Federal Bureau of Investigation's
Implementation of the Communications Assistance
for Law Enforcement Act
00-10
March 2000
The FBI negotiated with carrier and manufacturing representatives to determine the most appropriate way to arrange for carriers to obtain and deploy capability requirements. The FBI desired an approach that was economical for the government and would provide for the broadest industry compliance with CALEA. The FBI determined that manufacturer right-to-use (RTU) licenses3 for CALEA solutions would be the major cost for reimbursement to carriers.
The FBI sought to enter into agreements with carriers and manufacturers to facilitate reimbursement for the manufacturers' RTU licenses rather than reimburse carriers individually for these costs. The FBI's General Counsel issued a legal opinion on February 25, 1999, addressing the legality of this type of agreement. The FBI legal counsel determined that such an agreement was legal within the framework of the CALEA legislation. The legal opinion also stated that " ... the proposed arrangement is a reasonable attempt to minimize the costs to the federal government because it reduces the potential for manufacturers to collect substantial profit from carriers who will in turn seek reimbursement from the federal government." Also, the legal opinion stated that the government should determine if the RTU buyout costs are " ... consistent with the government estimate, substantiated by the manufacturer or established by the marketplace."
Determination of Reasonableness of Price of RTU Licenses
The FBI received a best and final offer (BAFO) RTU license buyout offer from a telecommunications equipment manufacturer (Nortel), on February 24, 1999, after extensive negotiations. Nortel proposed a nationwide CALEA solution RTU buyout for a price of $101.8 million. In addition to the RTU licenses, this offer included software activation, verification testing and extended support.
The FBI attempted to determine whether Nortel's buyout offer was reasonable. The Telecommunications Contract and Audit Unit (TCAU), Finance Division, FBI conducted a proposal review of Nortel's BAFO. The resultant audit report, issued March 31, 1999, concluded:
TCAU could not determine the reasonableness of Nortel's proposed buyout offer either through evaluation of documentation submitted in support of the BAFO, or through employing other cost/price analysis techniques. ... Nortel refused to provide adequate cost or pricing data to support its BAFO price. A comparison performed by TCAU of the BAFO to the independent government cost estimate (IGCE) resulted in large disparities. An analysis relating to costs of similar items could not be performed. In addition, there is no sales history for Nortel's solution that would have allowed for an evaluation of their price.
The FBI sought the advice of the Department's Chief Acquisition Officer concerning the proposed buyout agreement. The Chief Acquisition Officer stated in a May 6, 1999 memo:
- your agreement does not constitute a letter contract,
- is probably not a contract at all because it lacks consideration, and
- is otherwise exempt from the prior approval requirement set forth in the Justice Acquisition Regulations because of your legislative exemption from the Federal Acquisition Regulations. Nonetheless ... I can advise you that I have no objection to your entering it so long as you have assured yourselves that the price is fair and reasonable.
The FBI was unable to determine the reasonableness of Nortel's BAFO through traditional financial analysis means. Therefore, on June 2, 1999, the FBI set forth an analysis of the reasonableness of Nortel's offer in a document entitled Determination and Findings Regarding the Implementation of the Communications Assistance for Law Enforcement Act (D&F). The D&F was issued for the approval of the Assistant Directors, Finance Division and Information Resources Division, and the Director, FBI.
The D&F stated that Nortel's initial price for the nationwide buyout was $207 million. During further negotiations, Nortel's price fell to $179.3 million, then to $143.8 million, and finally to $101.8 million. Nortel's price did not include carrier deployment or hardware costs. [Carriers will be permitted to seek reimbursement for these costs from the government apart from any buyout agreements.]
The D&F set forth the IGCE for the development of the CALEA solution. Originally, the IGCE was $47.2 million for the CALEA solution for all of Nortel's equipment. Subsequently, the IGCE was reduced to $36 million based on the assumption that Nortel would achieve certain efficiencies across its various equipment lines. To this cost estimate the FBI added a 20 percent profit estimate.
