Telecommunication operator MCI will receive no government money unless it can convince the US General Services Administration (GSA) that it has the necessary internal controls and business ethics to deal with the government responsibly.
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The GSA, a centralised government procurement and property management agency, proposed to debar MCI from competing for Federal government contracts.
With immediate effect, the company is suspended from competing for government contracts, and existing contracts will not be renewed. MCI will have 30 days to challenge the decision and prove its fitness to compete.
The move was welcomed by campaigners calling for MCI to be debarred from federal contracts as punishment for its past misdeeds, including the trade union Communications Workers of America and pressure groups including the Gray Panthers and Citizens Against Government Waste.
"A company of MCI/WorldCom's low repute should not be subsidised with federal tax dollars," wrote Mitch Marcus, founder of campaign group BoycottMCI.com. He added that he hoped the government will make the debarment permanent to show that crime does not pay.
However, federal acquisition regulations do not allow the GSA to punish companies for past misdeeds, and the move instead is intended to protect the government's interests, according to GSA spokeswoman Mary-Alice Johnson.
"It's not punitive. It's to ensure that they are responsible to do business with the government today," she said.
MCI emerged from bankruptcy following a series of accounting fraud scandals that raised questions about its internal accounting controls and its business ethics.
MCI has proposed measures to correct accounting control problems identified by external auditors, but "the fact remains that the material weaknesses have not been fully corrected", an agency official wrote to MCI chairman and chief executive officer Michael Capellas.
The letter went on to say that the steps the company has taken to address its lack of an ethics programme and its standards of business conduct are positive, "but are inadequate to protect the government's interest".
MCI said that it accepted the GSA's decision and it will work to meet the agency's recommendations and to win its approval to do business with the government again. The decision does not affect existing government contracts and will not affect the timing of its emergence from bankruptcy.
The debarment means the government will not award contracts to MCI, existing contracts with MCI will not be renewed or extended, and government contractors may not award subcontracts worth more than $25,000 (£15,599) to MCI without a compelling reason to do so, the GSA said.
Peter Sayer writes for IDG News Service