War Contracting Gone Bad

A Congressional report released Tuesday details the sordid story of how the military contrator AEY, and its 22 year-old company president, Efraim Diveroli, won, and then lost, a $298-million Pentagon contract to supply munitions to Afghanistan security forces.

AEY and Diveroli became infamous after a March New York Times story detailed how the company, which employed less than a handful of people and operated from an unmarked Miami Beach office, rapidly rose to become one of the most successful, and unreliable, wartime contractors. In 2004, at the age of 18, Diveroli took over AEY from his father. At that time, the company primarily sold equipment to local police forces. Diveroli, though, quickly tapped into the lucrative wartime contracting business. But fulfilling the contracts that AEY won was another matter.

For the Afghanistan contract, AEY bought Chinese-made, 40-year-old rifle cartridges from Albania and other former Soviet bloc nations. Since buying Chinese-made arms is illegal under U.S. law, AEY worked with the Albanian defense ministry to repackage the arms, and disguise their point of origin, before shipping them to Afghanistan.

For buying Chinese-made munitions, and then covering it up, a federal grand jury Friday indicted Diveroli; AEY’s former Vice President David Packouz, a 25 year-old masseur; and three additional company officials on 71 counts of fraud, false statements and conspiracy. The revelations had also led to the Pentagon terminating their contract with AEY in May.

But the saga surrounding aged Chinese munitions is part of a bigger story–why did a tiny company with a post-adolescent president win millions in defense contracts? The House Committee on Oversight and Government Reform report doesn’t answer the question of how AEY got a leg into the contracting world.

But it does highlight a litany of Pentagon and State Dept. wartime contracting mishaps that indicates why AEY was able to keep winning Pentagon dollars. For example, there was actually no need to buy Albanian weapons, because the Albanian government was trying to give them away. AEY got this Pentagon contract even though 11 prior government contracts had been terminated for mismanagement. It seems that the Pentagon officers who terminated those deals never told the officers in charge of the Afghanistan contract. And the weapons contract didn’t specify weapons quality — allowing AEY to buy ammunition that was, in some cases, more than 60 years old.

These revelations come after a House oversight committee report Monday that the U.S. embassy in Albania worked with the Albanian defense ministry to conceal the ammunition’s Chinese origins. Taken together, the reports provide an extreme example of what happens without a clear Pentagon and State Dept. process for awarding war contracts.

“This is a case study of a dysfunctional contract process,” said Henry A. Waxman, chairman of the House oversight committee.

In January 2007, the Pentagon gave AEY a $298-million contract to be the chief supplier of ammunition for Afghanistan’s national police and army forces. Since the U.S. invaded Afghanistan in 2002, these have been the forces principally in charge of fighting the Taliban and Al Qaeda terrorist network.

In rewarding the contract, the Pentagon did not establish ammunition quality standards or age limitations, despite the fact that such munitions are perishable. The only requirement was that munitions be “serviceable.”

The lack of requirements played right into the AEY strategy of underbidding competitors and then looking for a weapons source to fill the contract. According to the committee report, in shopping for an ammunition supplier, AEY emphasized the lack of a age limitation. “Please be advised there is no age restriction for this contract!!!” AEY officials wrote to one possible contractor.

Their quest for the cheapest munitions brought them to Albania, a former Soviet bloc member that had bought millions of rifle cartridges from China in the 1960s and ’70s. AEY bought these cartridges from the Military Export Import Co,. run by the Albanian government’s defense ministry.

AEY did this despite the fact that it is against U.S. federal law to buy weapons made in China, either directly or indirectly. There was also a more practical consideration — Albania was trying to unload these weapons and had even offered to donate them to the U.S. military.

The committee report found that Albana, in its quest for NATO membership, was actively cooperating with U.S. and NATO programs to destroy stockpiles of China-purchased weapons and ammunition. Albania– along with Bosnia, Bulgaria, Hungary– even offered to donate the ammunition to the U.S. for the war in Iraq.

This donation plan ended last December, though, when the Albanian president met with Gen. David Petraeus, the commander of the Iraq forces. Petraeus said it was against the law to receive China-made munitions.

Why AEY was dealing with Albania, much less giving the Albanian defense ministry millions, is not known. Part of the answer, though, might lie in the defense ministry’s record of corruption. Ylli Pinari, the head of the Military Export Import Company, is on the State Dept’s arm trafficker “watch list.”

The middleman company in the AEY-Albania deal, Evdin Ltd., a Cyprus-based company, is also on the State Dept. watch list. At the hearing Tuesday, it was revealed that the State Dept. never informed Pentagon contracting officers that either Evdin Ltd. or the Albanian Military Export Import Co. were on the watchlist.

The committee report turned up a litany of other ways that AEY, and its Afghanistan weapons, was not vetted until this year, when the Pentagon terminated the contract in May.