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EXAMINATION OF AEY CONTRACTS WITH THE

U.S. GOVERNMENT

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JUNE 24, 2008

Serial No. 110–119

Printed for the use of the Committee on Oversight and Government Reform

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Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

——— ———

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on June 24, 2008 ............................................................................... 1

Statement of:

Parsons, Jeffery P., Executive Director, Army Contracting Command,

U.S. Army Materiel Command, and Brigadier General William N. Phillips, U.S. Army, Commanding General, Picatinny Arsenal, Commander,

Joint Munitions and Lethality Life Cycle Management Command;

Mitchell A. Howell, Executive Director, Ground Systems and Munitions

Division, Defense Contract Management Agency; and Stephen D. Mull,

Acting Assistant Secretary of State, Bureau of Political Military Affairs,

U.S. Department of State ............................................................................. 47

Howell, Mitchell A. .................................................................................... 60

Mull, Stephen D. ....................................................................................... 67

Parsons, Jeffery P. ..................................................................................... 47

Phillips, Brigadier General William N. ................................................... 49

Letters, statements, etc., submitted for the record by:

Braley, Hon. Bruce L., a Representative in Congress from the State

of Iowa, prepared statement of .................................................................... 88

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of ........................................................................ 41

Howell, Mitchell A., Executive Director, Ground Systems and Munitions

Division, Defense Contract Management Agency, prepared statement

of ..................................................................................................................... 62

Parsons, Jeffery P., Executive Director, Army Contracting Command,

U.S. Army Materiel Command, and Brigadier General William N. Phillips, U.S. Army, Commanding General, Picatinny Arsenal, Commander,

Joint Munitions and Lethality Life Cycle Management Command, joint

prepared statement of ................................................................................... 51

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 94

Waxman, Hon. Henry A., a Representative in Congress from the State

of California:

Letters dated June 18, 2008 ..................................................................... 44

Prepared statement of ............................................................................... 33

Staff report ................................................................................................. 3

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EXAMINATION OF AEY CONTRACTS WITH THE

U.S. GOVERNMENT

TUESDAY, JUNE 24, 2008

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The committee met, pursuant to notice, at 10 a.m. in room 2154,

Rayburn House Office Building, Hon. Henry A. Waxman (chairman

of the committee) presiding.

Present: Representatives Waxman, Cummings, Tierney, Watson,

Lynch, Norton, Davis of Virginia, Platts, Issa, and McHenry.

Staff present: Phil Barnett, staff director and chief counsel; Kristin Amerling, general counsel; Karen Lightfoot, communications director and senior policy advisor; David Rapallo, chief investigative

counsel; John Williams and Theodore Chuang, deputy chief investigative counsels; Russell Anello, Stacia Cardille, and Suzanne

Renaud, counsels; Christopher Davis, professional staff member;

Earley Green, chief clerk; Jen Berenholz, deputy clerk; Caren

Auchman and Ella Hoffman, press assistants; Miriam Edelman,

staff assistant; Lawrence Halloran, minority staff director; Jennifer

Safavian, minority counsel for oversight and investigations; Keith

Ausbrook, minority general counsel; John Brosnan, minority senior

procurement counsel; Steve Castor, minority counsel; Benjamin

Chance, Adam Fromm, and Emile Monette, minority professional

staff members; Patrick Lyden, minority parliamentarian and member services coordinator; and Brian McNicoll, minority communications director.

Chairman WAXMAN. The meeting of the committee will come to

order.

Today’s hearing examines a $300 million contract to supply ammunition to the Afghan Security Forces. This contract is an important one because it relates directly to the success of our mission in

Afghanistan. We know a lot about what went wrong after the contract to AEY was awarded in January 2007. We know that ammunition provided by AEY was unserviceable. We know that much of

the ammunition was illegal, Chinese-made ammunition. We know

that after paying AEY over $60 million, the Army canceled the contract. And we know that last week the Justice Department indicted

AEY and its top officials with 71 counts of fraud and related

charges.

We have also learned that there are questions about the role of

the U.S. Embassy in Albania in approving a plan to conceal the

Chinese origins of AEY’s ammunition. A letter I sent yesterday

sought additional information about the Embassy’s actions.

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Today’s hearing will examine what is not known: how did a company run by a 21-year-old president and a 25-year-old former masseur get a sensitive, $300 million contract to supply ammunition to

Afghan Forces?

My staff has prepared an analysis of the evidence that the committee has received, and I would like to ask unanimous consent

that the staff analysis and the documents it cites be made part of

today’s hearing record.

Mr. DAVIS OF VIRGINIA. No objection.

Chairman WAXMAN. Without objection, that will be the order.

[The information referred to follows:]

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Chairman WAXMAN. 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.

The first step in any procurement should be to ask whether the

contract is necessary. That is especially true when the contract will

cost taxpayers hundreds of millions of dollars. This apparently

never happened. 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 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 awarding the $300

million arms contract.

In the source selection decision, 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. If Army officials had 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. Under these contracts, AEY provided potentially unsafe

helmets to our forces in Iraq, failed to deliver thousands of weapons, and shipped poor quality ammunition to U.S. Special Forces.

Government contracting officials repeatedly warned of poor quality, damaged goods, junk weapons, and other equipment in the reject category, and they complained the company repeatedly engaged in bait and switch tactics that were hurting the mission.

One contracting official told us, ‘‘I just don’t trust the guy. I

couldn’t take anything he said credibly.’’ He told us that AEY was

the single worst company he dealt with in Iraq, saying, ‘‘That was

my lemon I had to make lemonade out of.’’

In testimony to be delivered today, the witness from the Defense

Contract Management Agency continues to assert that, ‘‘AEY had

a history of satisfactory performance.’’ That is simply ridiculous.

Rating AEY’s performance as excellent and satisfactory is an insult

to the taxpayers.

The procurement deficiencies cascaded upon each other. The

terms of the contract left out essential details, allowing AEY to deliver ammunition that was over 60 years old. There were few inspections of the quality of the ammunition.

This unfortunately is not an aberration. Over the last 8 years we

have witnessed a complete breakdown in the procurement process.

As the AEY experience demonstrates, it appears that anyone, no

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matter how inexperienced or unqualified, can win a lucrative Federal contract worth hundreds of millions of dollars.

There are profound lessons to be learned from the AEY experience. By examining AEY as a case study of what went wrong and

why, we can begin to rebuild our procurement system and protect

the interests of the taxpayers.

[The prepared statement of Chairman Henry A. Waxman follows:]

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Chairman WAXMAN. I want to recognize Mr. Davis for his opening statement.

Mr. DAVIS OF VIRGINIA. Thank you, Chairman Waxman, for holding the hearing.

Last Friday’s indictment of AEY’s officials certainly justifies this

committee’s decision to pursue questions about how and why a

small, inexperienced company was awarded a Federal contract

worth hundreds of millions of dollars. Obvious evidence of consistently shoddy performance was somehow missed or ignored as substandard or illegally obtained munitions were apparently being

sent to Afghanistan.

The system eventually caught up with AEY, but it took too long

and it cost too much. The failure to root out AEY sooner highlights

the difficulties that can arise in trying to capture and use information on a contractor’s past performance. That such a bad apple continued to receive Federal contracts only strengthens my belief that

a well-maintained data base of current information on prior violations and other relevant information could be a valuable tool for

contracting officers.

Such a data base was proposed in H.R. 33, and we appreciate

Chairman Waxman and the bill’s sponsor, Representative Maloney,

for working with us to improve the latest version of the bill. It still

needs some work, but with derogatory information on performance

issues available only to acquisition officials, the data base could

provide the tool the Government needs to root out the rotten apples

before they can spoil even the most valuable barrels.

Perhaps if we had acted faster to put such a system in place we

wouldn’t be having a hearing today, but other gaps in the contracting system also appear to have played a key role in this fiasco.

It is one thing to have the appropriate information on past performance available; it is quite another to be able to use it effectively. In interviews with various contracting officials involved in

the AEY transactions, the impact of the Small Business Administration’s Certificate of Competency process surfaced several times.

Under that statutory scheme, contracting officials are prohibited

from rejecting an offer from small businesses such as AEY only on

the basis the company is not a responsible perspective contractor

due to negative or marginal past performance. Instead, the matter

must be referred to the SBA, which decides whether the firm is eligible for award.

While I understand that this program was designed for the protection of legitimate small business firms, it might be useful, in

light of this case, to take a careful look at the impact of the process. We should ask whether it has an intimidating impact on contracting officials who might otherwise reject a firm as non-responsible for reasons such as bad past performance, but are reluctant

to do so because of the delay and extra paperwork required by the

SBA referral process.

This case seems to speak volumes about what is wrong with the

military contracting process today. Yet again we see poor decisionmaking by overworked and under-trained Army acquisition officials. Over the course of awarding and monitoring 29 contracts

worth more than $200 million, someone, somewhere should have

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heard an alarm bell and looked more closely at what this small

company was doing with an implausibly large set of tasks.

But we should take care before extrapolating this specific, hopefully unique facts of AEY, and any broad conclusions about the entire acquisition system. This is a sordid tale of greed and ineptitude

involving repackaged Chinese munitions, alleged kickbacks to an

Albanian government official, and phantom plane crashes. There is

little indication the United States routinely purchases ammunition

for vintage Soviet weapons from 22-year-old arms dealers, so we

should ask what needs fixing while keeping an eye on what needs

to keep working in the vast majority of contract transactions to

taxpayers can have their money spent efficiently and wisely. Meaningful reforms are based on data, not anecdotes, even sensational

ones.

Today’s testimony should add important information to the public record about the mistakes and waste at the heart of the AEY

debacle, and we welcome the witnesses.

Thank you.

[The prepared statement of Hon. Tom Davis follows:]

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Chairman WAXMAN. Thank you very much, Mr. Davis.

We are pleased to have before us today from the Defense Department Brigadier General William N. Phillips, the Commander General of Picatinny Arsenal, Commander of the Joint Munitions and

Lethality Life Cycle Management Command, and the Program Executive Officer for Ammunition. He is accompanied by Jeffery P.

Parsons, Executive Director of the Army Contracting Command at

the U.S. Army Materiel Command.

Mitchell A. Howell, Executive Director of the Ground Systems

and Munitions Division at the Defense Contract Management

Agency.

From the State Department we have Stephen D. Mull, Acting Assistant Secretary of State for the Bureau of Political Military Affairs.

