Harbours of resentment
By Vanessa Houlder
In the Victorian seaside town of Douglas, a new mood of uncertainty has punctured the customary ebullience of the Isle of Man’s senior legal and financial officials as they fret about the loyalty of their most powerful neighbour. “If jettisoned by the UK, we will have to fight tooth and nail for our survival,” says William Corlett, the island’s attorney general.
In the 1960s, young Manx people began to leave the windswept island until politicians started creating jobs for them by scrapping taxes and luring financial institutions to do business in the self-governing Crown dependency. Finance, says Mr Corlett, is what has saved the Isle of Man, 60 miles off the western coast of Britain, from the fate suffered by other isolated outposts such as Scotland’s Western Isles, which are plagued by depopulation.
Hence the sense of vulnerability as the island’s close relationship with the City of London is called into question. Alistair Darling, the UK chancellor of the exchequer, launched a review last week into London’s financial ties with what he has described as “a tax haven sitting in the Irish Sea”. From next month, the White House will be occupied by an avowed enemy of tax havens who backed a bill targeting “offshore secrecy jurisdictions”, including the Isle of Man.
|Cayman Islands Home to most of the world’s hedge funds
Bermuda Leading insurance centre. Finance employs one in 16 of the population
Panama Operates strict bank secrecy
British Virgin Islands World capital for incorporating offshore companies
Turks and Caicos Islands Hosting trusts is a feature
This icy blast is a sign of the growing hostility to the tiny states and islands around the world that harbour an estimated $6,000bn (£3,895bn, €4,725bn) of offshore assets. After months of financial crisis and banking scandals that rocked Liechtenstein and Switzerland, the world’s most powerful countries have lost patience.
In Washington last month, finance ministers from the Group of 20 leading industrial and developing nations concluded that tax secrecy “should be vigorously addressed”. This weekend, it was the turn of the developing countries. At a United Nations meeting on development in Doha, tax havens came under fire for fuelling capital flight.
Tax havens are used to threatening language. Ever since they came into vogue after the second world war as places for individuals to shelter money and savvy international corporations to manage their tax affairs, havens have faced pressure from bigger countries. Will it be different this time? If it is, what future is there for the small island and mountain countries that turned the dusty notions of privacy and opaque corporate architecture into lucrative national industries?
“The political climate on the issue of tax havens has changed dramatically over the past three months,” says Jeffrey Owens of the Paris-based Organisation for Economic Co-operation and Development. As the official who has driven the international crackdown on secrecy for more than a decade, he says the new climate could turn the reform promises extracted from many offshore centres into a reality. The financial crisis has intensified the attack on havens. The near-collapse of the west’s banking industry has drastically increased governments’ need to raise funds, brutally exposed the risks inherent in small countries with large financial sectors, and raised questions about the role of offshore centres in destabilising the system.
Some European finance ministers claim that the “opaque environment” of offshore finance – particularly hedge funds – contributed to reckless behaviour and, ultimately, the current crisis. President Nicolas Sarkozy of France is among those questioning whether, at a time of taxpayer-funded bail-outs, banks should even be allowed to operate in tax havens.
|Switzerland Foreign assets make up 35 per cent of bank balance sheets
Liechtenstein Rocked by an evasion scandal at LGT, its biggest bank. Had announced concessions over secrecy
Monaco Dubbed unco-operative by the OECD. Residents are mostly tax exiles
Guernsey Europe’s leading captive insurance domicile
Jersey Fund management grown rapidly
Onshore businesses in London and New York exploit the offshore benefits offered by the likes of Jersey and the Cayman Islands to optimise the tax efficiency of certain deals, such as the repackaging of debt and cross-border lending. The havens themselves reject claims that they fuelled the crisis. “It is like blaming a car manufacturer for road crashes,” says an official in one of Britain’s overseas territories.
The arrival of Barack Obama in the White House provokes even more anxiety for the havens. As well as launching last year’s Stop Tax Haven Abuse Act, the president-elect helped this year to launch the Incorporation Transparency and Law Enforcement Assistance Act. This aims to make it easier for investigators to “see through” opaque corporate ownership structures and stop the flow of offshore funds to the US from hedge funds and private equity that are “of unknown origin” but do not have to pass money-laundering checks.
On the campaign trail, Mr Obama also laid bare his hostility to the corporate use of offshore jurisdictions for international tax planning, which analysts estimate accounts for between one third and a half of the revenues that Washington loses through offshore evasion and avoidance. “There’s a building in the Cayman Islands that houses supposedly 12,000 US-based corporations,” he said. “That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.”
