, I want to start off, before I ask a few questions, and
thank Chairman Pai for your comments about making sure that we
have access in our society, the digital divide. You and I have
spoken about that a great deal. I know you are sincere, I know
you are passionate about making sure that folks in this country
have access to communications service, which is absolutely
essential in the modern age. We have to have that. This country
made a focus to make sure everybody had electricity in the last
century. Communications is every bit as important as
electricity. It is essential to life.
And so, the basic premise and the goals of this program
remain the same, are very important, that folks who may not
have those opportunities need to have it. But, as I mentioned,
with the GAO report, none of us can stand here and accept the
kind of fraud and abuse that we see going on in this program.
And, it endangers a program that does bring a lot of
significant benefits to people who need it, and that angers me
that you have actors out there that are basically scamming this
program, and we have to stop that and be very aggressive in
doing that.
And, I could not agree with Senator McCaskill more--the
scam really seems to be from the companies that are out there.
It is not individuals that are bringing--at least that is not
my understanding. Correct me if it is a wrong understanding,
but it is not individuals bringing fraudulent documents. It is
companies that have an incentive to just sign everybody up. I
am very confident the thousands of phantom people who are dead
are not scamming it themselves. There is not a dead person who
is trying to scam this. These are companies that are taking
this money away from taxpayers and endangering a program that
provides vital services to people who need it.
On the other hand, there are folks who do not need it, but
it is pretty hard for most folks, if you get a notice for a
free telephone, you do not usually ask a lot of questions if
you get a free telephone. So, we have to hold these folks
accountable, and I know there are a number of steps that are
being taken.
When I saw the GAO report, I wrote a letter to both Mr. Pai
and Ms. Robinson, and I appreciate your very detailed responses
to the questions that I asked. And, Mr. Chairman, I would like
to enter all three letters into the record,\1\ if I may.
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\1\ The letters submitted by Senator Peters appears in the Appendix
on page 189.
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Chairman Johnson. Without objection.
Senator Peters. Thank you.
I want to focus on some of the potential fixes here, and so
I want to talk a little bit about the National Verifier system
that Ms. Robinson talked about quite a bit, which is to address
many of the outstanding issues. And, I asked many of these
questions in the letter that I have just entered into the
record, so I do not need to repeat some of those. But, I just
have some straightforward questions for you, Ms. Robinson.
In your August 18th response to my letter, you said that
USAC will publish and distribute a comprehensive list of
available State eligibility databases for service providers to
use by the end of the month. Are you on track to do that?
Ms. Robinson. Absolutely. That has been done.
Senator Peters. It has been done? So, we have completed
that.
Ms. Robinson. Yes.
Senator Peters. Good. Do you agree with those who think
that the National Verifier will significantly reduce the risk
of waste, fraud, and abuse by shifting the burden of
eligibility determinations away from sales agents and third-
party contractors to a neutral administrator?
Ms. Robinson. Absolutely, I do.
Senator Peters. Well, I just want to add a follow-up. We
are shifting some of the burden of that to a third party, but
we still have to have the burden on those folks who are signing
these individuals up. They need to be held accountable, that
they have to check the paperwork, they have to have it. They
have to have records of it, and it has to be available for
vigorous audits, just like any other private entity would be.
Chairman Pai, do you agree with the assessments?
Mr. Pai. Senator, I do, and I also want to commend Ms.
Robinson for her able leadership of USAC during the past
several months. She has been a terrific partner for the FCC in
this effort, and I am grateful to all that she and her team
have done. I would simply add two points, however.
First, that the National Verifier will only cover
eligibility. There are a number of other vulnerabilities in the
processes that GAO identified.
And, second, in the meantime I think we also need to make
sure that we pursue as aggressively as we can some of those
unscrupulous actors on the enforcement side to make sure that
there are no cracks in the system as best we can fill them.
Senator Peters. And, if you could tell me how you will
personally ensure that the National Verifier system is
implemented, are you actively involved as well? And, what do
you plan to do personally?
Mr. Pai. Yes, sir, we are actively monitoring that. We are
working with USAC to make sure that we can get that National
Verifier stood up as quickly as possible. It involves
coordination with a number of different jurisdictions,
obviously, and so we and our team are very actively working on
that to make sure that we can meet those timeframes, six States
by the end of the year, a couple dozen States more by the end
of 2018, and nationwide implementation by the end of 2019. That
is our goal, and I am doing everything I can to make sure that
we meet it.
Senator Peters. As I mentioned in my earlier comments, the
most important thing here is enforcement, and deterrence is the
best way to prevent a lot of these problems when providers know
that the consequences of their fraud will be detected, they
will be punished, and they will have to pay back the taxpayers
aggressively.
Chairman Pai, tell me a little more about what the FCC is
doing to make this painfully clear to all of these probably
thousands of service providers who have been scamming us for
quite some time, that the Enforcement Bureau is going to take
tough actions, and what you have seen in the past is nothing
like what you are going to see in the future?
Mr. Pai. Thank you for the question, Senator. It is an
unfortunate feature of human nature that if there is not a cop
on the beat, people tend to play a little faster and looser
with the rules. And, unfortunately, that has manifested itself
here.
As Senator McCaskill observed, when I was a Commissioner, I
aggressively urged the FCC to take action against some of those
unscrupulous providers that you mentioned who are scamming not
just the ratepayers but, of course, the people who really need
the help, the recipients.
Senator Peters. And, what have we seen during that time?
When you say additional action, what have we actually seen in
that time period?
