We were somewhat astonished this week to learn that the Pentagon had awarded a $298 million contract to arms dealer AEY Inc. despite the fact the company and its then-21-year-old president were on the U.S. State Department's Arms Trafficking Watchlist.

An Army general said, quite simply, they don't typically check that watchlist before awarding big contracts.

Now we've found evidence that the State Department might not be checking its own list.

AEY and its president, Efraim Diveroli, were on the watchlist as early as April 2006 because U.S. Immigration and Customs Enforcement (ICE) had started an investigation of the company in 2005 for "numerous violations of the Arms Export Control Act and contract fraud," according to the House oversight committee.

Yet according to a government Web site that tracks federal contracting activity, the State Department on Dec. 1, 2006, signed a purchase order for $113,967 with AEY to provide a batch of K3 Light Machine guns.

Less than two weeks after State officials inked the new deal with AEY, someone at Foggy Bottom was adding to the company's watchlist file. According to the oversight committee's report:

On December 12, 2006, the State Department made the following entry to the watchlist regarding both Mr. Diveroli and his company, AEY:

"There appear to be several suspicious characteristics of this company, including the fact that Diveroli is only 21 years old and has brokered or completed several multi-million dollar deals involving fully and semi-automatic assault rifles. Future license applications involving Diveroli and/or his company should be very carefully scrutinized."

Nevertheless, State continued to do business with AEY.

According to the public records:

In February 2007, the State Department signed a purchase order for $70,330 for AEY to provide bullet proof vests.

Also in Februrary 2007, the State Department signed a purchase order for $166,357 for AEY to provide "340 Halographic Weapons Systems and 400 RICO Alpha 9 Tactical Weapons Systems."

In June 2007, the state Department signed a $34,878 purchase order for more bullet proof vests.

Legally, the watchlist doesn't have much teeth to it. It was set up for officials to consider when signing off on weapons deals. According to the committee's report:

In 1968, Congress passed the Arms Export Control Act to require companies engaging in the brokering of weapons and ammunition to obtain a license for each transaction. The State Department's Directorate of Defense Trade Controls may deny or revoke licenses if it "deems such action to be in furtherance of world peace, the national security or the foreign policy of the United States, or is otherwise advisable." To help make these determinations, the State Department maintains a watch list of suspect individuals and entities based on information it receives from law enforcement, the intelligence community, and other government and non-governmental sources.

AEY finally lost its license in March 2008, after the New York Times began asking about the company.

A spokesman for the State Department said they're not going to comment while the department's inspector general is investigating the matter.

Efraim Diveroli's hot-shot Miami lawyer, Howard Srebnick, concedes that the 22-year-old president of arms dealer AEY Inc. bought massive stockpiles of old Chinese ammo and shipped them to Afghanistan.

But Diveroli didn't break any laws, the attorney says in a statement released to TPMmuckraker:

The federal regulation cited in the indictment (paragraph 10) prohibits delivery of ammunition acquired "directly or indirectly, from a Communist Chinese military company." The regulation does not prohibit an American from selling Chinese-made ammo to the U.S. Army if the ammo was acquired before the 1989 Chinese munitions embargo. Indeed, pre-embargo Chinese-made ammo is readily available on the internet.

The U.S. Army solicited bids for the ammo to arm Afghan (not U.S.) soldiers fighting the Taliban. The government knows that Mr. Diveroli purchased the Chinese-made ammo from the Albanian government, which had acquired the ammo back in the 60's and 70's, before the Chinese embargo and before Mr. Diveroli was even born. Mr. Diveroli did not acquire the Chinese-made ammo, "directly or indirectly," from ANY Communist Chinese military company.

The government has misconstrued the statute as a ban on all Chinese-made ammo so that the U.S. Army can avoid its multi-million dollar contractual obligation to Mr. Diveroli. Fortunately, a federal judge and jury -- not a government bureaucrat -- will decide who's right.

One question left unanswered by the officials summoned to Capitol Hill yesterday to talk about arms dealer AEY was this: Why did U.S. taxpayers end up spending $300 million for Cold War-era ammunition rounds which it easily could have gotten it for free?

Eastern Europe is full of old Soviet-era ammunition. And many countries have been offering to give it away for years. Countries like Bosnia, Bulgaria and Hungary.

In fact, the Albanian Defense Minister himself offered to give the U.S. virtually the same ammo that AEY ended up providing under contract.

The House oversight committee report said:

The Committee has been informed that on December 23, 2007, the Albanian President and Defense Minister traveled to Iraq to meet with General David Petraeus, the commander of Multi-National Force-Iraq, and Ryan Crocker, the U.S. Ambassador to Iraq. According to Major Larry Harrison, the Chief of the Office of Defense Cooperation, he personally accompanied the Albanian officials on this trip and attended the meeting. Major Harrison informed Committee staff that the Albanian officials offered to donate the country's surplus ammunition to Afghanistan and Iraq. According to Major Harrison, General Petraeus rejected this offer because Albania was known to possess large quantities of Chinese munitions, which cannot be received under United States law.

