A Change of a Name
September 9th, 2010
You’ve heard the story before. A corporation with something to hide uses a tax haven as a host for its phony subsidiaries. In the classic tale, it is for the purposes of evading millions in taxes. Sometimes the corporation exploits the tax haven for other evils, like hiding losses from investors. My favorite example is Enron’s executives, who used shell corporations with snazzy names like “Raptor” and “JEDI” to hide losses and fabricate earnings—with disastrous results. But never before have I heard of companies using tax havens to win U.S. government contracts. That sentence sounds shady before I even spell out the details. Well it’s about to get shadier.
Blackwater.
The name alone gives most Americans a creepy-crawly feeling. I’d say that’s probably the number one reason the company renamed itself “Xe Sevices.” Nothing like a short, snappy, and completely unpronounceable moniker to rid yourself of the stigma associated with past indiscretions.
And those indiscretions which have earned Blackwater its shameless reputation are many, particularly in the Iraq war, but the company remains infamous for one event in particular. Though I’m sure you don’t want a reminder, in case you’ve blocked out the memory, here’s how it went. In September of 2007 in Baghdad, then-Blackwater guards armed with automatic rifles shot and killed a man who was driving his mother to the grocery store. When his car careened out of control, they opened fire on his car and others driving frantically away. Seventeen innocent civilians died and twenty-four were wounded in the deadly cascade of events. The tragic affair, along with other abuses, prompted the State Department to terminate Blackwater’s security contract in Iraq.
Last week we learned the newly-minted Xe has obtained millions of dollars in American government contracts using a network of 30 companies incorporated in tax havens, at least three of which have deals with the CIA and the U.S. military. That network has also allowed “Blackwater to obscure its involvement in government work from contracting officials or the public and to assure a low profile for any of its classified activities.”
In response Senator Carl Levin has requested the Justice Department conduct an investigation into why Blackwater officials misled the government when using the alternatively named subsidiaries.
What may seem simple—a change of a name, either by an individual or a company—is in reality very dangerous. And it is the secrecy and lack of transparency created by tax havens that enables these disguises—which in turn can cause massive problems. Or, to put it another way, lets bad people do bad things.
It gets back to the issue of beneficial ownership, which is the person or company that is ultimately the beneficiary of an account or subsidiary. This is a problem in the case of politically exposed persons (PEPs), who have public functions and so are at a high risk for potential involvement in bribery and corruption. Most countries have strict laws on banks when it comes to domestic and foreign PEPs, but many tax havens do not.
Shell companies are used by PEPs who are hiding ill-gotten gains and they are also used in money laundering and terrorist financing. And, apparently, to win U.S. government contracts. In some ways the Blackwater case represents just one more reason that secrecy in financial transactions is dangerous and should not be tolerated. On the other hand it could be emblematic of a new and more dangerous exploitation of tax havens.
Either way, I am keenly interested to see the results of the potential investigation by the Department of Justice into this affair.