Think Progress

Cayman Islands Subsidiary Allows Pentagon Contractor Assisting War In Iraq To Avoid Millions In Taxes»

The Boston Globe recently revealed that two Defense Department contractors operating in Iraq — KBR and MPRI — have avoided paying hundreds of millions of dollars in federal Social Security and Medicare taxes by hiring its employees through “shell companies” based in Bermuda and the Cayman Islands.

Today, the AP reveals a third contractor assisting the U.S. military’s mission in Iraq that is also dodging Social Security and Medicare taxes. Immediately after winning a DoD contract worth more than $2 billion nearly ten years ago, Combat Support Associates established CSA Ltd. in the Cayman Islands allowing it to avoid paying the taxes and evade scrutiny from the U.S. government:

The subsidiary, CSA Ltd., now employs about 2,000 American citizens in Kuwait, where they support U.S. forces moving in and out of Iraq. Yet as a foreign corporation doing work outside the United States, CSA Ltd. does not pay Social Security and Medicare taxes for these workers.

In fact, according to the AP, “company officials” have acknowledged their immunity from U.S. law, noting that CSA Ltd. “is outside the jurisdiction of U.S. courts, so federal labor rules and anti-discrimination laws don’t apply either.” Indeed, the Globe noted that because of such practices, “workers cannot receive unemployment compensation when their jobs end and may be deprived of other protections under US law.”

But Congress has taken notice of these contractors’ unethical practices. The House passed a bill last month — despite Republican opposition — to “stop federal contractors from using foreign subsidiaries to evade Social Security and other employment taxes.”

In the meantime, companies such as KBR, MPRI and CSA Ltd. continue to avoid paying millions in taxes:

The Joint Committee on Taxation estimates shutting the employment tax loophole would bring in about $846 million in revenue over 10 years. That figure could be higher, lawmakers say, since it’s unclear how widespread use of the opening is.

Indeed, assuming that the American employees of CSA Ltd. make only $30,000 per year (online job ads place salaries much higher), the company would still “owe about $4.6 million in employment taxes.”

FBI Agents Raid Special Counsel’s Home, Office In Corruption Investigation»

Today, FBI agents raided the home and office of federal Special Counsel Scott Bloch, seizing computers and documents in relation to a corruption investigation. The Wall Street Journal reports:

More than a dozen FBI agents served grand jury subpoenas shortly after 10 a.m., shutting down the agency’s computer network and searching its offices, as well as Mr. Bloch’s home. Employees said the searches appeared focused on alleged obstruction of justice by Mr. Bloch during the course of an 2006 inquiry into his conduct in office.

Bloch was charged with looking into whether Karl Rove used government resources to help elect Republicans in 2006. Yet Bloch has engaged in his own Rove-like behavior and has been under investigation since 2005. A look at some of the charges against Bloch:

– In April 2005, government watchdogs complained that the Bush appointee had allowed his office to “sit on” a complaint that Condoleezza Rice, then National Security Adviser, had “used government funds to travel in support of President Bush’s re-election bid.” By contrast, Bloch had ordered an immediate investigation into whether Sen. John Kerry (D-MA) had “improperly campaigned in a government workplace,” even though the complaints had been filed around the same time.

– The Office of Personnel Management’s inspector general has been “looking into claims that Mr. Bloch improperly retaliated against employees” who disagreed with his policies, such as that “federal employees are not protected from discrimination based on sexual orientation.” He has also reportedly “dismissed whistleblower cases without adequate examination.”

– In 2006, Bloch “erased all the files on his office personal computer,” potentially as part of a cover-up. To do so, Bloch bypassed the Office of Special Counsel’s technicians and phoned Geeks on Call, the mobile PC-help service.

Bloch has angrily responded to the investigations against him by noting that the White House and the Office of Personnel Management “have conflicts of interest making impartiality unlikely in their investigation.”

Kyl Shackles Justice Department Watchdog To Bush Administration’s Whims»

On April 23, the Senate unanimously approved the Inspector General Reform Act (S. 2324), a bill meant to enhance the independence of federal agency watchdogs.

Yet it passed only after Sen. Jon Kyl (R-AZ) inserted a little-noticed amendment to water down the bill. His amendment deleted a provision giving the Justice Department’s Office of Inspector General (OIG) jurisdiction to investigate misconduct amongst senior officials. The National Law Journal reports:

Unlike all other OIGs who can investigate misconduct within their entire agency, Justice’s OIG must refer allegations against department attorneys to the department’s Office of Professional Responsibility (OPR). The latter office, unlike the OIG, is not statutorily independent and reports directly to the attorney general and the deputy attorney general.

In October, the House passed a similar IG bill, except that it eliminated the requirement that the Justice Department’s IG refer misconduct allegations to OPR. The White House had threatened to veto the House bill, and the Kyl amendment “was seen by many as a vehicle for the White House’s objections.”

In the past, the White House has repeatedly used OPR to block investigations. Last year, then-Attorney General Alberto Gonzales directed OPR to investigate the U.S. attorney scandal, even though it would face a conflict-of-interest by having to look into its two bosses — the attorney general and the deputy attorney general. Justice Department IG Glenn Fine objected, and eventually a joint OPR-OIG investigation was conducted.