We also invited officials from AEY, Efraim Diveroli, the president

of AEY, and David Packouz, the vice president. Mr. Diveroli and

Mr. Packouz are not with us today. Both individuals informed us,

through letters from their attorneys, that they would assert their

fifth amendment rights against self-incrimination and would refuse

to answer questions at the hearing.

I ask unanimous consent that both letters be made part of the

hearing record. Without objection, that will be the order.

[The information referred to follows:]

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Chairman WAXMAN. In fact, both men were indicted last week on

Federal charges of procurement fraud, false statements, and conspiracy, so their Fifth Amendment concerns would appear to be

well-founded.

I should also note that, as part of their bail conditions, the Federal Court has restricted their travel to the Miami area.

Under these circumstances we concluded that it did not make

sense to require them to appear today.

We are pleased to have our witnesses from the Defense Department and the State Department with us today.

It is the practice of our committee that all witnesses that testify

before us and those who are accompanying them answer questions

under oath, so I would like to ask you all to please stand and raise

your right hands.

[Witnesses sworn.]

Chairman WAXMAN. The record will indicate that each of the witnesses answered in the affirmative.

Why don’t we start with Brigadier General Phillips.

General PHILLIPS. Mr. Chairman, if I could, I would like to let

Mr. Parsons go first, sir. He is the lead for the Army here. He is

the Director of the Army Contracting Command, and I am here

with him, so, so I would like to defer to Mr. Parsons if that is OK.

Chairman WAXMAN. OK. Thank you.

Mr. Parsons.

STATEMENTS OF JEFFERY P. PARSONS, EXECUTIVE DIRECTOR, ARMY CONTRACTING COMMAND, U.S. ARMY MATERIEL

COMMAND; BRIGADIER GENERAL WILLIAM N. PHILLIPS, U.S.

ARMY, COMMANDING GENERAL, PICATINNY ARSENAL, COMMANDER, JOINT MUNITIONS AND LETHALITY LIFE CYCLE

MANAGEMENT COMMAND; MITCHELL A. HOWELL, EXECUTIVE DIRECTOR, GROUND SYSTEMS AND MUNITIONS DIVISION, DEFENSE CONTRACT MANAGEMENT AGENCY; AND

STEPHEN D. MULL, ACTING ASSISTANT SECRETARY OF

STATE, BUREAU OF POLITICAL MILITARY AFFAIRS, U.S. DEPARTMENT OF STATE

STATEMENT OF JEFFERY P. PARSONS

Mr. PARSONS. Chairman Waxman, Congressman Davis, and distinguished members of the Committee on Oversight and Government Reform, I appreciate the opportunity to appear before you

and discuss you concerns regarding the award of a contract to AEY,

Inc., to supply ammunition to the Afghanistan Army and Afghanistan National Police.

The U.S. Army is conducting an extensive review with this contract action to determine if policies, procedures, rules, and regulations were properly followed in the pre-award, award, and postaward phases of the contract.

While I did not identify any breaches in policies, procedures,

rules, and regulations, we certainly learned a great deal in our review and identified a number of improvements to make to our acquisition process.

Here with me today, as you know, is General Phillips, the Commanding General of the Army Materiel Command’s Joint MuniVerDate 11-MAY-2000 16:49 Mar 09, 2009 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\DOCS\47390.TXT KATIE PsN: KATIE
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tions and Lethality Life Cycle Management Command. General

Phillips will address some of the improvements we are making in

the management and acquisition of non-standard ammunition, to

include specifications, packaging, inspection, and acceptance.

I respectfully request that our joint written statement be made

a part of the record for today’s hearing.

Chairman WAXMAN. Without objection, that will be the order.

Mr. PARSONS. As Executive Director of the Army Contracting

Command, I carefully reviewed the contracting process associated

with the AEY contract. I reviewed and discussed the source selection process with the contracting officer. I also reviewed relevant

documents such as the pre-award survey, minutes from the contract post-award survey, meeting between the ACO and AEY, and

post-award documentation to include reports of discrepancy provided by the Combined Security Transition Command Afghanistan.

Just recently I visited Afghanistan and had the opportunity to

meet with the Combined Security Transition Command Afghanistan leadership and members of the Afghanistan Army. My review

indicated that the contracting officer properly followed the contracting process and made reasonable judgments based upon the factual

information in her possession. As we have come to learn, however,

there was some factual past performance information that was not

in the possession of the contracting officer at the time of the contract award.

Based upon our review, we identified a number of small contract

actions awarded by offices in the Army Contracting Agency where

AEY had been terminated for cause in 2006 prior to the award of

the contract in January 2007. This information was not visible to

the contracting officer, as the dollar thresholds of the terminated

contracts did not require the recording of past performance information in accordance with the Defense Federal Acquisition Regulations Supplement.

As a result, there were no reports of past performance in the

past performance information management system that is used in

the source selection process to evaluate an offeror’s past performance.

Although those terminated actions were not included in the past

performance information management system, the solicitation did

include FAR–52–209–5 certification regarding responsibility matters, which required AEY to identify whether they had one or more

contracts terminated for default in the preceding 3 years by any

Federal agency. The provision also requires an offeror to provide

immediate written notice to the contracting officer if at any time

prior to contract award the offeror learns that his certification was

erroneous when submitted or has become erroneous by reason of

changed circumstances. Again, AEY did not indicate to the contracting officer that they had several contracts that had been terminated for cause prior to the award of the ammunition contracts.

We have informed our procurement fraud attorneys of this situation to determine if AEY provided false certifications during the solicitation phase of the contract. In addition, we have initiated policy

changes within the Army that will require the posting of past performance information, regardless of dollar value, for all contracts

that have been terminated for cause or default.

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I believe similar policy changes are being considered at the DOD

level, and I would recommend similar policy changes at the Federal

level.

In my opinion, while there certainly is room for improvement in

the way we acquire non-standard ammunition in support of our allies, this case is more about a contractor who failed to properly represent their company and failed to comply with the terms and conditions of the contract, rather than a faulty contracting process.

Once the contracting officials at the Army Sustainment Command became aware of performance issues in February 2008, they

initiated actions to ensure compliance with the contract.

Once matters became known to the Procurement Fraud Division

regarding the Chinese ammunition, they suspended them from further Government contracts. Based upon a show-cause letter that

the contracting officer issued to AEY and their admission that

there was Chinese ammunition provided under this contract, they

were terminated for default on May 23, 2008.

Last week’s indictment of AEY president and several other company officials is yet further indication of a less than scrupulous

contractor.

The Army is in the process of re-procuring ammunition requirements in support of the Afghanistan Army and National Police. We

have issued several contracts to meet short-term, critical needs and

will apply lessons learned to our new procurement. We will also

pursue re-procurement costs from AEY consistent with the Federal

Acquisition Regulations.

I appreciate the congressional support of our Army’s efforts in

providing our Nation’s war fighters and allies with quality products

and services. We continue to pursue improvements in our contracting process and work force, as demonstrated by our Secretary’s

commitment to implement many of the recommendations in the

Gansler Commission report regarding Army acquisition and program management and expeditionary operations.

I look forward to your questions.

Chairman WAXMAN. Thank you, Mr. Parsons.

General Phillips.

STATEMENT OF BRIGADIER GENERAL WILLIAM N. PHILLIPS

General PHILLIPS. Chairman Waxman, Congressman Davis, distinguished members of this committee, it is a privilege to appear

before you and to have an opportunity to address the support that

we are providing to a key ally.

As head of the Joint Munitions and Lethality Life Cycle Management Command, I have sought to gather lessons learned from our

experience with AEY and non-standard ammunition and apply

them simply to improve our process.

In early April, as a direct result of the AEY contract review that

Mr. Parsons just mentioned, we established a team of subject matter experts in contracting, program management, and contract administration, which included the Defense Contract Management

Agency, who continues to play a key role, as well as the Combined

Security Transition Command in Afghanistan. Members of my command have spent the past 2 weeks in Afghanistan and Iraq workVerDate 11-MAY-2000 16:49 Mar 09, 2009 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 C:\DOCS\47390.TXT KATIE PsN: KATIE
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ing with our forces on the ground. We have recognized the need to

improve how we acquire non-standard foreign ammunition.

Let me again emphasize that we have worked with all our key

partners, to include DCMA, to study non-standard ammunition

procurement procedures from acquirements to contracts to delivery.

As a result, future standards for quality, packaging, transportation,

and technical specification elements for non-standard ammunition

will more clearly state what we expect from our contractors.

These new terms and conditions have been prepared and have

been staffed with industry and other OSD offices for their comments. A request for a proposal has been prepared with these new

standards and will be published in early July for industry to respond.

Let me add that our response from industry has been very important, and we have sought to capture lessons learned from them

and apply that to our request for proposal process.

As part of our process and to enforce quality standards of nonstandard ammunition before shipment, DCMA and the Joint Munitions and Lethality Life Cycle Command will send trained personnel to the point of origin for non-standard ammunition contracts to

verify ammunition type, quantity, and condition.

The Army has moved aggressively to address this matter from

the first notification of the problems in the field, and our actions

have been prompt and fair. We also continue to pursue improvements to our contracting process as a result of this experience.

Your Army is committed to ensuring our soldiers and allies are

properly prepared to continue the fight against the global war on

terrorism.

In closing, let me just add that we thank Congressman Waxman

and Congressman Davis, thank you and this distinguished committee for your support for our soldiers, our service members, and our

allies.

I look forward to your questions.

[The prepared joint statement of General Phillips and Mr. Parsons follows:]

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Chairman WAXMAN. Thank you very much.

Mr. Howell.

STATEMENT OF MITCHELL HOWELL

Mr. HOWELL. Chairman Waxman, Congressman Davis, and distinguished members of the Committee on Oversight and Government Reform, I appreciate the opportunity to appear before you

and discuss your concerns about the Defense Contract Management

Agency’s contract administration and, more particularly, product

acceptance processes for various types of nonstandard ammunition.

The contract at issue was for the procurement and delivery of

various nonstandard ammunition types for the Afghanistan National Police and the Afghanistan National Army. The contract was

awarded in January 2007 to AEY, Inc., located in south Florida.

The Joint Munitions and Lethality Life Cycle Management Command, through their supporting acquisitions center at Rock Island,

IL, requested a pre-award survey from the DCMA in December

2006. Their request to DCMA was for an analysis of AEY’s financial and transportation capability. In January 2007 DCMA found

AEY to be satisfactory in both of the evaluated capabilities.

AEY had a history of satisfactory performance on similar contracts, showing increasing revenue growth, adequate capitalization,

and was considered low-risk for the evaluated capabilities.