Mr. Pai. Unfortunately, to be candid, Senator, we did not
see any action during the previous Administration, and I was
disturbed when I became Chairman to find in my review of the
Enforcement Bureau's policies and priorities that there was no
plan for any enforcement action against some of these Lifeline
providers. We have changed that. I have instructed our
Enforcement Bureau to make this a top priority. And, while I
cannot discuss the particulars of any given case, what I can
tell you is that this will not be an afterthought. It is front
and center in my mind in terms of our enforcement priorities.
Senator Peters. And, you will be able to come to us at some
future date and tell us how many cases have been pursued, how
many have been successful? And, we would expect to see that
fairly soon, I would expect?
Mr. Pai. I cannot give you a specific timeframe. What I can
tell you is I urge you to hold us accountable, and we will give
you all the information that we can as soon as we can to make
sure that you are aware that enforcement is not just an
aspiration but it is a reality at the FCC.
Senator Peters. Well, I appreciate that. My time has
expired, but I just want to say that, again, I think there is
an important goal here to make sure that people have access to
communications services, but it has to be done properly, it had
to be done efficiently, it has to be done without fraud and
abuse. And, if there are any tools that you need from us here
in Congress, I will at least let you know in my case, and I am
sure I speak for others, that we will be here to help you do
that, because we have got to make sure this program is
administered properly so the individuals who rely on this
service continue to have it. It is absolutely essential in
today's modern economy. Thank you.
Mr. Pai. Thank you, Senator.
Chairman Johnson. Thank you, Senator Peters.
Let me follow up on that same line of questioning. Chairman
Pai, are you telling me there has never been a prosecution
against these fraudulent actors?
Mr. Pai. Well, Chairman, the one notable exception would be
the Total Call Mobile case. That was a glaring case in which
one particular company had scammed the fund out of millions of
dollars. We did take action in that case. But, there are a
number of other cases that are pending, which Senator McCaskill
adverted to in her opening statement. I urged the FCC at the
time to take aggressive action in those cases, and nothing
happened.
Chairman Johnson. So, describe what enforcement means.
Mr. Pai. Typically, what will happen is the FCC will issue
what is called a ``Notice of Apparent Liability (NAL).'' We
tell Party X, ``We think you have violated the law, and based
on our assessment, we believe that you are liable to the
Federal Government for this amount of money.'' At that point
the company has a chance to respond, and based on that response
or non-response, the FCC then proceeds to what is called a
``forfeiture order,'' in which we say we affirmatively
determined that you are liable for this amount of money.
One of the unfortunate things that we found during the
previous Administration is that there were a lot of words about
enforcement. We might issue a Notice of Apparent Liability, but
there was no actual follow up on the back end.
Chairman Johnson. So, the enforcement sounds to me like,
``Oops, I got caught, I have to pay it back.'' Is that really
the only enforcement action possible? Is there a criminal
prosecution? Can we hold people accountable? Can they go to
jail?
Mr. Pai. Absolutely. There is one case, Icon Telecom in
Oklahoma, in which we found that the proprietor of that company
had been using some of the funds for personal benefit, and I
believe in that case there was a prosecution.
Chairman Johnson. What is the maximum penalty?
Mr. Pai. It depends on the particular nature of the
criminal offense that the Department of Justice (DOJ) chooses
to prosecute. We obviously do not have direct criminal
prosecutorial authority.
Chairman Johnson. Ms. Robinson, you are shaking your head.
Would this just fall under normal criminal statutes in terms of
theft and the extent of the theft in terms of penalties? Or,
are there specific penalties called out in the statute?
Ms. Robinson. So, I am speaking from another role that I
had. While at the FCC, I actually worked for some time in the
Enforcement Bureau, so I happen to know, and this is one of my
areas of expertise. The Communications Act actually sets forth
statutory maximums that kind of confine and restrict what the
FCC can do in terms of the structure of enforcement actions.
But, yes, the FCC has many tools, as Chairman Pai alluded to,
including the Notice of Apparent Liability, forfeiture actions,
citations, admonishments, and the FCC aggressively uses those
tools, especially under Chairman Pai, and we are working
closely with him right now to continue in that effort.
Chairman Johnson. So, again, kind of the question I want,
you literally have the possibility of--let us say a CEO of a
company, running the company, has to be aware of this fraud,
literally stealing millions of dollars. Now, if you go and rob
a bank of millions of dollars, you would be put away for how
many years? How many years can these people be put away for if
we actually enforce and have the Justice Department follow up
on it? What is the penalty?
Mr. Pai. I cannot give you the specific term of years that
would be applicable to that criminal offense, but I can say
from an FCC perspective, we are consistently looking at the
full range, up to the maximum of the fines that we can impose,
the other civil and criminal and administrative penalties that
we can impose, to make sure that there is a deterrent effect,
because, otherwise, as you pointed out, folks just think, OK, I
will get a slap on the wrist, I can go back to the business
model that we had before.
Chairman Johnson. So, I found it jaw-dropping, the
instances where one address was getting hundreds and then
thousands of phones. It kind of reminds me of the earned income
tax credit with some audits from the Inspector General of the
Internal Revenue Service (IRS).
I want to go through the process of how this reimbursement
works so we can understand how that kind of fraud can occur.
Mr. Bagdoyan, Chairman Pai, or Ms. Robinson, tell me how the
reimbursement works. How is the phone applied for or how is the
fraud committed?
Ms. Robinson. Sure, and I can try to approach this a couple
different ways. But, I think it is important, Chairman Johnson,
to kind of clarify a few issues.
In the first instance, the Lifeline program rules as
written today do not actually provide support for phones. It is
actually to provide the subsidies designed to provide for the
underlying service. But, of course, certain service providers
do have the ability to, and often do actually provide free
phones.
Chairman Johnson. So, a service provider basically sends an
invoice to the FCC----
Ms. Robinson. Or to USAC.
Chairman Johnson [continuing]. To get $9.25 reimbursement
for a phone.
