STENOGRAPHIC MINUTES Unrevised and Unedited Not for Quotation or
**Preliminary Hearing Transcript**
Duplication
HEARING ON EXAMINATION OF AEY CONTRACTS
WITH THE U.S. GOVERNMENT
Tuesday, June24,2008
House of Representatives,
Committee on Oversight and Government Reform. Washington, D.C.
"This is a preliminary transcript of a Committee Hearing. It has not yet been subject to a review process to ensure that the statements within are appropriately attributed to the witness or member of Congress who made them, to determine whether there are any inconsistencies between the statements within and what was actually said at the proceeding, or to make any other corrections to ensure the accuracy of the record."
Committee Hearings
of the
IJ.S. HOUSE OF REPRESENTATIVES
OFFICE OF TIIE CLERK Oflïce of Official Reporters
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HEARING ON EXAMINATION OF AEY CONTRACTS
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WITH THE
U.S.
GOVERNMENT
Tuesday, .fune 24, 2008
House
of Representatives,
Committee on Oversight and Government Reform,
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Ii'Iashington, D.C.
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The committee met, pursuant to ca11, âL l-0:00 a.m. in room 21-54, Rayburn House Office Building, the Honorable Henry
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A.
Waxman [chairman
of the committee] presiding.
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Present: Representatives Waxman, Cummings, Tierney, Watson, Lynch, Norton, Davis of Virginia, P1atts, fssa, and
McHenry.
Staff Present: Phil Barnett, Staff Director and Chief I7 Counsel; Kristin Amerling, General Counsel; Karen Lightfoot, 18 Communications Director and Senior Policy Advisor; David t9 Rapa11o, Chief Investigative Counsel; ,John Williams, Deputy zv Chief Investigative Counsel; Theo Chuang, Deputy Chief
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Investigative Counsel; Russell Ane11o, Counsel; Stacia Cardille, Counsel; Suzanne Renaud., Counsel; Christopher Davis, Professional Staff Member; Earley Green, Chief Clerk; .Ten Berenholz, Deputy Clerk; Caren Auchman, Press Assistant; EI1a Hoffman, Press Assistant; Miriam Edelman, Staff Assistant; Lawrence Halloran, Minority Staff Director; .fennifer Safavian, Minority Counsel for Oversight and Investigations; Keith Ausbrook, Minority General Counsel; ,fohn Brosnan, Minority Senior Procurement Counsel; Steve Castor, Minority Counsel; Benjamin Chance, Minority Professional Staff Member; Adam Fromm, Minority Professional Staff Member; Patrick Lyden, Minority Parliamentarian and Member Services Coordinator; Brian McNícoll, Minority Communications Director; and Emile Monette, Minority Professional Staff Member.
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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
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contract is an important one because it relates directly to 4t the success of our mission in Afghanistan. We know a l-ot 42 about what went wrong after the contract to AEY was awarded 43 in .fanuary 2007. We know that ammunítion provided by AEY was 44 unserviceable. V'Ie know that much of the ammunition v¡as 45 iIlega1, Chinese-made ammunition. We know that after paying 46 ,AEY over $60 million the Army canceled the contract. And we 47 know that last week the ,Justice Department indicted AEY and 48 its top official-s with 7l- counts of fraud and related
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charges.
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
I¡le have
Embassy's actions.
Today's hearing will examine what is not known: how did
a
run by a 2l-year-old president and a 25-year-oId 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
company
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consent that the staff analysis and the documents it cites
made
be
part of today's hearing record.. Mr. DAVIS OF VIRGINIA. No objection. Chairman WAXMAN. Without objection, that will be the
[The referenced information follows:
]
order.
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contract shows that the 69 procurement process at the Department of Defense is 70 dysfunctional. There was no apparent need for the contract, 7I no effective vetting of the company's qualifications, and no
Chairman
VüAXMAN.
The AEY
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n/l T=
adequate oversight.
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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
The first
Pact countries. These countries have surplus ammunition thev
are trying to give a\Àray or destroy. 80 We learned during the investigation that the president 81 of Albania flew to Iraq in 2OOi and offered to donate 82 Albanian stockpiles to General Petraeus. It appears that the 83 Army agreed. to pay $3OO million for ammunition it could have 84 gotten for free. 85 The procurement fail'ure that is the hardest to 86 understand is the sel-ection of AEY. The State Department .87 maintains a lVatch List of potential ilIegal arms traffickers. 88 Both AEY and Mr. Diveroli are on the Watch List. So are 89 AEY's subcontractor and the subcontractor's subcontractor. 90 The State Department official in charge of the V{atch List 9! ca1led thís a perfect trifecta. But the Defense Department 92 never bothered to check the Vüatch List awarding the $300
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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. ' ' If Army officials had examined This vras pure fiction. 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, oy 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
\^rere
in bait and switch tactics that
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hurting the mission. 1_13 One contracting official told us, "I just don't trust tr4 the guy. I couldn't take anything he said credibly.' ' He 115 told us that AEY was the single worst company he dealt with in lraq, saying, "That was my lemon I had to make lemonade J,1,6 IT7 out of.' '
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In testimony to be delivered today, the witness from the 11_ 9 Defense Contract Management Agency continues to assert that, 1,20 "AEY had a history of satisfactory performance. " That is Rating AEY's performance as excellent and 124 simply ridiculous. 122 satisfactory is an insult to the taxpayers. 123 the procurement deficiencies cascaded upon each other. t24 The terms of the contract left out essential details, ]-25 allowing AEY to deliver ammunition that was over 60 years 1-26 o1d. There were few inspections of the quality of the
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This unfortunately is not an aberration. Over the last 129 eight years we have witnessed a complete breakdown in the procurement process. As the AEY experience demonstrates, it l_3 0 1_3 1 appears that anyone, ho matter how inexperienced or t32 unqualified, can win a fucrative Federal contract worth hundreds of millions of dol1ars. 1_3 3 There are profound lessons to be learned from the AEY L34 l_3 5 experience. By examiníng AEY as a case study of what went
to rebuild our procurement 1,37 and protect the interests of the taxpayers. 1_3 I [Prepared statement of Chairman Ï¡traxman follows: ]
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vrrong and why, \^re can begin
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Chairman
WAXMAN.
I want to recognize Mr. Davis for his
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opening statement.
