Unlike two other security companies operating in Afghanistan and Iraq, Blackwater has said it designates its workers contractors, not employees, because it is a "model that works" and because its guards prefer the "flexibility" of the contractor relationship.

The arrangement has, according to Mr Waxman, wrongly allowed Blackwater to avoid paying social security and Medicare taxes, as well as federal income and unemployment tax - or $32m (£16m) in taxes from May 2006 to March 2007.

The IRS ruling was issued after a single security guard approached the tax authority after a dispute over back pay and other compensation. Although the ruling, which is based on Blackwater exercising control over its worker, applied only to the individual, the IRS alerted Blackwater that it could apply to others.

Blackwater, which has classified 604 security guards as contractors, agreed a settlement with the employee after the ruling. That included a confidentiality agreement that prohibited the employee from contacting "any politician" or "public official" about its details.

"It is deplorable that a company that depends on federal tax dollars for 90 per cent of its business would even contemplate forbidding an employee to report corporate wrongdoing to Congress," Mr Waxman said in a letter to Erik Prince, Blackwater chairman and CEO.

He further alleged that the confidentiality agreement was "particularly suspect" because it was signed by Blackwater general counsel Andrew Howell just as Mr Waxman's committee was stepping up its investigation into Blackwater's activities.

Blackwater said that Mr Waxman's assertions were "incorrect" and took issue with his use of the IRS decision, against which the company has appealed.

The company said the IRS had not made a final determination on the employee and the Small Business Administration had decided Blackwater security contractors were not employees.

According to documents filed in Court, from 1996 through at least 2003, Brown was the owner and sole stockholder of Excell Personnel, Inc., which “leased” employees to companies that did not want to directly hire their own workers.  Excell would locate, hire and train employees, and then provide them to the businesses that were Excell’s customers. 

The customers did not directly pay the employees that Excell provided, but rather paid a fee to Excell that included the gross wages that would be owed to the employees for their labor, plus an administrative fee from which Excell received its profit and out of which Excell was obligated to pay indirect costs of the employees and Excell’s overhead expenses. 

Excell, in turn, paid the employees their wages, making deductions for the required withholding of income taxes, Federal Insurance Contribution Act (FICA) taxes and Medicare taxes that were required to be paid to the United States.

Brown admitted that he was aware of the legal obligations and that he knowingly and deliberately chose not to pay over to the IRS the required withholding taxes, social security taxes and Medicare taxes.  During the fourth quarter of 2002, Brown, on behalf of Excell, wilfully failed to pay over to the IRS approximately $297,384.41 in federal income taxes withheld as well as all FICA and Medicare taxes due and owed to the U.S.

U.S. Attorney Roper praised the investigative efforts of the Internal Revenue Service - Criminal Investigation.  The case is being prosecuted by Assistant U.S. Attorney Phillip C. Umphres.

The review panel found poor communication between diplomats and military officials and too little oversight of contractors like Blackwater USA, two people familiar with the report's findings told the AP on Monday.

The State Department risks another incident like the Sept. 16 Blackwater shooting of 17 Iraqi civilians unless it quickly installs closer management of the private army guarding diplomats in Iraq, the independent panel privately told Secretary of State Condoleezza Rice.

Rice said she wants to discuss the findings with Gates face to face and intends to act quickly.

"The recommendations point a very good way forward," Rice told reporters Monday night. She provided no details but said she and Gates would "discuss how we will carry out better coordination, how we will make certain that the United States government moves this forward with one voice."

The group strongly recommended that Rice coordinate her next move with the Pentagon, and she plans to speak with Gates by phone before he returns from an overseas trip late this week, a State Department official said. A face-to-face meeting would follow.

The panel, named by Rice in the wake of the Sept. 16 killings, made no specific recommendations about what should happen to Blackwater, whose guards were escorting an official from the U.S. Embassy when they fired on civilians in a Baghdad square, those familiar with the report said. The killings have outraged Iraqis and focused attention on the shadowy rules surrounding heavily armed private guards.

"There needs to be unity of effort so that whatever's moving in the battle space is coordinated, and it needs to be understood, especially, by the military out in that battle space," one person said.

Those familiar with the recommendations in the report spoke on condition of anonymity because Rice has not yet decided what changes she will make.

The recommendations would apply to management of all private security contractors in Iraq, and recognize that it is impractical to eliminate such protection altogether. The military has resisted assuming responsibility for guarding large numbers of U.S. officials, and the State Department's own security force is too small and already stretched too thin.

The group's closely held report also identified a gap that left private guards for diplomats in Iraq outside the direct control of U.S. civilian or military law, and outside Iraqi law, a U.S. official said. It was not clear whether the report recommends placing private contractors squarely under U.S. civilian law, but Congress has already acted to place such guards under military law when working for the Pentagon.

The Iraqi government is demanding that Blackwater be expelled from the country within six months and that its employees be subject to Iraqi law.

One person familiar with the report said the group did not focus on the specific events of Sept. 16, looking instead at the rules of engagement, responsibilities and oversight for all security contractors.

Rhode Island plans to use information from the Internal Revenue Service to track down employers who are failing to properly pay state unemployment insurance taxes.

