working with Custer Battles, a high-profile private security
company in Iraq, are accusing the firm of using affiliated
"shell" companies 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 October 8.
Custer Battles, headquartered in McLean, Virginia, first
grabbed headlines after winning a $16.5 million contract in
June 2003 to provide security for the Baghdad International
Airport by hiring Nepalese Gurkhas. It was the first major
assignment for the fledgling firm after being launched in
Founded by two Army
veterans, Scott Custer and Michael Battles -- a former
Republican candidate for Congress in Rhode Island -- the
firm had little experience in private security and employed
only a handful of people at the time. The two entrepreneurs,
both in their mid-30s, made their first payroll with credit
cards and personal loans. Since then, Custer Battles has
landed security contracts totaling an estimated $100 million
that include protecting Iraq’s new currency and training
the Iraqi army.
But during those
early months in Iraq, the company resorted to using crooked
accounting and "sham" companies in far-flung
countries including the Cayman Islands, Cyprus and Lebanon,
to dramatically pump up charges on contracts by as much as
162 percent on equipment, construction supplies and
services, claim plaintiffs’ Robert Isakson and
W.D."Pete" Baldwin, both of who worked for Custer
"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
Since the 1991 Gulf War, Isakson says his disaster relief
and construction company, DRC 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 in
"direct competition" with the company. Custer
Battles spokeswoman Jennifer Martin referred inquires about
the lawsuit to an October 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
Nevertheless, the Pentagon temporarily banned the company
from future government contracts on September 30 until legal
proceedings are resolved. In an Air Force memo calling for
the government-wide suspension, Custer Battles and its
officers are accused of creating "sham" and
"interlocked" foreign companies to fraudulently
increase profits and inflate costs charged to the Coalition
Provisional Authority (CPA), the temporary governing body in
Iraq largely led and funded by the U.S. government.
evidence" establishes that the conduct of Custer
Battles and top individuals associated with the firm
"is of so serious or compelling a nature that it
affects their present responsibility to be government
contractors or subcontractors," the memo concludes.
During one contract meeting with CPA officials, the Air
Force claims that Battles absentmindedly dropped a
spreadsheet on a table reflecting an attempted billing of
$9,801,550 for expenses that cost the company $3,738,592.
Under the contract, actual costs and invoiced costs should
have been the same, the memo says, but had been marked up
The Air Force also makes additional accusations against the
company, which 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 in Mosul, Iraq.
Offshore tax havens popular with government contractors
Custer Battles is
just one of many government contractors known to use
offshore companies 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
Many of the federal contractors named by GAO also hold
multi-million dollar contracts in Iraq, including Fluor,
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
Houston-based Halliburton, the largest contractor in Iraq, holds billions of dollars
in reconstruction and logistics contracts. It operated 17
subsidiaries in tax haven nations as of 2001, according to
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 for this report
declined to comment on GAO’s findings of offshore
subsidiaries or if such operations are used in their Iraq
Titan, a contractor that provided interpreters accused of
being involved with torture incidents at Abu Ghraib prison,
may have had as many as three offshore subsidiaries but they
probably became dormant or recently dissolved because they
were acquired through acquisitions of other companies,
according to company spokesman Wil Williams.
"We can confirm that no bids – particularly U.S.
government bids – or revenues were received or made out of
these entities as far back as we can see," Williams
Bearing Point, which holds contracts worth up to $240
million for famine relief and 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.
spokesman John Schneidawind acknowledged existence of the
subsidiaries but cautioned that his company never
"availed itself" to accomplish tax savings as
"some other entities are thought to."
declined comment on a BearingPoint contract with Custer
Battles for security that was reportedly terminated six
months prematurely because of the fledgling firm's
inexperience and misunderstanding of the agreement.
According to a
September 20 USAID Inspector General report, security costs
grew 49 percent under Bearing Point's Iraq Economic Reform
Point, in its cost proposal, proposed to spend approximately
$894,000 for security costs during the base year of the
contract, but later estimated its actual security costs at
closer to $37 million," the report states.