Turning tough talk into real action will require considerable political will. Any reform of US tax to stop offshore fiscal planning is sure to face fierce opposition from US multinationals worried about being put at a disadvantage to foreign competitors. Martin Sullivan of Tax Analysts, a non-profit US publication, says: “Nothing will sail through. It will be much diluted.”
Havens hope the likely differences between the Obama administration and that of President George W. Bush have been exaggerated. “The Democrats are never as bad as their rhetoric; the Republicans never as good,” says an official at a centre bruised by concessions on transparency that were extracted after the 2001 terror attacks.
|Singapore Leading world financial centre, employing 127,000. Foreign law enforcement authorities say it is unco-operative and slow in answering requests for help
Anjouan Politically unstable part of the Comoros islands located in the Mozambique Channel. Launched an offshore centre in 2005 – one of a rash of newcomers
But the prospect of a renewed crackdown on secrecy is jangling nerves. The more reputable offshore centres are fearful that the difference between co-operative and unco-operative jurisdictions will be lost. “Politicians like scapegoats. In a crusade, the details get swept away,” says Allan Bell, the Isle of Man’s treasury minister. He complains that the nuances of the debate – including offshore-style tax dodging in many large “onshore” countries – are being overlooked. In October, he won support from Angel Gurría, OECD secretary-general, who called for “clear political recognition” of the half-dozen jurisdictions, such as the Isle of Man, that had taken “high political risk” in their move to greater transparency.
But even the most co-operative havens are only partially transparent. Information about private companies or trusts is not on public record. At best they will surrender information only to foreign tax inspectors who already have a “smoking gun” demonstrating evidence of wrongdoing. In practice, information exchange is rare.
Yet moving too far, too fast, might put the more co-operative tax havens at a competitive disadvantage. Wealthy individuals can be highly sensitive about financial privacy. Advisers at leading banks report that clients are already moving their money to Singapore and Switzerland – widely perceived as the last hold-outs against the international drive for transparency.
The danger of focusing solely on small players while ignoring similar shortcomings in some industrialised countries was one lesson of an OECD crackdown on secrecy launched in 1996. Tax havens have exploited this evident hypocrisy to stall reforms pending the introduction of a “level playing field”. The success of the latest crackdown is likely to depend on the attitude of relatively powerful countries such as Switzerland and Singapore.
Even if secrecy is eliminated, the leading offshore jurisdictions will survive, reckons Tax Analysts’ Mr Sullivan. “Will there still be Switzerland, Jersey, the Cayman Islands and the Isle of Man in a world where there was no tax evasion? Absolutely.” But for dozens of others, the outlook is bleak. “There is so much competition. Some would go out of business.”
That message has yet to reach the many eager wannabes. Last month, Tax Justice Network, one of several campaign groups that have vigorously lobbied against havens, proclaimed the Indian Ocean island of Anjouan to be the “new kid on the block”. But such newcomers may not have reckoned with the ever-mounting costs of new regulations designed to tackle terrorist financing and money laundering.
Smaller, less successful tax havens are caught in a pincer as competition and regulatory costs mount. As recession arrives, their fragile economies are also feeling the pain from declines in tourism and other industries. Construction companies are pulling out across the Caribbean. In the Turks and Caicos, a UK dependency in the region, unpaid workers stranded by the Lehman Brothers collapse prevented managers from leaving the premises.
Some locations have tried to diversify. Liechtenstein is the world’s largest false-teeth exporter. Monaco has more jobs in manufacturing than in finance. The Isle of Man has a foothold in the space industry and a lively manufacturing sector. Bermuda wants to break into the gambling business.
Despite such efforts, the tax havens still fear a bleak future if the international firms of accountants, lawyers and bankers pull out. “They are birds of passage. If they up sticks and go somewhere else, unemployment would be dramatic,” says one official.
The tiny states and protectorates that thrived in the free-wheeling second half of the 20th century are left struggling to shore up their defences against the coming storm. But as big countries try to block the leakage of much-needed tax revenues and stanch the flow of dirty money, sympathy for the tax havens is in short supply.
Additional reporting by Rachel Keeler
DELAWARE: AMERICA’S OWN HOME TO CORPORATE ANONYMITY
Joe Biden, the US vice-president-elect, has a distinction that went all but unnoticed during the election campaign: he is senior senator for a state prominent in the world of tax havens, writes Michael Peel.
Delaware, represented by Mr Biden since 1972, is infamous for allowing corporate financial secrecy of the kind that president-elect Barack Obama and many others are seeking to shatter in offshore financial centres.
Arguments over Delaware – whose more than 600,000 registered companies compare with an estimated 865,000 inhabitants – are part of a broader fight over what many havens see as rich-country double standards in international action to tackle money laundering and tax evasion. “The reality of Delaware is not lost on anybody,” says one official involved in efforts to improve financial transparency.