That's the same Albanian defense minister, Fatmir Mediu, who a few months later reportedly called a late night meeting with U.S. Ambassador John Withers in Tirana and talked about how to conceal the Chinese origins of an AEY shipment. The ammunition was purchased by AEY to supply the Afghan Army.

Mediu had made his offer of free ammo very publicly.

Incidentally, Mediu resigned from his post a few months ago after a massive explosion at a weapons depot in Albania killed 26 people. It was a major disaster for such a small country, and underscored Albania's massive weapons stockpiles. AFP reported:

The Socialist-led opposition accused the government of corruption in dealing with the disposal of obsolete weapons, and called on Prime Minister Berisha to resign.

The Pentagon is dismissing reports that Army Maj. Larry Harrison was removed from his post as a military attache at the U.S. embassy in Albania after he started talking to the House oversight committee.

In a statement just released by the Army's European Command, spokesperson Lt. Col. Elizabeth Hibner, says that Harrison remains in his post in Tirana, but was already scheduled to be transferred this summer:

MAJ Harrison sent his memo for record to the J-5 desk officer for Albania on April 18, 2008. The desk officer forwarded the memo to the European Command Judge Advocate's office for consideration. Before further action could be taken, the House Committee on Oversight and Government Reform Staff contacted MAJ Harrison by phone and conducted a preliminary interview.

During the interview, MAJ Harrison referred to the memo, and later provided it upon request of the Committee staff. Following the interview call, the US European Command Washington Liaison Office contacted OSD Legislative Affairs. Subsequently, OSD Legislative Affairs contacted MAJ Harrison to notify him the Committee had formally requested an opportunity to interview him.

MAJ Harrison began a transcribed interview with members of the Committee staff. During the interview, MAJ Harrison requested an opportunity to consult with legal counsel, terminating the interview. At MAJ Harrison's request, personal counsel was assigned by the Army Judge Advocate Corps.

MAJ Harrison is still assigned as Chief, Office of Defense Cooperation in Albania. However, he has served in that position for his scheduled 2 years, and is due for an assignment during this Summer's move cycle.

EUCOM has not coordinated with the Department of State about this issue.

Harrison sent an April 18 memo to his commanders about alleged misconduct by State Department officials at the Albania embassy.

While the U.S. Ambassador to Albania denied allegations of wrongdoing today from his office in Tirana, back in Washington the State Department's Inspector General has opened an investigation.

"We've opened an investigation into this matter at the request of the department and we are coordinating with other agencies," Tom Burgess, a spokesman for the State Department IG, said in a phone interview with TPMmuckraker.

State Department officials have known for months about the allegations that arms dealer AEY and its 22-year-old president may have tried to pass off cartons of illegal Chinese-made ammunition to fulfill a $300 million U.S. government contract supplying the Afghan Army.

But yesterday's disclosure that the the U.S. Ambassador in Tirana, John Withers, may have known about it and then concealed that knowledge from lawmakers on Capitol Hill apparently came as a surprise to the State Department.

According to the AP:

In Washington on Tuesday, U.S. State Department spokesman Tom Casey said the allegation would be investigated, but that he knew of no evidence to support it.

Speaking to reporters, Casey said the State Department has asked its inspector general "to go and look at these charges and conduct a thorough, fair and transparent investigation of these allegations."

He said, "These are very serious allegations."

But Casey also said, "We certainly don't have any information that would support or substantiate these allegations which are being made against a career Foreign Service officer" with 24 years of distinguished experience.

Does arms dealer AEY, Inc., still have some U.S. defense contracts?

Even though it's been on a U.S. State Department Arms Trafficking Watchlist for three years?

Even though it's been under federal investigation for several months?

Even though its president was arrested last week on federal charges related to arms exports?

Even though military officials were testifying about the company this morning on Capital Hill?

Maybe so.

At the House oversight committee hearing this morning, Rep. Stephen Lynch (D-MA) asked military contracting officials:

"I hear and I read that the contracts have been canceled, terminated. Now I was in Iraq at the Taji weapons depot a few weeks ago and I asked a commanding general there about the AEY contract. He said 'yeah, they're shipping into us.' So myself and Mr. Platts from Pennsylvania actually asked the general to give us some detail and went around and started opening up some crates. They were all AEY contracts, it looks like they're still performing in this contract, and that doesn't jive with the testimony and documents I have before me. So can you tell me, is AEY still performing on some contracts in Iraq?"

Jeffrey Parsons, Executive Director of the Army Contracting Command responded: "Sir, I am not aware, and I will have to get back to you on whether they are still performing..."

"That's not good enough," Lynch said.

Late Update: Here's the video of Lynch's query.

Arms dealer AEY Inc. and its 22-year-old president have been on the U.S. State Department's Arms Trafficking Watchlist for years.

But that didn't keep them from landing a nearly $300 million Pentagon contract providing ammo to the Afghan Army.

AEY is getting a lot of scrutiny since its 22-year-old president and three others from the firm were indicted last week and accused of providing useless and illegal Chinese-made ammunition under a U.S. government contract.

