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AEY Betrayal?
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Reports surfaced in late March that a company with several hundred million dollars worth of contracts, acting as the main supplier of munitions to Afghanistan’s army and police forces, has been delivering substandard ammunition and violating military export regulations. It operated out of an unmarked office in Miami Beach, FL, and employed a 22 year old licensed masseur as its Vice President. Naturally, a number of readers recommended it as DID’s lead April Fool’s Day story. Unfortunately, the story is not a joke.

In March 2007, “$298M to AEY for Ammo in Afghanistan” covered one of the firm’s key contracts. As of March 25/08, however, AEY, Inc. is barred from future contracts with any agency of the US government, and is under investigation by the Department of Defense’s inspector general and by Immigration and Customs Enforcement. Complaints include the quality and origins of ammunition it provided, and allegations of corruption.

Now an investigation by Government Executive Magazine may help shed light on how the firm was able to win the contracts it received. Apparently, it helps to be a “small, disadvantaged business”...

Policeman, Sabari
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Reports indicate that AEY shopped across the former Eastern Bloc for Soviet-caliber small arms ammunition, including significant business with Albania whose stocks are considered substandard. That business was reportedly conducted through Evdin Ltd. in Cyprus, and its terms raise issues on two fronts. One is the possibility of corruption in Albania, using Evdin as a middleman firm to divide the profits with officials while remaining outside of US government accountability. Another is the issue of sourcing, given that millions of those rounds were produced in China and may thereby violate American law.

The quality of the other stocks reportedly varied widely from excellent to substandard, and significant quantities of the ammunition delivered by AEY reportedly dated from the 1960s. Other allegations include dealings with Petr Bernatik, who had been accused by Czech officials of illegal arms trafficking and was listed on the US State Department’s Defense Trade Controls watch list.

A March 27/08 DefenseLINK release states:

“As of today, the Army has issued five task orders, collectively worth $155.3 million, the official said. AEY has made about 80 deliveries, with an estimated value of $54.6 million, into Kabul. Those deliveries violated two specific terms of the contract, the official said. One stated that the ammunition could not be acquired directly or indirectly from the People’s Republic of China, and the other specified that it must be packaged to comply with best commercial practices for international shipment.”

The Pentagon’s deputy assistant secretary of defense for public affairs Bryan Whitman added that:

“Safety and performance has not apparently been a factor, according to our folks in Afghanistan…. They have had no safety incidents reported and no reports of any ammunition that has malfunctioned associated with this particular contract.”

The New York Times, whose persistent investigation and enquiries were reportedly instrumental in sparking the US Army’s investigation and suspension, offered its own in-depth report. It suggests that Whitman’s statement may be strictly true, but misleading:

“In January, American officers in Kabul, concerned about munitions from AEY, had contacted the Army’s Rock Island Arsenal, in Illinois, and raised the possibility of terminating the contract…. And yet after that meeting [in late February], AEY sent another shipment of nearly one million cartridges to Afghanistan that the Combined Security Transition Command-Afghanistan regarded as substandard. Lt. Col. David G. Johnson, the command spokesman, said that while there were no reports of ammunition misfiring, some of it was in such poor condition that the military had decided not to issue it. “Our honest answer is that the ammunition is of a quality that is less than desirable; the munitions do not appear to meet the standards that many of us are used to,” Colonel Johnson said. “We are not pleased with the way it was delivered.”

It would seem that even a Kalashnikov has limits on what it will fire. Ammunition that is not issued will not malfunction – but neither does it qualify as acceptable performance and safety.

Nor is this merely a contracting issue, given the tactical and relationship implications for key allies in a war:

“But problems with the ammunition were evident last fall in places like Nawa, Afghanistan, an outpost near the Pakistani border, where an Afghan lieutenant colonel surveyed the rifle cartridges on his police station’s dirty floor. Soon after arriving there, the cardboard boxes had split open and their contents spilled out, revealing ammunition manufactured in China in 1966. “This is what they give us for the fighting,” said the colonel, Amanuddin, who like many Afghans has only one name. “It makes us worried, because too much of it is junk.”