DCMA conducted a post-award conference in March 2007 with

AEY representatives to confirm contract technical, quality, and

safety performance requirements. At the meeting it was understood

that all ammunition would be off the shelf and previously manufactured. All storage, packaging, and transportation were required to

be international best commercial practices. AEY confirmed their

understanding of these requirements. The contract’s packaging and

quality terms and conditions specified by the Buying Command

had been utilized in previous contracts without any identified discrepancies.

The contract required kind, count, and condition inspection.

There was no age limitation on the procured ammunition. Product

acceptance took two distinct forms. For domestic sources, acceptance was performed at origin. For outside the continental United

States, OCONUS, sources, acceptance was performed at destination.

The contract terms allowed the contractor to submit certificates

of conformance for OCONUS sourced items. The Federal Acquisition Regulation authorized buying commands to allow contractor

use of COCs in lieu of more stringent Government inspection criteria, especially where risk is determined to be low.

In addition, the Government maintains its inspection rights, regardless of whether the contract allows for use of COCs or not.

The items of concern originated from OCONUS sources. The

OCONUS shipments were delivered to the airport in Afghanistan.

Due to limitations at the airfield, kind, count, and condition, inspection took place after movement of the ammunition from the air

field to the bunkers. Ordinance commissioned and non-commissioned officers conducted that inspection. These officers have specialized ammunition training and the expertise necessary to perform kind, count, and condition inspection.

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COCs were acknowledged by the ordinance officers at the delivery point. In these COCs, the contractor certified the ammunition

provided was in acceptable condition and could be safely fired in

an originally chambered weapon or weapon system.

Due to the off-the-shelf nature of the OCONUS source non-standard ammunition, DCMA’s inspection and acceptance services were

very limited. For OCONUS-to-OCONUS shipments, these duties

primarily involve processing payment after receipt of invoices and

a COC signed by both the contractor and the ordinance officer conducting the inspection.

DCMA has been a critical strategic partner in helping the Buying Command fashion a new acquisition strategy for non-standard

ammunition. Letters of delegation requiring enhanced scrutiny of

non-standard ammunition items have recently been accepted by

DCMA. We have already performed some of these delegated functions on short notice in support of urgent ammunition requests.

We are confident that the more stringent specifications and corresponding inspection and acceptance requirements will greatly enhance the likelihood that only conforming ammunition will be presented and accepted in the future.

DCMA is fully engaged with our Buying Command partners to

ensure we continue to improve the processes related to the acquisition and acceptance of non-standard ammunition.

In addition to the improvements already mentioned, DCMA’s internal realignment enhances our Contract Administration operations. Subsequent to the award of this contract, DCMA realigned

into product groupings, including the Munitions and Support System’s Contract Management Office facilitating better customer

service and subject matter expertise minimizing the potential for

situations like this one in an environment of increasing mission

and constrained resources.

We appreciate the congressional support of our efforts as the Department’s primary contract management agency in providing our

Nation’s war fighters and allies with quality products and services.

Again, thank you for the opportunity to appear before this committee today to address DCMA’s role in this matter.

I will now answer any questions the committee may have.

[The prepared statement of Mr. Howell follows:]

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Chairman WAXMAN. Thank you, Mr. Howell.

Mr. Mull.

STATEMENT OF STEPHEN D. MULL

Mr. MULL. Thank you very much, Mr. Chairman and Ranking

Member Davis and all the members of the committee, for the opportunity to meet with you today to provide you some background

on the Department of State’s Watch List for Defense export licensing.

The Watch List is managed by the Directorate of Defense Trade

Controls [DDTC], and that is part of the Bureau for Political Military Affairs which I lead.

The State Department has been responsible for regulating defense trade since 1935 with the objective of ensuring that defense

trade supports U.S. national security and foreign policy interests.

We carry out our work on the authority of the Arms Export Control

Act and the Foreign Assistance Act of 1961, according to the International Traffic and Arms Regulations [ITAR], which includes the

U.S. Munitions List [USML].

The USML covers items specially designed for military appraisals, and its 20 categories extend from firearms to the joint strike

fighter. The Secretary of State has assigned the Bureau of Political

Military Affairs the responsibility for performing this critical national security function for the State Department.

The Department’s primary mission in this regard is to deny our

adversaries access to U.S. Defense technology while facilitating appropriate defense trade with our allies and Coalition partners to

allow for their legitimate self-defense needs and to fight effectively

alongside U.S. military forces in joint operations.

We do this in part by screening all export applications against

our Watch List, a large task given the volume of applications handled by the Department. In fiscal year 2007, the Political Military

Bureau received approximately 81,000 licensing applications for exports valued at approximately $100 billion. In fiscal year 2008 we

anticipate that the trend of an average annual increase of 8 percent will continue.

Our Watch List is based on section 38(g) of the Arms Export

Control Act, and that directs the Department of State, as designated by the President, to develop appropriate mechanisms to

identify persons and entities who are ineligible to contract with the

U.S. Government or to receive an export license.

The Watch List was created to respond to this section of law, as

well as to help us identify other parties who might be unreliable

recipients of Defense articles and services licensed by the State Department.

The Watch List currently has just under 80,000 entries drawn

from a wide array of governmental and other sources. We update

the Watch List daily with our compliance specialists, who continuously review intelligence information, law enforcement information,

and open source information for relevant material.

Public lists such as the General Services Administration’s Excluded Parties List, the Office of Foreign Asset Control’s specially

designated foreign nationals, and the Department of Commerce’s

Denied Parties List are all part of our Watch List.

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The Watch List also includes persons who are subject to criminal

or civil debarment by DDTC, as well as entries derived from classified intelligence reporting.

Additionally, sensitive information regarding ongoing criminal

investigations is routinely provided to us by the FBI and Immigrations and Customs Enforcement senior special agents who are assigned and work with us in the Political Military Bureau and to

serve as liaison among our agencies.

It is important to point out what the Watch List is and what the

Watch List is not.

The Watch List functions mainly to alert our licensing officers

and compliance specialists within DDTC about potential concerns

regarding a party to a Defense export license application. The wide

range of information and sources used in compiling the Watch List

reflects the statutory requirements of the Arms Export Control Act

and the wide latitude given the State Department in making the

decisions regarding the exports of munitions.

Consequently, while some entries clearly determine whether an

export may be approved—for example, if a party to a deal is

debarred or otherwise ineligible to export—other entries tend to be

of a more informational nature and are used in coming to decision

on making licensing applications.

Consequently, the presence of an entity on the Watch List will

prompt further scrutiny and review, but it doesn’t automatically

entail removal of the party or the denial of a license application.

Each license application submitted to DDTC is required by the

regulations to include the names of all the parties who are involved

in the proposed transaction. All of those parties, both foreign and

domestic, are checked against this Watch List. If there is a match,

the license application is immediately put on hold for a review by

a compliance specialist.

If the party in question is debarred by the Department for a conviction under the Arms Export Control Act or otherwise ineligible—

for example, if another U.S. Government agency has debarred them

from contracting with the U.S. Government—or if they are under

criminal indictment, they will be removed and the approved export

application or the license will be denied.

If the Watch List entry indicates concerns in the activities of a

particular party without rising to the level of removal or denial,

DDTC’s compliance and licensing officers will undertake a careful

review and may request additional information from the applicant.

Additional or clarifying information regarding the entity may also

be sought from other Government agencies.

If it appears after review the that original reasons for entering

the party on the Watch List have been resolved, the hold will be

released and the license will likely be approved without further

delay.

We find the Watch List to be an effective tool to facilitate coordination with other Government agencies that may have a concern

with the particular entity. For example, companies under criminal

investigation may be Watch Listed to make sure that investigative

agency, such as FBI or ICE, is alerted when a company applies for

an export application. Such Watch Listing can facilitate a criminal

69

investigation by ensuring communication and coordination among

Government agencies.

It is also worth noting that such coordination may confirm the

suspensions of investigators, but it is also true that such coordination may demonstrate that a particular entity, in fact, is acting

within the law, and helps ensure that investigative resources are

not wasted on law-abiding companies.

Thank you for your interest. I will be happy to answer any of

your questions about our Watch List.

Chairman WAXMAN. Thank you very much for your testimony.

Without objection, the questioning will commence with a 10-

minute round for the majority followed by a 10-minute round for

the minority. Either side may reserve any unused time of its 10-

minute block for use during or immediately following a 5-minute

round by a Member of that side, with this reserved time to be controlled by the chairman and the ranking member, respectively.

Without objection, that will be the order.

I am going to start off the questions, myself.

One of the questions we are trying to figure out at this hearing

is: How can a company like AEY get such an important contract

for $300 million to provide ammunition to the Afghanistan Security

Forces? Mr. Howell, in your written statement for today you explain AEY got the contract because of AEY’s strong record of past

performance. Here is what you said: ‘‘AEY had a history of satisfactory performance on similar contracts, showed increased revenue

growth, adequate capitalization, and was considered a low risk.’’ Do

you stand by that statement?

Mr. HOWELL. Yes, sir, I do.

Chairman WAXMAN. Well, we did what the Army apparently

never did. We looked back at past contracts to see what AEY’s past

performance under other contracts was really like. One contract

that AEY got was a contract with the Multi-National Security

Transition Command in Iraq to deliver protective helmets. A U.S.

official who examined AEY’s shipments wrote, ‘‘The helmets came

to Abu Graib by mistake. They were not very good. They had peeling paint, and a few appeared to have been damaged such as having been dropped. When I first saw them, I put them in the reject

category.’’

The same inspector also wrote this to Mr. Diveroli, the head of

AEY: ‘‘Some people 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. Several scenarios were being planned for you, none of them

pleasant.’’

Another official wrote, ‘‘Bottom line, the helmets are damaged

goods and we don’t want them.’’

General Phillips, does this sound like satisfactory performance to

you?

General PHILLIPS. Sir, I am going to let Mr. Parsons address that

question, but before I do that I would just like to state that when

the officer goes in to make an award on a contract they do a thorough review of past performance and they ask DCMA to assist in

that process, so——

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Chairman WAXMAN. Well, if you did a thorough performance and

someone came back with this kind of report of performance under

a previous contract, would you think that sounded like satisfactory

performance? Mr. Parsons, maybe you can answer this question.

Mr. PARSONS. No, I would not, sir. And, as I mentioned in my

opening remarks, we have found that, due to dollar value of many

of those contracts not being within the reporting threshold, a lot of

that information did not get reported. Again, the reason why we

are initiating a policy change in the Army to ensure that, regardless of dollar value, that type of information is sent forward.

