**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | *  | CC Docket No. 02-6           |
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| Federal-State Joint Board on     | ** |                              |
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| Universal Service                | *  |                              |
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| Petition of the Puerto Rico      | ** |                              |
| Department of Education to       |    |                              |
| Release Funds Associated with    | *  |                              |
| the Schools and Libraries        | *) |                              |
| Universal Service Support        | ** |                              |
| Mechanism for Years 2001 and     |    |                              |
| 2002                             | *  |                              |
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**Order**

**Adopted: November 14, 2003 Released: November 25, 2003**

By the Commission:

**I. INTRODUCTION**

1.  In this Order, we direct the Schools and Libraries Division (SLD) of
    the Universal

Service Administrative Company (USAC, or Administrator) to review and
process the applications of the Puerto Rico Department of Education
(PRDOE) for funding years (FY) 2001 and 2002[^1] under the schools and
libraries universal support mechanism (E-rate Program) with the
conditions contained in this Order. We direct USAC to engage an
independent auditor to examine PRDOE's compliance with the Commission's
requirements for FY 2001 and 2002 funding, before USAC commits or
disburses FY 2001 and 2002 funds on behalf of PRDOE.

2.  We also direct USAC to engage an independent auditor to examine
    PRDOE's compliance with Commission rules during the first three
    years of its participation in the E-rate Program (FY 1998, 1999,
    2000). Upon completion of that audit, we will address issues related
    to PRDOE's participation in the E-rate program for those three
    funding years, including any need for recovery of funds that were
    distributed during those years.

    **II. BACKGROUND**

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A.  **Program Rules and Policies**

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3.  Under the E-rate program, eligible schools, libraries, and their
    consortia may apply

for discounts on eligible telecommunications services, Internet access,
and internal connections.[^2] In order to receive discounts on eligible
services, the Commission's rules require that the applicant make a bona
fide request for services by filing with the Administrator an FCC Form
470, which is posted to the Administrator's website for all potential
competing service providers to review.[^3] The Commission's rules
require eligible schools and libraries to seek competitive bids for all
services eligible for discounts.[^4] After the FCC Form 470 is posted,
the applicant must wait at least 28 days before entering into binding
service agreements with its chosen providers.[^5] When choosing a
service provider, the applicant must select the most cost effective
bid.[^6]

4.  Once the applicant has complied with the Commission's competitive
    bidding

requirements and signed a contract for eligible services, the applicant
must file FCC Form 471 to notify the Administrator of the services that
have been ordered, the carrier with whom the applicant has signed the
contract, and an estimate of funds needed to cover the discounts
requested for eligible services.[^7] SLD reviews the FCC Forms 471 it
receives and issues funding commitment decisions in accordance with the
Commission's rules.

5.  USAC does not provide funds directly to schools and libraries.
    Instead, the

Administrator disburses funds to eligible service providers who, in
turn, offer discounted services to eligible schools and libraries.[^8]
The applicant may ask its service provider to bill the discounted
amount. Alternatively, the applicant may pay the full, undiscounted
amount, and then file a designated form with the Administrator to
request reimbursement.[^9]

6.  In order to protect against waste, fraud, and abuse, action on
    pending applications is

deferred when USAC is made aware of investigations by federal, state, or
local authorities that potentially implicate compliance with program
rules for that funding request. In order to avoid jeopardizing
non-public investigations, USAC does not notify applicants that an
application may be on hold.

**B. USAC Audit of PRDOE and Pending Investigations**

7.  In accordance with its standard operating procedures, USAC committed
    and

disbursed funds on behalf of PRDOE during FY 1998-2000 to two service
providers, Puerto Rico Telephone Company (PRTC) and Data Research
Communications Company (DRC).[^10] After the first year of operation of
the program, USAC initiated audits of selected beneficiaries in order to
carry out its obligation to protect against waste, fraud and abuse. This
audit of FY 1998 beneficiaries, conducted by an independent audit firm,
was completed in 2000. The audit identified apparent program violations
with respect to PRDOE for funding year 1998. Specifically, the
independent auditors determined that, in the classrooms visited, there
were no desktop computers, which would appear to violate the
Commission's requirement that recipients have the necessary resources to
utilize the services funded by the E-rate.[^11]