The D&F also set forth Nortel's projected catalog and commercial prices of the CALEA solution on the open market and the discount price for its best customers. The FBI compared these prices to the Nortel BAFO price. The comparison showed that the government would achieve significant savings via the buyout versus the hypothetical market prices.
Also, the FBI conducted an analysis to develop estimated market values for the CALEA solution. However, the results of this analysis were not included in the D&F. This analysis determined that $25,000 and $45,000 were reasonable prices for the CALEA solution for generic wireline and cellular systems, respectively. When these prices were multiplied by the number of Nortel systems installed or deployed on or before January 1, 1995, the resultant figure was $101.7 million, which was almost identical to the final negotiated price of $101.8 million.
After considering the pros and cons of Nortel's proposed buyout agreement, the FBI set forth its determination of the reasonableness of Nortel's BAFO. The D&F cited the pros as follows:
Some members of Congress want to shift funds available ... to new programs. ... the telecommunications industry has consistently attempted to weaken the statute through legislative means. ... the Nortel proposal represents the only current, viable vehicle by which the government would be able to obligate funds ... Congressional appropriators have made public statements of their willingness to appropriate more money ... if the Government can successfully illustrate implementation progress ... to date carriers have been hesitant to hold detailed discussions with the FBI concerning the implementation of CALEA because of the absence of a solution. ... timeliness of actual solution deployment may be hastened with the availability of Nortel's solutions to carriers at no charge. ... an unlimited RTU license goes a long way in alleviating Congress' concerns in regard to the burden placed on small carriers ... Nortel has stated that its price will not be adjusted based upon the final capability mandate from the Federal Communications Commission (FCC).
The D&F cited the cons as follows.
The Cellular Telecommunications Industry Association (CTIA) ... may argue that the structure of the Nortel arrangement regarding "installed and deployed" is similar to the definition CTIA advocates in the pending lawsuit. ... the telecommunications industry is likely to claim that ... the Government has chosen to reimburse certain carriers for equipment, facilities, and services installed or deployed on or before January 1, 1995 that has already undergone a "significant upgrade." ... the telecommunications industry may successfully portray the Nortel arrangement as a de facto shifting of the January 1, 1995 reimbursement eligibility date. ... under the Nortel arrangement, the timing and structure of reimbursement will change.
The D&F provided that the liabilities of the agreement could largely be mitigated through contract language, per the legal opinion by the FBI's general counsel mentioned above. The Assistant Directors of the Finance and Information Resources Divisions as well as the Director of the FBI approved the D&F. However, the Director, Finance Division attached an addendum to the D&F. In this addendum he concluded:
Because of the apparent large gross profit included in this offer, some other analysis is required to justify reasonableness. The Determination and Findings lists eight categories of other benefits to the government, but no costing information is provided and we are left unable to change our position on reasonable charges. Based on the above, I cannot make a determination of reasonable charge for the Nortel offer. If the Director proceeds to approve this Determination and Findings, I recommend that disclosure of the reasonable charge issue be provided to the Office of Management and Budget and Congress.
FBI RTU Agreements
On September 10, 1999, the FBI entered into a letter agreement with Nortel and Ameritech. This agreement provided that Ameritech will acquire a RTU license upon payment of a fee for Nortel's CALEA solution, which included industry developed assistance capabilities and those capabilities which the FCC or a court of competent jurisdiction determines are required.
The agreement further provided that Nortel and the FBI agreed that the total license fee for the RTU license for equipment installed or deployed on or prior to January 1, 1995 was $101.8 million. Also, through this agreement, Nortel agreed to provide the CALEA solution to all carriers in the United States using Nortel equipment once it received the total license fee.