Mr. DAVIS OF VIRGINIA. Thank you, Chairman Waxman, for 1,43 holding the hearing. r44 Last Friday's indictment of AEY's officials certainly L45 justifies this Commíttee's decision to pursue questions about ]-46 how and why a smaII, inexperienced company was awarded a r47 Federal contract worth hundreds of millions of dollars. ]-48 obvious evidence of consistently shoddy performance was 1,49 somehow missed or ignored as substandard or iI1ega11y t_5 0 obtained munitions \^rere apparently being sent to Afghanistan. The system eventually caught up with AEY, but it took 151 t52 too long and it cost too much. The failure to root out AEY that can arise in trying 153 sooner highlights the difficulties L54 to capture and use information on a contractor's past performance. That such a bad apple continued to receive 1_55 Federal contracts only strengthens my belief that a 1_56 well-maintained database of current information on prior 1-57 violations and other relevant information could be a valuable l_58 159 tool for contracting officers. 1_6 0 Such a database was proposed in H.R. 33, and we t6t appreciate Chairman Vüaxman and the bill's sponsor, t62 Representative Maloney, for working with us to improve the It still needs some work, but 1_6 3 latest version of the bill. ]-64 with derogatory information on performance issues available
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only to acquisition officials, the database could provide the L66 tool the Government needs to root out the rotten apples L67 before they can spoil even the most valuable barrels. 168 Perhaps if we had acted faster to put such a system in L69 place we wouldn't be having a hearing today, but other gaps L70 in the contracting system also appear to have played a key L71, rol-e in this fiasco L72 It is one thing to have the appropriate information on L73 past performance available; it is quite another to be able to L'7 4 use it effectively. In interviews with various contracting L75 official-s involved in the AEY transactions, the impact of the t'7 6 Small Business Administration' s Certificate of Competency t77 process surfaced several times. Under that statutory scheme, t78 contracting officials are prohibited from rejecting an offer 179 from sma1l businesses such as AEY only on the basis the 1_80 company is not a responsible perspective contractor due to 1_81_ negative or marginal past performance. Instead, the matter 1,82 must be referred to the SBA, which decides whether the firm L83 is eligible for award. 1,84 While I understand that this program was designed for 1_85 the protection of legitimate sma11 business firms, it might 186 be useful, in light of this case, to take a careful look at 187 the impact of the process. T¡'Ie should ask whether it has an 1_88 intimidating impact on contracting officials who might 1_89 otherwise reject a firm as non-responsible for reasons such
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as bad past performance, but are reluctant to do so because
of the delay and extra paperwork required by the SBA referral
process.
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This case seems to speak volumes about what is wrong with the mil-itary contracting process today. Yet again we see poor decision-making by overworked and under-trained Army acquisition officials. over the course of awarding and monitoring 29 contracts worth more than $200 miIlion, someone, somewhere should have heard an alarm bell and looked more closely at what this sma11 company was doing with an implausibly large set of tasks. But we should take care before extrapolating this specific, hopefully the unique facts of the 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 from vintage Soviet \Âreapons 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
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the publíc record about the mistakes and waste at the heart of the AEY debacle, and we welcome the witnesses.
Thank you.
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[Prepared statement of Mr. Davis of Virginia follows:]
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Mr. Davis. We are pleased to have before us today from the Defense Department Brigadier General William N. Phi11ips, 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 Divísion at the Defense Contract
Chairman WAXMAN. Thank you very much,
Management Agency.
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the State Department we have Stephen D. MuIl, 232 Acting Assistant Secretary of State for the Bureau of 233 Politica1 Military Affairs. 234 V'Ie also invited officials from AEY, Efraim Diveroli, the 235 President of AEY, and David Packouz, the Vice President. Mr. 236 Diveroli and Mr. Packouz are not with us today. Both 237 individuals informed us, through letters from their 238 attorneys, that they would assert their Fifth Amendment 239 rights against self-incrimination and would refuse to answer 240 questions at the hearing. 24t I ask unanimous consent that both letters be made part 242 of the hearing record. Without objection, that will be the
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order.
[The letters of Mr. Diveroli and Mr. Packouz fo11ow:]
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In fact, both men \^rere 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, âs part of their bail conditions, the Federal Court has restricted their travel to the Miami area. Under these circumstances \^/e concluded that it did not make sense to require them to appear today. Vüe 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 anshrer questions under oath, so I would like to ask you all to please stand and raíse your right hand.
Chairman
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[Witnesses sworn.
Chairman
VüAXMAN.
]
The record wil-I índicate that each of
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the witnesses answered in the affirmative. l{hy don't we start with Brigadier General Phi11ips. General PHIIJIJIPS. Mr. Chairman, if I cou1d, 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 líke to defer to Mr. Parsons if that is okay. Chairman IVA)ruAN. Okay. Thank you.
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Parsons?
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Mr.
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STATEMENTS OF BRIGADIER GENERAL VIILLIAM
ARMY,
COMIVIANDING
GENERÃL, PICATINNY ARSENAL, COMMANDER, JOINT
MUNITIONS AND LETHALITY
.JEFFERY
LIFE
CYCLE MANAGEMENT COMMAND;
P.
PARSONS, EXECUTIVE DTRECTOR, ARMY CONTRACTTNG
COMMAND, PROVISIONAL,
U.S.
ARMY MATERIEL COMMAND; MITCHELL A.
HOWELL, EXECUTTVE DIRECTOR, GROUND SYSTEMS AND MUNTTTONS
DTVÏSÏON, DEFENSE
CONTRÃCT MANAGEMENT AGENCY; AND STEPHEN D.
OF
MULL, ACTING ASSISTANT SECRETARY OF STATE, BUREAU
POLITTCAL MILTTARY AFFAIRS,
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U.S.
DEPARTMENT OF STATE
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STATEMENT OF JEFFERY
P.
PARSONS
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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 contract to AEY, Incorporated, to supply ammunition to the Afghanistan Army and Afghanistan National Police. The U.S. Army is cond.ucting 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. I¡ühile I did not identify any breaches in policies,
a
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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 aQdress some of the improvements we are making in the management and acquisition of non-standard ammunition, to incl-ude specifications, packaging, inspection,
and acceptance.
procedures, rul-es, and regulations,
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f respectfully request that our joint written statement be made a part of the record for today's hearing. Chairman VIAXMAN. V'lithout 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
I also reviewed relevant documents such as the 3L2 pre-award survey, minutes from the contract post-award 313 survey, meeting between the ACO and AEY, and post-award 3L+ documentation to incl,ude reports of discrepancy provided by 3 1_5 the Combined Security Transition Command Afghanistan. 3!6 .Tust recently I visited Afghanistan and had the 3L7 opportunity to meet with the Combined Security Transition
officer.
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Afghanistan leadership and members of the Afghanistan Army. My revíew indicated that the contracting officer
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properly fol-lowed the contracting process and made reasonabl-e judgments based upon the factual information in her possession. As we have come to learn, hou/ever, there was some factuar 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 smal1 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 of 2007. This information was not visibl-e 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 Requlations
Supplement.
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As a result, there $¡ere 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 termj-nated actions were not incl_uded in the past performance information management system, the
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solicítation did include FAR-52-209-5 certification regarding responsibility matters, which required AEY to identify
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whether they had one or more contracts terminated for default 344 ín the preceding three years by any Federal agency. The
provision also requires an offeror to provide immediate 346 written notice to the contracting officer if at any time 347 prior to contract award the offeror learns that hís 348 certification was erroneous when submitted or has become 349 erroneous by reason of changed circumstances. Again, AEy did 350 not indicate to the contracting officer that they had had 351 several contracts that had been terminated for cause prior to 352 the award of the ammunition contracts. 353 We have informed our procurement fraud attorneys of this 354 situation to determined if AEY provided false certifícations 355 during the solicitation phase of the contract. rn addition, 356 we have initiated policy changes within the Army that will 357 require the posting of past performance information, 3sB regardress of dollar value, for all contracts that have been 3s9 terminated for cause or default. 360 I believe similar policy changes are beíng considered at 36r the DOD level, and I would recommend similar policy changes 362 at the Federal leve1. 363 In my opinion, while there certainly is room for 364 improvement in the way \^re acquire non-standard ammunition in 365 support of our aIIies, this case is more about a contractor 366 who faíIed to properly represent their company and failed to 367 comply with the terms and conditions of the contract, rather
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than a faulty contracting process. Once the contracting officials at the Army Sustainment Camp became au/are of performance issues in February 2008, they initiated actions to ensure compliance with the contract
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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 23 May 2008. Last week's indictment of AEY President and severalother 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. Vüe 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 alIies with quality products and services. We continue to pursue improvements in our contracting process and workforce, âs
Once matters became known
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demonstrated by our secretary's commitment to implementr many
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of the recommendations in the Gansl-er commission report regarding Army acquisition and program management and expedit ionary operations . I look forward to your questions. Chairman VüAXMAN. Thank you, Mr. parsons. General Phillips?