8.  In response to that audit, on December 5, 2001, USAC suspended
    payments on behalf

of PRDOE for FY 1998-2000 for failure to "secure access to all of the
resources, including computers" necessary to make use of the discounted
services purchased with the E-rate funding.[^12] After consultation with
the Wireline Competition Bureau, USAC also suspended consideration of
PRDOE's applications for FY 2001 and 2002, and it required PRDOE to
respond to the findings of the USAC-initiated audit.[^13] In its
December 5, 2001 Suspension Letter, USAC asked PRDOE for a detailed
analysis of the state of the E-rate program in Puerto Rico, including
information on computer installation, curriculum software, teacher
training and the school electrical systems.[^14] In January, 2002, PRDOE
responded to USAC with written and in-person reports. PRDOE stated that
it had launched a three-pronged E-rate recovery effort that focused on
PRDOE's schools, its central communications network, and its central
offices.[^15] PRDOE updated its reports in April and October, 2002,
detailing its progress in achieving the goals of its recovery program.
On September 27, 2002, PRDOE wrote USAC, urging USAC to resume its
processing of PRDOE's FY 2001 and 2002 applications.[^16]

9.  Meanwhile, in the fall of 2000, soon after the USAC-initiated audit,
    Puerto Rico held

general elections. In early 2001, the new governor took office and
appointed a new Secretary of Education to head PRDOE. Upon taking over,
the new Secretary determined that in many schools the equipment did not
appear to have been properly installed, and in other schools the
electrical infrastructure was obsolete or inadequate.[^17] The new
Secretary immediately began corrective measures, including hiring an
outside consulting firm to undertake a comprehensive and critical
analysis of the status of the E-rate program under PRDOE.[^18] PRDOE
cancelled DRC's service contract under the E-rate program, and
subsequently asked the Department of Justice of the Commonwealth of
Puerto Rico to investigate DRC's record of performance.[^19] At the same
time, other federal and local authorities began investigating
questionable procedures at the PRDOE under the prior administration's
tenure. Between January, 2001 and January, 2002, four separate entities
initiated investigations of PRDOE.[^20] These investigations, examining
events that occurred prior to January, 2001, uncovered a past record of
competitive bidding violations, contracts inconsistent with federal
requirements, and funds spent on "unallowable activities."[^21]
Irregularities in the use of U.S. Department of Education funds led the
U.S. Department of Justice to indict Victor Fajardo-Velez, Secretary of
Education for Puerto Rico from 1994 to 2000. That individual
subsequently was sentenced to three years in federal prison and required
to pay restitution of over \$4 million.[^22] Federal investigations into
these matters are ongoing.

10. As previously noted, late in 2001, USAC suspended payment to PRDOE
    for all

outstanding commitments for FY 1998, 1999, and 2000. Subsequently, PRTC
brought a lawsuit against DRC, alleging it had failed to pay PRTC for
services rendered to it. DRC, in turn, counterclaimed, and filed a
third-party complaint against USAC in the Commonwealth Court of Puerto
Rico.[^23] The complaint seeks \$77 million in damages from USAC, based
in part on the contention that funding commitments issued by USAC
constituted binding contracts with the PRDOE.  DRC claims that USAC is
responsible for any funds due to PRTC based on USAC\'s funding
commitments in previous program years. DRC is claiming that USAC\'s
cessation of payments under the schools and libraries support mechanism
is the cause of DRC\'s default against PRTC. DRC also claims relief
against USAC based on USAC\'s funding commitments to PRDOE.

**C. PRDOE's Petition**

11. On January 30, 2003, PRDOE petitioned the Commission to direct USAC
    to

resume processing PRDOE's applications for FY 2001 and 2002.[^24] PRDOE
argues that such relief is appropriate for the following reasons: (1) as
a result of the 2000 general elections in Puerto Rico, the leadership of
PRDOE is new, and unaffiliated with the administration from the first
three years of the E-rate program in Puerto Rico; (2) independent audits
identified the needed changes in administrative structure and control
mechanisms; (3) PRDOE launched a "recovery program" to implement the
findings of the independent auditors; and (4) PRDOE responded promptly
to requests by USAC for documents and other information.

12. PRDOE states that its recovery program has corrected three key areas
    that were

formerly deficient: (1) the network itself; (2) the infrastructure in
the schools; and (3) the infrastructure at the PRDOE central offices.
Carried out with funding from non-E-rate sources, PRDOE states it has
made \$80 million in school electrical repairs, installed 3,300 school
computers, set up network help desks with 43 technicians, and trained
27,000 teachers (65% of all teachers), with training scheduled for more
teachers. PRDOE states that it is strictly enforcing bidding
regulations. PRDOE has rewritten vendor contracts to include enforceable
anti-corruption clauses. PRDOE also has instituted a validation process
that measures actual access of schools to the network. According to
PRDOE, it has moved from practically no schools connected to the network
to more than 600 schools.[^25]

13. PRDOE pledges to continue cooperating with ongoing investigations of
    funding

years 1998-2000.[^26] It commits to comply with all applicable local and
federal laws, and to periodically retain an external independent
professional firm to evaluate the operational aspects of its E-rate
projects and future use of E-rate funds.[^27] It also states it will
apply its new anti-corruption procedures to funding requests for FY 2001
and 2002, including any service substitution requests that may be
required since the original submissions for FY 2001 and 2002.