Unfortunately, betrayal of the corporation’s duty to its customers on the front lines is only the beginning of the problem. Allies who believe they have been given “junk” to fight with, for instance, are far less likely to fight at all.

Afghan forces are the only long-term solution to security in Afghanistan, and countries like Britain and Australia are expressing unease about the willingness and ability of NATO to lead the Afghan mission. Its popularity is low, and is contested in many of the East Bloc countries that are taking risks and contributing fully. Given these circumstances, AEY’s performance under this contract may well end up having international reverberations that reach beyond the mere investigations into its arms dealing partners and practices.

UPDATES:

July 23/08: Federal prosecutors in Miami add 13 charges of wire fraud against AEY. These are not new allegations, just new charges stemming from the contention that AEY provided misleading information to the US Army, in order to get get paid. Payment was done via money transfer, hence wire fraud. Each charge of wire fraud carries a potential sentence of 20 years in prison, which may give the prosecutors some additional negotiating leverage toward guilty pleas.

The report comes from the liberal blog Talking Points Memo’s TPMMuckraker publication. That source also alleges that prosecutors also take the very unusual step of summoning the U.S. Ambassador to Albania to testify before a grand jury. See below for the background behind this move.

July 14/08: The US State Department is allowing US Ambassador John Withers II to go public with his version of events, in response to allegations from Rep. Henry Waxman.

The liberal Los Angeles Times newspaper landed an extensive interview with the ambassador, and their story says that the allegations against the Ambassador do not hold up well to scrutiny. See also UPI’s report.

June 23/08: In a letter to Secretary of State Condoleeza Rice, Rep Henry Waxman [D-NY] says that his committee has received information suggesting that the US Ambassador to Albania may have provided improper assistance to AEY. House Committee on Oversight and Goverment Reform page | HOC Letter copy [PDF]

June 20/08: 4 of AEY’s principals are indicted, and arrested on charges of violating the Arms Export Control Act, and conspiring to misrepresent the types of munitions they sold to the U.S. Department of Defense. US Department of Justice release | Miami Herald | UPI.

April 3/08: GovExec reports that:

“A Miami-based defense contractor under investigation for delivering faulty munitions to Afghan security forces saw his business boom after being incorrectly labeled as a small disadvantaged business. Before the designation first appeared in the Federal Procurement Data System in mid-2006, AEY Inc., owned by 22-year-old Efraim Diveroli, had done $8.14 million in business with the federal government. Since the SDB label was applied, AEY has earned more than $204 million in federal contracts. But several federal sources told Government Executive that AEY has never been certified as a small disadvantaged business…”

One would hope not. Somehow, we don’t think having a VP whose main qualification is “masseur” is the kind of disadvantage regulators had in mind.

Readings & Sources

• DID (March 21/07) – $298M to AEY for Ammo in Afghanistan. DID has not found any other DefenseLINK announcements pertaining to AEY, Inc., though the New York Times notes a number of smaller contracts below $10 million in Afghanistan and beyond.

• US DoD DefenseLINK (March 27/08) – Army Suspends Ammo Contract for Afghan Security Forces

• NY Times (March 27/08) – Supplier Under Scrutiny on Arms for Afghans. DID has criticised NY Times defense reporting in the past, and deservedly so. This story, on the other hand, is an excellent example of well-done investigative journalism.

• Deutsche Presse Agentur, via Military.com (March 27/08) – Firm Sent Cold War Ammo to Afghanistan

• Reuters (March 27/08) – NATO meet a test for Afghanistan, says Australia. Defence Minister Joel Fitzgibbon says of the April 2008 Bucharest meeting: “It’s a watershed meeting. It will determine the strength of will of so many of the participating nations.”

• UK House of Commons Defence Committee (Session 2007-08, March 20/08) – Future Of Nato Threatened By Lack Of Political Will, Say MPs. “Succeeding in Afghanistan must remain at the top of NATO’s agenda. The Alliance is facing real difficulties in generating sufficient forces and national caveats continue to hamper the ISAF mission. The burden in Afghanistan is not shared equitably and other nations should contribute more. The future of the Alliance does not depend on the outcome of Afghanistan but failure there would deal a severe blow to the unity and cohesion of NATO.”