Employees of American defence contractor Blackwater took more than 500 assault rifles that were intended for the Afghan police force and routinely carried weapons without permission, it emerged in a hearing of the Senate armed services committee today.

It also emerged that to shed its sullied reputation and win contracting business in Afghanistan, Blackwater created what one senator called a shell company. Senators said that company, Paravant, deceived US officials into thinking Blackwater was not involved even as it laid claim to Blackwater's past performance to establish a track record. "They made representations here that are wildly false," said Senator Carl Levin, a Democrat. "Everyone knew in the field it was Blackwater trying to get rid of a negative name."

Steven Ograyensek, a US army contracting officer who testified, said: "There is no indication that they were part of Blackwater."

Blackwater has come under intense scrutiny in recent years for its employees' involvement in a 2007 Baghdad shooting in which 17 Iraqi civilians were killed, and other allegations. The company has since sought to rebrand itself as Xe, and in order to win the training contract in Afghanistan, created a firm called Paravant.

Paravant represented itself as a separate company, even as the training personnel were aware they had been hired by Blackwater, according to witnesses and senators.

At the hearing today Levin warned that Afghan civilians did not distinguish between troops and contractors, and that when contractors misbehaved it turned the population against US forces and encouraged them to side with the Taliban.

The hearing focused in part on a December 2008 accident in which a Blackwater employee was shot in the head during what the company described as a vehicle training exercise but Levin called horseplay.

According to committee investigators, a Blackwater trainer jumped on top of a moving vehicle while carrying a loaded AK47. The vehicle hit a bump and the rifle discharged, striking another trainer in the head. At the hearing today former Blackwater officials insisted the Americans were engaged in vehicle training. Levin accused Blackwater of covering up misconduct by describing the shooting as an accident during "routine" training.

In May two Afghan civilians were killed in a shooting involving Paravant employees. Investigators later determined that the Americans had "violated alcohol policies", were not authorised to have weapons and had violated other policies. The US department of justice said the shooting had a detrimental effect on US national security.

Former Paravant official Brian McCracken acknowledged the company's trainers were carrying weapons without authorisation but said they often ­operated in dangerous environments among armed Afghans, without US army protection.