State Dept Document from 2005 Shows Fraud in Blackwater's Iraq Contract

Spencer Ackerman, TPMmuckraker: A report prepared for the State Department's inspector general in January 2005, and obtained by TPMmuckraker, shows Blackwater's accounting system for its no-bid, multimillion dollar Iraq contract was "not considered adequate for accumulating costs on government contracts."

The report is an audit of Blackwater's contract prepared by the accounting firm of Leonard H. Birnbaum. It has been referred to by the House Oversight and Government Reform Committee (pdf) and in a 2006 story in The Nation, but has not been made publicly available until now. It was obtained by TPMmuckraker after we filed a Freedom of Information Act request in October with the State Department for Blackwater-related documents. You can read the 2005 State Department report in our Documents Collection here.

Much of the document is redacted -- including any description of how Blackwater's accounting system in Iraq operated, as well as any numerical figure for the size of the contract. (In 2004, the year that the report covers, Blackwater held contracts from the federal government totaling $48 million, of which the State Department contract was a portion.) But the unredacted portion of the report finds problems with how Blackwater tallied its labor costs, its overhead-expense costs, and its indirect costs. It also found that Blackwater cited its profit from the contract as a cost it incurred, and billed the government for it -- resulting in what the report called "a pyramiding of profit."

The State Department was under a massive time-crunch in mid-2004 to stand up its new Baghdad embassy as the Coalition Provisional Authority went out of business that June. As a result, State Department logistics official William Moser explained to Congress, State opted to sign a no-bid contract for diplomatic security services with the company already on the ground: Blackwater. "We did not like doing a sole source award for Blackwater," Moser told the House oversight committee in October. No wonder: Blackwater, apparently, took advantage of the opportunity.

Yet despite its own internal watchdog's finding of fraudulence in Blackwater's Iraq contract, months later, the State Department re-signed a deal with the company to provide security for U.S. diplomats.