Delaware corporations are under no obligation to file names of shareholders or beneficial owners, according to a 2006 report by the intergovernmental Financial Action Task Force on money laundering. The state offers a structure known as a limited liability company, which can be registered with not much more than a name and address.
The report says Delaware company agents advertise the state as allowing even greater secrecy than offshore tax havens. “The Delaware LLC provides the anonymity that most international jurisdictions do not offer,” claims one agent website quoted by the task force.
Carl Levin, the senator with whom Mr Obama has campaigned on tax haven reform, is critical of the US failure to heed the task force’s calls to lift the confidentiality surrounding companies in Delaware and states such as Nevada and Wyoming. Before the election, a Levin aide told the FT the senator believed that the US “ought to meet its international commitments, especially when it is urging other countries to strengthen their anti-money-laundering controls”.
The debate highlights the vulnerability of the global campaign on tax havens to accusations that leading economies fail to practise what they preach.
Copyright The Financial Times Limited 2008
One Man’s Military-Industrial-Media Complex
In the spring of 2007 a tiny military contractor with a slender track record went shopping for a precious Beltway commodity.
The company, Defense Solutions, sought the services of a retired general with national stature, someone who could open doors at the highest levels of government and help it win a huge prize: the rightto supply Iraq with thousands of armored vehicles.
Access like this does not come cheap, but it was an opportunity potentially worth billions in sales, and Defense Solutions soon found its man. The company signed Barry R. McCaffrey, a retired four-star Army general and military analyst for NBC News, to a consulting contract starting June 15, 2007.
Four days later the general swung into action. He sent a personal note and 15-page briefing packet to David H. Petraeus, the commanding general in Iraq, strongly recommending Defense Solutions and its offer to supply Iraq with 5,000 armored vehicles from Eastern Europe. “No other proposal is quicker, less costly, or more certain to succeed,” he said.
Thus, within days of hiring General McCaffrey, the Defense Solutions sales pitch was in the hands of the American commander with the greatest influence over Iraq’s expanding military.
“That’s what I pay him for,” Timothy D. Ringgold, chief executive of Defense Solutions, said in an interview.
General McCaffrey did not mention his new contract with Defense Solutions in his letter to General Petraeus. Nor did he disclose it when he went on CNBC that same week and praised the commander Defense Solutions was now counting on for help — “He’s got the heart of a lion” — or when he told Congress the next month that it should immediately supply Iraq with large numbers of armored vehicles and other equipment.
He had made similar arguments before he was hired by Defense Solutions, but this time he went further. In his testimony to Congress, General McCaffrey criticized a Pentagon plan to supply Iraq with several hundred armored vehicles made in the United States by a competitor of Defense Solutions. He called the plan “not in the right ballpark” and urged Congress to instead equip Iraq with 5,000 armored vehicles.
“We’ve got Iraqi army battalions driving around in Toyota trucks,” he said, echoing an argument made to General Petraeus in the Defense Solutions briefing packet.
Through seven years of war an exclusive club has quietly flourished at the intersection of network news and wartime commerce. Its members, mostly retired generals, have had a foot in both camps as influential network military analysts and defense industry rainmakers. It is a deeply opaque world, a place of privileged access to senior government officials, where war commentary can fit hand in glove with undisclosed commercial interests and network executives are sometimes oblivious to possible conflicts of interest.
Few illustrate the submerged complexities of this world better than Barry McCaffrey.
General McCaffrey, 66, has long been a force in Washington’s power elite. A consummate networker, he cultivated politicians and journalists of all stripes as drug czar in the Clinton cabinet, and his ties run deep to a new generation of generals, some of whom he taught at West Point or commanded in the Persian Gulf war, when he rose to fame leading the “left hook” assault on Iraqi forces.
But it was 9/11 that thrust General McCaffrey to the forefront of the national security debate. In the years since he has made nearly 1,000 appearances on NBC and its cable sisters, delivering crisp sound bites in a blunt, hyperbolic style. He commands up to $25,000 for speeches, his commentary regularly turns up in The Wall Street Journal, and he has been quoted or cited in thousands of news articles, including dozens in The New York Times.
His influence is such that President Bush and Congressional leaders from both parties have invited him for war consultations. His access is such that, despite a contentious relationship with former Defense Secretary Donald H. Rumsfeld, the Pentagon has arranged numerous trips to Iraq, Afghanistan and other hotspots solely for his benefit.
At the same time, General McCaffrey has immersed himself in businesses that have grown with the fight against terrorism.