Ms. Robinson. That is correct.
Chairman Johnson. That is on a monthly basis?
Ms. Robinson. Sure, they can submit monthly. They can
submit quarterly, etc, and that is through the Form 497. And,
what we are doing now, actually through the great work that
Chairman Pai pointed out, previously there were some
disconnects that he was quick to note, between information that
was included in that form, the Form 497, and in the National
Lifeline Accountability Database. And, through Chairman Pai's
observations, we actually rectified that process such that we
no longer allow a delta between what was submitted on the Form
497, which could be a lot more than what was actually allowed
in the NLAD.
Chairman Johnson. So, the companies themselves have sales
agents that can go through different types of eligibility
rolls, whether it is Medicare or Medicaid.
Ms. Robinson. Correct.
Chairman Johnson. And, start calling up people and say,
``Hey, do you want a phone?'' Is that kind of how it works or
it could work?
Mr. Pai. It could work that way, yes.
Chairman Johnson. So, I understand the verification process
in terms of whether one of these people who subscribe actually
are part of that program, and there is an audit result, what
was it, 3.5 million people contacted, 1.5 million they were not
part of those programs. Do we also verify that they actually
get a phone?
Mr. Bagdoyan. That is a great question, Mr. Chairman. We
really do not know whether they do get a phone.
Chairman Johnson. I am shaking my head again here.
Mr. Bagdoyan. Yes, I know. I am not trying to compound your
problem, but we really do not know, and we really do not know
how many of these individuals have other phones, like the 12.3
million or so subscribers that I mentioned in my opening
remarks, we have no idea how many other phones they have and
from whom. So, that is also a problem.
Chairman Johnson. I will get to that in my next round, but
it was also pretty stark that it was like one in eight or one
in nine did not have another phone, or whatever. We will get
into that in the next round. Senator McCaskill.
Senator McCaskill. I do not even know where to start. There
is so much.
Chairman Johnson. That was one of the problems with this
hearing.
Senator McCaskill. Let us go with enforcement first. I have
a list of folks who received NALs, and NALs are basically for
the folks you found that have done bad stuff. Right, Ms.
Robinson? And on this list, Icon was referred for criminal
prosecution, but that ended up as a money-laundering case.
Mr. Pai. Correct.
Senator McCaskill. And, the only person I know of that has
ever been convicted of anything was this guy, and it was not
for anything having to do with Lifeline. He was convicted of
money laundering.
Mr. Pai. Right.
Senator McCaskill. So, let us take that case and put it
aside. I have $94 million--take his out, so that means I have
$90 million that has been identified from 10 carriers, $90
million from 10 carriers. Now, keep in mind those same 10
carriers you wrote checks totaling $2.4 billion to in the last
three years.
Now, how in the world are we writing these people checks
when they owe us $90 million? How is that happening?
Mr. Pai. Senator, that is a great question, which I asked
when I was a Commissioner, and we are committed to stopping
that now that I have the privilege of serving as Chairman.
Senator McCaskill. Well, you are not. Nothing is happening
here. There is no enforcement in this program. These guys know
they can get away with it. I mean, you have done three. You
have done three settlements with AT&T, Bluejay and Total Call.
But nobody has gone to jail. And, let us look at what the GAO
did. They did a secret shopper program, and they applied with
fraudulent information, and 63 percent of the time they were
deemed eligible. This is after 2012, Chairman Pai. This is
after all these reforms. This is after the database. This is
after all of that. Sixty-three percent of the time they were
made eligible.
So, why you guys do not internally have a secret shopper
program? And, the minute you catch somebody doing that, why you
do not immediately slap a lawsuit on them and go after them?
This is not hard. I am a prosecutor. I guarantee you a jury
will convict these guys. It is outrageous to me that they have
gotten away with this level of fraud for this long, $90 million
that you guys have identified and you keep writing them checks.
I mean, I do not know what I have to do to stop this.
Mr. Pai. Senator, what I can tell you is that, again, this
is a top enforcement priority for us. We are moving
aggressively. And, again, I cannot give particular information
in this setting, but what I can tell you is this is not falling
through the cracks under my leadership.
Senator McCaskill. Is there a statute of limitations
problem?
Mr. Pai. There are legal issues such as that that we have
to take into account.
Senator McCaskill. OK. I need to know what you are going to
do about all those things. I mean, this is like the third
hearing I have had where I have said, ``You have collected no
money, much less sent anybody to jail.'' Of course, this is
going to continue.
Let us talk about overrides. Basically, right now, the
Lifeline providers are supposed to use the databases to confirm
eligibility. When they cannot be confirmed, the Lifeline
requires that the providers independently review income. Prior
to February 2016, you guys had no way to confirm they were
doing so other than literally taking their word for it.
So, we now know that 63 percent of the time that GAO
applied with fake info, they were getting a phone. You
indicated you found in June of last year that between October
2014 and April 2016, carriers were overriding the duplicate
database 35 percent of the time.
So, we put this database in there for duplicates, and then
they are just going in and overriding it. No harm, no foul. Is
anybody calling them when they override it and saying, ``What
are you doing?'' Thirty-five percent of the time, one of out
three times, they are not paying any attention to the duplicate
database.
Ms. Robinson. Ranking Member McCaskill, that is a very fair
question, and under the existing rules, I think, and with all
the universal service programs, as I understand the
Commission's policy, there is always a balance between program
integrity and trying to manage and balance program
participation.
Senator McCaskill. Believe me, program integrity is lost on
this one.
Ms. Robinson. Sure.
Senator McCaskill. In that battle they are not even close.
Ms. Robinson. Right.
Senator McCaskill. It is not even close. I mean, I think
there are various ways you could confirm if it is a nursing
home or a homeless shelter.
Ms. Robinson. Sure.
Senator McCaskill. The notion that you are letting one out
of three override the duplicate verification process is
outrageous on its face. Outrageous. So, what is going to keep
them from overriding the National Verifier? Have you got any
ideas on that?
Mr. Pai. Senator, that is one of the issues that I am
concerned about, given the fact that, as you pointed out, in my
own investigation in 2016 we found that overrides for some
companies in particular was more the norm than the exception.
And, that is one of the things that we have to make sure----
Senator McCaskill. Yes, those guys are cheating, the ones
that are overriding the most. I will just tell you right now
they are cheating. You want to go out and send an investigator
and then bring whatever jurisdiction they are in to the local
prosecutor, I will be glad to call the local prosecutor and
walk them through putting them in jail. They are cheating. I
mean, you guys just have to decide. Why can we not hand these
phones out when someone signs up for unemployment insurance?
Why can we not hand these phones out when someone signs up for
Supplemental Nutrition Assistance Program (SNAP) benefits? Why
can we not have these phones handed out at the very setting
where their eligibility verification has been done? Why are we
providing these companies with this massive opportunity for
fraud? Is there a reason why we cannot do that?
Ms. Robinson. Ranking Member McCaskill, I want to just kind
of clarify a couple of things.
First, in the first instance, with respect to the
overrides, literally through the ongoing investigation and
things that have been pointed out, we have been getting more
aggressive with--and the process for allowing overrides through
the dispute process has been modified as a result of seeing
that there was clearly a level of abuse that was occurring, and
we have modified and significantly reduced the instances in
which providers would be able to sort of override the system to
sort of say, no, this actual subscriber is eligible. So, that
is what I want to say in the first instance.
Second, with respect to the National Verifier, there is no
override function being contemplated within there, so we have
actually taken that lesson and learned from NLAD and have no
intent in working with the Commission to sort of duplicate what
some subscribers are using as a loophole to take----
Senator McCaskill. So, there will be no override?
Ms. Robinson. No.
Senator McCaskill. OK. So, if there is not a local database
and the National Verifier cannot, then it will be upon the
person who wants the phone to prove their verification to the
National Verifier or to the local phone company?
Ms. Robinson. Right, and we also have a manual review
process as well, so it is three components. There will be the
Federal----
Senator McCaskill. Well, I will be interested to learn all
about that. I would really love to see the proposal on that. I
know, and why we do not stop the override on the duplicate
database? Why do we not just say you cannot do it anymore? Why
can we not do that? Do you not have the power to do that,
Chairman Pai.
Mr. Pai. We would have to change our rules to do that, but
that is----
Senator McCaskill. I am down for that. And, by the way, we
have two people here that are all about getting rid of stupid
regulations, and if there is a regulation that is keeping you
from quickly changing the rule to stop the override on the
duplicate database, you have three champions right here, three
warriors that will help you.
Mr. Pai. Well, I appreciate that and would be happy to work
with you and your staffs on it going forward.
Senator McCaskill. Thank you.
Chairman Johnson. Or, come up with a whole new system that
is fraud-proof in terms of distribution of these phones.
Senator Heitkamp.
OPENING STATEMENT OF SENATOR HEITKAMP
Senator Heitkamp. I want to start out by just telling you
that I hope we all appreciate how critically important this
program is to saving lives. The access to communications, if
you have ever seen any example of how critical maintaining
access to communications is, you can look at Hurricane Harvey,
you can look at what happened with Hurricane Irma. This is a
program that is about saving lives. When I look at this
program, I think about it in the context of 911 programs. I
think of it in the context of all of the other availability for
especially older elderly to live in their homes, to live worry-
free in their homes, and still have that access. So, this is
not a choice for me of throwing out the baby with the bath
water. But, you have to get it right.
And so, I want to talk about what could be kind of a
reaction to the GAO report. In the report issued by GAO in May,
they recommend the Universal Service Administrative Company
transfer their funds which are currently held in private bank
accounts into the Treasury. I am concerned that that could be
done without assurances that the funds would be rated or
transferred around to help pay down the debt, or in the case of
extraordinary measures, used when we are hitting close to the
debt ceiling. And, I think it is critical that the universal
service fee maintain its ability to access these funds without
implementation to maintain the continuity providers rely on.
And one thing, we all grouse when we pay the additional
taxes and we pay the additional fees when we pay our
communications bills, but I do it with a smile because I think
that means that a Grandma in her home still able to live has
access to important and critical communications services.
And so, those funds are intended for that purpose, and what
are we going to do to guarantee if we do follow the GAO
recommendation to transfer them into bank accounts that those
funds are insulated or protected against utilization for other
purposes? Mr. Pai.
Mr. Pai. Senator, thank you for the question. My
understanding is that the funds being transferred to Treasury
actually make the universal service funds more insured against
the risk of loss, that there are Federal management and other
practices that the Treasury observes that will make sure that
those funds are there for the grandmother that you spoke about.
The second point is that my understanding is that those
funds, once transferred to Treasury, would be used to offset
debts that are owed by payees. And so, for example, if Party X
owes money to the IRS and that party is also getting Lifeline
subsidies from the FCC, those funds being in Treasury would be
allowed to be an offset, which is a way of giving the Federal
Government more flexibility.
Senator Heitkamp. Well, we are going to be watching very
closely the administration of those funds to guarantee that
those funds are utilized the way, when I pay my bill, I expect
them to be utilized.