14. PRDOE states that it has insufficient funds to keep its technology
    development

program underway without reentry into the E-rate program.[^28] PRDOE
states that vendors provided E-rate-eligible services to PRDOE during
funding years 2001-2002 and still have not received payment for these
services.[^29] It also indicates its desire to substitute a service
provider other than DRC for internal connections in Funding Year 2001,
upon receiving a funding commitment. Finally, PRDOE states that those
who will lose the most from a curtailment of its technology initiative
are the 660,000 students enrolled in Puerto Rico's public schools.
According to PRDOE, every year that PRDOE is unable to participate in
the E-rate program results in 50,000 Puerto Ricans graduating from high
school without the benefits of the E-rate program.[^30]

**III. DISCUSSION**

15. PRDOE asks the Commission to direct USAC to resume processing its
    applications

seeking discounts from the schools and libraries support mechanisms for
FY 2001 and 2002. As explained above, USAC deferred action on these
applications as a result of the beneficiary audit which revealed
evidence of potential program violations by PRDOE in prior years.
Subsequent to that audit, USAC became aware of a number of local and
federal law enforcement investigations involving activities of the
Puerto Rico Department of Education. Under the facts presented here, it
was appropriate for USAC to defer action on PRDOE's FY 2001 and 2002
applications, upon receiving the results of the beneficiary audit and
learning of the additional investigations underway in Puerto Rico. We
believe that such action is necessary to ensure that the goals of
section 254 are met. Specifically, we must guard against waste, fraud,
and abuse of E-rate funds to ensure that all schools and libraries
receive the benefits of access to advanced telecommunications and
information services. This is particularly important here because demand
for discounts under the schools and libraries support mechanism
continues to exceed the supply of funds. To guard against waste, fraud,
and abuse, it is reasonable for USAC generally to defer action on
applications upon receiving evidence of potential program violations,
including evidence acquired from an active law enforcement investigation
related to the E-rate related activities of the applicant or any of the
service providers utilized by that applicant, until such time as
questions raised by the evidence can be resolved. [^31] Thus, USAC
correctly deferred action on PRDOE's FY 2001 and 2002 applications in
light of the investigations by several third parties of PRDOE's conduct
with regard to activities related to their 1998, 1999, and 2000 E-rate
applications. That deferral should generally continue until the
investigation is resolved, or until there is sufficient reason to
believe that potential program violations are not implicated in the
deferred applications.

16. We find that USAC proceeded in a probing and cautious fashion in
    this case, which

is appropriate with respect to applications and/or Funding Request
Numbers (FRNs) that are linked to an ongoing law enforcement
investigation. At the same time, we recognize that indefinitely
deferring action on applications could inadvertently harm individuals
that ultimately will be cleared of any wrongdoing, particularly in those
instances when an investigation takes years. As we recently stated in
addressing the State of Tennessee's petition for relief, we are
disinclined to relegate applications to an uncertain status for an
indefinite period of time during the pendency of any protracted
investigations.[^32] Thus, we believe that there are circumstances where
deferring action on an application in whole or in part is unnecessary to
prevent waste, fraud and abuse, notwithstanding the pendency of an
ongoing law enforcement investigation.[^33] In reviewing such
applications, however, USAC must subject such applications and/or FRNs
to probing and cautious review and carefully consider the specific facts
presented in each case. In particular, where, as is true here, there are
law enforcement investigations pending, we think it appropriate for USAC
to subject these requests to a more intensive review, tailored to the
nature of the allegations that have been raised.[^34]

17. Here, it was appropriate for USAC to defer action on PRDOE's FY 2001
    and

2002 applications in light of the ongoing investigation of activities at
PRDOE in the recent prior years, particularly in light of the indictment
and conviction of the former Secretary of Education for Puerto Rico for
extortion activities related to contractors for PRDOE.[^35] However, as
discussed below, PRDOE has convinced us that it has taken sufficient
action to ensure that the prior issues have been addressed and will not
occur again. Thus, we direct USAC to review and process the funding
requests of PRDOE for FY 2001 and 2002, other than those associated with
DRC, consistent with the conditions contained in this Order. We conclude
that such action is appropriate in light of PRDOE's change in leadership
and the achievements of its recovery program. This conclusion in no way
should be viewed as condoning the actions that occurred in the first
three years of PRDOE's E-rate funding. We will address the appropriate
measures that will be taken with respect to funding years 1998-2000 in a
separate, forthcoming order.

