Since the New York Times first reported March 27 on the contract awarded on January 26, 2007, to Miami Beach, Florida‐based AEY Inc, headed by then 21‐year old president Efraim E Diveroli, with the US Army to provide US$298 million in various types of ammunition to the Afghan army and police forces, and the rabbit hole just keep getting deeper.
The contract required AEY to certify that it was providing “serviceable and safe ammunition”. The army contract also banned supplying ammunition acquired “directly or indirectly from a communist Chinese military company”.
But according to the Times the company provided ammunition that is more than 40 years old and in decomposing packaging. Much of the ammunition came from old communist bloc aging stockpiles, including those that the US State Department and North Atlantic Treaty Organization had determined to be unreliable and obsolete, and had spent millions of dollars to have destroyed.
The ammunition had not been tested for reliability under well‐established military standards. The obsolete and defective cartridges were shipped in poorly packed cardboard boxes that split open on arrival in war zones. Other ammunition was in crates that suffered from extensive termite damage and “were no longer safe for transportation”.
Documents uncovered by the Times revealed that AEY bought more than 100 million Chinese cartridges that had been stored for decades. Different lots or types of ammunition were mixed. In some cases, the ammunition was dirty, corroded or covered with a film. The repackaging operation was carried out by an AEY subcontractor at the Rinas Airport in Tirana, Albania.
AEY also worked with a shell company in Cyprus and middlemen on a federal watch list of entities suspected of illegal arms trafficking.
Under US law, American dealers must disclose every entity involved in an arms shipment overseas, including brokering, transportation and repackaging companies. The State Department checks subcontractors and partners against a watch list of entities suspected of involvement in illegal arms deals.
But there is a loophole. The law exempts federal agencies and contractors working for them. Arms‐trade researchers complain that contractors like AEY have worked with suspicious companies abroad, and that the Pentagon has not screened their activities.
Even such a conservative as Caspar Weinberger, secretary of defense in the Ronald Reagan administration, wrote, “While a $300 million contract in a multi‐trillion dollar war is not all that much, the case is illustrative of not only of an encrusted bureaucracy, bloated, redundant, and often blind, but of the problems a capitalistic society in general must surely have in buying goods and services for the defense of the nation.”
In Albania, Attorney General Ina Rama opened an investigation into claims that senior politicians, including Prime Minister Sali Berisha and Defense Minister Fatmir Mediu, were involved in arms trafficking with AEY.
The New York Times published transcripts of a phone conversation between a subcontractor and Diveroli, in which he appears to say that Albanian politicians took bribes to facilitate arms trades.
But by then, complaints about the ammunition had already surfaced. According to the New York Times, an Afghan lieutenant colonel said that the Chinese ammunition he received from AEY last autumn dated to 1966 and arrived in decomposing packaging. And AEY reportedly continued to make shipments even after American officers in Kabul told the army about the company’s failings earlier this year.
On May 23, the army suspended AEY from receiving federal contracts, after paying it $66 million, contending that it sent a different shipment of Chinese cartridges to Afghanistan after certifying that they were made in Hungary. And then the State Department suspended AEY’s international export activities, meaning any applications for licenses would be refused.
But the army already had issued five task orders and paid AEY $155.3 million on the contract, which was subject to full and open competition, but had failed to deliver on $88 million of the ammunition it had committed to procure. While AEY was allowed to provide ammunition already ordered, the remaining $143 million on the contract was put on hold while the army completes its investigation.
Subsequently, AEY was singled out as an example of fraud and mismanagement in how the federal government awards contracts to small and minority‐owned businesses.
Senator John Kerry, chairman of the committee on Small Business and Entrepreneurship, said AEY won as many as 50 contracts worth $298 million, in part because of its designation as a small disadvantaged business (SDB) — a status reserved for people belonging to certain minority groups who can prove their net worth is under $750,000.
SDBs are usually owned by blacks, Hispanics, Asians or Native Americans. Other ethnicities can qualify only if they show a “preponderance of evidence” that they are disadvantaged.
At one point, Diveroli identified AEY as a disadvantaged small business in an online form submitted to the army for other contracts. But he also wrote that his company had not been certified as such by the federal Small Business Administration, and that AEY had received no preferential treatment.
But there was no evidence that AEY would have been eligible for this status. Diveroli’s grandfather is Italian — not one of the minorities singled out under the program. Diveroli himself is Jewish. Orthodox Hassidic Jews qualify but Diveroli is not Hassidic.
Even if could have met the minority status it’s highly unlikely Diveroli would have met the stringent economic criteria.
His family owns two military and police supply companies, both of which receive government contracts. Worldwide Tactical, which sells riot gear, chest protectors and flight suits, operates at the same Miami address as AEY and is owned by Michael Diveroli, Efraim’s father.
There is also Botach Tactical, a military and police supply company in South Central Los Angeles that has received more than $13 million in contracts and is owned by Efraim’s uncle, Bar‐Kochba Botach.
Incidentally, Diveroli started AEY after both he and his father learned the business from Bar‐Kochba Botach.