I want to just talk more systematic, because I think
Senator McCaskill and Senator Johnson--I mean, we are always
amazed because it is like when people come in front of our
Committee and you think, oh, we just discovered this problem,
guess what? We did not just discover this problem. This is a
problem that has been ongoing for a lot of years. Why is it
that there never seems to be urgency in solving this problem
when we discover it, a problem of fraud, waste, and abuse? We
would think you would jump on that, say, man, we do not want to
go in front of Claire and Ron because they are going to have
our lunch. Why is it that I envision them in 2 years we are
going to be back here talking about the same thing unless
people really get that our expectation is that in protecting
the Federal fisc, you have to act with immediacy and urgency
when you see a problem. And, why is it that we do not seem to
get that?
Mr. Pai. Senator, I could not agree with you more, and as
Senator McCaskill knows, because we have talked about this
issue, she and I, for many years now, when I was a
Commissioner, I was irritated about the fact that the prior
administration of the FCC did not make this a priority. That is
why I started my own investigation as a minority Commissioner
because I wanted to get facts. I sent USAC a number of letters
in my capacity as a Commissioner because I did not have the
chance to set the agenda for the agency, but I wanted Congress
and the American public to know that someone at the FCC was
looking at this issue.
Now that I am in the driver's seat, it is a top priority,
and we have an enforcement plan to go after the unscrupulous
actors. I sent to USAC a very detailed letter on July 11th
saying weed out the dead subscribers, weed out the ineligible
subscribers. Make these sales agents register with USAC before
they get to dip into the database. These are some of the steps
we are taking to make sure that the problems we saw in 2014,
2015, and 2016 under the prior leadership do not continue. And,
I want you to be able to go back to North Dakota and say,
``This program is delivering for the grandmother who deserves
it and nobody else, no unscrupulous actors, no undeserving
beneficiaries.''
Senator Heitkamp. Mr. Pai, you are a big thinker. That is
your reputation in town, that you think beyond what you are
doing. Offer us some advice on how we can create a greater
sense of urgency in the bureaucracy--I am not even going to say
``the administration'' because I do not think--this is an
administration to administration to administration problem. We
do oversight. We cannot sit here and administer agencies, and
we only respond when we have hearings like this. But, give me
three good ideas on how we can create a greater sense of
urgency when people spot fraud, waste, or abuse or just have a
good idea that could promote government efficiency.
Mr. Pai. Well, that is a good question, Senator, and you
are certainly putting my reputation, if that is earned, on the
line.
Senator Heitkamp. I do not always agree with you, but you
are known as a big thinker. [Laughter.]
Mr. Pai. We were doing so well. Senator, I will say a
couple different ideas that spring to my mind, especially after
reading the GAO report.
First, it is always better, I think, to have up-front
verification as opposed to after-the-fact enforcement. The pay-
and-chase model that was described in the GAO report is never
going to be sufficient. It is going to be, as Senator McCaskill
has described it before, sort of like whack-a-mole. You just
hope to catch the ones that you can after the fact. So, having
up-front verification is very important.
Second, one of the things that Senator McCaskill has talked
about, including today, is having a cap, a budget for the
program. I think any family in the United States knows, OK,
before going out and spending a bunch of money, let us see how
much money we have available, and we do not want to go above
that money. We do not have a meaningful budget mechanism for
the Lifeline program, and that is something that I think many
advocates have talked about as well.
The third thing--and this is much bigger picture, but we
have to think about what is the purpose of the program and does
the FCC, and USAC on our behalf, have the ability to monitor
with key metrics whether we are meeting that goal? As the GAO
report points out, we do not have the ability right now to
know, for example, are these funds actually going to people who
otherwise have non-Lifeline phone services and other services?
We need to make sure that we figure out what the goal is and
then measure whether the program is meeting that goal in a very
quantitative way. That is something, I think, that Congress
could certainly look at.
Senator Heitkamp. Just to close the loop on that, Mr.
Chairman, Senator Lankford and I just had a hearing yesterday
talking about government efficiency, and we talked about the
lack of cost-benefit analysis on existing programs. We do it on
regulations, major regulations, but we do not analyze ongoing
programs probably as adequately as what we should.
Chairman Johnson. Is that term not an oxymoron,
``government efficiency''? [Laughter.]
Thanks, Senator Heitkamp.
I do want to point out, the three witnesses we have before
us, they are wearing white hats. These are individuals who are
going to be partners with this Committee to do this. We will
hold everybody accountable, but we are venting frustration up
here, but I think we really do have three individuals before us
that want to get to the bottom of this, want to take a look at
the rules and regulations, alter them, control this, and fix
this problem. So, I want to point that out. Senator Daines.
OPENING STATEMENT OF SENATOR DAINES
Senator Daines. Thank you, Mr. Chairman, Ranking Member
McCaskill. I first want to thank the witnesses for highlighting
the need to reform the Lifeline program in order to curb the
waste, fraud, and abuse. I cannot even think how many times I
have used the words ``waste, fraud, and abuse'' as it relates
to programs in the Federal Government, and I applaud your
efforts in doing this. And, Mr. Chairman, as well, thank you
for your leadership here as taxpayers.
I also appreciate the leadership we have seen from Chairman
Pai and the reform of the FCC has already made to the program.
It is a very good start.
Chairman Pai, you often speak of closing this digital
divide. This is an important goal. But, I want to also add one
more part which is probably closing the rural-urban divide as
well, closing that rural gap. I see so often your decisions in
government focus on the needs of the population centers, and I
understand that rationale, but sometimes forget States like
Montana that have a very strong rural thread that runs through
it, and I know you grew up that way in Kansas. A decision or
solution that might make sense and work in San Francisco may
not work and probably will not work in a place like Richey,
Montana. We are seeing a broadband explosion across the United
States. However, it is confined more to cities and to urban
areas. Free Wi-Fi can be found in coffee shops, book stores,
and now even whole cities are adopting municipal Wi-Fi systems.
While they are thinking about going from 4G to 5G, we still
have not found the alphabet sometimes in parts of Montana.