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STATEMENT OF BRTGADIER GENERA,L WTLLIAM
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PHTLLIPS
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General PHrLLrPs. chairman
Tatraxman,
congressman Davis,
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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 a11y.
As head of the 'Joint Munitions and Lethality Life cycle Management command, have sought to gather ressons learned from our experience with AEy and non-standard ammunition and apply them simply to improve our process.
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In early April, âs a direct result of the AEy contract 4IO review that Mr. Parsons just mentioned, we established a team 4lL of subject matter experts in contracting, program management, 41,2 and contract administration, which included the Defense 41,3 contract Management Agency, who continues to play a key rore, 41,4 as well as the Combined Security Transition Command in 41,5 Afghanistan. Members of my command have spent the past two 4L6 weeks in Afghanistan and rraq working with our forces on the 4L7 ground. lVe have recognized the need to improve how we 418 acquire non-standard foreign ammunition. 41,9 Let me again emphasize that we have worked vrith all our 420 key partners, to include DCMA, to study non-standard
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ammunition procurement procedures from acquirements to
contracts to delivery.
As a result, future standards for
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qual-ity, 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 wilr be published in early ,Ju1y 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 t1pe, quantity, and condition.
The Army has moved aggressively to address this matter
44t from the first
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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 alIies are properly prepared to continue the fight against the global war on terrorism. rn closing, let me just add that we thank congressman
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and Congressman Davis, thank you and this
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distinguished committee for your support for our soldiers, our service members, and our allies. I look forward to your questions. [Prepared joint statement of General phillips and Mr.
Parsons foll-ows:
]
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Chairman WAXMAN. Thank you very much.
Mr. Howell?
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457
STATEMENT OF MITCHELL HOVüELL
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Mr. HOVüELL. Chairman Iatraxman, Congressman Davis, and distinguished members of the committee on oversight and
Government Reform,
r appreciate the opportunity to appear 46t before you and discuss your concerns about the Defense 462 contract Management Agency's contract administration and, 463 more particularl-y, product acceptance processes for various 464 tlpes of nonstandard ammunition. 465 The contract at issue was for the procurement and 466 delivery of various nonstandard ammunition types for the 467 Afghanistan National Police and the Afghanistan National 468 Army. The contract was awarded in ,fanuary 2OO7 to AEy, 469 Incorporated, located in south Florida. 470 The Joínt Munitions and Lethality Life cycle Management 47t command, through their supporting acquisitions center at Rock 472 rsland, rl1inois, requested a pre-ar/üard survey from the DCMA 473 in December of 2006. Their request to DClvlA was for an 474 analysis of AEY's financial and transportation capability. 475 ïn ,-fanuary of 2oo7 DCMA found AEy to be satisfactory in both 476 of the evaluated capabilities. 477 AEY had a history of satisfactory performance on similar 478 contracts, showing increasing revenue growth, adequate 479 capitalizaLiort, and was considered low-risk for the evaluated
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capabilities.
DCMA
conducted a post-award conference in March
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with AEY representatives to confirm contract technical, quality, and safety performance requirements. At the meeting it was understood that all ammunítion would be off the shelf and previously manufactured. All storage, packaging, and transportation were required to be international best commercíaI practices. AEY confirmed their understanding of these requirements. The contract's packaging and quality terms and conditions specified by the Buyíng Command had been utilized in previous contracts without any identified
discrepancies.
The contract required kind, count, and condition
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inspection. There \^ras no age limitation on the procured ammunition. Product acceptance took two distinct forms. For domestic sources, acceptance was performed at origín. For outside the continental- United States, OCONUS, sources, acceptance r¡tlas 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 a11ow contractor use of COCs in lieu of more stringent Government inspection criteria, especially where risk is determined to be Iow. In addition, the Government maintains its inspection
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rights, regardless of whether the contract al1ows for use of 506 COCs or not. 507 The items of concern originated from OCONUS sources. 508 The OCONUS shipments were delivered to the airport in 509 Afghanistan. Due to limitations at the airfield; kind, count, 51_0 and condition inspection took place after movement of the 5 l-1_ ammunition from the air field to the bunkers. Ordinance 5t2 commissioned and non-commissioned officers conducted that 513 inspection. These officers have specialized ammunition 5:J.4 training and the expertise necessary to perform kind, count, 5L5 and condition inspection. 516 COCs \^rere acknowledged by the ordinance officers at the 5L7 derivery point. rn these cocs, the contractor certified the 518 ammunition provided was in acceptable condition and could be 51_9 safely fired in an originally chambered \^/eapon or vveapon
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system.
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to the off,-the-shelf nature of the OCONUS source non-standard ammunitíon, DCMA's inspection and acceptance services \Àrere very limited. For ocoNus-to-ocoNUS shipments, these duties primarily involve processing palrment 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
Due
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scrutiny of non-standard ammunition items have recently been accepted by DCMA. lVe 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 wil-l 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, DClvlA'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
enhanced
549
550
55l_
resources.
appreciate the Congressional- support of our efforts as the Department's primary contract management agency in
We
552
553
providing our Nation's war fighters and allies with quality
products and services.
554
Again, thank you for the opportunity to appear before
HGO176.000
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30
this Committee today to address DCMA's role in this matter. I will- now answer any questions the Committee may have. [Prepared statement of Mr. Howe]-l follows:l
**********
INSERT
558
**********
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PAGE
VüAXlvlAN.
3].
559 560
Chairman
Thank you, Mr. Howel1.
Mr. Mull?
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STATEMENT OF STEPHEN
PAGE
32
D.
MULL
562 s63
564
bes
s66
567 568
569
5'7 0
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 Contro1s, which we call DDTC, and that is part of the Bureau for Political Military Affairs which I 1ead. 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
57]572
573
574
575
576 577
578 579
580
581_
582
583
policy interests. Vüe carry out our work on the authority of the Arms Export Control Act and the Foreign Assistance Act of L961, according to the International Traffic and. Arms Regulations, the 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 Politica1 Military Affairs the responsibility for performíng this critical national security function for the State Department.
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584
585 586 587 588 589 590 591
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 theír legitimate self-defense needs and to fight effectíveIy alongside U.S. military forces in joint operations.