More significantly, President Bush personally stepped in and blocked OPR from investigating the administration’s wiretapping program in 2006. CBS News reported:

The memos from OPR chief H. Marshall Jarrett to Deputy Attorney General Paul McNulty, in February, March and April of this year show that while Gonzales publicly told the Senate that OPR was investigating, Jarrett was complaining to higher-ups that he was “unable to move forward” because of the lack of security clearances for himself and six staff members.

At the time, Gonzales attempted to defend the stonewalling, stating, “The president of the United States makes decisions about who is ultimately given access.” This rationale is precisely why IGs, who are statutorily independent, need the power to investigate misconduct.

Another Iraq Contractor Avoiding Millions In Taxes Through Off-Shore Havens»

Last March, the Boston Globe reported that KBR — one of the top profiteers of the Iraq war — has avoided paying more than $500 million “in federal Medicare and Social Security taxes by hiring its workers through shell companies” based in the Cayman Islands.

Today, the Globe reports that another Pentagon contractor, Virginia-based MPRI, has also established offshore havens that have the appearance of avoiding payment of millions of dollars in Medicare and Social Security taxes and also evading scrutiny from the IRS:

In March 2005, one of the Pentagon’s most trusted contractors - Virginia-based MPRI, founded by retired senior military leaders - won a $400 million contract to train police in Iraq and other hotspots. Two months later, MPRI set up a company in Bermuda to which it subcontracted much of the work. […]

A year earlier, MPRI headed a joint venture that won a $1.6 billion contract to provide US peacekeeping forces in Kosovo and elsewhere. Three months later, MPRI set up a company in the Cayman Islands to do the work.

But tax lawyers say that MPRI appears to be avoiding the payment of roughly $4 million dollars a year in Social Security and Medicare taxes for the police-training contract alone and is sidestepping scrutiny by hiring workers through offshore entities based outside the jurisdiction of the Internal Revenue Service.

MPRI has hired “roughly” 400 employees through the Bermuda shell company, but the company also avoids taxes by hiring its workers as “independent contractors.” But experts, and even MPRI employees themselves, say their work would unlikely “pass the IRS test for self-employment.”

Georgetown professor Albert Lauber said […] that genuine independent contractors come into a job with their own equipment, require little training and oversight, and generally get the job done on their own schedule.

MPRI’s police trainers, who asked not to be identified, said they do not work that way. One former trainer working for MPRI in Iraq said that police trainers in Baghdad received letters at the end of 2005 saying that they might experience a brief disruption in their payments because “payroll was being moved to Bermuda to satisfy US tax code.”

The letters became a running joke among the trainers. “We said, ‘What do you mean, to avoid tax codes?‘” the former trainer recalled.

The Globe notes that as a result of MPRI’s practices, “workers cannot receive unemployment compensation when their jobs end and may be deprived of other protections under US law.”

KBR Ignored Warnings Of Unsafe Electrical Wiring That Led To Deaths Of U.S. Troops»

In March, House Oversight Committee chairman Henry Waxman (D-CA) announced that he was investigating the accidental electrocution of troops in Iraq and pressed Defense Secretary Robert Gates for uncensored details on at least a dozen deaths since 2003. Contractor KBR is at the center of the probe, with questions about whether it irresponsibly ignored wiring problems.

Today, The New York Times has more details on this malpractice, including the fact that senior KBR and Pentagon officials repeatedly ignored warnings by KBR electricians:

One electrician warned his KBR bosses in his 2005 letter of resignation that unsafe electrical work was “a disaster waiting to happen.” Another said he witnessed an American soldier in Afghanistan receiving a potentially lethal shock. A third provided e-mail messages and other documents showing that he had complained to KBR and the government that logs were created to make it appear that nonexistent electrical safety systems were properly functioning.

KBR itself told the Pentagon in early 2007 about unsafe electrical wiring at a base near the Baghdad airport, but no repairs were made. Less than a year later, a soldier was electrocuted in a shower there.

John McLain, the electrician who in 2007 told a visiting defense contracting agency official about his concerns over the logs, was fired shortly after the incident. Another employee “said his KBR bosses mocked him for raising safety issues.”

This sort of refusal to acknowledge and correct errors seems to be standard operating procedure within KBR, unfortunately. Former employee Jamie Leigh Jones revealed that after she was gang-raped by co-workers, not only did the company place her “under guard in a shipping container,” but warned her that if she left Iraq for medical treatment, she would lose her job. In an opposite situation, a KBR employee who was “busted by the military” for looting in Iraq was “given a promotion.”

Similarly, Bunnatine “Bunny” Greenhouse, who oversaw contracts for the Army Corps of Engineers, told the Senate in 2005, that KBR represented the “most blatant and improper contract abuse I have witnessed during the course of my professional career.” Reflecting the Pentagon’s efforts to protect KBR, Greenhouse was demoted almost two months to the day after voicing that critique.

Despite all these irresponsible, unethical actions (as well as providing contaminated water to troops and evading millions in taxes), KBR recently announced that it had tripled its first quarter net profits and received new contracts worth up to $150 million for 10 years to provide assistance to the U.S. military overseas.