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