However, with each new expansion in our major cities, rural
States are left with nothing.
In fact, I just saw a Brookings Institution study that
showed one in four rural residents do not have access to
broadband. And, as a Westerner, sometimes when I come back
here, back east, there is kind of this highbrow mentality on
the East Coast where you grew up, where you went to school. I
can tell you the folks out in rural America are as
sophisticated, as well educated, and have, frankly, more common
sense than most in this Nation. Compared now to 0.6 percent of
those living in cities, so one in four in rural areas do not
have access, 0.6 percent in the cities. This rural gap hurts
Montana, it hurts rural States where we lack access to even the
most basic forms of broadband communication.
As you know, I was part of building a world-class cloud
computing company headquartered in Montana that Oracle later
acquired, that had products in 33 different languages. In fact,
Oracle took our cloud expertise and elevated that to leave the
entire Oracle cloud, the seventh largest cloud computing
company in the world, and they took Montana expertise here,
elevated it to the world.
Chairman Pai, how can we reform Lifeline and other USF
programs to focus on those who have nothing before upgrading
those who already have good access?
Mr. Pai. Senator, thanks for the question, and you put your
finger on the central problem that we are discussing today,
which is that, by definition, a dollar that goes to somebody
who does not need the help is a dollar denied from someone who
does. And, that is the core of this FCC's mission in terms of
closing the digital divide, is ensuring that scarce Federal
dollars are devoted to where they are absolutely needed. And,
in the Lifeline context, that means that we weed out the waste,
fraud, and abuse, the dead subscribers who are getting Lifeline
benefits, the $137 million or more annually that GAO pointed
out that is wasted. We need to make sure that those dollars are
directed to the people who are on the wrong side of the divide,
who need the help, to make sure that they have a chance to
participate in the digital economy just like the folks in
bigger cities.
Senator Daines. Yes, as we have said, technology now has
removed geography as a constraint, where some of our best and
brightest who bring incredible capacities to the workforce, but
have been disconnected because of this divide, and this is
closing. And, as a Nation, as we think going forward here of
bringing not only their competencies professionally to the 21st
Century economy, they bring a work ethic that is exceptional.
When you get raised getting up early, having to take care of
what needs to be done, you are up early--I was struck the other
day. Some farmers and ranchers came here to the office, and
they are struck by the fact that D.C. does not start until 9:00
in the morning, oftentimes. And, I remind them, I said they do
stay here late. But, they reminded me, the Montana Legislature,
their hearings start at 8 a.m. That would be unheard of here in
Washington, D.C. But, the point is you have a strong work
ethic, and you have this great workforce here that is ready to
engage in this global economy.
I want to shift gears here to the National Verifier. One of
the solutions GAO has proposed and the FCC has already taken
action on is the National Verifier. Although no solutions are
ever perfect, I think this is a step in the right direction,
reducing the waste, fraud, and abuse. There, I said it again.
Mr. Chairman, could you outline the status of the National
Verifier program and some of the benefit and shortfalls? And,
the second part of this question would be: How will this
program work in a State like Montana where many of these rural
customers do not have access to the broadband needed to even
sign up or may have other difficulties that arise from living a
long ways from town?
Mr. Pai. Sure, Senator. So, in terms of the status, we are
working actively with USAC, and I am sure Ms. Robinson could
also give you an update. But we are on track to roll out the
National Verifier in six States by the end of this year, a
couple dozen more by the end of 2018, and then full national
implementation by the end of 2019. That is certainly our goal,
and we are actively working with all relevant jurisdictions,
including States like Montana, to make sure that we have a
chance to integrate the data that they have into that verifier.
I also should add, by the way, that the National Verifier
is an important tool with respect to Lifeline in terms of
eligibility. It is not the only tool. There are other
administrative actions that the FCC needs to take, and USAC on
our behalf can take, as well as potential programmatic changes
that could help stop this problem. So, eligibility is
important, but there are other tools in the toolbox that we
need to consider as well.
Senator Daines. I am running out of time. Ms. Robinson, I
am just reading lots of body language here. You have some
things to share here. I have limited time, but I would like
your thoughts as well, please.
Ms. Robinson. I am happy to add a little bit, some
additional detail around the status of the National Verifier.
We are very passionate about that, and we think it will be a
great tool.
Senator Daines. Yes.
Ms. Robinson. Your State is one of the six States that will
be included in the initial launch of the six States. I am happy
to report again or to reiterate that currently we are running
on budget and to be on time. We are projecting to have our soft
launch of the National Verifier in December of this year, going
with the six States, including Montana, and we also have
secured an agreement with the Department of Housing and Urban
Development (HUD) to have Federal matching of eligibility using
Federal housing information. And, we are targeting our hard
launch in March 2018, so things are moving along great.
Of course, there have been some challenges we have to deal
with various privacy issues and things of that nature when
looking to deal with States, but they are not insurmountable.
And, we also recognize that there will not necessarily be
matching in all of the States, and we are moving along with the
understanding that we will have a combination of matching with
States, Federal databases, but also some manual use. I can give
you information on cost if you would like that as well,
Senator.
Senator Daines. I am out of time, so I will respect the
Chairman. But we can follow up with you on that.
Ms. Robinson. Absolutely.
Senator Daines. Thank you for including Montana.
Ms. Robinson. Absolutely.
Senator Daines. If you get a chance to come out there, you
are going to find you will meet some great folks out there.
They will be very excited about moving forward.
Ms. Robinson. We are excited about that.
Senator Daines. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Senator McCaskill.
Senator McCaskill. First, for the argument that has been
made in other settings to GAO that this report is outdated
based on the changes to the program that have actually been
implemented since 2014, do you believe your results would have
been significantly different based on the changes that have
actually been implemented?