We
do this in part by screening aII export applications
592
593
594
595
s96
597 598
against our Watch List, a large task given the volume of applications handled by the Department. In fiscal year 2007, the Politica1 Military Bureau received approximately 8l-,000 licensing applications for exports valued at approximately In fiscal year 2008 we anticipate that the $l-00 billion. trend of an average annual increase of I percent will
continue.
Our Vrlatch List is based on section 38 (g) of the Arms
s99
600
6 01_
Export Control Act, and that directs the Department of State, as designated by the President, to develop approp:riate
602
603
604 60s 606
607 608
to identify persons and entities who are ineligible to contract vüith the United States Government or to receive an export license. The V{atch List was created to respond to this section of Iaw, 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
mechanisms
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34
drawn from a wide attay of governmental- and other sources.
We
0
update the Watch List daily with our compliance
specialists, who continuously review intelligence 612 information, law enforcement information, and open source 613 information for relevant material. Public lists such as the General Services 6r4 615 Administration's Excluded Parties List, the Office of Foreign 6t6 Asset Control's specially d.esignated foreign nationals, and 6r7 the Department of Commerce's Denied Parties List are all part
6tt
618
List. The V'Iatch List also includes persons who are subject to 6]-9 620 criminal or civil debarment by DDTC, âs well as entries 62t derived from classified intelligence reporting. Additionally, sensitive information regarding ongoing 622 623 criminal investigations is routinely provided to us by the 624 FBT and Immigrations and Customs Enforcement senior special 625 agents who are assigned and work with us in the Political 626 Military Bureau and to serve as liaison among our agencies. It is important to point out what the Watch List is and 627 628 what the V'Iatch List is not. The Watch List functions mainly to alert our licensing 629 630 officers and compliance specialists within DDTC about 631, potential concerns regarding a party to a Defense export 632 license application. The wide range of information and 633 sources used in compiling the Watch List reflects the of our
V'Iatch
HGOI_76.000
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35
statutory requirements of the Arms Export Control act and the 635 wide latitude given the State Department in making the 636 decisions regarding the exports of munitions. 637 Consequently, while some entries clearly determine 638 whether an export may be approved--for example, íf a party to 639 a deal is debarred or otherwise ineligible to export--other 640 entries tend to be of a more informational nature and are 64t used in coming to decision on making licensing applications. 642 Consequently, the presence of an entity on the V'Iatch 643 List will prompt further scrutiny and review, but it is 644 doesn't automatically entail removal of the party or the 645 denial of a license application. Each license application submitted to DDTC is required 646 647 by the regulations to include the names of all the parties 648 who are involved in the proposed transaction. All of those 649 parties, both foreign and domestic, are checked against this If there is a match, the license application is 6s0 Watch List. 651 immediately put on hold for a review by a compliance 652 specialist. If the party in question is debarred by the Department 6s3 654 for a conviction under the Arms Export Control Act or 655 otherwise. ineligible--for example, if another U.S. Government 656 agency has debarred them from contracting with the U.S, 657 Government--or if they are under criminal indictment, they 658 will be removed and the approved export application or the
634
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6s9
660
66L
662
663 664
66s
666 661 668
669
670
67]672 673 674 675 676 677
678
679 680
6 81_
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 1ike1y be approved v/ithout further deIay. We find the Vrlatch List to be an effective tool to facilitate coordination with other Government agencies that For example, may have a concern with the particular entity. companies under criminal investigation may be Vfatch 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.
682
683
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
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684
685
that investigative resources are not wasted on law-abiding
companies.
686
68'7
688
for your interest. I will be happy to any of your questions about our V{atch List. [Prepared statement"of Mr. MuIl follows:]
Thank you
answer
689
**********
INSERT
**********
HGOt_76.000
PAGE
38
690
691, oJz
693 694 695 696
697
698
699 700
701
702
703
704
705
706 707 708
709
7LO
7]-1,
71-2 71,3
71-4
for your testimony. rVithout objectíon, the questioning will commence with a ten-minute round for the majority followed by a ten-minute round for the minority. Either side may reserve any unused time of its ten-minute block for use during or immediately fo11owíng a five-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 fígure 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. Howe11, 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. HOT/üELL. Yes, sir, I do. Chairman WAXMAN. V'Iell, w€ did what the Army apparently never díd. We looked back at past contracts to see what AEY's past performance under other contracts viras really like. One contract that AEY qot was a contract with the
Chairman WAXMAN. Thank you very much
HGO]_76.000 '715
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39
Multi-National Security Transition Command in Ïraq to deliver protective helmets. A U.S. official who examíned AEY's / i_o 7r1 shipments wrote, "The helmets came to Abu Graib by mistake. 7]-8 They were not very good. They had peelíng paint, and a few 749 appeared to have been damaged such as having been dropped. '720 When I first saw them, I put them in the reject category. " The same inspector also wrote this to Mr. Diverol-i, the 72t 722 head of AEY: "Some people got a litt1e wound up.when they 723 saw the daily receiving report. They remembered the l-0,000 724 helmets you sold them earlier this year and the junk AKs we have in the warehouse. Several scenarios \^tere being 725 stitl 726 planned for you, none of them pleasant. " Another official wrote, "Bottom line, the helmets are 727 728 damaged goods and we don't want them.' ' 729 General Phi11ips, does this sound like satisfactory 730 performance to you? 731, General PHILLIPS. Sir, I am going to let Mr. Parsons 732 address that question, but before I do that I would just like 733 to state that when the KO goes in, the contracting officer, 734 goes in to make an award on a contract they do a thorough 735 review of past performance and they ask DCMA to assist in 736 that process, so-Chairman WAXMAN. !Ve11, if you did a thorough performance 737 738 and someone came back with this kind of report of performance 739 under a previous contract, would you think that that sounded
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40
140 '74r
t+¿
743
744 745 746 747
748 749 750
75L
752
753
754 755
756 757
758 759
760 761 762 763 764
like satisfactory performance? Mr. Parsons, maybe you can answer this question. Mr. PARSONS. No, I would not, sir. And, as f mentioned in my opening remarks, wê 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. Vüe11, 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: "AlI 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, flo 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. Howel1, would you think that indicated sound past performance?
HGO176 .000
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4L
765
766 767 768 769 770 77L 772 773 774 775 776 777 778 779 780
781
782 783
784
785
/öb
787 788
789
Mr. HOVüELL. I would not, if I heard those things, sây it was 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 WA)WAN. V'Iell, under another contract with AEY, with one with the U.S. Army Special Operatíons Command, AEY r^ras supposed to provid.e the same type of ammunition that it alter delivered to Afghanistan. The contracting officer who terminated that contract said that AEY ' 'failed to deliver acceptable goods, provided no notice of an excusable deIay, " and "provided inadequate assurance of future performance. " Does that sound like satisfactory performance, Mr. HowelI? Mr. HOWELL. Absolutely not. Chairman V'IAXMAN. 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 ï/eapons 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
HGO176.000
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790 791
792
793
794 795
796 797
failure to del-iver the listed items has endángered 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 subiect order." Mr. Parsons, does that sound like satisfactory
performance?
798
799
800
80r_
802
803 804 805 806 807 808 809
81_
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 miIlion. That is quite
PARSONS.
Mr.
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.
