Finding Of Fraud Led To Suspension Of Company Supplying Arms To Afghanistan

Team Infidel

Forum Spin Doctor
New York Times
March 28, 2008
Pg. 14
By C. J. Chivers and Eric Schmitt
When the United States Army decided this week to suspend the main supplier of munitions to Afghan security forces from future federal work, it did so after a field investigation documented what it called an act of fraud.
Last Nov. 25, the president of the company, Efraim E. Diveroli, signed papers certifying that 28 pallets of ammunition for Afghanistan had been manufactured by MFS 2000, a Hungarian company, according to the investigators’ memorandum.
Acting on a tip, the Army’s Procurement Fraud Branch visited an Afghan ammunition storage site in January after the shipment arrived. There, investigators found that ammunition certified as Hungarian was actually made in China, according to the memorandum.
Mr. Diveroli declined to comment, and has 30 days to contest this finding.
The investigators’ discovery did more than lead to his company’s suspension. The discovery placed him at risk of a federal criminal charge of fraud. And it raised questions about how Army contracting officials have been securing arms for the Pentagon’s allies in Afghanistan and Iraq.
Mr. Diveroli’s company, AEY Inc. of Miami Beach, received a two-year contract in January 2007, potentially worth $298 million, to provide Afghan security forces with ammunition. At the time, Mr. Diveroli was 21.
An examination of the company’s business by The New York Times, reported on Wednesday, found that it had shipped tens of millions of decades-old Chinese cartridges to Afghanistan, almost all of them in poor packaging. AEY has also worked with middlemen and a shell company that are on a list of federal entities suspected of illegal arms trafficking and that have been accused of corruption.
Representative Henry A. Waxman, the California Democrat who leads the House Oversight and Government Reform Committee, said Thursday that the committee would hold a hearing next month to review contracts received by AEY.
“Something appears to have gone fundamentally wrong inside the Defense Department,” Mr. Waxman said in a statement. “The committee will try to find out how many taxpayer dollars were squandered and who is responsible.”
Representative Ike Skelton, the Missouri Democrat who is chairman of the House Armed Services Committee, said his committee would also examine military procurement and “work to ensure that such practices are eliminated and never repeated.”
In a statement, he said: “Supplying substandard equipment to the Afghan security forces can only undermine our mission there. Furthermore, the use of networks of illegal arms dealers, if this in fact occurred, undermines U.S. arms sales policy and our international reputation.”
Interviews with military officers, American officials, international arms dealers and private organizations that monitor them suggest that the problems with the Afghan contract were rooted in part in AEY’s business conduct. But they stemmed as well from how Army procurement officials write contracts and vet and supervise companies that receive them.
Nicholas Marsh, a research fellow at the International Peace Research Institute in Norway who studies the arms trade, said AEY’s work with suspicious middlemen was part of a pattern for purchases of foreign munitions for the Pentagon.
Under American law, arms dealers must notify the State Department of everyone they do business with in a given arms transfer, including middlemen, brokers, sellers and transport companies. As a practice, the State Department checks subcontractors and partners against a watch list, which is regularly updated by analysts and with information from embassies around the world.
Purchases for the Pentagon, however, are exempt from this law and practice. Middlemen have rushed into the deals, without the Pentagon’s contractors disclosing the relationships. “You see people subcontracting and subcontracting all over the place,” Mr. Marsh said. “It’s a huge mess.”
Military officers and a private arms dealer also said that insufficient quality-control standards were evident in many Army purchases of foreign arms.
Afghan and Iraqi forces principally use weapons designed by the Soviet Union. Munitions for these weapons are not typically made in the United States.
During the cold war, however, the American military and intelligence agencies studied Soviet arms and published volumes on their design, use, packaging and performance. The volumes, long ago declassified, are available in libraries in military installations.
But when the Army began buying huge batches of Communist bloc equipment, many contracting officers apparently did not refer either to such information or to the foreign standards for age limits and reliability testing.
AEY’s Afghan contract did not set an age limit for any munitions or require it to be tested. This meant that despite providing millions of cartridges more than 40 years old, Mr. Diveroli’s company was in compliance with the contract, Army contracting officials have said.
Reuben F. Johnson, an American in Ukraine who has been buying Eastern bloc equipment for the United States military since 1999, said such standards were a mark of contracting incompetence.
“The people in the U.S. Army who are responsible for issuing these solicitations are, almost to a man, completely unaware of the many volumes of data that were amassed on these systems during the cold war,” he said. (Mr. Johnson said he did not bid on any contracts that AEY was awarded.)
Not everyone has ignored those old manuals, however. For shipments of Chinese munitions, AEY removed it from its Chinese packaging and repacked it in generic brown cardboard boxes.
This step might have obscured its origins. But years ago the Defense Intelligence Agency published a detailed guide of manufacturer markings for military small-arms cartridges made around the world.
These keys enable investigators to trace a cartridge to the factory where it was made. The New York Times used these old intelligence charts last fall to show that ammunition shipped to Afghanistan by AEY was Chinese and had been made in the 1960s.
The Army’s fraud investigators, snapping pictures of what they found in January, used these same charts to show that AEY’s supposedly Hungarian munitions had come from Chinese factories, too, according to the investigators’ memorandum.
Based on this evidence, Mr. Diveroli was accused of fraud, and his company suspended.