I will say that——

Chairman WAXMAN. Well, I want an answer to this question and

I have limited time. Under another Defense Department contract

AEY failed to deliver 10,000 Beretta pistols under a contract for

$5.6 million. The contracting official who terminated that contract

said this about Mr. Diveroli: ‘‘I just don’t trust this guy. I couldn’t

take anything he said credibly.’’

The contracting official added: ‘‘All his reasons continued to build

and build, and then it just got to the point where it was the straw

and the camel’s back, and I said, ‘Look, no amount of consideration

is going to take care of the fact that you have been unable to deliver. You have not had one delivery order come in.’ ’’

Now, hearing that, Mr. Howell, would you think that indicated

sound past performance?

Mr. HOWELL. I would not, if I heard those things, say it was

sound past performance. But I would also question if those contracting officers, in fact, provided written input to the Excluded

Parties List or other reference areas that we could use, in fact, to

weigh our evaluation for adequate performance for our contractor.

Chairman WAXMAN. Well, under another contract with AEY,

with the U.S. Army Special Operations Command, AEY was supposed to provide the same type of ammunition that it later delivered to Afghanistan. The contracting officer who terminated that

contract said that AEY ‘‘failed to deliver acceptable goods, provided

no notice of an excusable delay,’’ and ‘‘provided inadequate assurance of future performance.’’ Does that sound like satisfactory performance, Mr. Howell?

Mr. HOWELL. Absolutely not.

Chairman WAXMAN. The committee also looked at AEY’s performance under contracts with other agencies. Under a contract

with the State Defense to provide tactical equipment for use in

Iraq, including optical sites and weapons adaptors, AEY repeatedly

ignored a contracting officer’s warnings. In fact, AEY delivered only

one item by the delivery date, and it was rejected as a nonconforming substitute.

When the contracting officer withdrew the order, this is what he

wrote to AEY: ‘‘You are hereby notified that your failure to deliver

the listed items has endangered the performance of the Department of State mission. Further, in subsequent correspondence your

promises of delivery have not been met. You are hereby informed

that the undelivered items are being withdrawn from subject order.

The DOS mission can no longer be delayed due to your inability to

produce the items as stated in subject order.’’

Mr. Parsons, does that sound like satisfactory performance?

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Mr. PARSONS. No, it does not, sir.

Chairman WAXMAN. The award of this contract to AEY despite

these numerous examples of contracts terminated for poor performance reveals a fundamental flaw. The system for vetting contractors appears to be broken. It is hard to imagine a less-qualified

contractor than AEY, and yet this company was rated excellent by

the Defense Department and it was awarded a contract worth $300

million. That is quite amazing to me.

I am going to reserve the balance of my time and I am going to

yield to Congresswoman Norton her opportunity to ask questions.

Ms. NORTON. Thank you, Mr. Chairman.

Let me go first to Mr. Mull. You are aware, of course, that the

Arms Export Control Act requires us to make sure that brokering,

arms brokering overseas, is done in light of the national security

interests of the United States. I want to look at the Watch List

that you discussed in your testimony.

When there is an application for someone to be an arms broker,

the Government is supposed to check all the parties on the Watch

List specifically to see if these are arms traffickers. That is correct?

Mr. MULL. Yes. We compare every application for an arms

brokering license against the Watch List.

Ms. NORTON. So this Watch List is very important, and we have

learned—and I want to verify this—that everyone involved in the

AEY contract was on the Watch List. Let’s go first to the buyer,

the president, Efraim Diveroli, flagged in April 2006 because of

suspected illegal arms trafficking; is that not correct?

Mr. MULL. Yes, ma’am, that is correct.

Ms. NORTON. Although, Mr. Chairman, I would like to put their

words on the record of the Watch List that, although Mr. Diveroli

was only 21 years old, he has brokered and completed several

multi-million-dollar deals involving fully semi-automatic rifles, and

here are the operative words—‘‘future license applications involving

Diveroli and/or his company should be very carefully scrutinized.’’

Mr. Mull, that entry was placed in 2006; is that not accurate?

Mr. MULL. Yes, ma’am. And if I might elaborate, we actually first

put the company AEY on our Watch List in January 2005.

Ms. NORTON. I have limited time. I just want to make sure that

my questions are predicated on the facts. They are on the Watch

List.

Now, the middleman, Mr. Mull, was Heinrich Thomet. Now, he

was also placed on the Watch List in 2006 before this contract was

awarded; is that not correct?

Mr. MULL. Yes, ma’am, that is correct.

Ms. NORTON. Now, the source of the ammunition was Mr. Pinari.

He is the head of Albania’s military export/import company. He

was first listed, according to my information, in 2005; is that not

true?

Mr. MULL. Yes, ma’am, that is correct.

Ms. NORTON. Now, we note that the entries of Mr. Thomet and

Mr. Pinari came from the CIA and the DIA, and we understand

that their information is classified, but the fact that they were on

the list in 2005 and 2006 is not classified; is that correct?

Mr. MULL. That is correct.

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Ms. NORTON. General Phillips, let me turn to you. The head of

the State Department’s Directorate of Defense Trade Controls

[DDTC] told us that the AEY had ‘‘a perfect trifecta,’’ and yet, of

course, they were awarded by the Army a $300 million contract.

How do you explain awarding the contract to somebody who is on

a Watch List that is not classified, sir?

General PHILLIPS. Ma’am, the contracting officers that execute

the contracts are not required to go and look at the Watch List. I

believe that to be true, and I will ask Mr. Parsons to just elaborate

on that comment, if he would.

Ms. NORTON. Wait just a second. Your testimony here is that you

didn’t check the Watch List because you were not required to

check—the contracting officer was not required to check the Watch

List. I want to ask you, in light of what we now know, we know

the contracting officer did not. And the last thing I am trying to

do is to blame it on the contracting officer.

The only reason we are having hearings like this is to see what

we can do to improve in the future, so I am not trying to say why

in the world did you do it. In light of what you now know, would

it not seem in the best interest of the United States to either, when

you are involved in sales which require a license, to either check

the Watch List or, if there is no requirement to have your own internal procedures so that the contracting officer would know to

check the Watch List? Or is your testimony that we didn’t have the

procedures, we didn’t have to do it, and we are not going to do it

in the future?

Mr. Parsons.

Mr. PARSONS. Ma’am, I don’t disagree. What I am not sure of is

whether that Watch List is accessible to people outside of the

DDTC. I can tell you that there is nothing in the regulation——

Ms. NORTON. Mr. Mull, was that Watch List which is not classified, if it had been asked for by the DOD, would they have been

allowed to look at the Watch List?

Mr. MULL. We often get requests from other Government agencies and we evaluate it. We have to make sure that we don’t release any classified information, so——

Ms. NORTON. This was not classified.

Mr. MULL [continuing]. We would screen in response to a Government agency. We would consider the request and provide what

we could.

Ms. NORTON. Thank you. So this could have been released. It

was not classified.

Mr. Chairman, I would like to ask if any procedures have, in

fact, been set up to check the Watch List, before I sign off. Are

there any procedures now within the DOD to check the Watch List

now that, of course, you know that you have access to that information?

Mr. PARSONS. Ma’am, no, there is not to my knowledge, but we

will pursue that with the Department of State. Our understanding

was that Watch List fed the Excluded Parties List, which is what

is required by the contracting officer, but we will engage with the

State Department to see if there is a way that we can add that to

our procedures.

73

Chairman WAXMAN. Thank you, Ms. Norton. Your time has expired.

I just want to ask a quick question of Mr. Parsons. One of the

sources for the classified information was the Defense Intelligence

Agency. Do you know now what the entry was?

Mr. PARSONS. Can you repeat the question, sir?

Chairman WAXMAN. One of the sources for the classification was

the Defense Intelligence Agency. Do you know now what the deletion was?

Mr. PARSONS. With the DIA, no, I do not.

Chairman WAXMAN. You do not. OK.

We have another vote on the House floor. we are going to recess

for around 10 minutes in order for Members to vote and come back.

We stand in recess.

[Recess.]

Chairman WAXMAN. The committee will come back to order.

I would like to now recognize Mr. Davis for 10 minutes.

Mr. DAVIS OF VIRGINIA. Thank you.

Mr. Howell, let me ask you, what does it take to be a non-responsible bidder?

Mr. HOWELL. Yes, sir.

Mr. DAVIS OF VIRGINIA. I mean, in retrospect you would say

these guys are probably non-responsible, wouldn’t you, for a $200

million bid?

Mr. HOWELL. I would. Given the facts that we know today, I

would tell you that they were a non-responsive contractor. They did

not comply with the terms and specifications of the contract, which

is a primary metric that we use. They didn’t deliver on time, didn’t

deliver in accordance with the specifications in both the basic contract or the modifications.

Mr. DAVIS OF VIRGINIA. Let me just go through another company

and ask if you think it is responsible. This is a company that in

2007 paid a $1.1 million settlement for over-billing for aircraft

parts, and in 2006 a $30 million payment to settle claims that 100

neighbors in the Santa Susanna Field Nuclear Research Facility

were sickened by decades of radioactive and toxic contamination.

This was supposed to be confidential, but one of the plaintiffs divulged the terms to local media. In 2004, a $615 million settlement

to resolve the Darlene Druin scandal and other pending investigations, if you remember that.

In 2003 an $18 million settlement for violations of the Arms Export Control Act and the International Trafficking in Arms Regulations. In 2003 a $6 million settlement for violations of the Arms

Export Control Act involving transferred data to China. In 2003

they paid a $4 million fine for violations to the Arms Export Control Act and the International Trafficking Arms control. That is a

different violation. In 2003 a $2.5 million settlement for alleged defective pricing. In 2003 a $490,000 settlement for a qui-tam action

for false claims. They had had business units suspended from receiving new Federal contracts for an 18-month period from 2003 to

2005. Criminal investigations.

But this is the Boeing Corp., but they are responsible under the

criteria because they can still deliver; is that how you view it?

74

Mr. HOWELL. Well, sir, the DCMA’s ability to assess prior performance and potential responsiveness is directly limited to the

data that we have and can review.

Mr. DAVIS OF VIRGINIA. Yes. That is all public data here. And

they continue to receive. I guess what I am saying is it is a fairly

low bar for companies. Really, debarment or not finding people responsible is basically a fairly low bar, isn’t it?

Mr. HOWELL. Yes, sir.

Mr. DAVIS OF VIRGINIA. What did DCMA’s review entail? Based

on their review, a complete award was recommended. AEY was

classified as a low financial risk at the time, and the firm was

deemed well-managed, efficient, and experienced. Can you find

where that information came from?

