The saga of United States military contractor AEY and its supply of substandard ammunition to Afghanistan keeps getting curiouser and curiouser, as Alice in Wonderland phrased it, after descending the rabbit hole. Or put another way, it is the news story that keeps on giving.
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:
There appear to be several suspicious characteristics of this company, including the fact that Diveroli is only 21 years old and has brokered or completed several multi‐million dollar deals involving fully and semi‐automatic assault rifles. Future license applications involving Diveroli and/or his company should be very carefully scrutinized.
The watch list warned that “future license applications involving Diveroli and/or his company should be very carefully scrutinized”. The watch list also had entries for Heinrich Thomet, the president of Evdin, Ltd, a company based in Cyprus that acted as AEY’s middleman; and Ylli Pinari, the head of the state‐run Military Export Import Company (MEICO), which supplied the ammunition from Albania. The reasons both Thomet and Pinari were placed on the list are classified.
But wait, there’s more. This past Monday, the House Oversight and Government Reform Committee, headed by Representative Henry Waxman (Democrat‐California) sent out a press release stating it had received evidence that the US Embassy in Albania approved an effort to conceal the illegal Chinese origins of ammunition shipped to Afghanistan by AEY.
US Army military attache Major Larry D Harrison II, who is chief of the embassy’s office of defense cooperation, told investigators that John L Withers II, the US ambassador to Albania, endorsed a plan by the Albanian defense minister, Fatmir Mediu, to hide several boxes of Chinese ammunition from a visiting reporter.
According to Harrison, he was one of the aides attending a late‐night meeting, on November 19, 2007, where Mediu asked Withers for help, saying he was concerned that the reporter would reveal that he had been accused of profiting from selling arms. The minister said that because he had gone out of his way to help the United States, a close ally, “the US owed him something”, according to Harrison.
Mediu ordered the commanding general of Albania’s armed forces to remove all boxes of Chinese ammunition from a site the reporter was to visit, and “the ambassador agreed that this would alleviate the suspicion of wrongdoing”, according to Harrison’s testimony.
It is clear from the records that at that time the embassy knew the ammunition was illegal, as this excerpt from the transcribed question and answer with Harrison confirms:
Question: So at the time of this meeting between the defense minister, the ambassador, and several other State Department officials, it was clear that you were discussing Chinese ammunition; is that correct?
Answer: That is correct. That is correct.
Q: And it was clear that AEY was the company that was buying it under a US contract?
A: That is correct. …
Q: And you said, by this time, you had been informed that it was illegal under US law for a US contractor to buy Chinese ammunition. Is that correct?
A: That is correct, yes, sir …
Q: And you said also at this time it was clear that there was an investigation ongoing … Is that right?
A: That is correct, yes, sir.
Not only did the embassy help Mediu conceal the ammunition, but it also did not tell the truth about what happened when the House Oversight and Government reform committee inquired of the State Department what it knew of the case. As committee chairman Waxman wrote in a letter to US Secretary of State Condoleezza Rice:
The information obtained by the committee raises serious issues. If the information is accurate, it appears that senior US Embassy officials in Albania approved of the efforts of the Albanian defense minister to conceal evidence of illegal shipments of Chinese ammunition that are now the subject of a criminal indictment. It also appears that information about the incident was withheld from the committee. It is hard to understand what rationale would justify these actions.
On Tuesday, the committee held a hearing on AEY’s Afghan contract. According to Waxman’s prepared statement, “The AEY contract shows that the procurement process at the Department of Defense is dysfunctional. There was no apparent need for the contract, no effective vetting of the company’s qualifications, and no adequate oversight.”
To add insult to injury Waxman noted:
AEY acquired its ammunition from stockpiles in Albania and other former Warsaw Pact countries. These countries have surplus ammunition they are trying to give away or destroy. We learned during the investigation that the president of Albania flew to Iraq in 2007 and offered to donate Albanian stockpiles to General [David] Petraeus. It appears that the army agreed to pay $300 million for ammunition it could have gotten for free. The procurement failure that is the hardest to understand is the selection of AEY. The State Department maintains a “watch list” of potential illegal arms traffickers. Both AEY and Mr Diveroli are on the watch list. So are AEY’s subcontractor and the subcontractor’s subcontractor. The State Department official in charge of the watch list called this “a perfect trifecta”.
But the Defense Department never bothered to check the watch list before awarding the $300 million arms contract. In the source selection decision, the contracting officer wrote: “There essentially is no doubt that AEY would perform in accordance with the delivery schedules and has no history of quality rated problems. Based on this, AEY’s initial rating was ‘Excellent’.’ This was pure fiction.
