Aussie telco steals country's phone numbers to keep porn trade going
David Clayton
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Dial S-E-X for Optus
Vanda Carson | January 5, 2009 - 6:43AM
The Optus "facilities maintenance centre" on the corner of Epsom Road and
Dalmery Avenue in Rosebery looks like any other large glass-fronted
commercial office building in the Sydney industrial hub.
Unlike its former flagship headquarters in North Sydney topped with a
neon sign proclaiming its residence, the Rosebery building is barely
noticeable.
Passers-by would never have suspected it was the base for the nation's
second biggest telco's lucrative sideline as the middleman in the
international porn video and phone-sex trade. It is a business a NSW
Supreme Court judge described as a "commercial goldmine", bringing in $45
million in profit over three years until the middle of 2001.
One Optus staffer boasted in 2000 that the company was generating $100
million in revenues from faceless phone sex operations.
It was a handy earner for Optus, which prefers to portray itself as a
family friendly telco and uses cuddly cartoon animals in its advertising.
Naturally it wanted this shady side of its business to remain behind
closed doors.
But its part in the billion-dollar phone sex industry has been laid bare
in the courts in a series of legal wrangles over the past eight years
over Optus's behaviour in Sydney, where Optus's Australian business is
based, and in Vanuatu.
Only now can the full story of Optus's involvement be told, with the last
of the legal cases finalised.
The lawsuits were triggered by a falling out between Optus and its
pornography partners and other telcos that teamed up to profit from a
loophole in international telecommunications rules.
The scheme allowed the telcos to bill customers premium rates for
sexually explicit calls or X-rated downloads when they dialled the
country codes of small, often impoverished and far-away places. Optus was
part of the partnership of telcos which acted as gatekeepers in the porn
trade between the US and Europe and small Pacific islands.
Pacific nations were chosen because of their high call rates and because
US laws restrict obscene phone messages. Optus profited because the call
charge paid by customers was divided between it and its telco partners
and the porn-broker.
The most recent legal case, decided on November 27, also forced Optus to
concede it had stolen 100 numbers from a tiny telecommunications carrier
in Vanuatu and then allowed a pair of its pornographer partners, Global
Internet Billing in Britain and MDC in Europe, to use the stolen numbers
for their business.
Optus then kept the proceeds of these calls, money which would have
normally been payable to the Vanuatu carrier.
The theft of the numbers from Telecom Vanuatu came after the Vanuatu
Government tried to shut another of its porn partners, the Gibraltar-
based Gilsan, out of the dial-up industry in 1999, ostensibly because it
endangered the morals and reputation of the island nation.
Gilsan's exclusion from the Vanuatu market was the trigger for a lawsuit
in Vanuatu and three other cases in Sydney.
They exposed the cut-throat competition in this lucrative but little-
known part of the global telecommunications industry between 1998 and
2001.
John Bragg, who headed the Optus division responsible for dial-up porn,
described the division's role as identifying "new and innovative non-
traditional business opportunities on an international level".
It went to great lengths to keep hold of the business, deciding the risk
to its reputation of allowing Gilsan and its rival Global Internet
Billing to keep their videos and voice recordings in Optus centres was
worth it for the comfort of knowing it would make it harder for them to
take their money to a rival telecommunications carrier.
It even had the nous to charge Gilsan and Global Internet Billing a 2-3c
surcharge on each minute of their $US6 ($8.45) a minute X-rated calls -
or about $800,000 in rent - for housing their porn-filled computer
servers in the Rosebery building.
The legal challenges exposed the commercial practices of the Optus senior
executive in charge of its international phone calls and relationships
with all foreign telecommunications carriers.
Justice Patricia Bergin found Mr Bragg, who has since died, arranged the
theft of the Telecom Vanuatu numbers.
She found he "was adept in utilising business opportunities and loopholes
to increase the profits for his employer, wherever it was possible to do
so. "Indeed his candour about his rather underhand conduct was quite
disarming," Justice Bergin said.
In an earlier case, Justice Robert McDougall was much harsher with Bragg,
saying he had no regard for the truth, except for when it suited him. In
this case Optus was forced to pay millions to Gilsan after it was found
to have skimmed money from Gilsan by under-reporting the number of
minutes porn clients were on the phone so Optus could take home a larger
share of the profits.
It was almost routine for telcos to try to increase their profits by
hoodwinking each other about how many minutes of traffic they had used,
according to evidence presented to the court. Most of the telcos,
including the US giant AT&T and Optus, were underdeclaring the number of
minutes of traffic they had carried for each other.
One Optus staffer said Optus standard practice was to declare only 99 per
cent of its traffic. On one occasion Optus only told AT&T about 98.3 per
cent of the minutes it had used, under-reporting by 396,542 minutes.
It also short-changed the Greek national carrier, telling it of only 97
per cent of calls.
Advertisements were placed in US and European magazines and websites
urging customers to dial a number starting with the country code 678 (for
Vanuatu), or that of other Pacific island nations, for phone sex.
