Federal prosecutors are delving into nearly a decade of alleged misconduct by MCI (search) to determine if the telephone company defrauded competitors by disguising long-distance calls as local ones, lawyers and others familiar with the probe say.

The investigation involves MCI's alleged avoidance of charges it is supposed to pay local phone companies.

The allegations surfaced in the past eight to 10 weeks when a former MCI employee called the FBI and disclosed a company project known as "Canadian Gateway," said two lawyers familiar with the events.

In this arrangement, MCI phone traffic is allegedly routed north of the U.S. border and then dumped onto the network of AT&T (search).

The whistle-blower also contacted Verizon and informed that company of an alleged MCI practice dating to the mid-1990s called "Project Invader," said the lawyers, who spoke on condition of anonymity.

The whistle-blower was said to know of six to nine companies that MCI had teamed up with in the alleged scheme. One of the lawyers said MCI made "scores" of such arrangements with small companies, many of them predating MCI's merger with scandal-plagued WorldCom (search).

Separately, San Antonio-based SBC Communications has been looking into allegations that MCI employed methods to bypass local access charges, the lawyers said.

MCI said in a statement that "access charges between local and long-distance carriers have existed for decades and are routine in the industry. As always, we take all inquiries by the U.S. attorney's office very seriously and will cooperate fully with any investigation."

"We were shocked at the scope of these scams that are ongoing today and we are cooperating with the major crimes section of the U.S. attorney's office" in New York City, said William Barr, executive vice president and general counsel of local provider Verizon Communications.

The New York Times quoted an unidentified AT&T executive as saying some of the diverted calls were placed by the State Department and other government agencies. Industry lawyers told the newspaper for its Monday edition that such diverted calls could not be protected from eavesdropping that could compromise national security.

The allegations are raising questions on Capitol Hill about the fate of MCI's federal contracts.

"To the extent that these allegations prove true, they raise additional troubling questions about WorldCom's business ethics and practices," said Sen. Susan Collins, R-Maine, chairwoman of the Senate Governmental Affairs Committee.

The latest disclosure "may have an impact on MCI's suitability" as a federal contractor "and to that extent we will look at it," said Michael Bopp, staff director of the committee, which is investigating why MCI has continued to receive government contracts.

David Drabkin, deputy associate administrator for acquisition policy at the federal General Services Administration, said "it's way too early to tell" whether the investigation by prosecutors in Manhattan "will have any impact" on MCI's government contracts.

Rep. John Sweeney, R-N.Y., a member of the House Appropriations subcommittee overseeing the GSA, said that regarding federal contracting, "it's critically important ... to be shutting the door to entities that pervasively commit misdeeds."

In mid-May, MCI received a government contract worth a reported $45 million to set up a mobile network in Iraq. MCI does more than $1 billion a year in federal business.

The GSA earlier renewed the company's contract to provide communications services for several government agencies, including the Defense, Commerce and Interior departments. The company also has a seven-year deal to provide satellite links for the National Oceanic and Atmospheric Administration.

MCI says competitors, some of whom it beat out for government business, are behind all the criticism.

Parent WorldCom filed for bankruptcy in July 2002, citing massive accounting irregularities.

WorldCom settled its $11 billion fraud case with the Securities and Exchange Commission by agreeing to a $750 million fine, prompting its competitors and congressional critics to say the company got off too easily.