The consulting company he started after leaving the government in 2001, BR McCaffrey Associates, promises to “build linkages” between government officials and contractors like Defense Solutions for up to $10,000 a month. He has also earned at least $500,000 from his work for Veritas Capital, a private equity firm in New York that has grown into a defense industry powerhouse by buying contractors whose profits soared from the wars in Afghanistan and Iraq. In addition, he is the chairman of HNTB Federal Services, an engineering and construction management company that often competes for national security contracts.
Many retired officers hold a perch in the world of military contracting, but General McCaffrey is among a select few who also command platforms in the news media and as government advisers on military matters. These overlapping roles offer them an array of opportunities to advance policy goals as well as business objectives. But with their business ties left undisclosed, it can be difficult for policy makers and the public to fully understand their interests.
On NBC and in other public forums, General McCaffrey has consistently advocated wartime policies and spending priorities that are in line with his corporate interests. But those interests are not described to NBC’s viewers. He is held out as a dispassionate expert, not someone who helps companies win contracts related to the wars he discusses on television.
The president of NBC News, Steve Capus, said in an interview that General McCaffrey was a man of honor and achievement who would never let business obligations color his analysis for NBC. He described General McCaffrey as an “independent voice” who had courageously challenged Mr. Rumsfeld, adding, “There’s no open microphone that begins with the Pentagon and ends with him going out over our airwaves.”
General McCaffrey is not required to abide by NBC’s formal conflict-of-interest rules, Mr. Capus said, because he is a consultant, not a news employee. Nor is he required to disclose his business interests periodically. But Mr. Capus said that the network had conversations with its military analysts about the need to avoid even the appearance of a conflict, and that General McCaffrey had been “incredibly forthcoming” about his ties to military contractors.
General McCaffrey declined to be interviewed but released a brief statement.
“My public media commentary on the war labeled me as an early and serious critic of Rumsfeld’s arrogance and mismanagement of operations in Iraq and Afghanistan,” the statement said. “The New York Times noted my strong on-air criticism as an NBC commentator. My op-ed objections to the execution of the war were published in The Wall Street Journal, The Washington Post, The L.A. Times, USA Today and other media. Hardly the stuff of someone shilling a war for the administration — or privately pushing his business interests with the Pentagon. Thirty-seven years of public service. Four combat tours. Wounded three times. The country knows me as a nonpartisan and objective national security expert with solid integrity.”
In earlier e-mail messages, General McCaffrey played down his involvement in lobbying for contracts, suggesting he mainly gave companies “strategic counsel.” His business responsibilities, he wrote, simply do not conflict with his duty to provide objective analysis on NBC. “Never has been a problem,” he wrote. “Period.”
General McCaffrey did in fact emerge as a tough critic of Mr. Rumsfeld, describing him as reckless and incompetent. His central criticism — that Mr. Rumsfeld fought the Iraq war “on the cheap” — reflected his long-stated views on waging war. But it also dovetailed with his business interests. And his clashes with Mr. Rumsfeld were but one facet of a more complex and symbiotic relationship with the Bush administration and the military’s uniformed leaders, records and interviews show.
With a few exceptions General McCaffrey has consistently supported Mr. Bush’s major national security policies, especially the war in Iraq. He advocated invasion, urged building up the military to sustain the occupation and warned that premature withdrawal would invite catastrophe.
In an article earlier this year, The New York Times identified General McCaffrey as one of some 75 military analysts who were the focus of a Pentagon public relations campaign that is now being examined by the Pentagon’s inspector general, the Government Accountability Office and the Federal Communications Commission. The campaign, begun in 2002 but suspended after the article’s publication, sought to transform the analysts into “surrogates” and “message force multipliers” for the Bush administration, records show. The analysts, many with military industry ties, were wooed in private briefings, showered with talking points and escorted on tours of Iraq and Guantánamo Bay, Cuba.
The Pentagon inspector general is investigating whether special access gave any of these analysts an improper edge in the competition for contracts.
General McCaffrey offers a case study of the benefits that can flow from favored access: an inside track to sensitive information about strategy and tactics; insight into the priorities of ground commanders; a private channel to officials who oversaw war spending, as the Defense Solutions example shows. In that case the company has yet to win the contract it hired General McCaffrey to champion.
More broadly, though, his example reveals the myriad and often undisclosed connections between the business of war and the business of covering it.
A Move to Television
General McCaffrey made his debut as a military analyst in the weeks after 9/11. NBC anchors typically introduced him by describing his medals or his exploits in the gulf war. Or they noted he was a West Point professor, or the youngest four-star general in the history of the Army.
They did not mention his work for military contractors, including a lucrative new role with Veritas Capital.
Veritas was a relatively small player in 2001, looking to grow through acquisitions and Pentagon contracts. Competing for contracts is a complex and subtle sport, governed by highly bureaucratic bidding rules and the old-fashioned arts of access and influence.
Veritas would compete on both fronts.