18. As we stated in the recent *Tennessee Order*, the Commission takes
    seriously all

allegations of waste, fraud and abuse.[^36] We are disturbed by the
allegations of fraud and waste relating to PRDOE's activities during the
first three years of PRDOE's participation in the E-rate program.[^37]
Should the investigations of the first three years result in additional
convictions, the Commission's suspension and debarment rules will
automatically be triggered.[^38] The petition before us, as well as our
review of the record, however, convinces us that the fundamental
circumstances of leadership and administrative control have changed
dramatically since the first three years of the PRDOE program.[^39] In
determining whether relief is appropriate, we fulfill both section 254's
requirement of ensuring quality services "at just, reasonable and
affordable rates" and our duty to prevent waste, fraud and abuse.[^40]
We conclude that several factors weigh in favor of directing USAC to
resume consideration of PRDOE's FY 2001 and 2002 funding requests
seeking discounts for services provided by PRTC and Sprint.

19. At the outset, we note that the allegations under investigation
    relate to activities

occurring in prior funding years, while PRDOE seeks action on funding
requests for subsequent years. We conclude that it is appropriate for
USAC to proceed with respect to the later funding years, after
subjecting the applications to heightened scrutiny to provide assurances
that the issues under investigation for the earlier years are not
present in FY 2001 and 2002. Based on the representations made by PRDOE
in this proceeding, PRDOE is rectifying the problems created by the
prior administration.[^41] These efforts have allowed PRDOE to move
beyond the problems of the past and towards section 254's goal of
enhancing access at reasonable and affordable rates**.**[^42] The
current administration of PRDOE has been and continues to be responsive
to federal and local authorities requesting information. PRDOE has
undertaken significant measures to install infrastructure, network, and
desk equipment, and has undertaken training to utilize these resources.
Moreover, PRDOE launched and implemented these changes from its own
funding sources, without relying on E-rate program funds.

20. Furthermore, we conclude, based on the record before us, that there
    are no

outstanding allegations of waste, fraud, abuse, or other wrongdoing
relating to any of the current PRDOE leadership or employees, with
respect to funding years 2001 and 2002. The only challenge to PRDOE's
procedures affecting those funding years has been resolved in PRDOE's
favor. In response to allegations of bidding irregularities brought by
the losing bidder in PRDOE's FY 2001 award, the Commonwealth's appellate
court found against that bidder and for PRDOE.[^43] Similarly, there is
no evidence that allegations in a currently pending bid protest for FY
2003 affects PRDOE's funding requests for FY 2001 and 2002. Accordingly,
we think that the allegations pertaining to FY 2003 should be considered
separately and should not bar consideration of PRDOE's funding request
for FY 2001 and 2002.[^44] To further ensure that all rules have been
complied with for FY 2001 and 2002, we direct USAC, as discussed more
fully below, to engage the services of an independent auditor to provide
assurances that there has been compliance with the Commission's rules.
We expect that auditor will examine, among other things, compliance with
the Commission's rules on the competitive bidding process in both FY
2001 and 2002.

21. Although USAC has not acted on PRDOE's FY 2001 and 2002
    applications, we

understand that PRDOE has, in fact, received at least some of the
services for which it requested discounts.[^45] We also understand these
service providers have not been paid the full (nondiscounted)
amount.[^46] This situation is not unusual. Due to the vast number of
applications each year for the E-rate program, commitments often may not
occur by the time a new funding year, or even the new school year,
commences. Applicants proceed at their own risk in taking these services
in advance of funding commitments, and ultimately may be liable for the
full amount of the services, should funding commitments be denied. In
most instances, such applicants receive commitments at some point after
the funding year begins, and therefore obtain their discounts
retroactively. We, therefore, do not fault PRDOE or its suppliers for
obtaining or providing services in the absence of commitments, so long
as it is understood that the eventual funding approval and payment, if
any, will have to meet fully the requirements of our rules.[^47]

22. Taken together, the change in PRDOE's leadership, administration and
    operating

procedures represents a significant demarcation point in PRDOE's
relationship with the E-rate program. We therefore view PRDOE's conduct
with respect to FY 1998, 1999 and 2000 as severable from that of FY 2001
and 2002, such that the two periods should be treated with separate
approaches and in separate orders. The analyses required for these two
periods (FY 1998-2000 and FY 2001-2002) stem from separate sets of PRDOE
decision-makers employing separate administrative procedures. Audit
techniques will be able to examine the relevant conduct during distinct
phases of PRDOE's participation in the E-rate program.

