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FCC Chair Moves to Block E-Rate Funds for Companies Deemed 'Security Risk'

Ajit Pai, chairman of the Federal Communications Commission, wants to ensure that the E-rate funds schools and libraries receive to subsidize their internet and telecommunications costs are not spent on equipment or services that could pose a national security threat.

That's the crux of a proposal released by the FCC on March 27, which would affect four programs that receive Universal Service Fund monies, including the Lifeline program. That funding helps low-income families pay for phone and broadband service, which its supporters say help close the "homework gap."

The proposed rule is apparently aimed at Huawei Technologies Co., Ltd., a Chinese multinational networking, telecommunications equipment, and services company, that has been flagged in a government report for building a "back door" into its communications equipment. The concern is that this functionality could give Chinese officials spying capability into communications wherever the equipment is installed. 

John Harrington, president of Funds for Learning, which helps thousands of schools and libraries prepare their E-rate applications each year, said only about a tenth of a percent of all E-rate applications would be affected in the latest round. A relative newcomer in the networking electronics business in the United States, Huawei has a very small, but growing presence, in the schools and libraries marketplace, he said.

Huawei is the largest telecommunications equipment manufacturer in the world. Its expansion into the U.S. consumer market has been dramatically slowed by the fact that FBI Director Christopher Wray and others warned, in testimony before the Senate Intelligence Committee last month, about potential spying opportunities from foreign-made products. Last week, the company lost Best Buy as a distributor for its mobile devices, leaving only two online retailers as options for consumers to buy its devices.

Huawei and another company, ZTE, came under official scrutiny in a 2012 investigative report published by the U.S. House of Representatives' Permanent Select Committee on Intelligence, which recommended that the U.S. should "view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies."

More recently, 18 U.S. lawmakers sent a letter to Pai in December objecting to the sale of Huawei smartphones by U.S.- based companies such as AT&T, which Pai cited in the proposed rulemaking notice. 

The FCC is asking for comments about its proposed rule, which reads as follows:

"...no universal service support may be used to purchase or obtain any equipment or services produced or provided by any company posing a national security threat to the integrity of communications networks or the communications supply chain. Seek comment on how best to implement this proposal, including (1) the types of equipment and services that should be covered by the proposed rule; (2) how the FCC should identify, and how USF recipients can learn, which suppliers are covered by the proposed rule; and (3) the costs and benefits of the proposed rule."

Comment is also being sought about how to enforce this proposed rule, and what penalties should be imposed against any entities found to be disregarding it.

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