0
81_l_
8]-2 813
814
you, Mr. Chairman. Let me go first to Mr. Mul1. You are aware, of course, that the Arms Control Act requires us to make sure that brokering, arms brokering overseas, is done in light of the
Ms.
NORTON. Thank
HGOI_76.000
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43
national security interests of the United States. I want to 816 look at the V'tatch List that you discussed in your testimony. When there is an application for someone to be an arms 8]-'7 818 broker, the Government is supposed to check a1l the parties 819 on the Watch List specifically to see if these are arms That is correct? 820 traffickers. 82t Mr. MULL. Yes. We compare every application for an arms 822 brokering license against the V,Iatch List. ó¿5 Ms. NORTON. So this V'Iatch List is very important, and we 824 have learned--and I want to verify this--that everyone Let's go 825 involved in the AEY contract was on the V'Iatch List. 826 first to the buyer, the president, Efraim Diveroli, flagged 827 in April 2006 because of suspected i11egal arms traffickirg; 828 is that not correct? Mr. MULL. Yes, ma'am, that is correct. 829 Ms. NORTON. Although, Mr. Chairman, I would like to put 830 their words on the record of the Vrlatch List that, although 831_ 832 Mr. Diverol-i was only 21, years old, he has brokered and 833 completed several multi-milIion-dollar deals involving ful1y and here are the operative 834 semi-automatic rifles, 83s words--'' future license applications involving Diveroli 836 and/or his company should be very carefully scrutirtized.' ' Mr. MuIl, that entry was placed in 2006; is that not 837
815 838 839
accurate?
Mr. MULL. Yes, ma'am. And if I might elaborate,
hre
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841
842 843 844 845 846
847
848 849
850
851-
852
8s3 854
85s 8s6
857 858 859 860 861
862
863
864
actually first put the company AEY on our Watch List in .Tanuary of 2005. Ms. NORTON. I have limited tíme. I just want to make sure that my questions are predícated on the facts. They are on the Watch List. Nor,r/, the middle man, Mr. MuI1, r¡¡as Enrique Tolmay. 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 ís correct. Ms. NORTON. Now, we note that the entries of Mr. To1may and Mr. Pinari came from the CIA and the DIA, and we understand that their information is classified, but the fact that they hrere on the list in 2005 and 2006 is not classified; is that correct? Mr. MULL. That is correct. Ms. NORTON. General Phi11ips, 1et me turn to you. The head of the State Department's Directorate of Defense Trade Controls told us that the AEY had "a perfect tÈifecta,,' and yet, of course, they r^rere awarded by the Army a $300 million contract. How do you explain awarding the contract to
HGO176.000 865
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866
867 868
869
870
871-
872
873
874
875
876 877 878
879
880
881_
882
883 884
88s
886 887 888 889
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 l-ook 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. V'Iait 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 yoü, in light of what ü/e nor^r know, we know the contracting of f icer did not. And the last thing I am trying to do is to blame it on the contracting officetr. The only reason rr're 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 Vrlatch List oy, if there is no "requirement, " to have your own internal procedures so that the contracting officer would know to check the V'Iatch List? Or is your testimony that we didn, t have the procedures, wê 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. V'Ihat I am not
somebody v/ho
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891_
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46
sure of is whether that Watch List is accessible to people outside of the should. I can tell you that there is nothinq
892
893
894
895
896
897 898 899 900 901
in the regulation-Ms. NORTON. Mr. Mull, r,rras that Vüatch 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. hle have to make sure that we don't release any classified information, so-Ms. NORTON. This was not classifiedMr. MULL.--hre would screen in response to a Government agency. We would consider the request and provide what we
cou1d.
902
903
Ms.
NORTON. Thank
you. So this could have been
released. It was not cl-assif ied. 905 Mr. Chairman, I would like to ask if any procedures 906 have, in fact, been set up to check the V'Iatch List, before I 907 sign on. Are there any procedures now within the DOD to 908 check the Watch List now that, of course, yoü know that you 909 have access to that information? 910 Mr. PARSONS. Ma'am, flo, there is not to my knowledge, 9]-]- but we will- pursue that with the Department of State. Our 9t2 understanding was that that Watch List fed the Excluded 913 Parties List, which is what is required by the contracting 9]-4 officer, but we will engage with the state Department to see
904
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u/ay
47
915
if there is a
expired.
9t6
9]-7
91_8
that we can add that to our procedures. Chairman VüAXMAN. Thank yoü, Ms. Norton. your time has
9]-9
920
JZ!
922
923
924
925
926
92"1
928 929
930
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 classificatíon was the Defense Intelligence Agency. Do you know now what the deletion was? Mr. PARSONS. Vüith the DIA, fo, I do not. Chairman T/üAXMAN. You do not. Okay. We have another vote on the House floor. we are going to recess for around ten minutes in order for Members to vote
and come back.
We
stand in recess.
}üAXMAN.
93L 932
933
lRecess. l
chairman
The committee will come back to order.
934
935
I would like to now recognize Mr. Davis for ten minutes. Mr. DAVIS OF VIRGINIA. Thank you. Mr. Howell, 1et me ask you, what does it take to be a
non-
936
937 938
responsible bidder?
939
Mr. HOTiüELL. Yes, sir. Mr. DAVIS OF VfRGINIA. I mean, in retrospect you would say these guys are probably non-responsible, wouldn, t you,
HGOI_76.000
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48
940
941,
942
943 944 945
946 947
948 949
950
951_
952
953
954
955
9s6
957
9s8
9s9
:7()u
961,
962
963 964
for a $200 million bid? Mr. HOWELL. I would. Given the facts that we know today, I would tel1 you that they hrere 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 settl-e claims that 1-00 neighbors in the Santa Susanna Field Nuclear'Research Facility were síckened by decades of radioactive and toxic contaminatíon. This was supposed to be confidential, but one of the plaintiffs divulged the terms to Ioca1 media. fn 2004, a $615 million settlement to resolve the Darlene Druin scandal and other pending investigations, if you remember that. In 2003 an $1-8 million settlement for violations of the Arms Expert Control Act and the International Trafficking in Arms regulation. In 2003 a $6 million settlement for violations of the Arms Export Control Act involving transferred data to China. In 2003 they paid a $a million fine for violations to the Arms Export Control Act and the
HGO176.000 965
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49
rnternational Trafficking Arms control. That is a different 966 violation. In 2003 a $2.5 million settlement for alleged 967 defective pricing. In 2003 a $49O,OOO settlement for a 968 key-tam action for farse claims. They had had business uníts 969 suspended from receiving nev\¡ Federal contracts for an 970 l-8-month period from 2003 to 2005. criminal investigations. 97r But this is the Boeing Corporation, but they are 972 responsibl-e under the criteria because they can stíl_1 973 deliver; is that how you view it? 974 Mr. HOVüELL. Well, sír, the DCMA,s ability to assess 975 prior performance and potential responsiveness is directly 976 limited to the data that we have and can review. 977 Mr. DAVIS OF VIRGINIA. Yes. That is all public data 978 here. And they continue to receive. I guess what I am 979 saying is it is a fairly low bar for companies. Real.r_y, 980 debarment or not finding people responsible is basically a 9 81_ fairly low bar, isn't it? 982 Mr. HOVüELL. Yes, sir. 983 Mr. DAVIS OF VIRGINIA. What did DCMA, s review entail? 984 Based on their review, a complete award was recommended.. AEy 985 was cl-assified as a low financial risk at the time, and the 986 firm was deemed well-managed, efficient, and experienced. 987 Can you find where that information came from? 988 Mr. HOWELL. Yes, sir. We use a form 1403. That is what 989 the procurement contracting officer submits for a pre-award
HGO]_76. 000
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990
99]992
993
994 995 996
997 998 999
1-OOO
1_001 LOO2
10 03 10 04 10 05 10 06
t_007
1008 1009
101- 0
survey. In that, in section l_9 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-Lo-OCONUS delivêty, requested that we perform a pre-ahrard on the financial, transportation, and accountability aspects of this impending contract. Vüe did that for financial and transportation and the Defense Contracting Auditing Agency conducted the accountability piece of it. Mr. DAVIS OF VIRGINIA. Were they a\^rare that the CEO of this company was in his early 2Os? Mr. HOWELL. I cannot anstver that question at this point, sir. Mr. DAVIS OF VIRGINIA. Let me ask you, Mr. parsons, Mr. Diverori had some colorful off-the-field incidents, for lack of a better term. What affect do domestic incidents by contractors' presidents have on the awarding of a Government
contract?