23. While we are aware that at least four separate investigations have
    been initiated

relating to PRDOE, USAC has not, to date, undertaken an investigation of
PRDOE's compliance with our rules during funding years 2001 and 2002. As
a precondition to the commitment and release of FY 2001 and 2002 funds
to PRDOE's suppliers, PRDOE must be subject to an independent audit to
provide assurances that PRDOE has complied with the Commission's E-rate
rules for FY 2001 and 2002. USAC shall select the auditor, and that
auditor shall perform an audit consistent with the procedures currently
being performed for pending beneficiary audits.[^48] USAC may, at its
discretion, utilize the auditor currently performing these beneficiary
audits. The audit shall be conducted in accordance with government
auditing standards.[^49] We recognize that it may not be appropriate to
perform all the procedures currently being performed in the ongoing
beneficiary audits, given that in this case the entity has not actually
received any funding under the program.  Moreover, we note that
the audit procedures currently being performed in the ongoing
beneficiary audits are designed not only to determine whether
beneficiaries complied with all Commission rules in effect during the
relevant funding year, but also to identify broader programmatic issues
that may warrant revisions to our rules.  The procedures to be performed
in the audit that we require today shall be tailored to address the
particular issues raised in past investigations of PRDOE relating to
compliance with Commission rules in effect for the relevant funding
years.

24. Based on the record before us, we also direct USAC not to process
    funding requests

involving DRC for any services rendered during FY 2001 or 2002, or for
prior years, in the absence of further direction from the Commission.
This precaution is necessary because the Department of Justice of the
Commonwealth of Puerto Rico is investigating DRC's performance as a
former contractor-of-record.[^50] The record before us contains no
further information on the status or conclusions of that investigation.
We conclude it appropriate under these circumstances for USAC to defer
action indefinitely on all FRNs involving DRC because USAC is aware of
an active law enforcement investigation directly related to these FRNs
(namely, an investigation relating specifically to the conduct of DRC
vis-à-vis PRDOE as a vendor of services supported by the E-rate).
Conversely, where, as here, the applicant selected other service
providers for other funding requests, and we are not aware of any
pending investigations specifically relating to those service providers'
conduct vis-à-vis PRDOE, we conclude it appropriate for USAC to proceed
with respect to those other FRNs, after subjecting those FRNs to
heightened scrutiny tailored to the nature of the allegations under
investigation.[^51] Further, to the extent that funds are committed to
PRDOE for FY 2001 and 2002, requests to change service providers[^52]
and/or substitute service or equipment[^53] may be considered,
consistent with existing precedent. Such requests will not be
entertained with respect to the FRNs involving DRC at this time, pending
resolution of the investigations relating to DRC.

25. Finally, USAC has not undertaken a full investigation of the
    circumstances

surrounding PRDOE's participation in the E-rate program during its first
three years. It is critical that we expeditiously resolve all
outstanding issues relating to funding years 1998, 1999 and 2000. We
accordingly direct USAC to engage an independent auditor to examine
PRDOE's first three E-rate funding years, FY 1998, 1999 and 2000. This
audit shall be conducted separately from the audit of FY 2001 and 2002,
and is not a precondition to the release of FY 2001 and 2002 funds on
behalf of PRDOE, should such commitments and disbursements be warranted.
This audit may be conducted by the same auditor as the audit for FY 2001
and 2002, but that is not a requirement. As with the audit for FY 2001
and 2002, the audit for FY 1998-2000 shall be conducted in a manner
consistent with the procedures currently being performed for pending
beneficiary audits, and in accordance with government auditing
standards. The Commission will use the audit of FY 1998-2000 in
determining what action is appropriate with respect to PRDOE for the
first three years of PRDOE's E-rate program.

26. We will not hold PRDOE to a standard above and beyond that required
    by our rules,

but neither will we accept anything less. We caution PRDOE that should
it be determined that PRDOE did not, in fact, properly comply with all
applicable FCC rules for funding years 2001 and 2002, funding
commitments for those years will be denied. The heightened scrutiny to
which we subject PRDOE's requests is appropriate in light of the actions
of PRDOE in the past. In light of these factors, we find it consistent
with section 254 to direct USAC to resume processing of PRDOE's FY 2001
and 2002 funding requests associated with PRTC and Sprint, conditioned
on the results of the independent audit demonstrating PRDOE's material
compliance with the Commission's rules. The Commission is committed and
obliged to implement the E-rate program by advancing the overall public
interest, a requirement we find is fulfilled by this Order.[^54]

**IV. ORDERING CLAUSES**

27. ACCORDINGLY, IT IS ORDERED, pursuant to sections 1-4, and 254 of the

Communications Act of 1934, 47 U.S.C. §§ 151-154 and 254, and section
54.503 of the Commission\'s rules, 47 C.F.R. § 54.503, that the PRDOE
Petition filed by the Puerto Rico Department of Education on January 30,
2003, IS GRANTED to the extent provided herein, and subject to the
conditions stated herein. We instruct SLD to resume review of PRDOE's
funding requests for year 2001 and 2002 applications and, if
appropriate, issue the requisite funding decision commitment letters and
subsequent disbursements pursuant thereto.

