Iraq Contractor Accused of Offshore Shell Game

October 14th, 2004 - by admin

David Phinney / Special to CorpWatch – 2004-10-14 21:13:07

(October 14, 2004) — Former managers working for Custer Battles, a high-profile private security company in Iraq, are accusing the firm of using subsidiaries in the Cayman Islands and other “tax haven” countries to fraudulently overcharge on government contracts by tens of millions of dollars. The accusations are spelled out in a lawsuit filed under the False Claims Act and made public Oct. 8.

The company, headquartered in McLean, Va., first grabbed headlines in The Wall Street Journal after winning a $13 million contract in June 2003 to provide security for the Baghdad International Airport.

The nine-month-old firm had no track record in security and employed only a handful of people at the time. The two co-founders, Scott Custer and Michael Battles boast of making their first payroll with personal loans and credit cards. Since then, the company has landed contracts totaling an estimated $100 million including protecting Iraq’s new currency and training the Iraqi army.

But once on the ground in Iraq, the company resorted to using crooked accounting and “sham” subsidiaries in far-flung countries including the Cayman Islands, Cyprus and Lebanon, to dramatically pump up charges on contracts by as much as 162 percent or more on equipment, construction supplies and services, claim plaintiffs Robert Isakson and W.D. “Pete” Baldwin, both of who worked for Custer Battles.

“When I see crooks come into a war zone where people are fighting and dying, I just turn them in,” Isakson says. “In my opinion they were cheating the government and taxpayers and just being rewarded with more contracts.”

Since the 1991 Gulf War, Isakson says his disaster relief and construction company, DCR of Mobile, Ala., has worked in support of the military and others as a subcontractor in Kuwait, Somalia and Kosovo. The former FBI investigator says he has blown the whistle on other frauds in the past, but Custer Battles trumps everything he has seen.

Custer Battles denies the allegations as “baseless” and portrays Isakson and Baldwin as being in “direct competition” with the company. Custer Battles spokeswoman Jennifer Martin referred inquires about the lawsuit to a Oct. 8 press release.

“We believe that the individuals filed this claim solely as a last ditch effort to achieve a competitive edge over CB,” the release says.

Nevertheless, the U.S. Air Force temporarily banned company from future government contracts on Sept. 30 until legal proceedings are resolved. The government-wide ban cites additional accusations that include a $2.7 million bill fabricated from “forged leases, inflated invoices and duplication,” as well as a $157,000 charge for a $95,000 helicopter pad.

Offshore Tax Havens
Custer Battles is just one of many government contractors known to operate offshore subsidiaries in countries commonly known as “tax havens,” according to recent reports by the Government Accountability Office, the investigative arm of Congress.

One study, made public in February, finds that 59 of the 100 largest federal contractors in 2001 reported having subsidiaries in approximately 39 countries identified as tax havens. Such countries, including the Cayman Islands and Cyprus, levy negligible taxes on corporate income and provide privacy laws that shield businesses from international scrutiny.

Many of the federal contractors named by GAO also hold multi-million dollar contracts in Iraq, including Flor, Foster Wheeler (which is incorporated in Bermuda), Computer Associates International, Bearing Point, Harris, and others. (A separate GAO report released in August found that such companies enjoy a substantial competitive edge in winning contract awards over government contractors without such offshore operations.)

Halliburton’s Tax Haven in the Cayman Islands
Houston-based Halliburton, the largest contractor in Iraq, holding billions of dollars in contracts, operated 17 subsidiaries in tax haven nations as of 2001, according to GAO.
CorpWatch has found that Halliburton makes use of one Cayman Island subsidiary, Service Employees International, Inc., to employ an estimated 70 percent of its workers from the United States and elsewhere for a major Pentagon contract for military support services.

Company spokeswoman Cathy Gist offered no comment on this employment practice but said in an e-mail earlier this summer that all Service Employees International, Inc. employees are covered by U.S. workplace rules.

A number of other companies contacted by CorpWatch declined to comment on GAO’s findings of offshore subsidiaries or if such operations are used in their Iraq contracts.
Titan, a contractor that provided interpreters accused by Pentagon investigations of involvement with torture incidents at Abu Ghraib prison, may have as many as three offshore subsidiaries but they have become dormant or recently dissolved after being acquired in company acquisitions, according to company spokesman Wil Williams.

“We can confirm that no bids – particularly US government bids – or revenues were received or made out of these entities as far back as we can see,” Williams says.