1-01l_
r01,2
1_
0 l_3
LOt4
Mr. PARSONS. Sir, I have a hearing difficulty, so I just ask that you repeat the question. Mr. DAVIS OF VIRGINïA. V{hat affect to d.omestic incid.ents by a contractor's president have on the awarding of a
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Government
contract?
Any?
1016
ro!7
101- 8
10i_9
1,020
t02L
]-022
LO23
1,024
to25 to26
1,027
t028
1029
103 0
1031_
ro32
l_033
1
034
103 5
1036
1,037
1_038
1_039
Mr. PARSONS. As far as his status, himself? Mr. DAVIS OF VIRGINIA. yes, for his off-the-fieId 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. DAVrS OF VIRGINIA. A 22-year-o1d CEO, I don,t think he had a college degree--that doesn,t send off any beIls? 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. DAVrs oF vrRcrNrA. Nobody did in the investigation of this or had any idea what was behind the paperwork? Mr. PARSONS. Not that I know of. Mr. DAVrs oF vrRGrNrA. what if a contracting officer came across a news story where the presid.ent was arrested for domestic violence rel-ated charges? That would not be something that would necessarily ring any bel1s, because you look at the total company and not at the CEO? Mr. PARSONS. Sir, if that was informatíon that was available to the contracting officer, r am sure that would have caused some questions on their part. But, again, \,\re are not aware of any of that information being available to the contractíng officer.
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52
Mr. DAVIS OF VIRGINIA. Cou1d they have taken his into account in deciding whether they could have been selected for an award of this magnitude? Mr.
PARSONS.
r04t
1,042
r043
1"044 104 5
Not his age. No. That is not one of the in awarding--
things that Mr.
hre
use as a discriminator
Mr. DAVIS OF VIRGINIA. How about experience?
PARSONS. Excuse me?
r046
L047
104 8
Mr. DAVIS OF VfRGINIA. Experience is one, though, isn,t
ir?
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 mater is didn, t have a l_ot of
experience.
r049
105 0
10 51
]-052
105 3
1054
1-055 1-056
1_057
1058
1_059 1_060
10 61
Mr. PARSONS. The information available to the contracting officer indicated that the company had had relevant recent experíence, that they had started in lggg, 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 t)æes of goods and
services.
L062
106 3
1064
Mr. DAVIS OF VIRGINIA. Obviously they think in retrospect they hrere wrong, don, t
\Àrere
h/rong.
you
you?
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PARSONS.
53
Mr.
They \iìlere wrong?
ro66
1"067
MT. DAVIS OF VIRGTNTA. Yes.
Mr. PARSONS. The contractíng officer relied, again, on 1068 if that was supplied on a contract that AEy had for-to69 Mr. DAVIS OF VIRGINIA. Do you think he made a good 1070 decision or a bad decision? t071, Mr. PARSONS. Based on the information that she had, I 1,072 think she had-1-073 Mr. DAVIS OF VIRGINIA. I am asking you in retrospect, ]-07 4 now that we know all the facts. 1075 Mr. PARSONS. rn retrospect, knowing what we know no\iìr, it 1-07 6 v/as not a good decision. 1-077 Mr. DAVïS OF VIRGINIA. That is all I am trying to get 1078 after. L079 I will reserve the balance of my time for this point.
1-080 10
81_
chairman
VüAXMAN.
The gentleman has three minutes. He is
reserving that. to82 I want to recognize Mr. Issa. 10 83 Mr. ISSA. Thank you, Mr. Chairman. Artd thank you very 1_084 much for holding this hearing. 1_085 I am going to bifurcate my questions. I think the
1_086
Ranking Member has done a pretty good job, a very good job of
1087 1088
r_089
sort of asking the question of, in retrospect does thís award. make sense. No, it doesn,t. General Phi11ips, if I can ask you a question, knowing
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lvhat you kno\¡/ from the record, what tools should have been used to prevent this from happening?
to92
10 93
General PHILLIPS. Sir, this is non-standard ammunition
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]-097
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13
IIT4
that we are buying. ft is essentially foreign-made ammunition, Soviet block countries, former Soviet bl_ock. 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. VrIe 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, Do. Please ansh¡er 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 o1d Soviet Tricomm standards, and then there is, like, al1 others. This is not all others, is it? This is basically the old anti-NATO communist block ammunition,
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AK-47s, a 762 that doesn't use the same casing as ours, and
so on. It is what we dealt with all the way back in Vietnam,-
1.II7
1118
1A]-9
isn't that true?
General PHILLIPS. Correct, sir.
tt20
L1-2t
tL22
LA23
tL24 Lt25
Mr. ISSA. Let me ask you a question, speaking of Vietnam. I r^/as in Afghanistan almost immediately after we had secured it, and I was there wíth 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 hrere going to train the Afghans, the guys who, to a certain extent, had kicked the Soviets' ass with odds and ends
weapons.
tt26
L1-27
I know we are not supposed to use that word tL28 indiscriminately, but I noticed in the staff stuff I noticed tI29 there were some other words like shit ammo, so I figured, you 1L3 0 know, kick the Soviets' ass would work very wel1. So I will 1_131 limit myself to those two parts of George Carlin, s repertoíre tr32 for today in honor of George's passing. 113 3 But we were there with Duncan Hunter, and he looked at LA34 this stuff, and it was junk, and he asked, Are we going to 113 5 train with this? Oh, Do, this stuff is terrible. This is 1-L36 what was turned in. We are paying to have this turned in by 1"1,37 Afghans and none of it is useable. He said, V'IeIl, when are 1l_3I you going to start training these guys? Wel1, w€ are looking r_13 9 into procuring weapons.