28. IT IS FURTHER ORDERED that this Order is effective upon release.

    FEDERAL COMMUNICATIONS COMMISSION

    Marlene H. Dortch

Secretary

[^1]: For these two funding years, PRDOE has requested \$69,500,969 in
    internal connections, telecommunications services, and Internet
    access. *See* SLD's website,
    \<[http://]{.underline}[www.sl.universalservice](http://www.sl.universalservice/)[.org/]{.underline}\>.

[^2]: 47 C.F.R. §§ 54.502, 54.503.

[^3]: Schools and Libraries Universal Service, Description of Services
    Requested and Certification Form, OMB 3060-0806 (FCC Form 470); 47
    C.F.R. § 54.504(b); *Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776,
    9078, para. 575 (1997) (*Universal Service Order*), as corrected by
    *Federal‑State Joint Board on Universal Service*, CC Docket No.
    96‑45, Errata, FCC 97‑157 (rel. June 4, 1997), *affirmed in part*,
    *Texas Office of Public Utility Counsel v. FCC*, 183 F.3d 393 (5th
    Cir. 1999) (affirming *Universal Service First Report and Order* in
    part and reversing and remanding on unrelated grounds), *cert.
    denied, Celpage, Inc. v. FCC*, 120 S. Ct. 2212 (May 30, 2000),
    *cert. denied,* *AT&T Corp. v. Cincinnati Bell Tel. Co*., 120 S. Ct.
    2237 (June 5, 2000), *cert. dismissed,* *GTE Service Corp. v. FCC*,
    121 S. Ct. 423 (Nov. 2, 2000).

[^4]: 47 C.F.R. § 54.504; *Universal Service Order*, 12 FCC Rcd at 9029,
    para. 480.

[^5]: 47 C.F.R. § 54.504(b). Services also may be provided under tariff
    or month-to-month arrangements.

[^6]: *Universal Service Order*, 12 FCC Rcd at 9029-30, para. 481.

[^7]: 47 C.F.R. § 54.504(c); Schools and Libraries Universal Service,
    Services Ordered and Certification Form, OMB 3060-0806 (FCC Form
    471).

[^8]: *See* *Changes to the Board of Directors of the National Exchange
    Carrier Association, Inc., Federal-State Joint Board on Universal
    Service,* CC Docket Nos. 97-21 and 96-45, Order, FCC 99-291, paras.
    8-9 (rel. October 8, 1999), *recon. pending*; *Changes to the Board
    of Directors of the National Exchange Carrier Association, Inc.,
    Federal-State Joint Board on Universal Service,* CC Docket Nos.
    97-21 and 96-45, Order, FCC 00-350 (rel. October 26, 2000), *appeal
    pendin*g *sub nom*., *United States Telecommunications Association
    v. Federal Communications Commission,* No. 00-1500, filed November
    27, 2000; *see also* SLD's website,
    \<[http://]{.underline}[www.sl.universalservice](http://www.sl.universalservice/)[.org/]{.underline}\>.

[^9]: The reimbursement form is called the Billed Entity Applicant
    Reimbursement (BEAR) Form.

[^10]: PRDOE received commitments for its 1540 schools for
    telecommunications services, Internet access, and internal
    connections for FY 1998, 1999, and 2000, totaling \$158 million
    dollars. Of that, \$101 million dollars was disbursed. *See* Letter
    from Dr. César A. Rey Hernández, Secretary, PRDOE, to Jane Mago,
    General Counsel, Federal Communications Commission, dated January
    30, 2003 (*PRDOE Petition*) at 4 and Exhibit I (Appendix B of Arthur
    Andersen Audit Report, dated October 17, 2001). In FY 1998, PRDOE
    selected Puerto Rico Telephone Company (PRTC) for telecommunications
    service and Internet access, and Data Research Communication
    Corporation (DRC) for internal connections. In FY 1999, PRDOE
    selected PRTC for telecommunications service, both PRTC and DRC for
    Internet access, and DRC for internal connections. In FY 2000, PRDOE
    selected DRC for Internet access, and PRTC and DRC for internal
    connections.