Mr. HOWELL. Yes, sir. We use a form 1403. That is what the procurement contracting officer submits for a pre-award survey. In

that, in section 19 and 20 they have the ability to identify both

major and contributing factors that they would like for the agency

to examine for us to make a determination. The contracting officer,

in accordance with the contract, the type of contract, meaning the

priority, non-standard ammunition, previously manufactured,

OCONUS-to-OCONUS delivery, requested that we perform a preaward on the financial, transportation, and accountability aspects

of this impending contract.

We did that for financial and transportation and the Defense

Contracting Auditing Agency conducted the accountability piece of

it.

Mr. DAVIS OF VIRGINIA. Were they aware that the CEO of this

company was in his early 20’s?

Mr. HOWELL. I cannot answer that question at this point, sir.

Mr. DAVIS OF VIRGINIA. Let me ask you, Mr. Parsons, Mr.

Diveroli had some colorful off-the-field incidents, for lack of a better

term. What effect do domestic incidents by contractors’ presidents

have on the awarding of a Government contract?

Mr. PARSONS. Sir, I have a hearing difficulty, so I just ask that

you repeat the question.

Mr. DAVIS OF VIRGINIA. What effect to domestic incidents by a

contractor’s president have on the awarding of a Government contract? Any?

Mr. PARSONS. As far as his status, himself?

Mr. DAVIS OF VIRGINIA. Yes, for his off-the-field incidents.

Mr. PARSONS. They focus on the company, not on the people who

own the company, unless they are on the Excluded Parties List.

Mr. DAVIS OF VIRGINIA. A 22-year-old CEO, I don’t think he had

a college degree—that doesn’t send off any bells?

Mr. PARSONS. Sir, as part of the solicitation process, we don’t ask

for or even know what the age of the owners of the company are.

Mr. DAVIS OF VIRGINIA. Nobody did in the investigation of this

or had any idea what was behind the paperwork?

Mr. PARSONS. Not that I know of.

Mr. DAVIS OF VIRGINIA. What if a contracting officer came across

a news story where the president was arrested for domestic violence related charges? That would not be something that would

necessarily ring any bells, because you look at the total company

and not at the CEO?

75

Mr. PARSONS. Sir, if that was information that was available to

the contracting officer, I am sure that would have caused some

questions on their part. But, again, we are not aware of any of that

information being available to the contracting officer.

Mr. DAVIS OF VIRGINIA. Could they have taken his age into account in deciding whether they could have been selected for an

award of this magnitude?

Mr. PARSONS. Not his age. No. That is not one of the things that

we use as a discriminator in awarding——

Mr. DAVIS OF VIRGINIA. How about experience?

Mr. PARSONS. Excuse me?

Mr. DAVIS OF VIRGINIA. Experience is one, though, isn’t it?

Mr. PARSONS. Appearance?

Mr. DAVIS OF VIRGINIA. Experience.

Mr. PARSONS. Experience, yes.

Mr. DAVIS OF VIRGINIA. Experience is clearly a criteria, and at

22 the fact of the matter is he didn’t have a lot of experience.

Mr. PARSONS. The information available to the contracting officer

indicated that the company had relevant recent experience, that

they had started in 1999, had awarded contracts by the Department of Defense starting in 2004, so the contracting officer, again,

based on the information that was available to him, felt that the

company had experience in providing these types of goods and services.

Mr. DAVIS OF VIRGINIA. Obviously they were wrong. You think in

retrospect they were wrong, don’t you?

Mr. PARSONS. They were wrong?

Mr. DAVIS OF VIRGINIA. Yes.

Mr. PARSONS. The contracting officer relied, again, on—if that

was supplied on a contract that AEY had for——

Mr. DAVIS OF VIRGINIA. Do you think he made a good decision

or a bad decision?

Mr. PARSONS. Based on the information that she had, I think she

had——

Mr. DAVIS OF VIRGINIA. I am asking you in retrospect, now that

we know all the facts.

Mr. PARSONS. In retrospect, knowing what we know now, it was

not a good decision.

Mr. DAVIS OF VIRGINIA. That is all I am trying to get after.

I will reserve the balance of my time for this point.

Chairman WAXMAN. The gentleman has 3 minutes. He is reserving that.

I want to recognize Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman. And thank you very much

for holding this hearing.

I am going to bifurcate my questions. I think the ranking member has done a pretty good job, a very good job of sort of asking

the question of, in retrospect does this award make sense. No, it

doesn’t.

General Phillips, if I can ask you a question, knowing what you

know from the record, what tools should have been used to prevent

this from happening?

General PHILLIPS. Sir, this is non-standard ammunition that we

are buying. It is essentially foreign-made ammunition, Soviet Bloc

76

countries, former Soviet Bloc. Some things that we have to do is

to make sure that we improve our specifications, the way that we

transport this ammunition, our packaging, standards, those kinds

of things. And the team that I have established of subject matter

experts have taken that on in a very big way and we have developed the standards and the specifications, and we are going to go

off and improve those for future buys that we have for non-standard ammunition. We are going to do everything possible to ensure

that this doesn’t happen again, sir.

Mr. ISSA. I don’t want to disagree with you. Your service in the

Army is much longer than mine. But isn’t this standard ammunition, just not our standard?

General PHILLIPS. Sir, for our standard ammunition——

Mr. ISSA. No, no. Please answer the question because I asked it

that way for a reason. You know, there are three camps of ammunition in the world. There is the NATO standard, the old Soviet

Tricomm standards, and then there is, like, all others. This is not

all others, is it? This is basically the old anti-NATO communist

block ammunition, AK–47s, a 7.62 that doesn’t use the same casing

as ours, and so on. It is what we dealt with all the way back in

Vietnam; isn’t that true?

General PHILLIPS. Correct, sir.

Mr. ISSA. Let me ask you a question, speaking of Vietnam. I was

in Afghanistan almost immediately after we had secured it, and I

was there with now Chairman Reyes and former chairman of

Armed Services, Duncan Hunter, and we were shown by wellmeaning, I am sure, Army officers how they were going to train the

Afghans, the guys who, to a certain extent, had kicked the Soviets’

ass with odds and ends weapons.

I know we are not supposed to use that word indiscriminately,

but I noticed in the staff stuff I noticed there were some other

words like shit ammo, so I figured, you know, kick the Soviets’ ass

would work very well. So I will limit myself to those two parts of

George Carlin’s repertoire for today in honor of George’s passing.

But we were there with Duncan Hunter, and he looked at this

stuff, and it was junk, and he asked, are we going to train with

this? Oh, no, this stuff is terrible. This is what was turned in. We

are paying to have this turned in by Afghans and none of it is useable. He said, well, when are you going to start training these

guys? Well, we are looking into procuring weapons.

I asked that day what I am going to ask you today, although I

asked it with a shorter list. Isn’t it true that Bulgaria, the Czech

Republic, Estonia, former East Germany, Hungary, Lithuania, Latvia, Poland, Romania, Slovenia, and Slovakia all use this standard

historically, have large stockpiles, were known to have large stockpiles, and virtually all of these people, except for Germany, I guess,

were part of the Coalition of the willing that went into Afghanistan; isn’t that true?

General PHILLIPS. Sir, I am not sure. I believe that to be true.

Mr. ISSA. I said I would bifurcate this thing, but you led me right

into the other part. Wasn’t this an unnecessary contract, because

the truth is if you are going to buy standard ammunition and you

have colleagues, allies, friends, people you work with for whom this

is still a standard, they know about it.

77

General, let me ask you a question: why are you wasting Federal

taxpayers’ time writing standards for tricomm rounds when, in

fact, all those countries I named have experts who not only have

the ammunition and the weapons still in their stockpiles in many

cases, but have people who have the expertise, and they are all

NATO allies? Why is it in a NATO war in Afghanistan we didn’t

use our NATO allies’ expertise not only in supply but also in inspection? And why aren’t you doing it today as part of the fix?

General PHILLIPS. Sir, I would simply say that we are required

by statute and by Federal regulation that when we enter into

agreements with our foreign allies like Afghanistan we use specific

policies and procedures that are defined by, in the case of the

Army, the U.S. Army Security Systems Command.

Mr. ISSA. I am running out of time, so let me close with one question that is half comment/half question. You entered into agreements. You didn’t go there to do it, but you entered into agreements with Afghanistan that essentially locked out the ability for

our NATO allies who had large stockpiles from being the suppliers,

either for reduced cost or in-kind.

Now let’s go back again. If I take a trip to Afghanistan this week

and I talk to President Karzai and I ask him, would you be willing

to have this product delivered to you from any source that could

deliver you high-quality product that your troops could use, do you

think he is going to tell me, no, no, we have an agreement, we have

a certain standard? Or do you believe that, in fact, the U.S. military in a macro way—and procurement is just the tail end of the

macro mistake—made a mistake in Afghanistan that they continue

to compound because we made a decision to use the weapons they

were used to, and then we didn’t work with the people who had the

expertise?

General PHILLIPS. Sir, I agree with you that we have made mistakes and we need to capture those lessons learned and apply

them.

The one thing I would like to share with you is that we are doing

everything possible to ensure that our very important ally, Afghanistan, gets the munitions that they need, and that is my job, to

make sure we do that now and in the future.

Mr. ISSA. Thank you, Mr. Chairman. I think we have made our

point.

Chairman WAXMAN. Thank you, Mr. Issa.

Mr. Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

General, I just want to ask you a few questions. One of the

things, as I listened to the testimony and reviewed all the documents, there are four things that seem to be going on here: serious

communication problems, some serious incompetence, phenomenal

carelessness, and a culture of mediocrity.

General, we reviewed documentation from the Defense Department involving quite a few previous contracts your agency had with

this company, AEY. What struck me was the number of times AEY

failed to perform and then came up with outlandish excuses for

why it didn’t fulfill the contract.

Let me give you a few examples.

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In 2005 AEY was awarded a contract to provide munitions to the

Iraq Security Forces, including 10,000 Beretta pistols. Mr. Diveroli

was only 19 years old at the time. We interviewed your contracting

officer for this contract, and he told us that when Diveroli failed

to deliver the weapons, he just started making up wild excuses.

This is your contracting officer, now. This is what he said: ‘‘Diveroli

said the German government was interfering in the delivery of

these Italian-made pistols. He said that the transport planes

couldn’t fly because of bad weather. He even said that there was

a fiery plane crash that destroyed the documents necessary to secure an export license needed to ship the goods.’’

