Audit Questions Small-Business Contracts Won by Blackwater

RALEIGH, N.C., July 28 -- Private security contractor Blackwater Worldwide and its affiliates may have misrepresented their size to win more than $100 million in government contracts set aside for small businesses, federal auditors said Monday.

A report by the Small Business Administration's Office of Inspector General questioned the agency's decision to approve Blackwater as a small business even though there were signs that the company could be much larger than executives claimed.

In fiscal 2005 through 2007, Blackwater and affiliates won 32 small-business contracts worth more than $2.1 million even though the work was restricted to companies with revenue of $6.5 million or less, according to the audit. One contract had a revenue ceiling of $750,000. Meanwhile, Blackwater's airline affiliate Presidential Airways won more than $107 million in contracts set aside for companies with revenue of less than $25.5 million or fewer than 1,500 employees.

The audit questioned whether the Moyock, N.C.-based company, which built its name protecting U.S. diplomats on the volatile streets of Baghdad, could meet either of those limits. The company said last week that it's on track to reach annual revenue of $1 billion per year by 2010.

Blackwater questioned the factual accounting of the audit, noting that one contract on the list was awarded to a small company years before Blackwater purchased it.

"The failure to conduct a meaningful inquiry into the facts or review any of the relevant bid submission paperwork before making such reckless allegations should be disappointing to all," said Andy Howell, Blackwater's general counsel. "Blackwater is looking forward to correcting the record."

Auditors urged the SBA to review whether Blackwater's 29 affiliated entities should have any contracts, and they referred all previously awarded work to agencies "for possible action."

The audit focused particular attention on the $107 million in work awarded to Presidential Airways, saying Blackwater may have misrepresented its revenue for those contracts. Auditors also questioned the math behind the claim that it had fewer than 1,500 employees.

Several competing companies had filed a complaint in 2006 saying that Presidential was too large for a small-business contract for helicopter services. Presidential said the Blackwater affiliates had only 715 employees. An additional 1,000 workers were contractors, not employees, the company said.

The SBA had concluded that Blackwater did not supervise the workers in the field -- a key factor in IRS rules on what constitutes a contractor or employee -- because they were under Department of State supervision. But the audit found that Blackwater contracts indicate the company was required to work with the State Department to establish shift schedules, provide reports and ensure security personnel compliance.

Auditors were uncertain whether Blackwater was overseeing the operations of their guards.

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."

Rep. Henry A. Waxman (D-Calif.), chairman of the House Oversight and Government Reform Committee, had asked the SBA to investigate whether Blackwater had complied with small-business laws. He's also asked the IRS to investigate whether the company has sidestepped tax laws by defining its guards as contractors rather than employees.