By David Shepardson

WASHINGTON (Reuters) - AT&T Inc will pay $7.75 million in refunds and fines after federal investigators found it allowed unauthorized third-party charges related to phony directory-assistance service on its customers' telephone bills, U.S. regulators said on Monday.

The fraud was uncovered by the U.S. Drug Enforcement Administration while investigating two Ohio companies for drug-related crimes and money laundering, the Federal Communications Commission said.

AT&T, the Dallas-based telecommunications giant, allowed "scammers to charge customers approximately $9 per month for a sham directory assistance service," the FCC said. AT&T received a fee from the companies for each charge AT&T placed on its customers’ bills, the FCC added.

The settlement includes $6.8 million in refunds and a $950,000 federal fine, the FCC said.

AT&T signed a consent decree with the FCC and agreed to cease billing for nearly all third-party products and services on landline bills and adopt procedures to obtain express consent from customers prior to allowing third-party charges. The company also agreed to revise its billing practices to ensure third-party charges are conspicuously identified on bills.

AT&T said in a statement it has "implemented strict requirements on third parties submitting charges for AT&T bills to ensure that all charges are authorized by our customers; indeed, those requirements go beyond the requirements of FCC rules and impose safeguards that the FCC proposed but never adopted."

The FCC said two Cleveland-area companies, Discount Directory Inc and Enhanced Telecommunications Services, were billing thousands of consumers for a monthly directory assistance service on their AT&T landline telephone bills. The companies never provided any directory assistance service, the FCC said.

"A phone bill should not be a tool for drug traffickers, money launderers, and other unscrupulous third parties to fleece American consumers," FCC Enforcement Bureau Chief Travis LeBlanc said.

AT&T said it stopping billing for the two companies in June 2015. "Unbeknownst to us, two companies that engaged in a sophisticated fraud scheme were apparently able to circumvent those protections," AT&T said.

AT&T said it plans to send refund checks to consumers within 90 days.

In 2014, AT&T agreed to pay $105 million in fines and refunds to current and former wireless customers for unauthorized third-party subscriptions and premium text messaging services as part of a settlement with the FCC, Federal Trade Commission and state attorneys general.

(Reporting by David Shepardson; Editing by Chizu Nomiyama and Will Dunham)