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Chairman Waxman Calls for Blackwater Investigations

Posted on by Jesse Lee

This morning Chairman Henry Waxman of the Oversight Committee sent letters to the Internal Revenue Service (pdf), the Small Business Administration (pdf), and the Department of Labor (pdf) to request investigations into whether Blackwater has violated federal tax, small business, and labor laws through improper classification of security guards as “independent contractors” rather than “employees.”

The executive summary of the memorandum to Committee staff (pdf) explains:

Executive Summary

On October 22, 2007, I wrote to Blackwater CEO Erik Prince raising concern that Blackwater evaded millions of dollars in federal tax payments through its improper classification of security guards as “independent contractors” rather than “employees.” My letter was based in part on a March 2007 Internal Revenue Service ruling, which concluded that Blackwater violated federal tax law by designating an armed guard as an independent contractor. Committee staff estimated that Blackwater failed to pay or withhold up to $50 million under its contract with the State Department.

Since then, the Committee’s investigation has revealed two other contexts in which Blackwater appears to have improperly exploited this “independent contractor” designation. First, despite the fact that Blackwater is one of the largest private military contractors, receiving nearly $1.25 billion in federal contracts since 2000, Blackwater has sought and received special preferences normally reserved for small businesses. As it did in the tax context, Blackwater claimed that its security guards were not “employees” for the purpose of counting the company’s total number of staff. As a result, Blackwater obtained small business contracts without competing with other qualified bidders that properly designated their guards as employees. The Committee staff has identified at least 100 small business set-aside contracts. worth over $144 million, that have been awarded to Blackwater since 2000.

In addition, Blackwater has refused to cooperate with an audit by the Department of Labor into Blackwater’s potentially discriminatory employment practices. The audit seeks to determine whether Blackwater has complied with affirmative action and anti-discrimination laws imposed on all federal contractors. Blackwater has argued that it is not bound by these laws since it classifies its security guards as “independent contractors” rather than “employees.” On this basis, Blackwater has refused to turn over documents requested by the Department of Labor, stalling the Department’s inquiry for the last six months.

In all three instances, Blackwater has asserted in official communications that its security guards are independent contractors because the company does not exercise sufficient control over their activities in Iraq or Afghanistan. Blackwater has claimed in official communications that its security guards are “in no way directly supervised or controlled by Blackwater”; that they “do not report to any of the Blackwater entities regarding their work in the field”; and that they “do not report to Blackwater regarding their operations in country.” Blackwater has also claimed that it “plays no role in the development or planning of the contractors’ security missions” and “has little if any knowledge regarding the location or activities of these independent contractors.” According to Blackwater, its “only real involvement is to pay the independent contractors.”

All of these claims appear to be false. During the course of this investigation, the Committee staff has reviewed more than 20,000 documents and interviewed multiple State Department officials. The staff has also spoken with several former Blackwater security guards. This evidence indicates that Blackwater exercises what Mr. Prince has described as “tight control” over its security guards.

Blackwater’s claims also contradict the position its own lawyer, Fred F. Fielding, took in civil litigation before he became the White House Counsel to President Bush. After the estates of four security guards who died in Fallujah sued Blackwater for wrongful death, Mr. Fielding argued that the guards could not recover from Blackwater because they were “employees” limited to recovering only workers’ compensation. In his legal brief, Mr. Fielding asserted that the company’s security guards were “employees as a matter of law” and described this conclusion as “inescapable.”

Because Blackwater’s contentions before the Internal Revenue Service, the Small Business Administration, and the Department of Labor appear dubious, I am writing the three agencies to ask them to investigate Blackwater’s business practices and initiate appropriate enforcement action if warranted.

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