Sprint Wrongly Took Government Subsidies for 885,000 Inactive Customers

The Federal Communications Commission (FCC), the US comms regulator, has blasted wireless carrier Sprint after they were found to have received millions of dollars in subsidies for services that were not provided. The Lifeline program provides government funding to alleviate the cost of telephony and broadband services for subscribers with a low income, but Sprint claimed Lifeline subsidies for 885,000 customers who were not actively receiving a service. The 885,000 subscribers represent nearly 10 percent of the entire Lifeline program. Sprint over-reported their number of eligible Lifeline subscribers by an incredible 40 percent.

FCC Chairman Ajit Pai (pictured) described Sprint’s behavior as “outrageous”.

Lifeline is an important component of our efforts to bring digital opportunity to low-income Americans, and stopping waste, fraud, and abuse in the program has been a top priority of mine since I’ve been at the Commission. It’s outrageous that a company would claim millions of taxpayer dollars for doing nothing. This shows a careless disregard for program rules and American taxpayers. I have asked our Enforcement Bureau to investigate this matter to determine the full extent of the problem and to propose an appropriate remedy.

US telcos generally receive a USD9.25 monthly subsidy for each Lifeline subscriber, and this must be passed to the customer as a discount. For many subscribers this means their service is effectively provided free of charge. Sprint violated the Lifeline scheme rules by failing to remove subscribers from the subsidy program if they had not used their service during the last 30 days. The FCC explained that this rule was introduced to reduce an extraordinary level of waste.

…investigations showed that companies hawked free Lifeline service aggressively and indiscriminately, knowing that they would get paid each month even if consumer (sic) didn’t use their phones. And because the consumer paid nothing, he or she had no incentive to relinquish the subscription.

Even with this rule, the most recent report by the FCC Inspector General determined that 18.5 percent of all Lifeline payments were improper.

The news invigorated opponents of the proposed merger between Sprint and T-Mobile USA. FCC Commissioner Geoffrey Starks issued a damning statement about the Sprint Lifeline revelations, having previously called for more public consultation about the merger. He argued it was necessary to delay the Commission’s review of the merger.

How the merging parties were going to handle Lifeline was a prominent part of their merger pitch, so I am alarmed and concerned about such a massive inaccuracy in a core part of the transaction. And why was it that an outside party brought this issue to the FCC’s attention – shouldn’t the FCC have uncovered this? Such apparent misconduct raises serious questions about the accuracy and completeness of both the company’s filings in the merger proceeding and our review.

Though bureaucrats, journalists and politicians may claim to be shocked by these latest revelations, the Lifeline program has long been characterized as a magnet for fraud. Lifeline dates back to President Reagan, but was often referred to by the unofficial and derisory name of ‘Obamaphone’ because the number of recipients greatly increased during President Obama’s time in office. In 2012 the FCC set themselves a target of eliminating USD200mn of “waste, fraud and abuse” from Lifeline after estimating that up to 15 percent of Lifeline subscribers were ineligible. Journalists followed up by writing stories about how easy it was to obtain ‘Obamaphones’ they were not entitled to.

In contrast to the carefully-chosen words of Ajit Pai and Geoffrey Starks, some reporters have described Sprint as “liars” who committed “fraud”. But as I observed when discussing Lifeline abuses in 2013:

Part of the blame lies with government, for exercising inadequate oversight. However, the failures of the Lifeline program also illustrate how the private sector can easily become prone to waste, if it adopts an approach of incentivizing some staff to maximize ‘sales’, whilst failing to implement controls to prevent abuse.

It does not take much to encourage wrongdoing if nobody is incentivized to do work which is hard but right and necessary. The history of revenue assurance demonstrates the human propensity for making big, stupid mistakes – and how everyone takes credit for success but none confess to failure. I have met plenty of telco managers who felt is was their job to maximize income whilst disregarding the risk of inappropriately collecting money that the telco was not entitled to. A good number of these incompetents continue to earn fat salaries for their so-called expertise. Perhaps further investigation will reveal that some Sprint staff were dishonest, but we should also be mindful of Hanlon’s Razor:

Never attribute to malice that which can be adequately explained by stupidity.

Sprint did not motivate its staff to implement checks and controls that would have identified these hugely excessive Lifeline claims, which were discovered through an investigation by the Oregon Public Utility Commission. But the FCC also lacked the means to identify this systematic overspending, despite knowing about waste and fraud in the Lifeline scheme for many years. And if governments choose not to pay competent people to monitor how taxpayer’s money is spent, why would they expect a private sector business to do more?

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.