IBM to Pay $24 Million Settlement After Federal Investigations Allege It Broke E-Rate Rules

Contributing Writer

IBM will pay more than $24 million after reaching a settlement with the Federal Communications Commission to resolve a pair of investigations alleging the tech giant broke federal E-Rate program rules while working with two major school districts. 

The FCC found that IBM ran afoul of its competitive bidding process with the New York City Department of Education, the nation’s largest school district, and that it provided “ineligible equipment and services” to the El Paso Independent School District, one of the biggest in Texas, for E-Rate-related contracts. 

According to the agreement, IBM will return a total of $24.25 million to the federal pot that funds the E-Rate program.

The agreement resolves the two investigations, each of which have spanned nearly 15 years. IBM did not admit to any wrongdoing, and maintains that it followed E-Rate rules.

E-rate is a $4 billion federal program overseen by the FCC that provides discounts for internet connectivity services and devices for schools and libraries.

The FCC, per a consent decree, determined that IBM used an “improper two-step bidding process” for E-Rate work with New York between 2005 and 2008. That happens when a contractor is selected “without seeking bids on prices and specific E-Rate funded services and equipment,” followed then by negotiations with the contractor over prices “without seeking competitive bids,” according to the FCC.

E-Rate applicants are required to seek competitive bids, and must treat quotes from vendors as a “primary factor” for selection.

However, the FCC alleges that IBM responded to being selected as the systems integrator contractor for a New York City schools E-Rate-funded project by proposing it work with the district to “define E-Rate services and equipment which IBM would then provide.”

“IBM’s response also did not include any prices, descriptions, or quantities of E-Rate eligible services or equipment, but included hourly rates for system integration functions,” the FCC said, “and IBM negotiated the scope of the services, equipment and prices with NYC DOE only after IBM was awarded.”

$19 Million in ‘Ineligible Products and Services’

In the El Paso investigation, the FCC said IBM was selected as the systems integrator contractor for an E-Rate project in 2001. That same year, according to the FCC, the El Paso school district’s E-Rate funding request ballooned to more than $65 million, up from $1.4 million the year earlier.

More than $55 million of funding was approved. Years later, however, investigators concluded that about $19.5 million of that money was “used to provide ineligible products and services, had been allocated for products and services that were never actually provided, or had been otherwise unlawfully disbursed.” Those products and services are listed in the agreement as: maintenance, web access, email, video, and file servers.

In the consent decree, IBM “disputes the validity of the claims asserted by the FCC … and contends it complied with all applicable E-Rate Rules in effect at the time.”

Aside from the more than $24 million repayment, IBM agreed to not engage in a two-step bidding process and committed to providing new training to employees about the FCC’s competitive bidding process.

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