Mr. Bagdoyan. Thank you for the question, Senator
McCaskill. The analytics we performed were a point in time. I
want to be absolutely clear with that, and their purpose was
first and foremost to flag indicators of potential fraud,
waste, or abuse, not reach a definitive conclusion about that.
So, that is very important to know that.
As you know, we are working with the FCC IG and with this
Committee to provide referrals for follow up action to see
exactly what happened, both in the analytics part as well as
the undercover part. So, that is the first point.
The second point is I believe, my team believes, that while
what has happened since the analytics were performed, a lot of
our audit work was performed, are steps in the right direction.
But, to be perfectly candid, they would not materially change
what we found and what it means.
Senator McCaskill. Thank you for that. And briefly, you
mentioned about contractor oversight, the fact that we now know
that these carriers are now farming out to sometimes overseas
call centers calling to try to sign up customers. Did I hear
you say you have taken a step--that they cannot do that now
without being cleared by USAC?
Mr. Pai. Senator, I did not mention that. I do not know if
Ms. Robinson did. But, obviously we hold the providers
responsible and liable for any actions that their agents might
take on their behalf, and that is one of the things we have
reiterated.
Senator McCaskill. OK. I am sure those contractors are
being compensated by virtue of how many people they sign up.
Mr. Pai. And, that is one of the issues that we flagged.
So, long as those incentives remain, the behavior will tend to
follow.
Senator McCaskill. Finally, on contribution audits, I was
interested in that portion of your report. We know that they
are incorrectly assessing these fees based on this audit.
Sometimes they are charging under. Importantly, many times they
are charging over. What are you doing to make sure consumers
get refunds? I mean, this is a class-action lawsuit waiting to
happen. I am surprised it has not happened yet. Have you guys
not been sued in a class action yet for people being charged
too much for these fees on their phone bills, being assessed
incorrectly?
Mr. Pai. We have not yet, but the day is young, I suppose.
Senator McCaskill. Yes, I bet you do, because it is perfect
for a class-action suit because one individual, it is what,
maybe a dollar a month? But if you have thousands of people
that are being overcharged a dollar a month, that is a lot of
money to these carriers, and they clearly are getting away with
that. So, what steps have you taken on that?
Mr. Pai. Senator, here, too, I was disturbed by some of the
findings of the GAO, and we accepted that recommendation, and
that is one of the things we are looking at going forward, is
making sure that if a customer sees that line item on his or
her bill, he or she can have, must have confidence that, OK,
this is the exact amount that I am owed, because as you pointed
out, a lot of these folks, customers who were overcharged, they
will never figure it out. Or even if they figure it out, there
is not much recourse they can have.
Senator McCaskill. And, it is real found money for these
guys.
Mr. Pai. Oh, it is a lot of money.
Senator McCaskill. So, I hope you get after that. I will be
following up on that one, too.
Mr. Pai. Absolutely, Senator.
Senator McCaskill. Thank you, Mr. Chairman. And, tell
everybody at GAO how proud I am of this audit. This is a really
good job.
Mr. Bagdoyan. Thank you, Senator. I really appreciate that.
Thank you.
Chairman Johnson. Thank you, Senator McCaskill, and I know
you have to leave for Finance, so I will close it out here
after a couple of questions.
I do want to ask consent to enter in the record a study by
Olga Ukhaneva from Georgetown University.\1\ It is ``Universal
Service in a Wireless World,'' and it kind of gets to the point
that I made earlier about prioritization of spending, where
maybe money from the Universal Service Fund might be better
spent, kind of what Senator Daines was talking about, it is
great if you can get a phone, but if you do not have the
broadband to be able to effectively use it.
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\1\ The report referenced by Senator Johnson appears in the
Appendix on page 151.
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The summary of this study, on the front page it says,
``Results indicate that the Lifeline program increases a
households propensity to subscribe to phone service. However,
the effects are quite small. Findings reveal that the subsidy,
as it has evolved, suffers from a great deal of infra-marginal
subscribers and would benefit from restructuring.'' I would
call that an understatement.
But here is kind of the data behind this, and I want to get
your reaction. They really found that out of all the landlines
and wireless, basically one out of eight of the subscribers
needed the program. In other words, seven out of eight would
have had a landline or wireless anyway. When it was just
wireless, only 1 out of 20, which means that 19 of the
subscribers of wireless would have had a phone anyway and truly
did not need it.
Now, everybody likes free money. Everybody likes to get
that subsidy. But it is kind of beyond the Lifeline, and when
we are $20 trillion in debt, when we have a Universal Service
Fund that we really could allocate money to the Mobility Fund
for rural access to broadband to increase that access, does
this really make sense?
So, kind of what I am hearing within this hearing is this
is an important service. Now, I think for some people,
certainly the Lifeline name is relevant, but maybe not to 19
out of 20. And so, I just kind of want to get your reaction to
this study. We will start with you, Mr. Bagdoyan, and does this
kind of comport with what you found in your assessments?
Mr. Bagdoyan. Well, we really did not look at it from the
policy and impact perspective, certainly, but throughout this
study, it is pretty consistent that historically this has been
a low participation program. I think roughly we mentioned a
third, 33 or so percent penetration of the eligible universe,
which means the other 66 or so percent pay into the program
without benefiting from it.
Chairman Johnson. And, by the way, of the third, some of
those were 10,000 being billed to one household.
Mr. Bagdoyan. Well, since you bring that up, I would also
add that we verified with the Postal Service that that is not a
valid address, by the way. So, I just wanted to make sure that
we close the loop on that example. But, yes, in a prior report,
GAO mentioned that study by the professor, and we thought that
it was robust methodologically, so the findings are pretty eye-
opening in terms of who gets what and for what purposes.
