Federal prosecutors are investigating whether employees of the private security firm Blackwater USA illegally smuggled weapons into Iraq that might have been sold on the black market and ended up in the hands of a U.S.-designated terror organization, U.S. officials say.
The U.S. Attorney's Office in North Carolina, where Blackwater is based, is handling the investigation with help from auditors of the Defense and State departments who have concluded enough evidence exists to file charges, the officials told The Associated Press on Friday.
George Holding, the U.S. attorney for the eastern district of North Carolina, has declined to comment, as have Pentagon and State Department spokesmen.
Officials with knowledge of the case said it is active, although at an early stage. They spoke on condition of anonymity due to the sensitivity of the matter, which has heightened since 11 Iraqis were killed Sunday in a shooting involving Blackwater contractors protecting a U.S. diplomatic convoy in Baghdad.
The officials could not say whether the investigation would result in indictments, how many Blackwater employees are involved or if the company itself, which has won hundreds of millions of dollars in government security contracts since the 2003 invasion of Iraq, is under scrutiny.
Blackwater USA denied Saturday any involvement in illegal weapons smuggling through Iraq to Kurdish insurgents in Turkey, responding to reports the private security contractor is a target of federal prosecutors.
"Allegations that Blackwater was in any way associated or complicit in unlawful arms activities are baseless," the company said in a statement. "The company has no knowledge of any employee improperly exporting weapons."
In Saturday's editions, The News & Observer newspaper in Raleigh, North Carolina, reported that two former Blackwater employees - Kenneth Wayne Cashwell and William Ellsworth "Max" Grumiaux - are cooperating with federal investigators.
Cashwell and Grumiaux pleaded guilty in early 2007 to possession of stolen firearms that had been shipped in interstate or foreign commerce, and aided and abetted another in doing so, according to court papers viewed by The Associated Press. In their plea agreements, which call for a maximum sentence of 10 years in prison and a $250,000 fine, the men agreed to testify in any future proceedings.
Calls to defense attorneys were not immediately returned Friday evening, and calls to the telephone listings for both men also were not returned.
The News and Observer, citing unidentified sources, reported that the probe was looking at whether Blackwater had shipped unlicensed automatic weapons and military goods to Iraq.
The paper's report that the company itself was under investigation could not be confirmed by AP.
In a related story earlier this week, CBS News chief investigative correspondent Armen Keteyian reported that, according to an intelligence source, a shipment of artillery intended for U.S.-backed forces in Iraq was lost - and later.
Meanwhile, Secretary of State Condoleezza Rice ordered a review of security practices for U.S. diplomats in Iraq following a deadly incident involving Blackwater USA guards protecting an embassy convoy.
Rice's announcement came as theoutside the heavily fortified Green Zone after a suspension because of the weekend incident in that city.
Meanwhile, Interior Ministry spokesman spokesman Maj. Gen. Abdul-Karim Khalaf said Iraqi investigators have a videotape that showsin an incident Sept. 20 in Baghdad, from which 11 people died. He said they are expanding their investigation to include several other incidents involving Blackwater in which civilians have been killed or wounded.
In the United States, officials in Washington said the smuggling investigation grew from internal Pentagon and State Department inquiries into U.S. weapons that had gone missing in Iraq. It gained steam after Turkish authorities protested to the U.S. in July that they had seized American arms from the outlawed Kurdistan Workers Party, or PKK, rebels.
The Turks provided serial numbers of the weapons to U.S. investigators, said a Turkish official.
The Pentagon said in late July it was looking into the Turkish complaints and a U.S. official said FBI agents had traveled to Turkey in recent months to look into cases of U.S. weapons that have gone missing in Iraq.
Investigators are determining whether the alleged Blackwater weapons match those taken from the PKK.
It was not clear whether Blackwater employees suspected of selling to the black market knew the weapons they allegedly sold to middlemen might wind up with the PKK. If they did, possible charges against them could be more serious than theft or illegal weapons sales, officials said.
The PKK, which is fighting for an independent Kurdistan, is banned in Turkey, which has a restive Kurdish population, and is considered a "foreign terror organization" by the State Department. That designation bars U.S. citizens or those in U.S. jurisdictions from supporting the group in any way.
The North Carolina investigation was first brought to light by State Department Inspector General Howard Krongard who mentioned it, perhaps inadvertently, this week while denying he had improperly blocked fraud and corruption probes in Iraq and Afghanistan.
Krongard was accused in a letter by Democratic Rep. Henry Waxman, chairman of the Oversight and Government Reform Committee in the House of Representatives, of politically motivated malfeasance, including refusing to cooperate with an investigation into alleged weapons smuggling by a large, unidentified State Department contractor.
In response, Krongard said in a written statement that he "made one of my best investigators available to help Assistant U.S. Attorneys in North Carolina in their investigation into alleged smuggling of weapons into Iraq by a contractor."
His statement went further than Waxman's letter because it identified the state in which the investigation was taking place. Blackwater, based in North Carolina, is the biggest of the State Department's three private security contractors.
The other two, Dyncorp and Triple Canopy, are based in northern Virginia's suburbs of Washington, D.C, outside the jurisdiction of the North Carolina's attorneys.
Associated Press Writers Matthew Lee, Mike Baker in Raleigh, N.C., and Desmond Butler and Lara Jakes Jordan in Washington contributed to this report.