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.

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.

When Army officials asked Ralph Merrill to provide a "performance evaluation" of arms dealer AEY, he gave the the firm a glowing review.

Well, of course did. He's the company's financial backer. And he's also one of the three other men indicted last week along with AEY's 22-year-old president, Efraim Diveroli.

"We have dealt with AEY Inc. for the last four years and have built an excellent business relationship with them. We have found them to be reliable, competent, efficient and honest," Merrill wrote in the evaluation in October 2006.

Army officials had reason to know that Merrill was tied to AEY. In March of 2006, Merrill wrote an email to a military official describing himself as AEY's vice president. In January 2007, he told Army officials that he'd set aside $1 million in case AEY needed extra capital.

A federal indictment describes Merrill as a "business associate of Efraim Diveroli, who provided financial and managerial assistance." Merill was involved in some of AEY's negotiations with subcontractors, the indictment said.

Nevertheless, Merrill's was among the three ostensibly independent performance evaluations the Army had on file for AEY when they awarded it a $300 million contract in Janury 2007. Merrill, who also runs a Utah-based weapons dealership called Vector Arms, had responded to the Army's request for information about Vector Arms' dealings with AEY.

That's all according to documents disclosed today at the House oversight committees hearing on AEY.

At the hearing, Rep. John Tierney (D-MA) grilled military officials about the review process: "Mr. Merrill had a conflict of interest. ...How can you get an unbiased and objective assessment of past performance from someone who has a financial interest in the contract?"

Mitchell Howell, from the Defense Department's Defense Contract Management Agency, responded that they agency is reviewing its procedures to prevent similar problems in the future.

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.

Maj. Larry Harrison told his military commanders back in April that State Department officials might be concealing information from Congress.

Harrison was working in the U.S.embassy at Tirana, Albania, when he saw the U.S. officials there help Albanian officials conceal the origin of a weapons shipment that might be illegal, he told House investigators.

When Congress started asking questions about the weapons deal, Harrison suggested that the embassy officials be upfront about the late-night meeting they had in November 2007 with the Albanian defense minister when they talked about how to repackage the Chinese ammo.

But the embassy officials didn't take his advice. And it looks like Harrison sent a C-Y-A memo to his military bosses at European Command on April 16:

Although I provided input to the third question, the Political--Economic Officer, the Deputy Chief of Mission and the Ambassador did not accept my input. The answers were forwarded to the committee with my name on the memo as having cleared the memo, or in other words, approved the content.

I did not approve of the content of the answers and I am concerned that information may have been omitted relevant to the question.

The memo was disclosed today by Rep. Henry Waxman's oversight committee.

A spokesman for the State Department told me this morning said they were still reviewing Waxman's documents. We asked a Defense Department spokeswoman what European Command officials did with Harrison's memo. We'll let you know when we hear back from her.

Was the State Department involved in a shoddy and potentially illegal ammo shipment that led to the arrest of a 22-year-old Miami arms dealer last week?

That's what Rep. Henry Waxman (D-CA) now says. The House oversight committee says it has evidence that the U.S. embassy in Albania helped Albanian officials keep the allegedly illegal shipment of Chinese-made ammunition to Afghanistan under wraps and then failed to disclose that information when Waxman's committee asked about it.

Last week we updated you about the arrest of Efraim Diveroli and three of his business partners with AEY Inc. Federal prosecutors say he violated the U.S. Arms Export Control Act, which prohibits buying and selling weapons from certain countries, including China. The ammunition in question was obtained by AEY from an Albanian arms dealer.

Waxman's new-- and potentially explosive -- evidence stems from an interview by the oversight committee of Army Maj. Larry Harrison, the Chief of the Office of Defense Cooperation at the U.S. Embassy in Albania. Harrison told the committee about a previously undisclosed November meeting that included Albanian officials and U.S. Ambassador John Withers and others from the U.S. embassy in Tirana.

Waxman describes Harrison's account of the meeting in a letter today to Secretary of State Condoleezza Rice:

According to Major Harrison, the Albanian Defense Minister, Fatmir Mediu, called him on November 19, 2007, to request an urgent meeting with the U.S. Ambassador to Albania, John L. Withers, II. Major Harrison stated during his interview that the Albanian Defense Minister was concerned that a New York Times reporter planned to inspect the facility at Rinas Airport in Tirana where AEY was conducting its operation to repackage Chinese ammunition before shipping it to Afghanistan, a process that included removing some ammunition from its original Chinese packaging. ...

As a result of discussions that went late into the night, 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. Major Harrison told the Committee: "the Ambassador agreed that this would alleviate the suspicion of wrongdoing."

Back in April, after a front-page story about the 20-something arms dealers in the New York Times, Waxman asked the State Department for any information they had about the case. State officials responded with a memo noting only a few perfunctory meetings about the case.

But Waxman later obtained a draft of that State Department memo on which Harrison used the " track changes " function in Microsoft Word to suggest that reference to the November 2007 meeting be included. Harrison's draft included the following language:

"Do we mention the meeting at Steve's house on 19 November (present was Amb Withers, DCM Christina, RSO Patrick and ODC Chief Harrison) where the Amb recommended to the Minister to prevent the reporters form seeing the munitions at the airport on the following day and the Minister called MG Spahiu at approximately 23:00 to have all the ammunition removed from the airport by 0800 the next morning"

"Steve" is a reference to Stephen Cristina, the deputy chief of mission at the U.S. embassy in Albania. The changes suggested by Harrison were not included in the final draft of the memo that the State Department forwarded to Waxman's committee on April 9.

Waxman wrote in his letter to Rice:

The information obtained by the Committee raises serious issues. If the information is accurate, it appears that senior U. S. Embassy officials in Albania approved of the efforts of the Albanian Defense Minister to conceal evidence of illegal shipments of Chinese ammunition that are now the subject of a criminal indictment. It also appears that information about the incident was withheld from the Committee. It is hard to understand what rationale would justify these actions.

Waxman asked Rice to send several officials from the State Department to appear before the committee for "transcribed interviews."

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.

From the Miami Herald:

A 22-year-old munitions dealer and others in his Miami Beach company were arrested on charges of selling prohibited Chinese weaponry to the U.S. government to supply allied forces in Afghanistan, according to law enforcement officials.

Efraim Diveroli, president of AEY Inc., and three other employees were arrested Thursday night and Friday morning -- accused of conspiring to misrepresent the types of munitions they sold to the U.S. Department of Defense as part of a $300 million Army weapons contract, officials said.

Diveroli and the others are charged with violating the Arms Export Control Act stemming from an investigation that began earlier this year by the Pentagon and Immigration and Customs Enforcement.

Remember this guy?