Blackwater and the CIA

Excerpt: Blackwater's aggressive, entrepreneurial culture keeps its business growing
www.tradingmarkets.com
May 17, 2008

... As the company grows, so do its headaches: a persistent congressional investigation, several high-profile lawsuits and a federal weapons investigation. Still, Blackwater is thriving because of its aggressive and entrepreneurial business culture and a strong network of Republican connections. The company has hired extensively from the top levels of the CIA, Defense Department and State Department, and named the former No. 2 official at the CIA to its Board of Advisors.

"Their connections certainly help a lot," said Peter Singer, an expert on military contractors at the Brookings Institution. "But they may be a vulnerability in the future, if the regime changes in Washington."

This is a company that barely existed at the start of the decade; Blackwater grew from $204,000 in federal contracts in 2000 to almost $600 million in 2006. Its rise is a case study in business timing and the power of financial and political capital to take advantage of a new market.

Blackwater Lodge and Training Center was the brainchild of Al Clark, a Navy SEAL and instructor. Dissatisfied with the Navy's rented training grounds, Clark told colleagues he would open his own when he left the service. Clark hooked up with Erik Prince, a young Navy SEAL who shared his interest in training. Clark didn't know it at the time, but Prince was an heir to a billion-dollar auto-parts fortune.

When the two broke ground on Blackwater Lodge and Training Center in Currituck and Camden counties in northeast North Carolina in 1997, the timing was good. The military had closed and consolidated bases after the Cold War and neglected training facilities. Blackwater built the largest shooting facility in the country, with indoor ranges, mock urban landscapes, a 1,200-yard firing range, driving tracks and a lake for naval training. Blackwater boasted it could design any sort of training a client might want.

The location was excellent, within four hours of the Pentagon in Washington, and Fort Bragg and Camp Lejeune in North Carolina. The country's biggest naval base in Norfolk, Va., was less than an hour away. Despite the steady stream of business, Blackwater wasn't making money. Clark recalled how Prince summoned him to his office, on Christmas Eve 1999 and said, "I want this place profitable tomorrow."

Clark said his relations with Prince went downhill when Prince complained that he was training the students so well that no one would come back for more training.

Clark left Blackwater in the summer of 2000. Business was growing steadily, Clark said, but the company wasn't making a profit.

"There are two people who put Blackwater on the map," Clark said _ "Al Clark and Osama bin Laden."

After the attacks of Sept. 11, 2001, the demand for training from military and law enforcement filled Blackwater's ranges and classrooms.

Blackwater's most lucrative line of business wouldn't be in the Eastern North Carolina town of Moyock, but overseas. It was the brainchild of a former CIA employee, Jamie Smith.

While working at Blackwater before Sept. 11, Smith had suggested that Blackwater go into the private security business, guarding businessmen or government officials. Prince was initially skeptical, but warmed to the idea after the attacks on New York City and the Pentagon.

Prince contacted Alvin "Buzzy" Krongard, the No. 2 official at the CIA. Krongard had known Prince since at least 1999, when Krongard's son, a Navy SEAL, had trained at Blackwater, according to Al Clark. Krongard had visited Blackwater and shot at the firing ranges, Clark said. (In October, Krongard stepped down from Blackwater's Board of Advisors because his brother, Howard Krongard, was the State Department inspector general responsible for investigating Blackwater. Howard Krongard later resigned.)

The CIA was stretched thin in the aftermath of Sept. 11 and the invasion of Afghanistan. Blackwater landed a sole-source, no-bid contract to provide security at CIA stations in Afghanistan.

When Blackwater won the contract, the company had no one to staff it. Smith advertised for security contractors in the Washington Post, according to author Robert Young Pelton. Smith led the security team when it arrived in the early spring of 2002.

The contract was not a big one; it called for 16 Blackwater security personnel, plus dozens of Afghan guards hired locally. But it was profitable, a Blackwater budget spreadsheet shows. Blackwater expected a 26 percent profit on the job.

Most important, the contract was a start, a foot in the door of what would expand into a billion-dollar industry once the U.S. invaded Iraq.

The invasion created a huge demand for private security in Iraq. Secretary of Defense Donald H. Rumsfeld sent about half the troops recommended by his Army chief of staff. There weren't enough soldiers to secure the country, let alone protect U.S. diplomats and civilian workers.