[^11]: *PRDOE Petition* at Exhibit 1, page B-vi.

[^12]: Letter from George McDonald, USAC, to PRDOE, dated December 5,
    2001, at 1-2. (Suspension Letter).

[^13]: *Id.*

[^14]: *Id*. at 2.

[^15]: *PRDOE Petition* at Exhibit IV.

[^16]: Letter from PRDOE to George McDonald, USAC, dated September 27,
    2002.

[^17]: *PRDOE Petition* at 3.

[^18]: *Id.*

[^19]: *Id*. at 5 and Exhibit XII.

[^20]: Investigations were launched by (1) a committee of the Puerto
    Rican Senate; (2) by the Department of Justice of the Commonwealth
    of Puerto Rico; (3) by a committee of prominent citizens ("Blue
    Ribbon Committee"), appointed by Commonwealth Governor Sila M.
    Calderón *(see PRDOE Petition* at 5); and (4) by the U.S. Department
    of Education. *PRDOE Petition* at 5-6; Letter from William D.
    Hansen, U. S. Department of Education, to Puerto Rico Governor Sila
    M Calderón, dated May 29, 2002, at 2 (USDOE Letter).

[^21]: USDOE Letter at 2.

[^22]: *See* Criminal Docket for Case 02-CR-42-ALL, *U.S. v. Victor
    Fajardo-Velez,* U.S. District Court, Puerto Rico (San Juan), filed
    Jan. 22, 2002, sentence entered December 12, 2002. The indictment
    charged that between 1994 and 2000, the defendant and his
    co-defendants extorted approximately \$4.3 million from PRDOE
    contractors. Defendant recruited his sister-in-law to represent two
    corporations, in order to divert funds from them, and he awarded
    approximately \$138 million in contracts to four corporations owned
    by other defendants. Joint press release of the United States
    Attorney, District of Puerto Rico; the Puerto Rico Office of the
    Federal Bureau of Investigation; U.S. Department of Education,
    Office of Inspector General; and the Puerto Rico Office of the
    Comptroller, January 23, 2002.

[^23]: Puerto Rico Telephone Company v. DRC Corporation v. Universal
    Service Administrative Company, Civ. No. KAC-02-5075-(901) (Sala
    Superior de San Juan).

[^24]: *See PRDOE Petition*. *See also* *Wireline Competition Bureau
    Seeks Comment on a Petition by Puerto Rico Department of Education
    to Release Funds Associated With Schools and Libraries Universal
    Service Support Mechanism for Funding Years 2001 and 2002*, CC
    Docket No. 02-6, Public Notice, DA 03-1731 (rel. May 16, 2003)
    (*PRDOE Public Notice*). Comments, all in support of PRDOE's
    Petition, were submitted by the Hon. Anibal Acevedo-Vilá, Resident
    Commissioner, Commonwealth of Puerto Rico, U.S. House of
    Representatives; Centennal Communications Corp.; and The Hispanic
    Information and Telecommunications Network, Inc. PRDOE had selected
    PRTC for telecommunications service and Internet access and DRC for
    Internet access and internal connections for FY 2001. PRDOE selected
    PRTC for telecommunications service, Internet access, and internal
    connections and Sprint for telecommunications service for FY 2002.

[^25]: *PRDOE Petition* at 5. There are 1,540 schools in the public
    system of the Commonwealth of Puerto Rico. *Id.* at 2, note 1.

[^26]: *See* *id.* at 5-6.

[^27]: *Id.* at 6.

[^28]: *Id*. at 5.

[^29]: *PRDOE Public Notice* at 2; *see also* Letter from Jon Slater,
    PRT Telefonica de Puerto Rico, to César Rey, PRDOE, June 13, 2003.
    (PRT Telefonica de Puerto Rico Letter)

[^30]: *PRDOE Petition* at 5.

[^31]: USAC's practice, which, as this case demonstrates, is the correct
    one, is specifically to defer action on any application or funding
    request number (FRN) when it is aware of an active law enforcement
    investigation of either the applicant or service provider related to
    that application or FRN.

[^32]: *See Request for Immediate Relief by the State of Tennessee*,
    Order, CC Dockets No. 96-45, 97-21, FCC 03-161 (rel. July 2, 2003)
    (*Tennessee Order*), at paras. 12, 17.

[^33]: Of course, USAC must continue to deny all requests that are
    inconsistent with our rules and requirements applicable to the
    schools and libraries support mechanism.

[^34]: This heightened scrutiny may include site visits and other
    investigatory activities, as well as independent audits.