But that wasn’t all. Mr. Diveroli said at one point that he failed

to deliver the weapons because a hurricane hit Miami, FL, where

AEY was based. He told a contracting officer that they had no

water and that his life was just terrible. Well, as it turns out this

wasn’t true.

In an interview with the committee staff, this is what your contracting officer told us: ‘‘We could tell there was no hurricane in

Miami. It wasn’t like we didn’t have the internet in the Green

Zone.’’

General, are you concerned that Mr. Diveroli would make up

such excuses like this on important Government contracts, major

contracts?

General PHILLIPS. Sir, I appreciate your insight. I have not heard

those allegations that you just went over in terms of the nine millimeter contract and others, but certainly it raises issue as to Mr.

Diveroli, himself. In hindsight, if we had had knowledge, Army contracting, the contracting officer for the contract we are discussing,

had knowledge of that and those instances in the past performance,

that would have weighed in the decision that——

Mr. CUMMINGS. That is why I started off my discussion by saying

one of four things, of four, are happening here. There are some serious communication problems; wouldn’t you agree?

General PHILLIPS. Sir, I think when Mr. Parsons mentioned up

front that in past performance and sharing that information, that

we have to improve the way we do that. I would agree, sir.

Mr. CUMMINGS. So you did not know about this information that I just cited when this $300 million contract was awarded? You

didn’t know?

General PHILLIPS. Sir, I did not.

Mr. CUMMINGS. Mr. Parsons, did you want to say something?

Mr. PARSONS. Sir, again, the information that the contracting officer had was limited from the standpoint of past performance. She

did get a questionnaire on past performance answered by the Joint

Contracting Command in Iraq and Afghanistan. Many of those

issues that you just identified were not highlighted in that past

performance review.

Mr. CUMMINGS. It is interesting that when Mr. Diveroli said a

hurricane hit Florida and made his life terrible he was justifying

his failure to perform on one of three contracts that your team was

supposed to be reviewing to assess his past performance, and yet

you didn’t even talk to the primary contracting officer on the contract; is that right?

Mr. PARSONS. Sir, that is information I am not aware of.

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Mr. CUMMINGS. Well, we did talk to him, and this is what he

said. He told us, ‘‘I couldn’t take anything Diveroli said credibly.’’

He concluded that Diveroli was lying to him. That is his statement.

And this wasn’t the only person telling us this. Another contracting

official became suspicious when AEY sent helmets accompanied by

a cryptic Chinese document supposedly showing they were safe.

This official told us, ‘‘I just don’t trust the guy.’’ And there are

many more examples like this. It just seems like if you didn’t know

this, then we have a fundamental problem with the way we do

business. The entire system must be broken.

I heard what you said, General, about the corrections that you

plan to make, but I don’t know that those corrections deal with the

four things that I talked about—the communications problems, incompetence, carelessness, and a culture of mediocrity.

I am hoping that the things you said will correct this, but I am

going to tell you I don’t have a lot of faith.

Chairman WAXMAN. Thank you, Mr. Cummings.

Mr. Lynch.

Mr. LYNCH. Thank you, Mr. Chairman.

Mr. Chairman, I want to thank you for holding this hearing, and

I want to thank the ranking member for his work, as well. This is

very important.

You know, there has been some reluctance, I think, of the panel,

and I appreciate your coming in here and testifying, but there has

been a reluctance on the panel to criticize what happened here. I

just want to go on the record to say that all of us have spent a lot

of time in Iraq and Afghanistan and we have seen the excellence

with which our military has performed. The events here that we

are speaking of today are a disgrace. They do not meet the standards of those men and women in uniform that we have seen repeatedly in our visits to Iraq and Afghanistan. That is the great sin

here. This does not meet acceptable standards, not even close.

I am not hearing that from the panelists. I am hearing hedging,

I am hearing some defenses about information not being available.

This kid was 19 years old, 19 years old. He gets a $300 million contract, taxpayers’ money from the United States of America. That is

a disgrace. I don’t hear that from the panelists. I am hearing defense of different individuals.

Has anybody been fired for this? Can I ask the panel, anybody

get their walking papers for what has happened here? Has anybody

been fired?

Mr. PARSONS. No, sir. No one has been for instance fired.

Mr. LYNCH. I am sorry?

Mr. PARSONS. No one has been fired.

Mr. LYNCH. Well, that is a shame. That is a shame because in

the private sector somebody would be without a job because of this.

I have to ask you, as well, I know the two individuals were indicted, but it looks like, based on the information here, because the

standards are so lax, it doesn’t look like they broke the law. It

looks like these guys could walk, even though they are indicted, because there are no standards for age of ammunition, and they

knew it, so I am very concerned about that.

I hear and I read that the contracts have been canceled, terminated. Now, I was in Iraq at the Taji Weapons Depo a few weeks

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ago and I asked the commanding general there about the AEY contract. He said, Yes, they are shipping in to us. So myself and Mr.

Platts from Pennsylvania actually asked the general to give us a

detail, and we went around and started opening up some crates.

They were all AEY contract. It looks like they are still performing

in this contract. That doesn’t jive with the testimony and the documents that I have before me.

Can you tell me, is AEY still performing on some contracts in

Iraq?

Mr. PARSONS. Sir, I am not aware. I will have to get back to you

on whether they are still performing on a contract in Iraq.

Mr. LYNCH. That is not good enough.

Mr. PARSONS. I can tell you on this——

Mr. LYNCH. That is not good enough, sir.

Mr. PARSONS [continuing]. Ammunition contract they are not.

Mr. LYNCH. I will get back to you—that is not good enough. Considering what these kids did to the American taxpayer, there

should be no question in anyone’s mind that these contracts have

been terminated. That just sends the wrong signal to these contractors that someone could do this and still get paid and still perform

under other related contracts. I mean, this individual, Efraim

Diveroli, had seven contracts that were unsatisfactory previous to

this.

What bothers me is that a lot of this information was laid out

there. The sourcing committee on this most recent contract declared that he was unsatisfactory. Then the defense contracting officer changed that assessment, changed it from unsatisfactory to

good and allowed the contract to be granted. So I would be asking

if there was an investigation regarding that individual who turned

the recommendation around after we had all the information before

us.

The fact that I think, based on what I saw with my eyes, AEY

is still performing contracts for the U.S. Government. That is based

on my own assessment in person in Taji and Iraq with Mr. Platts

and some others.

Also, there is another individual here, Mr. Merrill. It appears, at

least from the documents in front of me, that you asked for verification and assessments from individuals about the way these

contractors performed. One of the things that gets me is that in assessing how a contractor performed you asked the vice president of

AEY how are you doing. He has a major financial interest in this

company, and he filled out the form and said we are doing great.

You asked the vice president of the company to do an assessment

of his company. How do you think that is going to come back? I

mean, that is just a systemic gap here. I wish we weren’t at this

point.

I think we have to scrap this whole system and come up with

something that is more worthy of our men and women in uniform,

because this has taken resources away from them, it is basically

stealing taxpayer dollars, and it is putting them in jeopardy.

I am beside myself. I am absolutely beside myself about this

whole deal. All the money and time we are spending here, this is

a mess. It is a mess. It is a disgrace.

Chairman WAXMAN. The gentleman’s time has expired.

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Mr. LYNCH. I will yield back. Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you.

Mr. DAVIS OF VIRGINIA. Mr. Chairman, let me claim my 3 minutes, if I could, really quick.

Chairman WAXMAN. Yes, sir.

Mr. DAVIS OF VIRGINIA. Could I just ask why this was a requirements contract as opposed to a multiple-award IDIQ or something

like that? Why was this vehicle chosen?

Mr. PARSONS. Congressman Davis, it is my understanding, after

talking with the contracting officials on this, that when they were

discussing the requirements for the Afghanistan ammunition they

could not get the customer to specify a minimum amount of ammunition that they would need to place a minimum order against an

IDIQ contract. So instead they elected to use a requirements contract, which doesn’t require us to necessarily award a minimum requirement.

Mr. DAVIS OF VIRGINIA. OK. Now, this was a small business that

got the contract at the end of the day. Who checked to see if their

certification was accurate? Is this the contracting agencies? Is it

the SBA? Or is it a competitors’ complaint? How does that work?

Mr. PARSONS. Sir, the contractors certified in their certification

representations that they were a small business. The contracting

officer verified that they were a small business and coded that in

the Federal procurement data system as a small business.

Mr. DAVIS OF VIRGINIA. That could have been protested if somebody wanted to protest, but it was not in this case, right?

Mr. PARSONS. The small business size was not a factor in deciding. This contract was open to large businesses and small businesses.

Mr. DAVIS OF VIRGINIA. Right. But if a small business competes

in this, don’t they have an advantage?

Mr. PARSONS. What was that last part again?

Mr. DAVIS OF VIRGINIA. If a small business competes, it isn’t

there some advantage to that?

Mr. PARSONS. Correct.

Mr. DAVIS OF VIRGINIA. What is the difference between a small

business and a small disadvantaged business?

Mr. PARSONS. Sir, the small disadvantaged business are those

companies that meet the qualifications of the Small Business Act

for being identified as disadvantaged for either minority status or

for other aspects of it. I don’t have a complete list off the top of

my head on what those are, but there is definitely something that

has the difference between the small business and small disadvantaged business.

Mr. DAVIS OF VIRGINIA. I know what it is. What is your understanding of the certificate of competency process and the role of the

SBA?

Mr. PARSONS. Sir, my understanding is that if there is a question

on the part of the contracting officer regarding the responsibility of

the small business, they go to the Small Business Administration

and ask for a certificate of competency for that small business.

Mr. DAVIS OF VIRGINIA. Now, when a contracting officer has to

interface with officials from SBA, what are the procedures? Do they

just ask for it and the SBA then will do appropriate checks?

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Mr. PARSONS. Yes. They correspond directly with the Small Business Administration and give them all the particulars regarding

the issue and wait for the SBA to make an assessment.

Mr. DAVIS OF VIRGINIA. So how much information does the contracting officer share, and how knowledgeable does the SBA have

to be in understanding the nuances of a specific acquisition?

Mr. PARSONS. I am not certain, sir.

Mr. DAVIS OF VIRGINIA. OK. How frequently does the SBA effectively reverse a contracting officer’s responsibility determination

during the processing? Do you ever see that?

Mr. PARSONS. Again, sir, I do not know.

Mr. DAVIS OF VIRGINIA. Have you ever seen it?

Mr. PARSONS. I have never seen the SBA reverse one, no.