In August 2003, Blackwater won a $27 million sole-source contract to guard Paul Bremer, the head of the Coalition Provisional Authority and probably the top assassination target of insurgents.

The contract called for helicopters to fly Bremer around Iraq. Blackwater was well positioned for that; the company had bought a Florida aviation company four months earlier.

Peter Singer, an expert on private military contractors, said this was typical of Blackwater's business savvy.

"They are very good and very savvy at identifying market needs and pushing hard to enter into those markets, even before clients have recognized the need," Singer said.

The private security business turned Blackwater into a heavyweight government contractor; the company went from $204,911 in government contracts in fiscal 2000 to $593 million in 2006, an average annual growth rate of 277 percent. Blackwater went from having 16 guards in Afghanistan to more than 850 personnel in Iraq.

By the end of 2006, Blackwater had received more than $1 billion in government contracts. That doesn't include classified contracts, including providing security at CIA sites overseas.

The CIA contracts are lucrative, according to a document Blackwater filed in a federal lawsuit.

Blackwater had a contract since 2003 to protect a CIA site in Pakistan, the document said. "The profit potential is high (25%+ margin)," because of the classified nature of the budgets, and the knowledge gained from past performance on existing contracts.

During congressional testimony in October, Erik Prince said that Blackwater made a 10 percent profit on his State Department contracts, but he declined to elaborate or discuss the company's annual profits. He also declined to comment for this report. But there is a healthy markup for the company's services: Blackwater bills the State Department $1,221 for a security guard earning $500 a day.

For all the controversy, Blackwater has an unblemished record on its main task in Iraq: None of the diplomats in the company's care have been killed or wounded. Undersecretary of State Patrick Kennedy recently told The New York Times that the diplomats could not function in Iraq without Blackwater: "If the contractors were removed, we would have to leave Iraq."

A company that has banked more than $1 billion in federal payments since Sept. 11, 2001, doesn't sound like a small business, but Blackwater says it is.

For a company providing security services, the threshold for a small business is $17 million in annual revenue. Blackwater passed that threshold in 2003, yet continued to list itself as a small business.

In 2006, Blackwater's aviation division won a $91 million contract for air charter work in Guam, a contract the Navy had set aside for small businesses. Two losing bidders challenged the award, saying Blackwater had more than 1,500 employees, the threshold for an aviation contract. An administrative judge ruled for Blackwater, saying the company's 1,000-plus guards working overseas did not count as employees.

Blackwater's contention that its guards are not employees has generated a lot of controversy.

Last year, an Internal Revenue Service hearing officer ruled that a Blackwater security guard was an employee, not an independent contractor. U.S. Rep. Henry Waxman has asked the IRS to investigate whether the company used the independent contractor designation to avoid paying federal taxes. Blackwater disputes Waxman's complaint. If that ruling were applied to Blackwater's entire work force, the company could be on the hook for $50 million in unpaid Medicare and Social Security taxes that companies must pay for their workers.

Prince, Blackwater's founder, is known for his libertarian views. He touts the virtues of the free market and entrepreneurs. But the company is not averse to exploiting contracting loopholes and government giveaways.

Blackwater teamed up with the Chenega, an Alaskan Native American tribe of 69 people, to guard a missile defense installation in northern Japan. As a native-owned company, Chenega can win special no-bid contracts because of rules crafted by Alaska's powerful U.S. Sen. Ted Stevens.

But to fulfill the terms, Chenega needed a partner to supply the guards, so it turned to Blackwater. The contract was worth $5 million for Blackwater in 2006 and $6 million for the first half of 2007.

In North Carolina, the Department of Commerce approved a $120,000 grant for Blackwater to support the company's production of its Grizzly armored vehicle. The department projected that Blackwater would file for $637,500 in tax credits for the same project.

Despite the phenomenal growth, Prince has been quietly looking for more investors. At the end of April, the giant hedge fund Cerberus said it had decided against investing as much as $200 million in Blackwater. After news broke of Cerberus' interest, Blackwater President Gary Jackson sent an e-mail message saying the company was anticipating even more growth, the Wall Street Journal reported.

"The company has "had two successive quarters of unprecedented growth," Jackson wrote, and is "exploring multiple avenues to finance our continued expansion."

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