At a hearing on Capitol Hill today, Stephen D. Mull, Acting Assistant Secretary of State at the bureau of Political Military Affairs, said AEY Inc. was placed on the watchlist in January 2005. AEY's president, Efraim Diveroli, was individually placed on the list in 2006, Mull said. They were placed on the list for reasons that remain classified, officials said.

AEY was awarded the $300 million Afghanistan contract in January 2007.

Military officials stammered to explain how the massive deal sailed through the Army's contracting system without any red flags.

"The contracting officers that execute the contracts are not required to go and look at the watchlist," said Brigadier General William N. Phillips, U.S. Army, Commanding General at Picatinny Arsenal and head of the Joint Munitions and Lethality Life Cycle Management Command, told the committee

Jeffrey Parsons, Executive Director of the Army Contracting Command said: "I'm not sure whether that watch list is accessible to people outside the State Department."

Lawmakers also asked questions about the Albanian arms dealer who AEY who sold the ammo to AEY.

His name was Ylli Pinari. He was president of the Military Export Import Company of Albania (MEICO) in Albania. And he was placed on a U.S. State Department Arms Trafficking Watchlist back in 2005. The reasons for putting him on the watchlist are also classified.

The purpose of the watchlist is to identify people and companies who "might be unreliable recipients of defense articles and services licensed by the State Department."

Rep. Stephen F. Lynch, (D-MA) described the situation as "a disgrace"

"This kid was 19 years old and he got a $300 million contract," Lynch said. "Has anybody been fired for this? Can I ask the panel: Has anybody gotten their walking papers for this?

No, Parsons replied, nobody's been fired over the AEY investigation.

From AFP

US Ambassador to Albania John Withers on Tuesday denied any involvement in the trafficking of Chinese weapons after allegations of US congressional investigators emerged in a New York Times report.

"Ambassador Withers is aware of the claims ... He is studying the content of that letter and will prepare a full refutation of any allegations against the US embassy or himself once he has done so," the embassy said in a statement.

In a letter to US Secretary of State Condoleezza Rice, Congressman Henry Waxman said Withers had helped conceal illegal Chinese origins of ammunition that a Pentagon contractor bought to supply Afghan security forces.

The story of arms dealer AEY Inc., run by the 22-year-old Miami man who was indicted last week, is getting worse by the minute.

Four government officials are testifying on Capitol Hill today about how the company ended up with a $300 million U.S. military contract providing unusable and probably illegal weapons to the Afghan Army.

So far, the officials haven't discussed the alleged State Department cover-up yet. But they are delving into AEY's previous contracts with the government and it doesn't look good.

In his opening statement, Rep. Henry Waxman (D-CA) revealed a series of previous problems that the military had with AEY.

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."

Nevertheless, AEY's formal record remained spotless, Defense Department officials said, party because the previous problems did not involve contracts large enough to trigger current reporting requirements.

"The system for vetting for contractors appear to be broken," Waxman said. "It's 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 contact worth $300 million. That is quite amazing to me."

First Efraim Diveroli was mocked for being the only U.S. arms dealer with a MySpace page. Now it looks like the feds will rest most of their prosecution on his emails.

The feds say they've got a pretty good paper trail on Diveroli, the 22-year-old arms trader who was just arrested and accused of providing shoddy and illegal Chinese ammo for the Afghan Army.

You remember him? He's the Miami party boy who inexplicably landed a $300 million U.S. Army weapons contract in January 2007. The New York Times put him on the front page back in March.

He was arrested along with several others involved with his company, AEY, Inc., including David Packouz, the AEY director and vice president; Alexander Podrizki, the company's man in Tirana, Albania; and Ralph Merrill, who provided "financial and managerial assistance."

They were charged with violating the Arms Export Control Act, which prohibits buying and selling weapons from certain countries.

According to the indictment released today by the U.S. attorney in Miami, Diveroli got nervous last year when his Albanian supplier emailed him some photos showing that the weapons he planned to buy and ship were clearly marked "Made in China."

Diveroli emailed the U.S. State Department in April asking whether, hypothetically, it was OK to fulfill a U.S. Army contract with weapons from China, the indictment says.

It's not, they told him. Not without special permission from the President.

He emailed back and asked if there was an exception for weapons that may have been sitting in Albania for 20 years, the indictment says.

The State Department emailed back and said there was no such exception.

So he had one of his financial backers, Ralph Merrill, help take care of the problem.

On or about April 25,2007, RALPH MERRILL sent an electronic communication to EFRAIM DIVEROLI and DAVID PACKOUZ, which referenced attached photographs showing methods of "cleaning wooden crates." Attached to the communication was a photograph showing a person scraping the words "MADE IN CHINA" off of a wooden crate.

Diveroli then filled out forms for the Army indicating that the ammo was from Hungary rather than China.

The Army paid AEY more than $10 million between July and December 2007, according to the indictment, before the Times broke the story in March and his arms exporting license was suspended.

There may be more charges coming from this investigation. A spokeswoman for the ICE office, Nicole Navas, said Friday that the investigation was ongoing and declined to comment further.