Custer Battles also
worked in tandem with Bearing Point on the Iraqi Currency
Exchange (ICE), a 2003 effort that introduced new currency
in Iraq, but performed security support, transportation and
the building of new camps in Iraq to house and feed workers
involved in the program under a contract directly with the
against Custer Battle’s use of offshore firms open a
window into the possible ways such companies may be
leveraged to raise profit margins, mask overcharges and
conceal company costs. Those possible manipulations go far
beyond the scope of recent GAO investigations focusing on
potential tax avoidance through the use of "tax
"By conspiring to bill fictive costs generated by their
shell entities," the lawsuit against Custer Battles
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 25 percent profit over
actual costs, Custer Battles made use of Cayman Islands
operations, Secure Global Distribution and Middle East
Leasing, to collect and inflate charges for even larger
profits, according to the lawsuit. It claims that equipment,
trucks and prefabricated buildings were leased through these
companies at costs that were sometimes doubled in the
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
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 dinars, the Iraqi currency. The cash was
confiscated by customs in Lebanon, where Darwish resides,
the lawsuit claims.
Efforts to locate
Darwish for comment have been unsuccessful, but Custer
Battles attorney Annemarie Carney said the allegation
"is entirely inaccurate."
Isakson says he
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.
During that time, Isakson says he witnessed Custer Battles
bill for work that was never performed and equipment that
was never delivered. The company also leased eight stolen
forklifts belonging to Iraqi Airways to the CPA after
repainting them, he says.
Contract requirements for 138 security guards at Baghdad
International Airport were never met, but the company
continued to charge for that amount of service, according to
the compliant. Originally a $13.6 million contract, the
price soon rose to $16.5 million after the award was made.
Isakson claims that top associates with Custer Battles
attempted to recruit him in fraudulent schemes but he
rebuffed their efforts."I refused to cooperate with
them," he 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 security IDs and guns and escorted to the
Having little money to stay at a hotel and no ID for access
to the CPA Green Zone, the three fled through war-torn Iraq
until they reached Amman, Jordan, and 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 did not know who to
report their allegations to until returning to the United
To this day, Isakson maintains that Custer Battles owes his
Alabama 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 FBI and U.S. Justice Department have been investigating
the allegations against Custer Battles since February, said
attorney Alan Grayson, who is representing Isakson and
Baldwin. On October 4, the Justice Department formally
rejected Grayson's request to join the lawsuit filed under
the False Claims Act to recover tens of millions of dollars
in taxpayer money.
The Justice Department offered no explanation for declining
to join the case, but false claim complaints generally stand
a far better chance in court when they receive government
backing. Custer Battles now believes that because the
Justice Department declined to participate, the firm will
soon be absolved of the charges made in the lawsuit.
Grayson interprets the Justice Department decision as a
backroom political deal, noting that Michael Battles, a
cofounder of Custer Battles ran as a Republican candidate
for Congress in Rhode Island against Democrat Representative
Patrick Kennedy in 2002. Although he lost the race, Battles
received backing during the campaign from Haley Barbour, a
former chairman of the Republican National Committee.
Battles has also worked as a commentator for the Fox News
"Justice said it has no interest in this case because
the contracts were through the Coalition Provisional
Authority even though it was funded with taxpayer
money," Grayson says.
Charles Miller says he is aware of the Grayson’s views,
but that the department does not comment on such cases.
The plaintiffs, he points out, are "free to pursue
Battles continues to build its business. Although the
security contract for Baghdad airport has ended --
reportedly because of constant feuding with CPA officials
and an addition to the contract's scope for covering cover
ports -- the company projects $200 million in business by
Much of that new
business is hoped to be outside of Iraq, which presently
comprises 90 percent of its work, according to the
Associated Press. Custer Battles opened a new office in
Qatar in July is reported to have $35 million in commitments
to invest in projects such as a shrimp farm in southern Iraq
and home-loan financing operations in Eastern Europe. The
company also is setting up a 227-acre corporate training
center near Fort Bragg in North Carolina, the report said.
In March, Custer
Battles also established what it calls an "office of
corporate integrity," according to a press release
posted on its Web site.
a core principle of Custer Battles' corporate values,"
Custer said in the release. "The OCI will help to
ensure that everything Custer Battles does, as a company,
complies with the highest ethical standards that are
expected of ourselves and our employees."