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I asked that day what I am going to ask you today, L]-4L although r asked it with a shorter 1ist. rsn't it true that ]-L42 Bulgaria, the Czech Republic, Estonia, former East Germany, L743 Hungary, Lithuania, Latvia, Poland, Romania, S1ovenia, and Ia44 Slovakia all use this standard historically, have large tI45 stockpiles, hrere known to have large stockpiles, and 11,46 virtually all of these people, except for Germany, I guess, 1,]-47 vrere part of the coarition of the witling that went into tr48 Afghanistan; isn't that true? ' ]-1,49 General PHILLIPS. Sir, I am not sure. I belíeve that to
11_50
be true
Mr. ISSA. I said f would bifurcate this thing, but you LAs2 led me right into the other part. hlasn't this an unnecessary 11_s3 contract, because the truth is if you are going to buy LAs4 standard ammunition and you have colleagues, a11ies, friends, L155 people you work with for whom this is still a standard, they 1156 know about it1"L57 General, 1et me ask you a question: why are you wasting 1t_58 Federal taxpayers' time writing standards for tricomm rounds 1L5 9 when, in fact, all those countries f named have experts who r_160 not only have the ammunition and the hreapons stilr in their 1-l_61 stockpiles in many cases, but have people who have the Lt62 expertise, and they are all NATO allies? Why is it in a NATO 116 3 war in Afghanistan we didn't use our NATO alIies' expertise Lt64 not only in supply but also in inspection? And why aren,t
1151
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you doing it today as part of the fix? General PHILLIPS. Sir, I would simply say that we are
Lt66
LL67
required by statute and by Federal regulation that when we 1l_68 enter into agreements with our foreign aIlies like tL69 Afghanistan we use specific policies and procedures that are 1"L7 0 defined by, in the case of the Army, the United States Army I1"7t Security Systems Command. LL72 Mr. ISSA. I am running out of time, so let me close with tI73 one question that is half comment/half question. you entered
LL7 4
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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 iKarzai and I ask him, Would you be will-ing to have this product del-ivered to you from any source that could del-iver you high-quality product that your troops could use, do you think he is going to tell me, flo, îo, we have an agreement, we have a certain standard? Or do you believe that, in fact, the United States 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 decísion to use the weapons they were used to, and then we didn, t work with the
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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 f would like to share with you is that we are doing everything possible to ensure that our very important aILy, 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 VüAXMAN. 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, âs 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
peopl-e who had
.incompetence, phenomenal carelessness, and a culture of
1209 12IO
1"2LL
mediocrity. General, we reviewed documentation from the Defense Department involving quite a few previous contracts your
aglency had
with this company, AEY. What struck me was the 1,21-3 number of times AEY failed to perform and then came up with \214 outlandish excuses for why it didn,t fu1fi11 the contract.
r2t2
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59
Let me give you a few examples. L2'J,6 In 2005 AEY was awarded a contract to provide munitions I2I7 to the lraq Security Forces, including 10,000 Beretta 12a8 pistols. Mr. Diveroli r,'ras only 1-9 years ol-d at the time. We L21,9 interviewed your contracting officer for this contract, and 1220 he told us that when Diveroli failed to deliver the weapons, 1,22L he just started making up wild excuses. This is your t222 contracting officer, now. This is what he said. "Diveroli 1223 said the German government was interfering in the delivery of r224 these Italian-made pistols. He said that the transport 1,225 planes couldn't f1y because of bad weather. He even said L226 that there was a fiery plane crash that destroyed the 1227 documents necessary to secure an export license needed to 4228 ship the goods. " 1-229 But that wasn't all. Mr. Diveroli said at one point ]-230 that he failed to deliver the weapons because a hurricane hit ]-231, Miami, Florida, where AEY was based. He told a contracting ]-232 officer that they had no water and that "his life was just ]-233 terribie. " V'IeIl, âs it turns out this wasn't true. 1-234 In an interview with the Committee staff, this is what ]-235 your contractíng officer told us. "Vile could te11 there was L236 no hurricane in Miami. It wasn't like we didn't have the r237 internet and the green zone.'' L238 General, are you concerned that Mr. Diveroli would make ]-239 up such excuses like this on important Government contracts,
HGOl_76. 000
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60
]-240 124L
major contracts?
General PHILLIPS. Sir, I appreciate your ínsight.
I 1,242 have not heard those allegations that you just went over in L243 terms of the nine millimeter contract and others, but 1244 certainly it raises issue as to Mr. Diveroli, himself. In ]-245 hindsight, if we had had knowledge, Army contracting, the ]-246 contracting officer for the contract we are discussing, had 1247 knowledge of. that and those instances in the past 1,248 performance, that would have weighed in the decision that-t249 Mr. CUMMINGS. That is why I started off my discussion by ]-250 saying one of four things, ot four, are happening here. There t25L are some serious communication problems; wouldn't you agree? L252 General PHILLIPS. Sir, I think when Mr. Parsons L253 mentioned up front that in past performance and sharing that 1254 information, that we have got to improve the way we do that. 1"255 I would agree, sir. 1256 Mr. CUMMINGS. So you did not know about this informat.ion 1_257 that I just cited when this $300 million contract was L258 awarded? You didn't know? 1259 General PHILLIPS. Sir, I did not 1"260 Mr. CUMMfNGS. Mr. Parsons, did you want to say
L261,
something?
1262
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L264
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
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Command
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1265
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performance ans\^/ered by the .Toint Contracting
in Iraq
and Afghanistan. Many of those issues that you just
identifíed were not highlighted in that past performance
review.
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Mr. CUMMINGS. It is interesting that when Mr. Diveroli said a hurricane hit Florida and made his life terrible he $/as justifying his failure to perform on one of three contracts that your team was supposed to be reviewing to assess hís past performance, and yet you didn't even'ta1k to the primary contracting officer on the contract; is that right? Mr. PARSONS. Sir, that is information I am not a\¡/are of . Mr. CUMMINGS. WeI1, w€ did talk to him, and this is what he said. He told us, "I couldn't take anythíng Diveroli said cred.ibly." He conclud.ed 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 rtrere 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 v\ray \^re 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
HGO176.000
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corrections deal with the four things that I talked t29t about--the communications problems, incompetence, 1,292 carelessness, and a culture of mediocrity. 1-293 I am hoping that the things you said will correct this, 1294 but I am going to tetl you I don't have a lot of faith. 1295 Chairman I/üAX}4AN. Thank you, Mr. Cummings. t296 Mr. Lynch? t297 Mr. LYNCH. Thank you, Mr. Chairman, L298 Mr. Chairman, I want to thank you for holding this L299 hearing, and I want to thank the Ranking Member for his work, 1-300 as well. This is very important. L3 01_ You know, there has been some reluctance, I think, of ]-302 the paneI, and I appreciate your coming in here and 1-3 03 testifying, but there has been a reluctance on the panel to 1_3 04 criticize what happened here. I just want to go on the l_3 0s record to say that all of us have spent a lot of time ín lraq 1_3 06 and Afghanistan and we have seen the excellence with which 1_3 07 our mílitary has performed. The events here that we are 13 08 speaking of today are a disgrace. They do not meet the 1_309 standards of those men and women in uniform that we have seen 1_310 repeatedly in our visits to Iraq and Afghanistan. That is 1_311 the great sin here. This does not meet acceptable standards, L3T2 not even close. 131_3 I am not hearing that from the panelists. I am hearing ]-314 hedging, I am hearing some defenses about information not
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This kid was 1-9 years old, 19 years o1d. 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 pane1, anybody get their walking papers for what has happened here? Has anybody'been fired? Mr. PARSONS. No, sir. No one has been for instance red. Mr. LYNCH. I am sorrv? Mr. PARSONS. No one has been fired. Mr. LYNCH. V'Ie11, 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 we11, I know the two individuals were indicted, but it looks like, based on the information here, because the standards are so 1ax, it doesn't look like they broke the 1aw. It looks like these guys could walk, even though they are indicted, because there is no standards for age of ammunition, and. they knew it, so I am very concerned about that. f hear and I read that the contracts have been canceled, terminated. Now, I was in lraq at the Taji V'Ieapons 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.
beíng available.