Mr. DAVIS OF VIRGINIA. What challenges does your agency have

with the SBA certificate of competency process, particularly in an

acquisition to be awarded on the basis of a low price, technically

acceptable offer?

Mr. PARSONS. I am not certain.

Mr. DAVIS OF VIRGINIA. You don’t feel you have any challenges,

or do you have challenges with the SBA certificate of competency

process, particularly in an acquisition that is awarded on the basis

of the low price, technically acceptable offer? Any problems?

Mr. PARSONS. Sir, again, for this particular acquisition I am not

aware of any issues regarding the competency, the certificate of

competency with SBA. There wasn’t any engagement at all with

the SBA in this acquisition process.

Mr. DAVIS OF VIRGINIA. But they weren’t competent at the end

of the day?

Mr. PARSONS. Correct.

Mr. DAVIS OF VIRGINIA. Thank you.

Chairman WAXMAN. Thank you, Mr. Davis.

Ms. Watson.

Ms. WATSON. I want to thank the chairman very much for having

this hearing today, and I thank the panelists for coming forth.

As we look into the background, we find that in 2006—it was December—Mr. Diveroli and Mr. Packouz allegedly beat a valet parking attendant, resulting in charges of battery and possession of a

stolen or forged document against Mr. Diveroli and a battery

charge against Mr. Packouz. In January 2007 AEY was awarded a $298 million, 2-year contract by the Defense Department. The president of AEY, Efraim

Diveroli, was 21 years old at the time that the contract was awarded, and the vice president, David Packouz, was 25 years old.

I just heard one of the witnesses say that we don’t look at age.

Well, suppose they were under-age, 16 and 17? Would you not want

to be aware that they were not adults?

And on Friday both of them and three other AEY officials were

indicted on charges that they concealed the Chinese origins of

AEY’s ammunition shipments from Albania to Afghanistan.

If the investigation revealed that there was a contract to buy

Chinese goods, which would be illegal in this regard, how is it that

the Department of Defense and the contractors did not know the

background that I just read? Somebody is not doing the work that

they should. They are not being accurate.

83

I want to ask Mr. Mull, Were you aware of the contract with the

Chinese for the goods?

Mr. MULL. The contract with the Chinese?

Ms. WATSON. Mr. Jin had notified the factory before and after

the production of 100 percent inspection of the vests to make sure

that there were no Chinese markings anywhere on the vests or on

the box, and I understand there were markings there. It is kind of

like, as I understand, a bait and switch thing that AEY did, and

there is a history of this kind of thing. I understand that there as

some, I guess, relationships and some purchase long before this

contract. Were you aware that they were buying these goods from

the Chinese?

Mr. MULL. No, ma’am, I was not. But, because that was not part

of an export of weapons from the United States and munitions from

the United States, which is what we are solely responsible for regulating, we wouldn’t necessarily have been aware of that. But, to answer your question, no, I was not aware in this particular case.

Ms. WATSON. Well, the documents that were obtained by the

committee seemed to show that AEY concealed these Chinese origins by claiming that the vests were made in South Korea and

were only shipped through China. This is how the AEY official described this plan: ‘‘Harry, I just spoke to Efraim, and here is how

we could resolve this situation. Please advise.’’

‘‘The commercial invoice would show that the shipper is a South

Korean company, and we have the letterhead, and that you and

your contact in C’’—meaning China—‘‘is just the export company.’’

Mr. Mull, again, would concealing the true Chinese origins of

goods under a State Department contract be a violation of law?

Mr. MULL. Well, if someone was exporting Chinese sourced munitions, we would not give a license to someone to export munitions

from the United States from China overseas; however, again, in the

State Department we do not regulate foreigners dealing with one

another overseas.

Ms. WATSON. According to the indictments of last week, the Justice Department is examining the Chinese origin of the ammunition AEY provided from Albania to Afghanistan under the Defense

Department’s $300 million contract, but the committee now has

evidence that AEY may have concealed the Chinese origins of other

goods, including the bullet-proof vests.

Mr. Chairman, I suggest that we share with the Justice Department the information we obtained to make sure that they are

aware of it. I am just appalled that we don’t have sharper people,

that we are not doing better background checks. To have a company like this get away with it and use $300 million of taxpayers’

money is abominable.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Ms. Watson.

Mr. Platts.

Mr. PLATTS. Thank you, Mr. Chairman. I appreciate your holding

this hearing.

I want to associate myself with comments from previous speakers, especially Mr. Lynch. As he referenced, we traveled together

in April and had some conversations regarding AEY and their supply.

84

I want to followup on the last speaker, Mr. Mull, on the issue

of the Department of State’s role here. It is my understanding that

Department of State does the licensing for any firm that wants to

engage in brokering sale of arms, munitions overseas. As part of

that process, there is a Watch List maintained from intelligence officials, law enforcement, other entities, developed. It is also my understanding that one or more individuals or entities associated

with the AEY contract were on that Watch List.

I guess my first question is: given that, how did AEY get a license? Was the information that led to them being on that Watch

List investigated before a license was issued?

Mr. MULL. Yes. Of the 17 licenses that the State Department

issued to AEY, we consulted with law enforcement agencies that

were involved with and looking at the activities of the company,

and we checked with them to make sure that issuing this license

would not obstruct any of their investigations or that it would otherwise break the law.

We are required by the Arms Export Control Act to make decisions on these applications for export licenses according to certain

criteria laid out in the Arms Export Control Act. In the licenses

that we did approve, there was nothing illegal that they were proposing, and we confirmed that in consultation with the appropriate

law enforcement agencies.

Mr. PLATTS. Maybe I am misunderstanding the intent of that

Watch List. It is not that they are proposing anything illegal, but

the fact that they are under investigation seems some bells would

go off that maybe we need to wait until those investigations are

completed before we issue new licenses. Is that not part of the consideration of whether a license is issued or not?

Mr. MULL. If the company is on the Watch List, yes, a bell will

go off and automatically it will attract more intensive attention

from our licensing specialists and our compliance specialists to see

if there is anything about that particular case that would be a violation of U.S. law. In those cases where we issued the licenses, we

made the determination in those discrete cases that there was

nothing illegal.

Mr. PLATTS. I guess I would add to colleagues who expressed

somewhat disbelief that, given the circumstances here, a company

with such a small record of engagement in this area was on a

Watch List, the age of the company executives combined, that then

we go ahead and issue a license that leads to a $300 million contract. So I guess my understanding of what scrutiny would result

from that Watch List is more perfunctory. As long as there is no

illegal conduct identified, the fact that they are under investigation

isn’t going to cause a license to be withheld. It sounds like it has

to be something identified, yes, they are proposing something illegal or yes, they have done something illegal, not there are lots of

questions here about whether they are worthy of this license.

Mr. MULL. Well, sir, we did not issue a license for the $300

million——

Mr. PLATTS. That is a separate contract.

Mr. MULL. Right.

Mr. PLATTS. But you issued a license to allow them to engage in

the activity that led to them being able to get contracts.

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Mr. MULL. No. These were separate contracts where they sought

to export U.S.-provided supplied weapons to overseas.

Mr. PLATTS. Right.

Mr. MULL. And we carefully vetted to make sure that the things

they were selling overseas was not a violation of law.

Mr. PLATTS. OK. What sharing of information from your Watch

List goes to DOD when they are looking at issuing contracts such

as this? What information that you had that led to them being on

a Watch List is shared with DOD?

Mr. MULL. Because so much of what we have on the Watch List

comes from intelligence agencies and other classified sources, we

cannot freely share it. But what we would do——

Mr. PLATTS. Even with DOD?

Mr. MULL. That is right, because we have to respect the originators of the classified information. The originator ultimately determines who can see it. So what we do gladly—and Mr. Parsons and

I were talking about this during the break—that if there were an

entity or a person that any part of the DOD was looking at for consideration for a contract, if they provided us with the name or the

person we would be happy to run that name against our List. If

we saw a hit, we would then consult with the originator of the information, say, Hey can we share this with the Defense Department?

Mr. PLATTS. So that is something you are discussing today, but

as of today the information that leads to the Department of State

to be concerned about individuals or entities to put them on a

Watch List, DOD today has no access to that information?

Mr. MULL. We receive on multiple occasions from many different

Government agencies who are aware of the Watch List, they contact us and ask us to check, and so we have done that in the past.

Mr. PLATTS. But there is no standard protocol that if you put

somebody dealing with the sale or brokering of ammunition or

weapons on a Watch List, that there is no automatic sharing with

DOD that buys a lot of ammunition and weapons, that there is not

an automatic sharing, hey, just so you know, this entity or this individual has been put on our Watch List, so you may want to take

a closer look if you are going to purchase, including a $300 million

contract? That doesn’t happen today?

Mr. MULL. No, sir. We do not push out the information, but if

we are contacted we——

Mr. PLATTS. I think that is one of the problems, that one branch

of our Government has information that raises some concerns is

not automatically sharing it with another entity within our Government that is engaged in the purchase of the underlying product,

ammunition and arms. I appreciate that dialog is beginning on how

to strengthen that, and I think that is what we are after in this

oversight hearing. How do we make sure this doesn’t happen again.

Mr. MULL. Yes. Sir, if I might, one of the concerns that we have,

we have close to 80,000 entities on this List, and much of the information is controlled, and so we wouldn’t know. Much of it comes

from other classified controlled sources. We would need the originator of the information’s permission to push that out, and so it

would be difficult on a list that long——

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Mr. PLATTS. My time is up. Given the level of classified clearance

in the Department of Defense equal to anyone at Department of

State, we should be able to find a way to share that information

in a seamless fashion.

I thank each of your for your testimony, and also for your service

to our country.

Thank you, Mr. Chairman.

Chairman WAXMAN. Your time is up.

Mr. Braley.

Mr. BRALEY. Thank you, Mr. Chairman.

There have been a number of disturbing issues raised by this investigation, but Mr. Mull I want to talk to you about one that specifically relates to the role of the U.S. Embassy in Albania and the

potential coverup of the countries of origin of this ammunition.

Yesterday Chairman Waxman sent a letter to Secretary Rice asking about reports that the U.S. Ambassador and other officials at

the U.S. Embassy at Albania approved a plan to conceal the Chinese origins of the ammunition that AEY supplied to the Afghan

Security Forces. The committee received this information from

Major Larry Harrison, the Chief of U.S. Office of Defense Cooperation in Albania.