Just days before the terrorist attacks — on Sept. 6, 2001 — Veritas had announced the formation of an “advisory council” of well-connected retired generals and admirals, including General McCaffrey. “They can really pick up the phone and call someone,” Robert B. McKeon, the president of Veritas, would later tell The Times.
Access was also part of what drew NBC to General McCaffrey. Mr. Capus said General McCaffrey “opens doors with generals and others who we would not otherwise be able to talk to.”
Veritas gave its advisers board seats on its military companies, along with profit sharing and equity stakes that were all the more attractive because Veritas intended to turn quick profits through initial public offerings. On Sept. 6, this might have been considered a gamble. Revenue growth — a key to successful I.P.O.’s — required sustained increases in military spending. But after Sept. 11, the only question was just how big those increases would be.
From his first months on the air, General McCaffrey called for huge, sustained increases in military spending for a global campaign against terrorism. He also advocated spending for high-tech weapons, including some like precision-guided munitions and unmanned aerial vehicles that were important to the Veritas portfolio. He called the C-17 cargo plane — also a source of Veritas contracts — a “national treasure.”
In a statement, Veritas said it had gained no “discernible benefit” from General McCaffrey’s television appearances and called his TV work “completely independent” from his role with Veritas.
In their corporate filings, Veritas military companies told investors they were well positioned to benefit from a widening global struggle against terrorism. The approaching conflict with Iraq, though, would create new areas of tension between General McCaffrey’s fiduciary obligations to Veritas and his duties to NBC.
General McCaffrey harbored significant doubts about the invasion plan. An informal participant in the war planning, he was troubled by Mr. Rumsfeld’s resistance to an invasion force of several hundred thousand, he acknowledged months and years later in interviews. Mr. Rumsfeld’s team, he said, was bent on making an “ideological” point that wars could be fought “on the cheap.” There were not enough tanks, artillery or troops, he would say, and the result was a “grossly anemic” force that unnecessarily put troops at risk.
That is not what General McCaffrey said when asked on NBC outlets to assess the risks of war. As planning for a possible invasion received intense news coverage in 2002, he repeatedly assured viewers that the war would be brief, the occupation lengthy but benign.
“These people are going to come apart in 21 days or less,” he told Brian Williams on MSNBC.
In the fall of 2002 General McCaffrey joined the Committee for the Liberation of Iraq, a group formed with White House encouragement to fan support for regime change. He also participated in private Pentagon briefings in which network military analysts were armed with talking points that made the case for war, records show.
In early 2003 Forrest Sawyer asked General McCaffrey on CNBC what could go wrong after an invasion. Anticipating this very question, the Pentagon had invited General McCaffrey and other analysts to a special briefing. Years later General McCaffrey would say he knew that the post-invasion planning was a disaster. “They were warned very categorically and directly by many of us prior to that war,” he said.
Given a chance by Mr. Sawyer to raise an alarm, the general reiterated Pentagon talking points about the “astonishing amount” of postwar planning.
And when Tom Brokaw asked him, days before the invasion, “What are your concerns if we were to go to war by the end of this week?” he replied, “Well, I don’t think I have any real serious ones.”
Only when the invasion met unexpected resistance did General McCaffrey give a glimpse of his misgivings. “We’ve placed ourselves in a risky proposition, 400 miles into Iraq with no flank or rear area security,” he told Katie Couric on “Today.”
Mr. Rumsfeld struck back. He abruptly cut off General McCaffrey’s access to the Pentagon’s special briefings and conference calls.
General McCaffrey was stunned. “I’ve never heard his voice like that,” recalled one close associate who asked not to be identified. He added, “They showed him what life was like on the outside.”
Robert Weiner, a longtime publicist for General McCaffrey, said the general came to see that if he continued his criticism, he risked being shut out not only by Mr. Rumsfeld but also by his network of friends and contacts among the uniformed leadership.
“There is a time when you have to punt,” said Mr. Weiner, emphasizing that he spoke as General McCaffrey’s friend, not as his spokesman.
Within days General McCaffrey began to backpedal, professing his “great respect” for Mr. Rumsfeld to Tim Russert. “Is this man O.K.?” the Fox News anchor Brit Hume asked, taking note of the about-face.
For months to come, as an insurgency took root, General McCaffrey defended the Bush administration. “I am 100 percent behind what the administration, what the president of the United States, is doing in Iraq,” he told Mr. Williams that June.
A Corporate Troubleshooter
Mr. Rumsfeld’s swift reaction underscored the administration’s appreciation of General McCaffrey’s influence. His comments were catalogued and circulated at the White House and Pentagon.
