A high-stakes dispute that flared Monday between Blackwater and the federal government boils down to a definition: Are the hundreds of Blackwater guards protecting diplomats in Iraq and Afghanistan employees or contractors? By labeling them contractors, Blackwater and its affiliates qualified for federal small-business contracts worth nearly $110 million.
Those contracts and others were called into question Monday when the Small Business Administration's inspector general said Blackwater got dozens of the contracts even though the private security company may have exceeded size limits for a small business.
The audit was requested in March by U.S. Rep. Henry Waxman, a California Democrat who is chairman of the House Committee on Oversight and Government Reform.
Waxman also asked that the Internal Revenue Service investigate Blackwater. If the IRS determines that Blackwater's guards are employees, Blackwater could owe $50 million or more in unpaid Social Security and Medicare taxes, Waxman said.
The inspector general said Blackwater, based in Moyock, N.C., in the state's northeastern corner, obtained 39 contracts set aside for small businesses from 2005 through 2007. Most of the money was for six aviation contracts worth $107 million that the Defense Department awarded to Presidential Airways, a sister company of Blackwater.
The inspector general's office, which is the agency's in-house watchdog, said it was unclear whether the contracts should be judged by revenue or employment.
The contracts were set aside for a company with less than $25.5 million in annual revenue. Blackwater has taken in more than $200 million in government contracts in each of the past three years and wouldn't qualify.
If the standard was employment, the contract was set aside for a company with fewer than 1,500 employees. Presidential Airways said Blackwater and its affiliates had 715 employees, a number that doesn't include security guards. According to a 2007 congressional report, Blackwater had 987 security personnel working for the U.S. State Department. The total would put the company above the 1,500-employee limit.
The inspector general cited several reasons to count the security guards as employees. Blackwater considered the guards employees for the purpose of workers' compensation insurance. The inspector general questioned Blackwater's claim that the company had no knowledge or control of its guards once they were in Iraq or Afghanistan.
The SBA inspector general referred the contracts to the inspectors general of the Department of Defense and the Department of Veterans Affairs for further investigation.
SBA report criticized
Blackwater released a statement saying it relied on the advice of experts in treating its guards as contractors and criticized the SBA's report as inconclusive and speculative.
"We recognize that the issue of independent contractor vs. employee classification is complex," the statement said. "If after fair and complete examination of the facts, the appropriate authorities have alternate recommendations about our worker classification, we are open to considering other options so long as we can continue to serve our government clients in the best way possible."
The report also discussed 33 non-aviation contracts worth $2.2 million; 32 were set aside for companies with annual revenues of $6.5 million or less, and the final contract was set aside for companies with 500 or fewer employees.
Blackwater's revenues have exceeded $200 million each of those years, according to federal data.
This "may have involved misrepresentations to obtain the contract," the inspector general report said.
The penalties for "misrepresentation" are spelled out on the SBA's standard form that companies must fill out to qualify as small businesses. A company that misrepresents its status as a small business can face criminal fines up to $500,000.
The government can also suspend contracts with the company or bar it from future government contracts.