[^35]: *See* note Error: Reference source not found above.

[^36]: *Tennessee Order* at para. 17.

[^37]: *See supra* note Error: Reference source not found.

[^38]: *Second Report and Order*, 18 FCC Rcd at 9224-9228, paras. 64-77.
    *See also* 47 CFR § 54.521

[^39]: *E.g.*, PRDOE's recovery program has revamped the infrastructure
    and networks in and among the schools, and in PRDOE's central
    offices. *PRDOE Petition* at 4.

[^40]: 47 U.S.C. § 254 (b)(1); *Tennessee Order* at paras. 17, 22-23.

[^41]: PRDOE explains that its E-rate recovery program has connected 600
    schools to the central network, has trained 65% (27,000) of its
    teaching force, has made \$80 million in school electrical repairs,
    and installed 3,300 school computers. *PRDOE* *Petition* at 3-5.

[^42]: 47 U.S.C. § 254 (b)(1).

[^43]: *Centennial De Puerto Rico v. Junta De Subastas
    Central-Departamento De Educación*, No. JR-2002-003, Estado Libre
    Asociado De Puerto Rico En El Tribunal De Circuito De Apelaciones,
    Circuito Regional I De San Juan, (Feb. 6, 2003).

[^44]: The challenge to the FY 2003 award was filed by the losing bidder
    in FY 2003, who happened to have been the winning bidder in the FY
    2002 award. That challenge to the FY2003 award is under
    consideration in *Puerto Rico Telephone Company, Inc. v. Junta de
    Subastas Central-Departamento de Educación*, Solicitud de
    Reconsideración de Adjudicacion de Subasta (Junta de Revision
    Administrativa Departamento de Educación, filed February 14, 2003).
    We conclude that USAC should defer action on the portions of PRDOE's
    funding year 2003 application relating to this action until this
    matter is resolved by the appropriate authorities in Puerto Rico, or
    it obtains adequate assurances from an independent auditor that
    there are no bidding irregularities with respect to FY 2003.

[^45]: PRT Telefonica de Puerto Rico Letter.

[^46]: *Id.*

[^47]: *Tennessee Order* at paras. 9, 18.

[^48]: USAC has retained the services of KPMG LLP to perform agreed-upon
    procedures audits of 78 beneficiaries of the schools and libraries
    support mechanism for funding year 2000. The procedures were
    developed by USAC, in consultation with the Commission\'s Office of
    Inspector General. The audits are being conducted in accordance with
    standards set by the American Institute for Certified Public
    Accountants and Government Auditing Standards.

[^49]: *See* Chief Financial Officer's Act of 1990, Public Law No.
    101-576, as expanded by the Government Management Reform Act of
    1994, Public Law No. 103-356. *See also* *Application of Generally
    Accepted Accounting Principles for Federal Agencies and Generally
    Accepted Government Auditing Standards*

    *to the Universal Service Fund and the Telecommunications Relay
    Services Fund*, WC Docket No. 03-213, Order, FCC 03-232 (rel. Oct.
    3, 2003).

[^50]: *PRDOE Petition* at 5, Exhibit XII.

[^51]: Thus, under the facts presented here, for funding requests
    involving service providers other than the one known to be under
    investigation, USAC may issue affirmative funding commitments if it
    determines, after subjecting those requests to more intensive
    review, that the service providers for those FRNs are not implicated
    in the issues under investigation, and the applicant and service
    providers have complied with program rules for those FRNS. The
    existence of an allegation, for instance, of a competitive bidding
    violation with respect to the selection of one service provider
    should not preclude action on FRNs involving other service
    providers.

[^52]: *See* *In the Matter of Request for Review of the Decision of the
    Universal Service Administrator by Copan Public Schools, Copan
    Oklahoma, Federal-State Joint Board on Universal Service, Changes to
    the Board of Directors of the National Exchange Carrier Association,
    Inc*., CC Docket Nos. 96-45 and 97-21, 15 FCC Rcd 5498 (2000)
    (*Copan Order*). *See also*
    <http://www.sl.universalservice.org/reference/SpinChange.asp>.

[^53]: *See In the Matter of Request for Guidance by Universal Service
    Administrator Concerning the Request of Los Angeles Unified School
    District,* CC Docket Nos. 96-45 and 97-21, Order, 16 FCC Rcd 3496,
    at 3499 (Com. Car. Bur. 2001). *See also*
    <http://www.sl.universalservice.org/reference/ServiceSub.asp>[.]{.underline}

[^54]: Upon conclusion of this independent audit, we will review the
    first three years of PRDOE's participation in the E-rate program.