Washington , D.C.  – Representatives Rosa L. DeLauro (CT-3), Lloyd Doggett (TX-25), Rahm Emanuel (IL-5), and Richard Neal (MA-2) sent a letter to Secretary of Defense Robert M. Gates expressing outrage that Kellogg Brown & Root (KBR) , the top U.S. contractor in Iraq, has been allowed by the Defense Department for the past four years to avoid paying Med icare and Social Security taxes by hiring U.S. workers through shell companies based in the Cayman Islands.

“This is one of the worst cases of corporate greed, aided and abetted by the Defense Department at the expense of the American taxpayer,” stated DeLauro.

"KBR has graduated from no-bid contracting to no-tax gimmickry. The Pentagon needs to explain how our security is advanced by forming a coalition of the willing tax dodgers in the Cayman Islands ," said Doggett.

“The Defense Department has known about this since 2004 and has done nothing about it,” said Emanuel.  “The Democratic Congress will not look the other way while the same company that is providing our troops with foul water, is setting up sham companies in the Cayman Islands to avoid having to pay payroll taxes for their U.S. employees.”

“Tax avoidance has become an art form for powerful corporations,” said Neal. “It is both shocking and disappointing that some American companies continue to exploit our system in wartime by setting up shell corporations via a tax haven mailbox.  The Pentagon should not be doing business with these contractors who skirt the rules. I believe there should be Congressional hearings on this matter.”

Below is the full text of the letter.

March 13, 2008

The Honorable Robert M. Gates,

Secretary of Defense

1000 Defense Pentagon, Room 3E880

Washington D.C. 20301

Dear Secretary Gates:

We write to express our serious concern over recent reports that Kellogg Brown & Root (KBR) has avoided paying hundreds of millions of dollars in federal Medicare and Social Security taxes by hiring U.S. workers through shell companies based in the Cayman Islands .  Moreover, we are deeply troubled by your Department's failure to act, despite allegedly knowing that the contractor was avoiding paying payroll taxes since at least 2004, and strongly urge you to take immediate action.  It is unacceptable for the Department of Defense to pay for this war by continuing to do business with a company that is siphoning money from the Social Security and Medicare trust funds.

            As you know, KBR has billions of dollars in contracts and is the largest U.S. contractor operating in Iraq .  It is our understanding that of the approximately 54,000 people working on KBR projects in Iraq , more than 21,000, including approximately 10,500 Americans, are listed as employees of two Cayman Islands ' shell companies, Service Employers International and Overseas Administrative Services, more than twice as many workers than those hired directly by the firm.  This practice allows KBR to avoid Social Security and Medicare taxes, as well as avoid paying unemployment taxes, which could deny benefits to workers who lose their jobs.   

            In our view, this tax evasion scheme clearly puts KBR at an advantage vis-à-vis loyal American companies and contractors the firm is competing against in Iraq that do pay Social Security and Medicare taxes for their American workers.  This unfair advantage comes in addition to the already highly scrutinized and criticized no-bid contract KBR received to rebuild Iraq's oil infrastructure and reported gasoline overcharges associated with that agreement, as well as the multibillion dollar contract it received to provide logistical support services to our military in Iraq. 

Of course, the costs of these actions rest squarely on the American taxpayer. Experts have estimated that the total loss to the Treasury from offshore tax evasion approaches $100 billion per year, including $30 billion from corporations alone.  It appears that KBR is a part of the problem leading to a significant loss of revenue to the Social Security and Medicare trust funds.  While the Administration may support this as a backdoor way to privatize Social Security and cut the Medicare program, we view it as damaging to seniors who expect these benefits.  Additionally, these U.S. employees hired through KBR's foreign subsidiary are being denied the opportunity to earn their Social Security benefits and may receive lower benefit amounts than they would if they were paid through a U.S. employer.

It has long-been evident that the Department of Defense is failing to provide sufficient oversight of KBR contracts, costing the American taxpayer millions of dollars. When your auditors reportedly uncovered KBR's practices, no complaint was filed because they viewed the resulting tax savings as “passed on” to the Pentagon.  Yet, such an assessment clearly does not take into account the effect this practice has overall on government revenues and the resulting burden it places on other taxpayers.  Any military cost savings using Social Security and Medicare money is clearly inappropriate.

The lack of oversight conducted by your Department raises serious questions to which we seek your prompt response:

1. On what date did the Defense Contract Audit Agency (DCAA) first become aware that KBR was not paying Social Security and Medicare taxes for thousands of its employees, and when was the issue brought to your attention?

1. On what dates did the DCAA conduct audits of KBR and were the findings ever reported to the relevant entities involved in contract management, including but not limited to the Joint Contracting Command – Iraq/Afghanistan and the Defense Contract Management Agency in Iraq and Kuwait ?  Please provide to us all audit reports of KBR and related documents since 2000, including the reported 2004 audit of KBR's two Cayman Islands ' subsidiaries.

1. Did the DCAA ever recommend to the contracting officers that KBR should not receive U.S. government contracts from the Department of Defense?  If so, when and why were these recommendations made?  If not, then please specify the reasons for the negative recommendation? 

1. How many contracts have been awarded or renewed to KBR since you or the DCAA first became aware that KBR was not paying Social Security and Medicare taxes for many of its employees who are U.S. citizens?

1. What justification does the DCAA have for not sharing the results of the audit with the appropriate enforcement agency, such as the Department of Treasury, the Internal Revenue Service or the Department of Justice?

1. The Boston Globe reported on March 7, “ The Pentagon has known of the KBR loophole, but has not complained about it, on the grounds that the savings are passed on to the military.”    Do you believe that the avoidance of Social Security and Medicare taxes are acceptable cost-savings to the military?  How much has the military saved?

1. Is KBR the only U.S. contractor in Iraq that has established foreign subsidiaries in a tax haven country?  Please list any other contractors in Iraq who have used this practice for tax avoidance.

In light of the massive waste of taxpayer dollars associated with Iraq-related contracts, effective work by your Department is an absolute necessity.  We believe that KBR's use of subsidiaries in a tax haven country is unacceptable and should have been dealt with immediately.  We thank you in advance for your prompt responses to our questions and for taking the necessary action to address this critical issue. 

Thank you for your continued service to our nation.

Sincerely,

Rosa L. DeLauro

 Lloyd Doggett

 Rahm Emanuel

 Richard Neal

Cc. The Honorable Tina W. Jonas

Cc: The Honorable William H. Reed

Cc: The Honorable Henry M. Paulson, Jr.

Cc: The Honorable Linda E. Stiff