Bearing Point, which holds an $80 million contract for directing Iraq’s transition to a sustainable market-driven economic system, is also identified by GAO as having operated 22 subsidiaries in tax haven countries during 2001, something spokesman John Schneidawind was unable to comment on after several inquiries for this report.

Schneidawind also declined comment on allegations made in the lawsuit against Custer Battles that the security firm may have defrauded Bearing Point while working on the Iraqi Currency Exchange (ICE), a 2003 program that introduced new currency in Iraq. Custer Battles was contracted for transportation and security support in the program.

Offshore Shell Companies
The allegations against Custer Battle’s use of offshore subsidiaries open a window into the possible uses of such companies to raise profit margins, mask overcharges and conceal company costs. Such manipulations go far beyond the current scope of GAO investigations of offshore companies which focus on tax avoidance.

“By conspiring to bill fictive costs generated by their shell entities,” the lawsuit contends, defendants fraudulently increased profits by including “artificial markups paid to shell entities owned or controlled by the defendants, but which themselves provided no additional service or item.”

While the ICE contract allowed for a twenty-five percent profit over costs, Custer Battles made use of its Cayman Islands operations, Secure Global Distribution Middle East Leasing, to collect and inflate charges, according to the lawsuit. Equipment, trucks and prefabricated buildings were leased through these companies at costs that were sometimes doubled in the process.

When asked to justify the high costs by the ICE Supervising Board, Custer Battles allegedly said that the leasing companies would not make leasing records available.
“Defendants Custer and Battles withheld from the ICE Board the fact that they, along with other defendants, owned or controlled these so-called leasing companies,” the lawsuit says.

On another occasion, Isakson says, in the midst of price negotiations company representatives absentmindedly dropped a spreadsheet on a table during a conference with employees of the Coalition Provisional Authority. The sheet contained information on Custer Battles attempted billing for $9,801,550 on expenses that cost the company $3,738,592.

The lawsuit also claims that Abu Darwish, an alleged business associate of Custer Battles, was recently discovered on a plane leased by the firm with $12 million dollars worth of Iraqi dinars. The cash was confiscated by customs in Lebanon, where Mr. Darwish resides, the lawsuit claims.

Baghdad Airport
Isakson began to protest to Custer Battles about fraudulent practices after his company modified an airport terminal into an operational post for Custer Battles at a cost of several million dollars.

Isakson says that Custer Battle billed for work that was never performed, equipment that was never delivered and at one point painted eight stolen forklifts belonging to Iraqi Airways before leasing them to the Coalition Provisional Authority.

Originally a $13.6 million contract, the price soon rose to $16.5 million after the contract award. Contract requirements for 138 security guards were never met, but the company continued to charge for that amount of service, according to the compliant. “I refused to cooperate with them,” Isakson says.

Within a month, Isakson says, tensions ran so high that Custer Battles employees drew their weapons on Isakson, his 14-year-old son and another worker. He says they were then stripped of their identification and guns and escorted to the airport gate.

Having little money to stay at a hotel and no ID for access to the Coalition Provisional Authority Green Zone, the three began an overnight journey through war-torn Iraq until they reached Amman, Jordan where they then traveled back to the United States.
“I had no money, no ID, no weapons and we were left outside the gate in a war zone,” Isakson says. “What was I supposed to do?”

Isakson and Baldwin both say they wanted to report Custer Battles to authorities in Iraq, but were confounded by who to report to until returning to the United States.

To this day, Isakson maintains that Custer Battles owes his company several million dollars for unpaid work and several hundred thousand more in personal loans he made to help Custer Battles through its first month in Iraq.

The allegations against Custer Battles have been under investigation by the FBI and US Justice Department since February, according to attorney Alan Grayson, who is representing Isakson and Baldwin. On Oct. 4, the Justice Department formally rejected his request to join the lawsuit filed under the False Claims Act. Complaints such as Isakson’s stand a far better chance in court if they receive government backing. Custer Battles believes the action absolves them of the charges made in the lawsuit. The Justice Department made no comment on its reasons for declining to join the case.

Grayson interprets the Justice Department decision as a backroom political deal, noting that Michael Battles, a co-founder of Custer Battles ran as a Republican candidate for Congress in Rhode Island against Democrat Rep. Patrick Kennedy in 2002. Although he lost the race, Battles received backing during the campaign from Haley Barbor, a former chairman of the Republican National Committee. He’s also worked as a commentator for the Fox News network.

“Even though this involved taxpayer money, Justice said they have no interest in this case because it happened in Iraq,” Grayson says.

Justice spokesman Charles Miller says he is aware of the Grayson’s views, but the department does not comment on such cases. He points out, “They are still free to pursue their case.”

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