But the Pacific nations were used just like flags of convenience because
the calls never reached the Pacific nations; instead AT&T in the US or
Greek carrier Hellenic sent the calls to the Optus centre in Rosebery
where callers either downloaded porn from computers in the Optus centre,
or were transferred to an MDC (Europe)-owned centre in Kippax Street,
Surry Hills, or to a call centre in New Zealand where staff simulated sex
over the phone.
Pornographers and telcos chose to use the dialling codes of Vanuatu and
other poor small Pacific countries because it allowed them to charge
customers high call rates. They were also preferable because the risky
call content is less regulated than it would be if clients were dialling
a number in the US, Europe or Australia.
In return for the thousands of incoming international calls, each paying
a high rate, the small Pacific island telcos were willing to share a
portion of the call rate with the telco-porn company partners.
US customers, who made up more than 90 per cent of calls, paid a hefty
$US4 a minute to connect to Vanuatu.
And it was profitable for each of the players because phone sex customers
tend to stay on the phone longer than those making other kinds of phone
calls. For each call, the Vanuatu carrier got about US10c a minute, and
Optus got at least US25c a minute.
Vanuatu was also preferred because it had an easy to remember
international dialling code, 678.
The two pornography companies involved in the legal cases - the
mysterious Gilsan and Asia Pacific Telecommunications, based in Hong Kong
- used country codes of at least six Pacific nations in their
advertisements for phone sex.
Gilsan used Vanuatu and the Solomon Islands, while APT used Vanuatu,
Niue, Tuvalu, Kiribati and the Cook Islands.
The traffic was so great that in 1996 Niue was ranked the second biggest
provider of phone sex services in the world, according to a Washington-
based telco market research firm, Telegeography. And APT's business was
so lucrative for the island of Tuvalu that at one stage payments
reputedly made up three-quarters of its GDP.
Vanuatu was happy to have the money coming in but wanted to keep the
exact nature of the business quiet. The advertisements in US and European
magazines and websites did not mention Vanuatu, and they asked that they
be drafted to have the number read 67-87 rather than 678, which is more
obviously recognised as its country code.
And it was not just a business done in the Pacific. X-rated calls from
the US were a boom industry in Guyana, the Caribbean, the Philippines,
Moldova, Sierra Leone, Guinea-Bissau, Poland and the Dutch Antilles
islands in the mid-1990s.
Gilsan and APT offered slightly different products.
APT was first on the scene in Vanuatu in 1996, offering "live chats" with
New Zealand phone-sex operators, and Gilsan started up two years later
and ultimately used the phone calls to allow customers to download
graphic sex photographs and videos from material held on computers in
Optus's Rosebery centre.
Global Internet Billing and MDC (Europe) started in 1999 using the stolen
numbers and a similar product to Gilsan. It offered its calls to
customers in Italy, South Korea and the US. APT sold calls to customers
in the US, Italy and the Philippines, while Gilsan sold to the US, Italy,
Greece and Turkey.
Ultimately Gilsan's download service became far more popular than the
traditional "chat" service offered by APT.
Between January 1999 and February 2001 Optus carried nearly 23 million
minutes of traffic for Gilsan, worth about $US5 million. Its smaller
rival MDC (Europe) carried 226,000 minutes of traffic in 2000-01.
Optus made about $US6 million in profit from Gilsan and about $US6
million from APT between 1998 and 2001, as well as about $US3 million a
year from a smaller contract with MDC/Global Internet Billing, helping
increase its total profits to about $US45 million.
An Optus staffer, Samantha Bicknell, said Optus was so keen to keep the
pornography business and reduce the risk of the pornographers defecting
to another telco that it decided to allow them to install their video and
audio material in Optus's centre.
"We have encouraged our customer [sic] to install all of their network
facilities in Australia in the Optus [centre]," Ms Bicknell emailed a
colleague in August 2000.
"This allows Optus to hold the customer at 'ransom' so to speak so that
all their infrastructure is in our control and therefore [sic] [they]
must use us as their transit point".
"Encouraging the installation of customer equipment is a win-win
situation for both Optus and the customer," she said. "My team look
after . . . premium rate/sex lines etc, and we collect a transit fee for
our services. The team attributes over $100 million of revenue to the
company."
The business flourished because customers preferred to be billed by
telephone rather than credit card, both because it is easier to claim a
large international phone bill as a work expense or to explain it to a
suspicious partner than it is to justify a suspicious item on a credit
card bill.
The business thrived between 1998 and 2001, but halted almost overnight
in 2001 when the American Federal Communications Commission changed the
law so it was not nearly as lucrative.
Instead of dividing $US4 a minute between the telco and its porn
partners, they were now left with just US48c a minute to divide between
them.
Given that more than 90 per cent of the traffic was from the US, it was
no longer commercially viable.
After three extensive legal cases and a lengthy appeal, it now appears
the end of the road of this messy episode for Optus, although Telecom
Vanuatu may yet appeal against Justice Bergin's decision handed down in
November.
Telecom Vanuatu's Sydney law firm, Marque Lawyers, said it was unable to
comment on the case because litigation was continuing and the findings
might yet be appealed against.
An Optus spokeswoman declined to answer questions about the theft of
phone numbers from Telecom Vanuatu.
In a statement, Optus said Telecom Vanuatu had failed to have the court
order that Optus pay for the money earned from using the stolen numbers.