And Efraim’s grandfather, Yoav Botach, is one of Los Angeles’ wealthiest property owners. According to the Los Angeles Daily News, he owns 144 commercial or other properties in the city and has an ownership stake in Botach Tactical.
Companies classified as small and socially or economically disadvantaged under section 8(a) of the 1953 Small Business Act are eligible for business development assistance in addition to access to contracts. The SDB program focuses on helping such companies gain access to the federal marketplace.
The Small Business Administration in Washington says it has no record that AEY ever applied for SDB status.
A review of the Federal Procurement Data System, which provides information on government contracting, found AEY was first identified as an SDB in June 2006 by the State Department and army. It ultimately received the SDB designation 33 times on contracts worth $224 million. The company received another 19 awards during the same period without being labeled an SDB. Before receiving the designation AEY had done just $8.14 million in business with the federal government.
AEY was incorporated in 1999 by Michael Diveroli, Efraim’s father. The company did little business until 2005, when Efraim, then 19, was named AEY’s president.
Now, consider the events of the past few days. Last Friday, a federal grand jury in Miami indicted Diveroli as well as two former employees and a business associate, on 71 counts of fraud and conspiring to misrepresent the types of ammunition they sold to the Defense Department as part of a $298 million army contract.
According to the indictment, Diveroli, and vice president David Packouz (a 25‐year‐old licensed masseur), Alexander Podrizki and Ralph Merrill were indicted on wide‐ranging fraud charges in connection with their provision of ammunition to Afghanistan. They sought “to unjustly enrich themselves” by shipping aged Chinese rifle cartridges to Afghanistan after claiming they were made in Albania.
It is obvious that the US government has decided to make a big deal of this, as the indictment was announced not only by R Alexander Acosta, US attorney for the Southern District of Florida; but also by Sharon Woods, director, US Department of Defense (DoD), Defense Criminal Investigative Service; Anthony V Mangione, special agent‐in‐charge, US Immigration and Customs Enforcement (ICE), Office of Investigations in Miami; Brigadier General Rodney Johnson, commanding general, US Army Criminal Investigation Command; and Paul Phillips, regional director, Defense Contract Audit Agency.
Count one of the indictment charged all defendants with conspiracy to defraud the US by making false representations to the government and by conspiring to commit procurement fraud. Counts 2 through 36 charge AEY and Diveroli with making false statements to the US Army regarding the country of origin of the ammunition. Lastly, all defendants are charged with procurement fraud.
Diveroli manages and directs the business operations of the company. David Packouz was a director and vice president of AEY; Alexander Podrizki was an agent of AEY stationed in Tirana, Albania; and Ralph Merrill was a business associate of Diveroli who provided financial and managerial assistance to AEY. According to the indictment, on July 28, 2006, the US Army issued a solicitation requesting bids on a contract to provide various types of ammunition to the Islamic Republic of Afghanistan. AEY submitted a bid and represented that it could fulfill the requirements of the contract and procure the ammunition for $298,000,000. Based on that bid, the army awarded the contract to AEY on January 26, 2007. Under the terms of the contract, AEY was required to certify that it provided serviceable and safe ammunition. The contract also prohibited delivery of ammunition acquired, directly or indirectly, from a communist Chinese military company.
The indictment alleges that the defendants submitted documents to the army falsely attesting that the ammunition they provided was manufactured in Albania, when, in fact, the ammunition came from China. To implement the scheme, Diveroli, Packouz and Podrizki directed others to assist in the packaging of ammunition to be delivered to Afghanistan and provided instructions to remove Chinese markings from containers to conceal that the ammunition was manufactured in China.
With each shipment, Diveroli falsely certified that the furnished ammunition conformed with the contract requirements and that the manufacturer and point of origin of the ammunition was the Military Export and Import Company (MEICO) in Tirana.
Based on these false submissions, the army paid AEY approximately $10,331,736 for 35 shipments of Chinese ammunition.
If convicted of the charges in counts 1 through 36, each defendant faces a maximum term of imprisonment of up to five years per count. If convicted of the charges in counts 37 through 71, each defendant named faces a maximum term of imprisonment of up to 10 years per count.
Interestingly, Anthony V Mangione, Special Agent of ICE, said, “The indictment and arrest of these four individuals is a result of a three‐year joint law enforcement agency investigation conducted by US Immigration and Customs Enforcement’s (ICE) Counter Proliferation Investigations (CPI) Unit, DCIS and army CID.” But as the initial request for proposals wasn’t issued until July 2006, about two years ago, that would mean an investigation was going on even before the contract was awarded.
That would be because both AEY and Diveroli had been placed on the watch list in April 2006 because they were under investigation by US Immigration and Customs Enforcement for “numerous violations of the Arms Export Control Act and contract fraud”.
The investigation actually began in July 2005 and involved “numerous violations of the Arms Export Control Act and contract fraud”. ICE had described this investigation as involving “illegal firearms or firearm related transactions” by Efraim Diveroli and had instructed US officials encountering Efraim Diveroli to “[p]lease search luggage and photocopy any suspect documents”.
On December 12, 2006, the State Department made the following entry to the watch list regarding both Diveroli and AEY: