Tuesday, October 23, 2007


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AP Photo/Charles Dharapak

AP correspondent Jerry Bodlander reports the head of a House panel says Blackwater may owe millions.

Statement of Blackwater USA CEO Erik D. Prince Before House Oversight Hearing Oct. 2, 2007

WASHINGTON (AP) -- The Democratic chairman of a House watchdog committee said Monday that Blackwater USA violated tax laws and may have defrauded the government of millions of dollars, a charge the embattled security firm said is groundless.

Rep. Henry Waxman, who chairs the Committee on Oversight and Government Reform, released a March letter from the Internal Revenue Service that states the company's classification of a security guard as an independent contractor, instead of company personnel, was "without merit."

Under U.S. law, companies must pay Social Security and other federal taxes on their employees. But unlike other security companies operating in Iraq, Blackwater says the guards it trains, equips and deploys to Iraq and elsewhere are independent contractors hired directly by the federal government.

"By classifying its armed guards and other personnel as independent contractors instead of employees, Blackwater has apparently evaded withholding and paying these taxes," Waxman, D-Calif., wrote in a letter to Blackwater chief Erik Prince.

Waxman's charge comes as the company is struggling to salvage its reputation after a string of security incidents involving its guards, including a September shooting that left 17 Iraqis dead.

U.S. and Iraqi officials are negotiating Baghdad's demand that Blackwater be expelled from the country within six months, and American diplomats appear to be working on how to fill the security gap if the company is phased out.

Secretary of State Condoleezza Rice has agreed to testify before Waxman's committee on Thursday.

Blackwater spokeswoman Anne Tyrrell said in an e-mail statement to The Associated Press that the company has appealed the IRS ruling and that no final determination has been made. Further, she said, the U.S. Small Business Administration has told the company that Blackwater security guards do not have to be classified as company employees.

"It is unfortunate that the chairman has relied upon a one-sided description of the issue to color public perception without all the facts being presented," Tyrrell said.

An IRS spokeswoman declined to comment on the case, as is custom to protect privacy.

Waxman has been investigating Blackwater's business dealings for several weeks, including whether the State Department unfairly awarded Blackwater a noncompetitive contract and if its guards took control of two Iraqi military aircraft without permission.

According to the House Democrat, the IRS' finding was the result of an inquiry filed by a Blackwater guard. The guard later agreed not to discuss the matter with anyone, including politicians or public officials, in exchange for receiving compensation owed to him by Blackwater, Waxman said.

The worker's nondisclosure agreement, also released by Waxman on Monday, is "evidence that Blackwater has tried to conceal the IRS ruling and the evasion of taxes from Congress and law enforcement officials," he said.

The primary factor in determining whether a worker is an employee or independent contractor is the degree of control the business has over its worker. Incorrectly classifying a worker could mean steep penalties for the company, including a $25,000 penalty if the IRS determines an appeal is frivolous or groundless.

In its March letter to Blackwater, the IRS noted the company paid all of the guard's travel expenses and signed a written agreement detailing the type of work required.

"A worker who is required to comply with another person's instructions about when, where and how he or she is to work is ordinarily an employee," the IRS stated in the letter.

In testimony before Waxman's committee earlier this month, Prince said Blackwater was not trying to avoid legal responsibilities but rather wanted to give its guards more control of their schedule.

"We provide the trained person with the right equipment, the right training, the logistics to get them in and out of theater," Prince said. "When they get to Iraq or they get to Afghanistan, they work for the State Department."

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October 23, 2007
Reports Assail State Dept. on Iraq Security

WASHINGTON, Oct. 22 — A pair of new reports have delivered sharply critical judgments about the State Department’s performance in overseeing work done by the private companies that the government relies on increasingly in Iraq and Afghanistan to carry out delicate security work and other missions.

A State Department review of its own security practices in Iraq assails the department for poor coordination, communication, oversight and accountability involving armed security companies like Blackwater USA, according to people who have been briefed on the report. In addition to Blackwater, the State Department’s two other security contractors in Iraq are DynCorp International and Triple Canopy.

At the same time, a government audit expected to be released Tuesday says that records documenting the work of DynCorp, the State Department’s largest contractor, are in such disarray that the department cannot say “specifically what it received” for most of the $1.2 billion it has paid the company since 2004 to train the police officers in Iraq.

The review of security practices was ordered last month by Secretary of State Condoleezza Rice, and it did not address the Sept. 16 shooting involving Blackwater guards, which Iraqi investigators said killed 17 Iraqis. The Federal Bureau of Investigation is leading a separate inquiry into that episode.

But in presenting its recommendations to Ms. Rice in a 45-minute briefing on Monday, the four-member panel found serious fault with virtually every aspect of the department’s security practices, especially in and around Baghdad, where Blackwater has responsibility.

The panel’s recommendations include creating a special coordination center to monitor and control the movement of armed convoys through areas under the command of the American military, which has long complained that contractors operate independently in the field.

The report also urged the department to work with the Pentagon to develop a strict set of rules on how to deal with the families of Iraqi civilians who are killed or wounded by armed contractors, and to improve coordination between American contractors and security guards employed by agencies, like various Iraqi ministries.

“They don’t have the right communications, they don’t have the right procedures in place, and you’ve got people operating on their own,” said one official who has been briefed on the report but who spoke on the condition of anonymity because it has not been released yet. “This is not up to the degree it should be.”

Sean McCormack, a State Department spokesman, said Ms. Rice would closely examine the report’s findings and recommendations and consult with Defense Secretary Robert M. Gates on what steps to take.

Mr. Gates, who is traveling overseas this week, is pressing for the nearly 10,000 armed security contractors now working for the United States government in Iraq to fall under a single authority, most likely the American military, in an effort to bring the contractors under tighter control.

State Department officials say they have already tightened controls over Blackwater by sending State Department personnel as monitors on Blackwater convoys in and around Baghdad, and by mounting video cameras on Blackwater vehicles.

The panel was led by Patrick F. Kennedy, the State Department’s director of management policy. The other members were Eric J. Boswell, a former diplomat and intelligence office and a former head of the bureau of diplomatic security; J. Stapleton Roy, a former ambassador to China and Indonesia; and George Joulwan, a retired four-star Army general.

While the panel’s review focused on work overseen by the Bureau of Diplomatic Security at the State Department, the second report, focusing on DynCorp, was an audit carried out by the Special Inspector General for Iraq Reconstruction, and it focused on another department office, the Bureau of International Narcotics and Law Enforcement Affairs.

The audit said that until earlier this year the State Department had only two government employees in Iraq overseeing as many as 700 DynCorp employees. The result was “an environment vulnerable to waste and fraud,” the audit said.

Stuart W. Bowen Jr., the chief of the Office of the Special Inspector General for Iraq Reconstruction, said in an interview that while the department had made “significant strides” in scrutinizing payments to DynCorp in the past year, the police training contract “appears to me to be the weakest-staffed, most poorly overseen large-scale program in Iraq.”

He added that “when you put two people on the ground to manage a billion dollars, that’s pretty weak.”

The contract gave DynCorp the job of building police training facilities and deploying hundreds of police trainers to instruct a new Iraqi police force.

Developing a police force was considered central to stabilizing Iraq, but the effort, led first by the State Department and then by the Defense Department, has been criticized by administration opponents as well as by the bipartisan commission on the war led by James A. Baker III and Lee H. Hamilton.

The State Department said it had improved monitoring of DynCorp, but in a letter to auditors department officials said that it would still take “three to five years” to reconcile fully the payments made to the company during the first two years of the training contract, beginning in February 2004.

As a sign of the confusion, the State Department reported to auditors that as part of its work in Iraq, DynCorp had purchased a $1.8 million X-ray scanner that was never used and spent $387,000 to house company officials in hotels rather than in existing living facilities.

Then, later, the State Department said those costs were actually incurred in Afghanistan, according to the audit. State Department officials say they have always said the spending occurred in Afghanistan.

Senator Joseph I. Lieberman of Connecticut said the special inspector general has shown, once again, “how vulnerable the federal government is to waste when it doesn’t invest up front in proper contract oversight.” He added, “This scenario is far too frequent across the federal government: we spend billions of dollars for goods and services with no oversight plans in place and hope and pray that an audit will identify any mistakes later.”

Thomas A. Schweich, the acting director of the law enforcement bureau, said it had increased staffing in October 2006 and had thoroughly checked all DynCorp invoices since then. He said a detailed review of all DynCorp spending was under way. “We put more people in place,” he said, referring to three additional staff members sent to Iraq to oversee DynCorp. “We have put together a team of 11 people to review historical invoices.”

A review of DynCorp’s spending over the past year identified $29 million in overcharges by DynCorp, including $108,000 in business travel, according to a State Department letter in response to Mr. Bowen’s auditors. A separate review by the Defense Contracting Audit Agency found that DynCorp had billed for $162,869 of labor hours “for which it did not pay its workers.”

Gregory Lagana, a DynCorp spokesman, said the amounts involved were small fractions of the $1.2 billion paid to DynCorp since 2004. He said that if DynCorp filed an erroneous charge the company would reimburse it, adding that DynCorp had already reimbursed the State Department for $72,000.

“There was no intentional misbilling,” Mr. Lagana said. “It could be just a documents problem.” He said that the company initially struggled with some record-keeping, but that it had informed the government whenever it found errors. “We fully acknowledge that we have some problems with invoicing,” he said. “It’s something we’re working really hard to clean up.”

In a letter to Ms. Rice on Monday, Representative Henry A. Waxman of California, the Democratic chairman of the House Oversight and Government Reform Committee, accused the department of failing to respond to a request the committee made in March for DynCorp-related documents. Mr. Waxman, whose committee is investigating the department’s oversight of both DynCorp and Blackwater, demanded that the department send him the records by Nov. 2.

“The police training program is a critical component of the administration’s efforts to bring stability to Iraq,” Mr. Waxman wrote. “It is a matter of serious concern that this critical initiative appears to have been so poorly managed.”

Officials and auditors said the law enforcement bureau that handled the DynCorp contracts was overwhelmed when large police training programs were begun in Afghanistan and Iraq.

A senior State Department official said the bureau was not equipped to handle such large contracts. “You have a perfect storm of bad events,” said the official, who requested anonymity because he was not authorized to comment publicly. “You have huge amounts of money passing through an organization that is being retooled as it’s running the race of its life.”

John M. Broder contributed reporting.


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