Chairman Johnson. I want the other two witnesses to react
to that, but while I am talking to you, your study was really,
like you said, trying to find indicators of waste, fraud, and
abuse.
As opposed to an overall study that says this is how much
waste we believe really exists.
Mr. Bagdoyan. Correct, right.
Chairman Johnson. Could you expand this with relative ease?
Or, are there other studies being undertaken either through the
Inspector General or through the FCC directly to try and get
some figure of the $1.5 billion we are spending, that this much
is being wasted?
Mr. Bagdoyan. That is a great question, and we are working
with the FCC OIG, their investigative component, to make
referrals. We are in the process of untangling the original
analysis so that we identify individuals and the phone
companies that they got their service from among the 1.2
million, as well as provide the appropriate leads from our
undercover work for them to follow up. They are fully staffed
and eager to work with us to get those referrals to really get
to the bottom of what happened in these cases, whether these
are fraudulent or legitimate ones that simply fell through the
cracks in terms of the process.
So, we are not going to do that work, but we are going to
make the referrals and track them over time to see what
happens.
Chairman Johnson. In business, you generally follow the 80/
20 rule: 80 percent of your sales really go through about 20
percent of your customers. Is that kind of true in terms of
these providers as well?
Mr. Bagdoyan. Yes, that is a great point. I believe--and
Chairman Pai may correct me--that roughly the top 30 providers
account for maybe 85 or 90-plus percent of the business.
Chairman Johnson. So, how difficult would it be to go in
there and do a real detailed forensic audit of 30 providers to
really get to the bottom of this? Is that not the way we should
approach this?
Mr. Bagdoyan. Of course, yes, it would be a pretty good
undertaking for GAO, but also the OIG would have a vast role in
doing that as well.
Chairman Johnson. Again, financial audits are relatively
simple, so that would be from my standpoint--is anybody doing
that? Is that an action that is being taken right now?
Mr. Pai. Not currently, Senator, but that is certainly
something that I think we should think about very seriously.
Chairman Johnson. I would highly recommend that. I would
start that next week. You want to get some control over this
thing, send in 30 audit teams to those 30 top providers, and we
would have a pretty good indication very early on, how much
really is being wasted and what kind of enforcement action
needs to be taken.
Chairman Pai, why don't you kind of comment on the one out
of 8 and one out of 20.
Mr. Pai. That study to me is exceptionally disturbing, and
if the study's methodology and conclusions are sound, then it
means that the benefit is not necessarily worthy of the name,
that the program is not necessarily closing the digital divide,
because the entire premise is that we give these $9.25
subsidies to people who otherwise would be disconnected. And,
if they are otherwise willing and able to subscribe to
communications services or do, in fact, have non-Lifeline
subscriptions already, then essentially we are not doing
anything other than going on the treadmill, so to speak. So, I
think it is incredibly important for us to make sure, as I
mentioned in our exchange with Senator Heitkamp, that the
agency has a goal in mind. What is the goal of the program? And
then, measure us against that goal to make sure that we are not
subsidizing people who do not actually need the help.
Chairman Johnson. We just do not have the money to waste.
Ms. Robinson, do you want to comment on that at all?
Ms. Robinson. Sure. I just would add two or three points,
Chairman Johnson.
On the first point, with respect to sort of what we are
doing with the FCC to actually sort of measure the
effectiveness of the program, just yesterday we actually
released a Request for Proposal (RFP) to actually begin to do
that work, to do a risk assessment, to actually begin to ask
those hard questions. Is the Lifeline program working as it is
intended to work? Because that is important. That is really the
question that is before us, and we are doing that in close
coordination with the FCC, and we look forward to begin to do
that work, to have it inform what we are doing in this regard.
And, that was really as a result of GAO's great work a few
years ago. It has taken us a while to get there, but we are
doing it now under Chairman Pai's leadership, and I think that
is a great undertaking. I have appreciated the support in that
regard.
Also, with respect to--you also talked about auditing and
taking a look at some providers and outliers, Chairman Pai has
actually directed us to do that in his July 11th letter, to
take the top 10 offenders, as it were, in GAO's report and to
begin to do sampling work to really sort of dig behind things
that they are doing. And, we are beginning that work as well.
So, we are taking really an all-hands approach both in terms of
looking at the effectiveness of the program, but also looking
at right now who is sort of on the radar right now and what can
we do about it.
Chairman Johnson. So, let me just interject. Let me suggest
that there are really 30 top suppliers. Go to the private
sector, go to the big three or four accounting firms, have them
send in a forensic audit team. You could pay them on a
commission basis based on what they are able to recover. They
would probably do it for 1 percent. OK, get in there and do it
now. My concern about kind of doing it the old government way
is we go in there, we do assessments, then we have another
study and we have another hearing like this 2 years from now.
Go in there assuming--because I think it is a pretty good
assumption--you are going to find a lot of waste, a lot of
fraud, that we need to get under control like right now. This
is your money. That would be my suggestion. You will probably
be getting a letter from me suggesting exactly that. But I
interrupted.
Ms. Robinson. That is really all I had to say, Mr.
Chairman. I thank you for your suggestion and look forward to
your letter.
Chairman Johnson. Again, we have gotten a little grumpy up
here, not directed at you whatsoever. This is just a real head
shaker here. And, I realize all three of you are really trying
to work and get this under control, and we truly appreciate
your efforts, and, again, your time, your testimony, your
answers to our questions.
With that, I will close out the hearing by saying the
hearing record will remain open for 15 days until September
29th at 5 p.m. for the submission of statements and questions
for the record.
This hearing is adjourned.
[Whereupon, at 11:36 a.m., the Committee was adjourned.]
A P P E N D I X
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