AP IMPACT: An islands tax haven for US defense contractor

"It's purely disgraceful for them to pretend to be foreign companies to avoid their very basic responsibilities like Medicare and Social Security," Krieger says. "The whole spirit of open competition has been completely lost."

Groups that represent contractors take an opposite view.

They say tighter controls could make U.S. companies less competitive in the global marketplace. Businesses in Europe and Asia that go after U.S. contracts may be the winners if American companies have fewer ways to keep costs down, said Alan Chvotkin, senior vice president of the Professional Services Council in Arlington, Va.

"Before we rush to a legislative change for a narrow purpose, let's understand the global competitiveness of U.S. firms and their ability to execute contracts outside the United States with this new restriction," Chvotkin says.

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 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.