Other network analysts were monitored, too, but not the way General McCaffrey was. He was different. He was one of the few retired four-star generals on television, and his well-known friendships with men like General Petraeus and Gen. John P. Abizaid gave him added currency.
As the wars in Iraq and Afghanistan dragged on, General McCaffrey increasingly gave public expression to the private frustrations of generals pressing their civilian bosses for more troops, weapons and reconstruction money. The Army, he repeatedly warned, could break under the strain.
These were politically charged topics, and so the administration worked to influence his commentary, using carrots and sticks alike. In 2005, for example, Mr. Rumsfeld took umbrage at remarks General McCaffrey made to The Washington Times about the impact of unchecked poppy production in Afghanistan. Mr. Rumsfeld wrote to Gen. Peter Pace, then the chairman of the Joint Chiefs of Staff, demanding to know where General McCaffrey “got his information,” records show. No less than an assistant secretary of defense was dispatched to speak with General McCaffrey, who said he had been misquoted.
In a letter to The Times, General McCaffrey’s lawyer, Thomas A. Clare, said the general’s recurring criticisms had cost him “business opportunities with defense contractors.” NBC executives said they, too, fielded high-level complaints, and General McCaffrey was not invited back to the Pentagon’s analyst briefings.
On the other hand, when Pentagon officials noticed that General McCaffrey was scheduled to appear on programs like “Meet the Press,” they asked generals close to him to suggest themes, records show. The Pentagon also began paying for General McCaffrey to travel to Iraq and Afghanistan. Other military analysts were invited on trips, but only in groups. General McCaffrey went by himself under the sponsorship of Central Command’s generals.
The stated purpose was for General McCaffrey to provide an outside assessment in his role as a part-time professor at West Point. But his trips were also an important public relations tool, meticulously planned to arm him with anecdotes of progress. Records show that Central Command’s generals expected him to “publicly support their efforts” upon his return home and solicited his advice on how to “reverse the perception” in Washington of a lost war.
After each trip General McCaffrey embarked on a news media campaign, writing opinion articles, granting interviews, publishing “after action” reports on his firm’s Web site. Each time he extolled Central Command’s generals and called for a renewed national commitment of money and support.
At the same time, General McCaffrey used his access to further business interests, as he did during the summer of 2005, when Americans were turning against the Iraq war in droves.
Veritas had been on a shopping spree, buying military contractors deeply enmeshed in the war. Its biggest acquisition was of DynCorp International, best known for training foreign security forces for the United States government. By 2005 operations in Iraq and Afghanistan accounted for 37 percent of DynCorp’s revenues.
The crumbling public support, though, posed a threat to Veritas’s prize acquisition. The changing political climate and unrelenting violence, DynCorp warned investors, could force a withdrawal from Iraq.
What is more, some of DynCorp’s Iraq contracts were in trouble, plagued by cost overruns, inept work by subcontractors and ineffective training programs. So when DynCorp executives learned that General McCaffrey was planning to travel to Iraq that June, they asked him to sound out American commanders and reassure them of DynCorp’s determination to make things right.
“It is useful both ways,” Gregory Lagana, a DynCorp spokesman, said in an interview. “If there were problems, and there were, then we could get an independent judgment and fix them.”
Mr. Lagana said General McCaffrey had been a troubleshooter for DynCorp on other trips. “He’ll say: ‘I’m going over. Is there anyone you want me to see?’ ” Mr. Lagana said. “And then he’d go in and say, ‘I’m on the board. What can you tell me?’ ”
The Pentagon had its own agenda. For eight days, General McCaffrey was given red-carpet treatment. Iraqi commandos even staged a live-fire demonstration for him. But General McCaffrey also was given access to officials whose decisions were important to his business interests, including DynCorp, which was planning an I.P.O. He met with General Petraeus, who was then in charge of training Iraqi security forces and responsible for supervising DynCorp’s 500 police trainers. He also met with officials responsible for billions of dollars’ worth of contracts in Iraq.
General McCaffrey would not discuss these sessions, and General Petraeus said in an e-mail message to The Times that he had no reason to discuss DynCorp with General McCaffrey because he would have gone directly to DynCorp’s executives in Iraq.
Back home, General McCaffrey undertook a one-man news media blitz in which he contradicted the dire assessments of many journalists in Iraq. He bore witness to progress on all fronts, but most of all he vouched for Iraq’s security forces. A year earlier, before joining DynCorp’s board, he had described these forces as “badly equipped, badly trained, politically unreliable.” Just months before, Gary E. Luck, a retired four-star Army general sent to assess progress in Iraq, had reported to Mr. Bush that security training was going poorly. Yet General McCaffrey now emphasized his “surprising” conclusion that the training was succeeding.