During an interview with this committee, he stated that the Ambassador and his top aides held a late-night meeting with the Albanian Defense Minister to discuss how to respond to a request by

the New York Times to visit the site where AEY was removing Chinese ammunition from its original packaging before sending it to

Afghanistan. According to Major Harrison, who was at that meeting, the Albanian Defense Minister ordered one of his top generals

to remove all evidence of Chinese packaging before the site was inspected the following day.

Although Major Harrison was ‘‘very uncomfortable’’ with these

actions, he told the committee that ‘‘the Ambassador agreed that

this would alleviate suspicion of wrongdoing.’’

Mr. Mull, I know you were invited here today to testify about the

Watch List, but do you have any further information from the

State Department regarding this specific issue?

Mr. MULL. No, sir, I do not. All I know is what I read in the

chairman’s letter yesterday and in the press accounts yesterday,

and I do know, while I am personally not aware of any wrongdoing

on the part of the management of our Embassy in Tirana, I do

know that the State Department plans to respond to these serious

allegations in the appropriate channel once they have collected the

information.

Mr. BRALEY. Well, let me just ask you then hypothetically, assuming that a U.S. Ambassador to a country like Albania had sat

in a meeting like the one I described and was aware that an intentional act was being committed to conceal the identity of the country of origin in violation of U.S. military procurement requirements, would you agree that would be a bad thing for that Ambassador to do without reporting?

Mr. MULL. Sir, I am reluctant to answer a hypothetical question,

because I can imagine there might be circumstances in which covert activity is involved of the transfer. I would——

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Mr. BRALEY. I am just going to have to stop you right there. I

am having a hard time understanding how a covert activity would

justify an intentional violation of U.S. law. Can you explain any situation where that would be acceptable?

Mr. MULL. I think any violation of U.S. law by any U.S. Government official is unacceptable.

Mr. BRALEY. What potential remedies are available against a

U.S. Ambassador who participates or allows the concealment of a

country of origin of ammunition that is being shipped to an ally of

this country?

Mr. MULL. Sir, I am afraid I personally can’t provide you the answer to the question because I don’t work on disciplinary matters

or investigative matters outside of the arms export business from

the United States, but I would be pleased to take your question

back to the appropriate authorities.

Mr. BRALEY. I would appreciate that.

[The prepared statement of Hon. Bruce Braley follows:]

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89

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Ms. WATSON. Mr. Braley, would you yield a second?

Mr. BRALEY. I would.

Ms. WATSON. As a former Ambassador, you would be recalled

from your post in no time. That is the remedy.

Thank you, Mr. Chairman.

Mr. BRALEY. Reclaiming my time, the other question raised in

the letter that Mr. Waxman sent yesterday to the Secretary of

State is that the Embassy apparently concealed information about

this meeting from the committee, and the committee specifically

asked for information about meetings between Embassy officials

and the Albanian Defense Ministry, as well as any information

about any interventions into AEY’s repackaging operation.

Although Major Harrison argued internally that the Department

should inform of us of those activities, he was overruled, and he

provided documents contemporaneously to back up his story.

Chairman Waxman made a new request yesterday for all the

documents relating to this meeting and for a series of interviews

with the Ambassador and his top aides. Mr. Mull, can you tell us

whether the State Department intends to comply with that request

voluntarily?

Mr. MULL. Sir, I am sorry, I can’t answer the question. I don’t

know what the intention is of the senior Department leadership,

except that we will respond to the chairman’s request through the

appropriate channel.

Mr. BRALEY. Well, let me tell you why this is so serious and why

this committee takes this so seriously. A BBC News report says

that Major Harrison was replaced in his position in the Embassy

on June 9th. Do you know if that is true?

Mr. MULL. That is the first I have heard of it, sir.

Mr. BRALEY. General, Mr. Howell, do you have any knowledge of

whether that occurred?

General PHILLIPS. No, sir.

Mr. HOWELL. No, sir, I don’t.

Mr. BRALEY. The reason why that is important is because Major

Harrison was a Defense Department official, and if there was any

retaliation against Major Harrison, that would be a serious issue,

particularly since June 9th was the very same day he was interviewed by this committee.

Mr. Chairman, I would certainly hope that the committee will

look closely into this matter and followup on any further investigation to protect Major Harrison as a potential whistleblower.

Chairman WAXMAN. Thank you very much, Mr. Braley.

Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

You know, I am trying a little bit here to understand how the

Defense Department came to the conclusion that AEY’s past performance was excellent and that there was no history of qualityrelated problems. If you just look at the report that we put together

and some of the information, they had an Army Special Forces

Command contract for ammunition terminated in 2005 because of

late deliveries and poor quality, an Army contract for gun scope

mounts terminated in 2006 because of its failure to deliver after

two extensions, a State Department contract for weapon systems

terminated in 2007 because they provided the wrong items. The

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Defense Department terminated four delivery orders under a larger

contract to supply munitions to Iraq Security Forces because the

company failed to deliver the goods, including 10,000 Beretta pistols.

General, I am curious. How can there be a conclusion that there

is no history of poor performance when the Government agencies

had terminated at least 11 different contracts?

General PHILLIPS. Sir, I believe your comments and what you described are true, but when you go back and you look at the decision

that the contracting officer made, based upon the information that

was available to that contracting officer, she made a reasonable decision based upon the information that she had, the past performance information, and the pre-award survey that was done by the

Defense Contract Management Agency.

Mr. TIERNEY. Let’s take a look at that. They did talk to her. She

was interviewed, and she said she had never heard of those terminations. That, I guess, is what is stunning on that. She said she

checked the Army’s Past Performance Management System data

base—I would think that should have had the information—and

there was no negative information about AEY.

So I guess, General, if that system has such serious flaws, what

has been done to correct that?

Mr. PARSONS. Sir, if I may, I will address that. We are initiating

policy changes in our past performance reporting to ensure that

type of information, regardless of dollar value of the contract, is

captured. Part of the problem we have today is past performance

reporting is only required when these types of contracts are $5 million or more. Many of the contracts I believe you describe were

below that threshold, and so there was no requirement to do the

reporting. However, what we are going to initiate is, when there is

evidence that the contractor is not complying with terms and conditions of the contract and is terminated for default or terminated for

cause or a show cause letter is issued for poor performance, that

will be recorded in the past performance data system in the future.

Mr. TIERNEY. I mean, it is unbelievable that it wouldn’t have

been done in the past. I mean, who is responsible for that, and do

they still have their job? Who is responsible for keeping that list

up and keeping it accurate? Has there been any accountability for

the fact that these past performance problems weren’t even on that

list?

Mr. PARSONS. The contracting officer is required to update past

performance information on those contracts that meet the threshold, so that is the contracting officer requirement, commonly shared

with the program office. But, again, in our review of many of the

contracts where they have been terminated for default, none of

those contracts met that dollar threshold. Again, that is a hole in

the system that we have to repair.

Mr. TIERNEY. You know, the Beretta pistols were $5.6 million, as

has been pointed out to me. I think some of those did hit the

threshold.

Mr. PARSONS. Sir, that information is new. I am not aware of

that $5.6 million contract or when that contract was actually terminated.

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Mr. TIERNEY. I guess that is the problem: nobody else was, either.

Mr. PARSONS. None of the ones I saw were that threshold.

Mr. TIERNEY. Let me change directions here just for a second.

There is a fellow named Mr. Ralph Merrill who was also indicated

last week. According to an e-mail that he sent back in March 2006,

he identified himself as the vice president of AEY.

Mr. Howell, did you know that Mr. Merrill was a vice president

of that company in 2006?

Mr. HOWELL. Not at the time, no, sir.

Mr. TIERNEY. Later that year in December 2006 Mr. Merrill was involved in helping AEY obtain its $300 million contract with the

Defense Department to provide ammunition to the Afghan Security

Forces. In December 2006 he stated he would support AEY’s efforts

to perform on the contract by reserving $1 million as working capital to be dispensed against purchase orders. He did this as the

president of a company called Vector Arms.

Mr. Howell, that information was submitted to your agency during its survey of the company AEY’s financial capability. Your

agency was informed that he had a financial interest in the success

of that contract; is that right?

Mr. HOWELL. Yes, sir, as far as I know.

Mr. TIERNEY. OK. Now, the committee talked to the contracting

officer who ordered that ammunition contract, and she told us that

Mr. Merrill even joined Mr. Diveroli in a meeting with her discussing the requirements of the contract. She said Mr. Merrill identified himself as a consultant to the company at that time. So we

probably don’t have any problem with him being vice president/financial backer/consultant, but the fact of the matter is the Department awarded the contract based on the conclusion that AEY had

an excellent past performance, and in part that conclusion was

issued on questionnaires that were submitted to contracting officials on only three of AEY’s contracts.

So I guess one problem would be they only went to three of the

prior contracts to get information. But one of the questionnaires

was sent to Mr. Merrill, whose company had a prior contact with

him, and, of course, Mr. Merrill gave him excellent reviews. He had

a conflict of interest. There is something wrong here where you are

asking somebody that has a huge financial stake in a current contract that is being sought and asking him about past performance

on contracts that he also had an interest in. How can you get an

unbiased and objective assessment of past performance from someone who has a financial interest in the contract?

Mr. HOWELL. First, sir, at the time, as I mentioned, we had no

knowledge that the gentleman was a vice president of the company,

but when we conducted our pre-award——

Mr. TIERNEY. He represented himself as a vice president of the

company. He sent an e-mail to you telling you he was vice president of the company in March 2006.

Mr. HOWELL. Sir, I am not sure of the timing of that

correspondence——

Mr. TIERNEY. March 2006.

Mr. HOWELL. I am not sure of the timing of that correspondence

as it related to the timing of the pre-award survey. Subsequent to

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the request for pre-award survey, we looked at several financial aspects of the company. That was one of them. And the rating was

that they were financially capable of conducting a brokerage operation.

Mr. TIERNEY. And you made that decision based on three questionnaires of the companies, at least one of which had a very serious conflict of interest. I think that is the issue here. You have to

do something, I would hope, with regard to that process to make

sure that doesn’t continue to happen.

Mr. HOWELL. DCMA has begun a review of all of its processes

related to that, and we are looking at the implementation of different policies that will prevent those occurrences in the future.

Mr. TIERNEY. I yield back, Mr. Chairman. My time has expired.

Chairman WAXMAN. Thank you very much, Mr. Tierney.

Gentlemen, we thank you for being here and answering our questions, and we hope this hearing will serve a constructive purpose,

because what we have been talking about is not a proud day for

contracting for our country.

We stand adjourned.

[Whereupon, at 12:12 p.m., the committee was adjourned.]

[The prepared statement of Hon. Diane E. Watson follows:]

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