The Rhode Island Department of Labor and Training has signed an agreement with the IRS to share information that will allow the state agency to identify businesses that should be paying into the state’s unemployment insurance trust fund but are not, said Raymond A. Filippone, who heads the state’s unemployment insurance program.

“It is very important for us. I think it’s a step in the right direction,” Filippone said in a telephone interview yesterday from Nashua, N.H., where he is attending a conference for state unemployment insurance directors.

Based on a statement issued by the state agency yesterday, and on comments by Filippone, the new agreement’s focus would include the following situations in which state unemployment insurance taxes are not being properly paid:

•A business may be registered with the federal government, but not with the state government.

•A company may be registered at the federal level as a business with employees, but at the state level as a sole proprietorship without employees.

•An employer may misclassify employees as independent contractors.

The agreement will help the state agency identify such employers and notify them about the requirement to pay the tax, Filippone said.

Under the current system, businesses that fail to properly report their situations and pay the required unemployment insurance taxes are not caught until after employees file for unemployment insurance benefits.

With the IRS agreement, “Now we can catch them before an employee contacts us with a claim,” Filippone said in a statement.

Adelita Orefice, director of the state Department of Labor and Training, said in a statement that, “Prevention, detection and elimination of abuse in the unemployment insurance program are top priorities for our department. We want to ensure that employers are paying only their fair share of employment taxes and are not subsidizing any dishonest employers.”

The state does not have an estimate of how much in additional unemployment tax revenue it might collect as a result of the agreement, Filippone said in the phone interview.

Nevertheless, he said it is bound to result in some additional collections. This, in turn, could benefit existing employers who currently pay unemployment taxes — they might wind up paying less in tax, or pay less of an increase that would otherwise be due, he said.

If a business has employees, “It has to pay . . . unemployment insurance tax,” said Patricia A. Thompson, former president of the Rhode Island Society of Certified Public Accountants.

The unemployment insurance program is run through a federal-state partnership and is designed to partially replace lost earnings of individuals who become unemployed through no fault of their own. It is also intended to stabilize the economy during downturns.

The program has been a key component in ensuring the financial security of America’s work force for more than 70 years, according to a report issued last month by the U.S. Government Accountability Office (GAO), the investigative arm of Congress.

For the year ended Sept. 30, 2006, the unemployment insurance program covered about 130 million workers and paid about $30 billion in benefits to about 7 million workers nationwide who lost their jobs, the GAO report said.

The program is paid for through state and federal employment taxes. In general, the taxes that employers pay are deposited into an unemployment insurance trust fund.

From that fund, the state pays benefits to workers who lose their jobs and qualify for benefits. The fund has a balance of about $192 million, Filippone said.

Broadly speaking, the tax that an employer pays is based, in part, on how many people have collected unemployment benefits in the past based on that employer’s account, said Thompson, tax partner with Piccerelli Gilstein & Co. LLP, a CPA firm in Providence.

Rhode Island is one of 29 states that will sign a memorandum of understanding with the IRS on Nov. 6. Besides Rhode Island, other New England states in the agreement include Massachusetts and Maine, Filippone said.

A spokesman for the IRS was not immediately available to comment about the agreement. Thompson said that the IRS could benefit from the information-sharing agreement in a number of ways.

For example, if an employer misclassifies a worker as an independent contractor, the employer does not pay federal payroll taxes that would otherwise be due, such as unemployment tax, Social Security tax and Medicare tax.

If the agreement uncovers such situations, the IRS could seek payment from the employers.

Medina's niece and nephew have pleaded not guilty to helping Medina set up sham companies to help funnel casino revenue into Medina's personal holdings.

Colma's former mayor was sentenced to 18 months in prison in July after pleading guilty to accepting airline tickets from Medina while the casino had business pending before him.

Continuing its global merger march, Reed Smith LLP is uniting with a large Chinese firm to gain entree to legal work in that country's growing legal market. Reed Smith, which has about 150 attorneys in the Bay Area, merged with Richards Butler Hong Kong. The 110 attorneys in Hong Kong specialize in corporate transactions and litigation. The deal marks Reed Smith's entry into Asia and instantly makes the firm one of the five largest law firms in China. Reed Smith said it will apply to the Chinese government to open an office in Shanghai as well.

With this combination, Reed Smith will have more than 1,500 lawyers worldwide and it expects revenue in 2007 just shy of $1 billion.

"This merger gives us a leading presence in Hong Kong, an entree into mainland China and the ability to provide the high quality services our clients need," said Greg Jordan, firmwide managing partner at Reed Smith.

The Hong Kong merger is the third significant union executed by Reed Smith in the past 12 months. Last January, Reed Smith merged with Richard Butler London, which operated as a separate business entity from its Hong Kong counterpart. Three months later, Reed Smith merged with Chicago law firm Sachnoff & Weaver Ltd.

Including the Hong Kong merger, Reed Smith will have added 500 lawyers in the past year.

Reed Smith pushed into California in 2003 by its merger with Crosby Heafey Roach & May, the largest Oakland-based law firm.