article

The Honor System

Posted: 11/2003

The Honor System
Accusers: Industry Trust Masked Alleged Call Laundering Scheme


By Josh Long

Telephone giants accusing MCI of
fraud say a primary reason they did not immediately detect the alleged
call-laundering scheme is the industry operates on the honor system when paying
each other to originate and terminate phone calls.

MCIs biggest rivals have accused the No. 2 long-distance
phone company of bilking them out of millions of dollars in access charges by
manipulating or abolishing call detail records and routing long-distance traffic
over trunks only dedicated to carry local phone calls. The U.S. Attorneys Office
and the FCC are investigating the claims.

Electronic signaling systems detect where traffic begins and
ends. However, local phone companies often do not know from where a
call originates so they rely on information from the long-distance provider in
order to bill the IXC at the proper rate for routing traffic over their
networks.

Theres always an amount of questionable traffic, says
SBC Communications Inc. spokesman Dave Pacholczyk, referring to disputes over
where phone calls originate, but much of this business is an honor system.

AT&T Corp., SBC and Verizon Communications Inc. claim MCI
violated that honor code. Over the summer, following reports that the U.S. Justice Department had launched a probe into its call-routing
practices, MCI said a preliminary internal investigation revealed no foul play.

MCI, the former WorldCom Inc., has called AT&Ts claims
a ploy to derail its reorganization plan at a time when the Ashburn, Va.,
company was seeking to emerge from the largest bankruptcy in U.S. history.

Onvoy Inc., a telecommunications company accused of conspiring
with MCI to cheat AT&T, also has repeatedly said it has done nothing wrong. AT&T claims MCI conspired with Onvoy to deceive AT&T
into thinking phone calls destined for high-cost areas in the United States were
placed from Canada, rather than their actual origin: the United States.

AT&T says it was paying millions of dollars in access
charges to rural telephone companies when its archrival was responsible for
footing the bill. According to AT&T, MCI was routing calls placed in the
United States through Minnesota-based Onvoy along to Manitoba Telecom Services
Inc. in Winnipeg, Canada. According to AT&Ts complaint, Manitoba would
route the calls to Bell Canada. Since Bell Canada had a bilateral relationship
with AT&T to exchange traffic from the United States to Canada, and vice
versa, AT&T would carry the traffic into the United States. AT&T says it
was frequently handing off traffic to independent rural telephone companies that
charged high access fees.

If MCI scammed its archrival out of millions of dollars as
AT&T claims spokesmen for the U.S. Attorneys Office and the FCCs
Enforcement Bureau say they cannot comment on pending investigations it is
unclear why nobody raised a red flag when millions of minutes of traffic were
going from the United States to Canada and back.

AT&T spokeswoman Claudia Jones says the phone company had
no reason to suspect foul play. There is an unspoken rule of conduct that
companies in the industry operate above board, Jones says, and so we had
no reason to think that anyone was putting their calls on our trunks so we could
pay the cost.

MCI says its routing practices are legitimate. Partnering with
a company such as Onvoy to find the most economical route to carry a phone call,
say MCI executives, is a common industry practice not fraud. Onvoy, a
leastcost routing company, leases the networks of other telecommunications
providers and directs traffic on that path to deliver calls on behalf of its
customers MCI and other phone companies.

Onvoys agreement to terminate the traffic was not a ruse
premised upon disguising the origin of the traffic but a transparent contractual
undertaking presumably based upon termination rates that AT&T had agreed to
with Bell Canada, MCI stated in a filing with the U.S. Bankruptcy Court.

However, MCIs competitors allege the bankrupt phone giant
made a concerted effort to conceal where calls were originating. Verizon and SBC
both allege MCI manipulated or removed the call detail records, including the
ANI. SBC also alleges MCIs long-distance traffic was terminated over trunks
designated for only local traffic.

Randy Milch, senior vice president and deputy general counsel
with Verizon, says MCIs actions represent a long-standing effort … to
evade the payment of access charges.

Kathryn Lovik, an Onvoy spokeswoman, says Onvoy interconnects
only with carriers that have SS7 capabilities throughout their network and can
guarantee the call detail record is preserved throughout the transmission of a
call. If there is a glitch in the records on a particular circuit, We would
troubleshoot that all the way to the root cause and eliminate that, she says.

In a letter to former WorldCom Inc. chief John Sidgmore dated
July 3, 2002, a top SBC executive said his company had disputed data WorldCom
had provided regarding what percentage of WorldCom traffic terminating on the
Bell network had qualified at interstate rates, versus the more expensive
intrastate rates.

Stanley Sigman, who is now the president and CEO of Cingular
Wireless, said if the dispute went to arbitration, We believe the evidence
will demonstrate that MCI has avoided the payment of millions of dollars in
tariffed rates and will represent another instance where a WorldCom company has
significantly understated its true operating cost.

Nine months later, WorldComs new chief, Michael Capellas,
received a letter from John Atterbury, SBCs Group President of Operations.
Atterbury reiterated the concerns of his predecessor.

MCI/WorldComs general failure to accurately report and
route traffic, including the provision of accurate signaling information, has
led to … the corresponding gross underpayment to SBC of tens, if not hundreds,
of millions of dollars of traffic compensation by MCI/WorldCom on an annual
basis, Atterbury wrote. SBC believes that many of these accounting
irregularities are ongoing despite our successful attempts to address some of
them on an interim basis.

Atterbury later called on Capellas to follow procedures to
ensure accurate reporting, which includes the transmission of accurate
signaling information with a telephone number correctly reflecting the location
of the calling party.

In a letter dated June 4, 2003, MCI executive James Lewis told
Atterbury MCI disagreed with the claims, but the companies were near agreement
on procedures for reporting call routing information. About a week later,
Atterbury replied to Capellas: Mr. Lewis response does not address or
refute the importance of traffic accounting, and glosses over other traffic
accounting concerns by focusing solely on the limited portion of the traffic
exchanged between our companies that has been the subject of our prior attempts
at amicable resolution.

Links
AT&T Corp. www.att.com
Bell Canada www.bell.ca
FCC www.fcc.gov
Manitoba Telecom Services Inc. www.mts.mb.ca
MCI www.mci.com
Onvoy Inc. www.onvoy.com
SBC Communications Inc. www.sbc.com
Verizon Communications Inc. www.verizon.com

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