After Mr. Bush gave a speech praising Iraq’s new security forces, Brian Williams asked General McCaffrey for an independent assessment. “The Iraqi security forces are real,” General McCaffrey replied, without noting the concerns about DynCorp.
His financial stake in the policy debates over Iraq was not mentioned. He did not disclose that he owned special stock that allowed him to share in DynCorp’s profits, up 87 percent that year largely because of the Iraq war.
“I took as objective a look at it as I could,” he told David Gregory, the NBC correspondent.
A Contract in Iraq
In his written statements to The Times, General McCaffrey said his role with Veritas was “governance, not marketing,” and Veritas insisted that he never “solicited new or existing government contracts.”
General McCaffrey did, however, play an indirect role in helping Veritas win one of its largest contracts, to supply more than 8,000 translators to the war in Iraq. The contract had been held by L-3 Communications, but when General McCaffrey got wind that the Army was considering seeking new bidders, he called his friend James A. Marks, a major general in the Army who was approaching retirement and was versed in the uses of translators, having served as intelligence chief for land forces during the Iraq invasion.
As General Marks recalls it, General McCaffrey asked him to lead an effort to win the contract for Veritas.
General Marks, who became a CNN military analyst after his retirement in 2004, would be named president of a new DynCorp subsidiary, Global Linguist Solutions, created in July 2006 to bid for the translation contract. In August 2006 Veritas designated General McCaffrey as chairman of Global Linguist. According to a 2007 corporate filing, General McCaffrey was promised $10,000 a month plus expenses once Global Linguist secured the contract. He would also be eligible to share in profits, which could potentially be significant: the contract was worth $4.6 billion over five years, but only if the United States did not pull out of Iraq first.
In the fall of 2006, that was hardly a sure thing. With casualties rising, the nation’s discontent had been laid bare by the November elections. Then, in December, the Iraq Study Group recommended withdrawing all combat brigades by early 2008.
That month, in a flurry of appearances for NBC, General McCaffrey repeatedly ridiculed this recommendation, warning that it would turn Iraq into “Pol Pot’s Cambodia.”
The United States, he said, should keep at least 100,000 troops in Iraq for many years. He disputed depictions of an isolated and deluded White House. After meeting with the president and vice president on Dec. 11 in the Oval Office, he went on television and described them as “very sober-minded.”
General McCaffrey was hardly alone in criticizing the Iraq Study Group, and in his e-mail messages to The Times he said his objections reflected his judgment that it was folly to leave American trainers behind with no combat force protection. But in none of those appearances did NBC disclose General McCaffrey’s ties to Global Linguist.
NBC executives asserted that the general’s relationships with military contractors are indirectly disclosed through NBC’s Web site, where General McCaffrey’s biography now features a link to his consulting firm’s Web site. That site, they said, lists General McCaffrey’s clients.
While the general’s Web site lists his board memberships, it does not name his clients, nor does it mention Veritas Capital, by one measure the second-largest military contractor in Iraq and Afghanistan, after KBR. In any event, Mr. Capus, the NBC News president, said he was unaware of General McCaffrey’s connection to the translation contract. Mr. Capus declined to comment on whether this information should have been disclosed.
CNN officials said they, too, were unaware of General Marks’s role in the contract. When they learned of it in 2007, they said, they were so concerned about what they considered an obvious conflict of interest that they severed ties with him. (General Marks, who also spoke out against the withdrawal plan on CNN, said business considerations did not influence his comments.)
On Dec. 18, 2006, the Pentagon stunned Wall Street by awarding the translation contract to Global Linguist. DynCorp’s stock jumped 15 percent.
Hiring a General
After touring Iraq in March 2007 and meeting with American officials responsible for equipping Iraq’s military, General McCaffrey published a trip report recommending that the United States equip Iraq with 5,000 armored vehicles.
This kind of access had strong appeal to Mr. Ringgold, Defense Solutions’ chief, who had a plan to rebuild Iraq’s decimated fleets of armored vehicles by culling “leftovers” from depots across Eastern Europe. “I was looking for an advocate,” Mr. Ringgold recalled.
General McCaffrey soon arrived for an audition at the Defense Solutions headquarters outside Philadelphia. “Frankly,” Mr. Ringgold recalled, “I had to get over the sticker shock of what he was going to cost me.”
General McCaffrey liked his basic concept but told him to think bigger, Mr. Ringgold said. Instead of minimally refurbished equipment, he urged Mr. Ringgold to sell “Americanized” armored vehicles upgraded with thermal sights and other expensive extras. And why not also team up with DynCorp and others to supply the maintenance, logistics and training to keep them running?
The suggestions vastly increased the proposal’s scale and price tag, but the general seemed to have a read on the complex interplay between the Iraqi government and the American military leadership, Mr. Ringgold recalled. For a retainer and an undisclosed equity stake, General McCaffrey signed on weeks later, then promptly wrote to General Petraeus.
