[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
         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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                               index.html
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director


                            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

         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.
    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 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 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 post-award 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 
Munitions 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.
    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 working 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 
non-standard 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.
    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.
    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 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----
    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?
    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.
    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.
    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?
    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 pre-award 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?
    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 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 well-
meaning, 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.
    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.
    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.
    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 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.
    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?
    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.
    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.
    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.
    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----
    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----
    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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    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 
quality-related 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 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.
    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 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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