According to Waxman, if army officials had just examined AEY’s performance under previous Defense and State Department contracts, they would have easily discovered a dismal record of failure. Documents produced to the committee show that federal agencies terminated, withdrew, or canceled at least seven previous contracts with AEY for poor quality or late deliveries, as well as four additional delivery orders under an eighth contract. That included a botched $5.6 million order for 10,000 Beretta pistols for Iraq’s security forces.
One Pentagon interviewed by the committee recalled that when AEY failed to deliver Beretta pistols for the Iraq security forces, Diveroli offered excuses that were false, such as blaming AEY’s failure to perform on a hurricane in Florida that never occurred. A contracting official stated: “It’s not like we didn’t have the Internet in the Green Zone and couldn’t check on this.”
Under these contracts, AEY provided potentially unsafe helmets to US forces in Iraq, failed to deliver thousands of weapons, and shipped poor quality ammunition to US special forces.
A US inspector in Iraq wrote to AEY about the helmets:
Some people at MNSTC-I [Multi‐National Security Transition Command — Iraq] got a little wound up when they saw the daily receiving report. They remembered the 10,000 helmets you sold them earlier this year and the junk AKs we still have in the warehouse. The concern was that, if they break and crack, are they ballistically correct? In other words, will they stop a bullet and what do we do if they don’t? Several scenarios were being planned for you, none of them pleasant.
How was it that AEY survived the initial evaluation for the Afghanistan contract when it performed so poorly on past contracts, the results of which had been amply documented?
According to the Oversight and Government Reform committee staff analysis, the Pentagon’s “source selection team” for the ammunition contract evaluated AEY’s past performance based only on three contracts identified by AEY. In other words, the Pentagon did not do anything more than check the paperwork that AEY provided.
A review of a database available to the source selection team would have identified the other Defense and State Department contracts awarded to AEY. Apparently, however, AEY’s performance under other contracts with the Departments of Defense and State was not considered.
But, even given that limited data, there were warning signs.
The selection team considered AEY’s record of on‐time delivery, quality, international movement of ammunition and success as a “system integrator”, which included experience in “the identification of ammunition appropriate for foreign weapon systems”, “the ability to establish quality control, safety and transportation plans”, and “adhering to the regulations and policies of both foreign and US governments”.
The team gave AEY a mixed rating. It rated AEY’s past history of on‐time delivery and quality as “Excellent”. But with respect to AEY’s history of “international movement” and experience as a “systems integrator”, the team concluded that AEY’s past performance was “Unsatisfactory”. It also found that the contracts submitted by AEY for consideration failed to demonstrate “past performance experience with contracts for large number of varied items and the ability to identify appropriate ammunition to stated foreign weapon systems”. The team concluded: “Lacking this experience, there is substantial doubt that AEY could perform in accordance with the solicitation requirements.”
On January 22, 2007, the contracting official who ultimately awarded the contract overruled the source selection team and raised AEY’s score from “Unsatisfactory” to “Good”. She acknowledged that her change made “a difference”, and she stated that AEY “would not [have] gotten the award” without this adjustment. But in changing the rating she gathered no additional information about these contracts beyond what was available to the source selection team.
Another major problem was that the contract with AEY contained a huge loophole, which it took full advantage of.
In the contract the Defense Department provided little or no guidance on the quality or condition of the ammunition required. The contract called for ammunition that was “serviceable”, but it gave no further details.
The contract also specifically permitted the use of “surplus” ammunition. The contract failed to set an age limit for the ammunition purchased by AEY. A section of the contract in which the contracting officer answered questions raised by bidders addressed this issue specifically: Question 2: Is there an age limitation on the items to be delivered under this contract?
Answer: No, but material must be serviceable and issuable to all units without qualifications.
Documents show that AEY paid close attention to age restrictions in contracts, and sought to take advantage of the lack of such restrictions in order to obtain older, cheaper ammunition. In a request for price quotes under the Afghanistan contract, AEY wrote to potential suppliers, “We remind you that although target prices seem low, we already have the contract with the US government signed … and ANY age ammunition is acceptable.”
And despite the hazardous nature of the cargo, the contract also had no specific restrictions on the type of packaging to be used in transporting ammunition. The contract had the following instruction, without any elaboration: “Package in cartons in accordance with the best commercial practice for international shipment.”
There is no adequate explanation why the Defense Department failed to include proper quality, age and packaging requirements in the contract. Other military contracts for similar ammunition included such restrictions.
AEY also took advantage of the Defense Department’s failure to conduct rigorous inspections. The Defense Contract Management Agency did not conduct consistent inspections of AEY’s ammunition before it was shipped, citing “a plethora of reasons”, including an inability to send inspectors to the various Eastern European countries from which AEY procured ammunition.