His letter, drafted with help from Defense Solutions, explained that in the three months since his trip to Iraq, he had found just one feasible way to equip Iraq with enough armored vehicles to permit a “phased redeployment” of American combat forces — the proposal by Defense Solutions. He urged General Petraeus to act quickly but did not disclose that he had just been hired by Defense Solutions.
In his e-mail message to The Times, General Petraeus said he received “innumerable” letters from “would be” contractors. In this case, he wrote, he simply sent General McCaffrey’s material “without any endorsement” to James M. Dubik, the general then responsible for training Iraq’s security forces.
General Dubik, now retired, said in an interview that he, too, received a letter and information packet, and as a result briefed Iraq’s defense minister. “Quite frankly,” he said, “I thought it was a good idea.”
General Dubik emphasized that although he used Defense Solutions briefing materials, he first “sanitized” them of any mention of the company. He said he presented the idea as his own, intending to ask Defense Solutions to bid if the Iraqis liked the concept. But the defense minister reacted coolly, he said, arguing that Iraq deserved advanced American-made vehicles.
General McCaffrey also sent letters to top lawmakers and approached contacts inside the Defense Department bureaucracy that oversees foreign military sales. His influence was immediately apparent. For example, General McCaffrey reached out to Maj. Gen. Timothy F. Ghormley, chief of staff at Central Command, who promptly invited Mr. Ringgold to a meeting in Tampa, Fla. Mr. Ringgold recalled General Ghormley’s first words: “Why aren’t we doing this already?”
Nevertheless, by late 2007, Defense Solutions still had no deal. General McCaffrey, Mr. Ringgold recalled, said the company needed to get to Baghdad and meet directly with Iraqi leaders and important Americans.
On Oct. 26, 2007, General McCaffrey wrote an e-mail message to General Petraeus proposing to return to Iraq. He said his “principal interest would be to document progress in standing up Iraqi security forces,” and he proposed traveling soon, before the presidential primaries, so he could “speak objectively — before politics goes to roar level.”
In early December General McCaffrey arrived in Baghdad, where he met with Generals Petraeus and Dubik, among others.
General Petraeus said he did not recall them discussing Defense Solutions. General Dubik recalled giving General McCaffrey a detailed briefing on the effort to equip Iraq’s army, including the plans for armored vehicles. He said it was a measure of General McCaffrey’s integrity that he did not raise Defense Solutions. “He’s not going to cross the line,” General Dubik said.
Mr. Ringgold said General McCaffrey “made it perfectly clear” that he would not discuss their proposal with the two generals and even sent instructions that he was not to be contacted in Iraq “to avoid even the perception of conflict of interest.”
But Defense Solutions used information General McCaffrey gleaned from his meetings to refine its proposal. Mr. Ringgold followed General McCaffrey to Baghdad in February 2008 and then made plans to return in the spring to meet with Generals Dubik and Petraeus. “General McCaffrey insisted that I see you,” Mr. Ringgold wrote to General Petraeus in a March 20 e-mail message.
General Petraeus forwarded Mr. Ringgold’s message to General Dubik, who warned Mr. Ringgold that while he was happy to meet, Iraq’s defense minister was still hesitant. “They’ve gone back and forth on the refurbished stuff,” General Dubik wrote.
Defense Solutions turned to the White House. On May 9, Mr. Ringgold and Tom C. Korologos, a Republican lobbyist, met with a military aide to Vice President Dick Cheney and two National Security Council officials.
The next day, in an e-mail memorandum to his staff, Mr. Ringgold discussed other ways to press Iraqi and American officials, including generating news media coverage to suggest that Iraq’s “failure to ready its Army” was prolonging the occupation. General McCaffrey had been making a similar argument for months on NBC and elsewhere. “The end of the game is that the Iraqis got to maintain internal order,” he told Ann Curry, the NBC journalist.
Mr. Ringgold said he had never asked the general to take positions supporting Defense Solutions in his news media appearances. On the other hand, he added, “I hope he was thinking of us.”
Mr. Weiner, the general’s longtime publicist, said General McCaffrey worked with clients “to get your mission achieved in the media.” General McCaffrey, he said, often speaks out with the twin goals of shaping policy and generating favorable coverage for clients with worthy products or ideas.
“His motive is pure,” Mr. Weiner said. “It is national interest.”
Despite Defense Solutions’ efforts, Iraq recently placed orders for billions of dollars’ worth of American-made armored vehicles. But the company is not giving up, and it continues to rely on the advice of General McCaffrey, who returned to Iraq on Oct. 31 for another visit sponsored by the Pentagon.