SBA faulted for role in Blackwater security guard scandal

Aug 01, 2008 (AllBusiness.com - McClatchy-Tribune News Service via COMTEX) -- SBCO | Quote | Chart | News | PowerRating -- Aug. 1--After its guards were accused of killing 17 Iraqi civilians without provocation last fall, Blackwater Worldwide, the security company responsible for protecting U.S. diplomats in that war-torn country, shifted its responsibility for the incident to an unlikely government agency -- the federal Small Business Administration.

Blackwater claimed the guards were not under its control because they were "independent contractors" and had been certified as such by the SBA. But a new report by the SBA's Office of Inspector General (OIG) says that Blackwater may have incorrectly categorized many of its security personnel as "independent contractors" to win more than $100 million in government contracts earmarked for small companies.

"During Fiscal Years 2005 through 2007, Blackwater or an affiliated company obtained a total of 39 contracts that were set aside for small businesses even though the bidder may not have met SBA's criteria to be considered a small business," the OIG report concluded. It referred the matter back to the SBA for further action.

The report, released this week, is the latest in a long series of investigations that have revealed large corporations on the receiving end of hundreds of millions of dollars in government contracts that are supposed to go to small firms. Mismanagement and lack of accountability at the troubled agency have been a persistent part of the problem. And that was also the case here.

The OIG investigators said the SBA did not adequately explain its reasons for concluding that Blackwater security personnel were independent. It also said the SBA "did not follow up on or attempt to reconcile conflicting information in its files that the total number of Blackwater employees -- even excluding the security personnel hired under federal contracts -- exceeded the applicable size standard." While the SBA has been down this road before, this is the first time a possible contractor miscertification has put the agency in the middle of a much broader controversy. Besides using the SBA to deny responsibility in the Iraqi shootings, Blackwater has used its "small business" certification to avoid paying $31.8 million in federal taxes, according to Congressional investigators.

Last March, the Internal Revenue Service warned Blackwater that the company's classification of a security guard as an independent contractor was "without merit." In response, Blackwater cited what it said was an SBA "official finding" that "Blackwater security contractors are not employees."

The situation incensed lawmakers on Capitol Hill. Rep. Henry Waxman, D-Calif., who chairs the House Committee on Oversight and Government Reform, asked the Labor Department, the IRS, and the SBA's OIG to investigate whether Blackwater defrauded the government of tax revenue and violated labor laws. The OIG's report is the first to be released.

"The SBA should not be involved in tax-related decisions," said Sen. John Kerry, D-Mass., who chairs the Senate small business committee.

"The SBA must explain to the American people what role they may have played in helping Blackwater avoid paying $31.8 million in taxes." Blackwater argued that about 1,000 of its security personnel, who serve under the State Department's $1.2 billion Worldwide Personal Protective Service (WPPS) contract, were independent contractors, not full-time employees. In fact, "Blackwater was considered to be the employer of the security personnel on the WPPS [contract]," which directly contradicts the SBA finding, the OIG report noted.

In response to the findings, Blackwater spokeswoman Anne Tyrrell said in a statement that "expert accounting and outside legal counsel have determined that Blackwater's classification of security personnel as independent contractors is reasonable, correct, and legally protected." Fay Ott, associate administrator of Government Contracting and Business Development at the SBA, said in a letter to Rep. Waxman that the OIG report amounted to "guesswork" and that the OIG auditor could not reach a firm conclusion that the SBA did anything wrong.

The OIG focused on contracts awarded from fiscal years 2005 through 2007. During that time, Blackwater and its affiliates won 32 small business contracts worth more than $2.1 million. The work was supposed to be restricted to companies with revenue of $6.5 million or less, according to the audit.

One Blackwater contract had a revenue ceiling of $750,000, and its airline affiliate, Presidential Airways, won more than $107 million in contracts set aside for companies with revenues of less than $25.5 million or fewer than 1,500 employees. Blackwater, however, claims it will have revenues in excess of $1 billion annually by 2010.

Lloyd Chapman, president and founder of the American Small Business League (ASBL), which has tracked the SBA contracting controversy for more than six years, said Blackwater may have received closer to $1 billion in federal small business contracts between 2004 and 2008. Based on his own review of a federal contract database, contracts went to Blackwater Security Consulting, Blackwater Lodge & Training, and Blackwater Target Systems.

The latest report puts the ball back in the hands of lawmakers.

According to a Waxman committee memorandum, the OIG report raises serious concerns about whether Blackwater made false statements about its small business status to win government contracts.

Under the Small Business Act, which established the SBA and many of its programs, misrepresenting an enterprise as a "small business concern" to win a federal contract is a criminal offense punishable by a $500,000 fine and up to 10 years in prison.

The act also states that a company found to have made false statements is "subject to suspension and debarment. No company has ever been prosecuted or debarred during the Bush administration's term in office. It's time to enforce the law."

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