Small Business Admin. Couldn’t Explain Why It Approved Small Business Status For Blackwater

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July 28, 2008 6:39 p.m.

Private military contractor Blackwater and its affiliates may have wrongly received more than $100 million in contracts that were supposed to be set aside for small businesses, according to an inspector general’s report released today.

At issue was a November 2006 determination by the Small Business Administration that a Blackwater affiliate, Presidential Airways, was a small business with less than 1,500 employees.

Blackwater contended, and the agency agreed, that its more than 1,000 workers providing security for the State Department overseas were not employees, but independent contractors. That made the company appear smaller on paper than it actually is.

The SBA Inspector General said that assessment was incorrect, based on SBA regulations.

How the agency made that determination regarding Blackwater is unclear, the report concluded.

“We’re not sure how that happened,” Glenn Harris, chief counsel for the SBA inspector general’s office, said in an interview with TPMmuckraker. “We’re not saying there was misrepresentation. … It could be contracting-officer error.”

Although Blackwater did provide some information indicating the size of the company, the SBA appears to have overlooked evidence that the company was too large to qualify as a small business.

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.

The SBA IG forwarded its report to the Department of Defense and the Department of Veterans Affairs, which together awarded Blackwater some 39 contracts that were set aside for small business. SBA only accesses whether a company is eligible for small-business contracts.

Rep. Henry Waxman (D-CA), chairman of the House oversight committee, questioned Blackwater’s conduct.

“The SBA IG report raises serious concerns about whet her Blackwater made false statements about its small business status to the federal agencies that awarded these contracts,” wrote in a memo to his committee today.

A spokeswoman for Blackwater denied any wrongdoing by the company.

“Over the past several years, expert accounting and outside legal counsel have determined that Blackwater’s classification of security personnel as independent contractors is reasonable, correct and legally protected,” said Anne Tyrell, the spokeswoman.

She said the IG’s report “draws no conclusions” and was “unnecessarily speculative.”

The Small Business Administration did not respond to a request for comment.

Late Update: The SBA issued a statement noting that the the IG report questions its reasoning in the size determination but did not declare it incorrect.

The lack of clarity, the report says, depends on various interpretations of whether nearly 1,000 security personnel hired for a Department of State contract were employees and should have been counted against the 1,500-employee limit, or whether they were contractors and should not have been counted.

“As a legal matter, some factors suggested Blackwater’s security personnel were employees; other factors suggested they were independent contractors. The company also represented that those staff were considered independent contractors for IRS purposes,” the statement said.

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