U.S. defense contractors seek offshore havens

Use of the Cayman Islands as a tax shelter is widespread among American businesses, according to the Senate Finance Committee, which estimates that thousands of companies have registered there to dodge taxes. The losers, the committee said, are ordinary Americans who must foot a larger share of the bill to pay for programs that benefit the elderly and the disabled.

Democratic presidential candidate Barack Obama said in March that setting up shell companies "turns the idea of patriotism on its head."

Combat Support Associates was created in 1998 to compete for a contract at Camp Doha in Kuwait. The camp has been a major American outpost since the first Persian Gulf War in the early 1990s. Private sector help has long been needed to run the facility as U.S. troops rotate in and out.

In July 1999, Combat Support Associates was selected for a Camp Doha support contract, a 10-year deal potentially worth $547 million. In March 2003, when U.S. forces invaded Iraq, demand for the company's maintenance and repair services increased dramatically as bases across Kuwait became nerve centers for American troops.

The value of the contract ballooned as well — reaching well over $2 billion. According to Army Sustainment Command in Rock Island, Ill., $1.9 billion was spent between 1999 and 2007 on the Combat Support Associates contract. An additional $535 million was set aside for the fiscal year that ends Sept. 30.

Court records shed light on corporation
Court records from a whistleblower case in Florida and workplace discrimination lawsuits filed against the company in Texas and Maryland show how the company fashioned its corporate architecture.

CSA Ltd. was registered in September 1999. Its purpose was to handle the unclassified work in Kuwait. That accounts for close to 90 percent of the contract. From its offices in Orange, Calif., Combat Support Associates would perform the remaining 10 percent, which includes the classified duties requiring employees with security clearances.

So while Combat Support Associates won the Kuwait contract, it delegated responsibility for the most of the work to an entity organized under the business-friendly laws of the Caymans. According to company managers, CSA Ltd. has its own human resources department, makes its own hiring decisions and even maintains its own banking accounts and issues its own paychecks.

That separation between the two formed the basis for a defense against a former CSA Ltd. employee named John G. Watson who sued the company in 2003. Watson claimed he'd been denied a promotion because he was black, a violation of the Civil Rights Act.

Lawyers for the company denied Watson's allegations. They also said CSA Ltd. was a foreign company and not subject to U.S. law. The case should be dismissed, they argued.

A federal judge in Maryland refused to do so. In a May 2005 ruling, Judge Richard Bennett concluded the "two companies' operations were so intertwined as to be virtually indistinguishable." The case was settled out of court. Watson's attorney, Dennis Chong, says the terms of the settlement remain confidential.

John Gadd, a lawyer in Clearwater, Fla., had less success representing a former CSA Ltd. business manager who charged the company had retaliated against her after she objected to its accounting methods.

Gadd's client, Debbie Einmo, a Winter Haven, Fla., resident, said she learned of her company job from an advertisement on the Houston Chronicle newspaper's Web site. Because she was recruited in Florida, the case should be tried there, she and Gadd argued.

Attorneys for CSA Ltd. denied Einmo's charges. And they also argued the company had no offices in Florida so there was no basis for trying the case there. Last August, a federal magistrate in Tampa agreed. The case was eventually dismissed.

"I didn't fully appreciate or anticipate that they were trying to entirely circumvent U.S. law," Gadd says. "It didn't seem legitimate. The idea of a corporation is not to create a fiction that is untouchable."

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