The agreement stated that Nortel would provide RTU licenses for the CALEA solution for Nortel's wireline, wireless and personal communication equipment lines. The agreement limited the liability of the FBI to $20 million, which was the total cost for the RTU license for the CALEA solution on two generic software releases for one of Nortel's wireline systems for all carriers in the United States.
The agreement provided that the parties to this agreement would negotiate and execute a cooperative agreement on or before October 30, 1999 before the FBI pays for additional RTU licenses. The parties had not entered into such a cooperative agreement prior to the end of our audit; however, there was a draft cooperative agreement under consideration. Pursuant to the draft cooperative agreement, Nortel would be reimbursed for the RTU licenses for the CALEA solution on both of its wireline equipment lines nationwide.
The FBI also entered into a letter agreement with Nortel and AirTouch on December 29, 1999. This agreement was similar to the FBI letter agreement with Nortel and Ameritech, except that this agreement concerned the buyout of the RTU license for the CALEA solution for wireless equipment nationwide. The FBI paid $26 million pursuant to this agreement. The remainder is to be paid under a subsequent cooperative agreement. The FBI was also in negotiation with Nortel and another carrier to develop an agreement for a buyout of the RTU license for the Nortel personal communication service equipment.
Future Buyout Agreements
During our audit, the FBI was negotiating with other industry representatives to consummate additional RTU license buyouts for carriers. The estimated cost for the RTU licenses nationwide during FYs 2000 and 2001 was approximately $400 million, including the Nortel RTU license cost. The FBI also expected to incur approximately $100 million for carrier deployment costs in FY 2001. All of this totaled approximately $500 million, which equaled the congressional authorization for the CALEA program. It should be noted that the FBI has estimated the total cost associated with implementation of CALEA to be about $749 million. The additional cost, over and above the congressional authorization of $500 million, is associated with deployment of the CALEA solution on equipment in locations that had little or no history of law enforcement intercepts. These are in contrast to equipment in locations with higher intercept histories for which deployment costs are expected to be incurred.
Views of Responsible Officials
We held an exit conference with FBI officials of the CALEA implementation office. They offered the following view.
The FBI believes that the findings by the Inspector General's Office found in this report are accurate. The FBI further believes that the content of the report portrays that the FBI exhibited due diligence in pursuit of determining price reasonableness and have (sic) effectively spent the funds currently available for CALEA implementation. These efforts, as well as being reflected in the report, are expanded upon in the Determination and Findings referenced several times in this document.
Subsequent to the exit conference, we provided a copy of the draft report to the Assistant Attorney General for Administration who offered the following comments.
In most procurements, the government relies upon the competitive procurement process to ensure that it has received fair and reasonable prices. When there has been no effective competition, as in this case, we often turn to cost and pricing data, provided by the vendor, to determine whether the prices offered are fair and reasonable. Despite its best efforts, in this case the FBI was unable to obtain cost and pricing data from the manufacturer and the law did not require it. I understand the Inspector General's conclusion to be a simple statement of the fact that without this vendor cost data, an audit of price reasonableness cannot be conducted. The Inspector General accordingly was unable to render an opinion, one way or the other, on whether the price in this case was reasonable in fact.Given the absence of cost data, the FBI looked at several alternative indicators to assess price and overall reasonableness in this case. Some of these alternative assessments are described briefly in the Inspector General's report. While these alternative indicators are not an ideal basis for assessing reasonableness, they were the best information available to the FBI under the circumstances. While the FBI could not reach their conclusion with an auditor's precision, they nonetheless did determine that the offer presented to the Government by the facilitating carrier partners and Nortel is reasonable. They reached this conclusion in good faith, and with the best available information. The Inspector General offered no opinion with respect to the FBI's conclusion. In my view, he simply notes that it was not based upon an audit of cost and pricing data.
Conclusion
The information provided by the FBI did not provide a basis for us to determine the reasonableness of the cost incurred for the RTU licenses. Accordingly, we do not offer an opinion of the reasonableness of the costs for the RTU licenses.