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a34L
]-342 L343 ]-344
Mr. Platts from Pennsylvania actually asked the general to give us a detail, and we went around and started opening up some crates. They \^/ere 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
So myself and
t345
1346
'J,347
before
me.
Can you
teI1 me, is
AEY
sti1l performing on some
contracts in lraq? Mr. PARSONS. Sir, f am not aware. I will have to get L348 t349 back to you on whether they are still performing on a 1350 contract in lraq. 1-351 Mr. LYNCH. That is not good enough. 'J,352 Mr. PARSONS. I can tell you on this-1_3 53 Mr. LYNCH. That is not good enough, sir. 1,354 Mr. PARSONS.--ammunition contract they are not. 1_355 Mr. LYNCH. I will get back to you--that is not good 1356 enough. Considering what these kids did to the American 1,357 taxpayer, there should be no question in anyone's mind that 1_358 these contracts have been terminated. That just sends the
13 59
1_360
l_3 6
1_
\^rrong
1,362
1-363
a364
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 Divero1i, had seven contracts that were unsatisfactory previous to this. T¡'Ihat bothers me is that a 1ot of this information was laid out there. The Sourcinq Committee on this most recent
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contract declared that he was unsatisfactory. Then the 1366 Defense contracting officer changed that assessment, changed ]-367 it from unsatisfactory to good and allowed the contract to be 1368 granted. So I would be asking if there was an investigation 1369 regarding that individual who turned the recommendation t37 0 around after we had a1l the information before us. The fact that I think, based on what I saw with my eyes, t37L L372 AEY is sti1l performing contracts for the United States L373 Government. That is based on my own assessment in person, in r37 4 Taji and lraq with Ivlr. Platts and some others. I hope you will get back to me on that. 1375 L37 6 [The information follows: ]
]-377
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Mr. LYNCH. AIso, there is another individual here, Mr. Merri11. It appears, ât least from the documents in front of ßê, 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 presídent of AEY how are you doing. He has a major financial interest in this company, and he fi1led 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 got to scrap this whol-e system and come up with something that is more worthy of our'men and women in uniform, because this has taken resources ah/ay 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.
00
L4OT
]-402
Mr. DAVIS OF VIRGINIA. Mr- Chairman, let three minutes, if I could, rea1ly quick.
me
claim
my
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V'IAXMAN.
67
Chairman
Yes, sir.
I just ask why this was a 1,405 requirements contract as opposed to a multiple-award IDIQ or a406 something like that? V'Ihy was this vehicle chosen? r407 Mr. PARSONS. Congressman Davis, it is my understanding, 1408 after talking with the contracting officials on this, that ]-409 when they were discussing the requirements for the ]-Ar0 Afghanistan ammunition they could not get the customer to ]-4tL specify a minimum amount of ammunition that they would need t41,2 to place a minimum order against an IDIQ contract. So ]-4t3 instead. they elected to use a requírements contract, which t4t4 doesn't require us to necessarily award a minimum
L404
Mr.
DAVIS OF VIRGINIA. Cou1d
a4a5
requirement.
t4t6
Okay. Now, this was a smal-I L41"7 business that got the contract at the end of the day. Who 1_418 checked to see if their certification was accurate? Is this L4I9 the contracting agencies? Is it the SBA? Or is it a L420 competitors' complaint? How does that work? T42L Mr. PARSONS. Sir, the contractors certified in their I422 certification representations that they hrere a sma1l 1423 business. The contracting officer verified that they luere a smal1 business and coded that in the Federal procurement data 1"424 1,425 system as a small business 1426 Mr. DAVIS OF VIRGINIA. That could have been protested if L427 somebody wanted to protest, but it was not in this case,
DAVIS OF VTRGINIA.
Mr.
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]-428
1-429
right? Mr. deciding.
PARSONS.
The smal1 business size was not a factor in
r430
This contract was open to large businesses and But if a small- business
t43I
L432
]-433 ]-434
1_435
smal-l- businesses.
Mr. DAVIS OF VIRGINIA. Right.
competes in this,
don't they have an advantage?
was that last part again?
Mr. isn't
PARSONS. What
Mr. DAVIS OF VIRGINIA. If a sma1I business competes, it there some advantaqe to that?
4436
]-437
1_438
Mr. Mr. Mr.
PARSONS.
DAVIS OF VIRGINIA. What
"ott..l.
is the difference between a
t439
]-440
sma1l business and a smal-I disadvantaged business?
PARSONS.
Sir, the small disadvantaged business are 1,44L those companies that meet the qualifications of the Smal1 L442 Business Act for being identified as disadvantaged for either I don't have a t443 minority status or for other aspects of ít. L444 complete list off the top of my head on what those are, but L445 there is definitely something that has the difference between t446 the small business and small disadvantaged business. ]-447 Mr. DAVIS OF VIRGINIA. I know what it is. What is your L44B understanding of the certificate of competency process and L449 the role of the SBA? 1_450 Mr. PARSONS. Sir, Ry understanding is that if there is a 1-45L question on the part of the contracting officer regarding the L452 responsibility of the small business, they go to the Sma1l
HGO176.000
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L453
Business Administration and ask for a certificate
competency
of
L454
1455
for that smal-I business.
Mr. DAVIS OF VIRGINIA. Now, when a contracting officer r456 has to interface with officials from SBA, what are the L457 procedures? Do they just ask for it and the SBA then will do 1_458 appropriate checks? Mr. PARSONS. Yes. They correspond directly with the 1459 ]-460 Sma11 Business Administration and give them all the 1,461, particulars regarding the issue and wait for the SBA to make
]-462 ]-463
an assessment.
Mr. DAVIS OF VIRGINIA. So how much information does the t464 contracting officer share, and how knowledgeable does the SBA ]-465 have to be in understanding the nuances of a specific
1,466
acquisition?
1467
L46B 1,469
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r472
]-473 t47
4
4475
1,47 6
1477
Mr. PARSONS. I am not certain, sir. Mr. DAVTS OF VIRGINIA. Okay. How frequently does the SBA effectively reverse a contracting officer's responsibitity 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, [o. Mr. DAVIS OF VIRGINIA. blhat challenges does your agency have with the SBA certificate of competency process, particularly in an acquisition to be awarded on the basis of
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price technically acceptable offer? l4'79 Mr. PARSONS. I am not certain. 1480 Mr. DAVIS OF VIRGINIA. You don't feel you have any 1,48]- challenges, or do you have challenges with the SBA ]-482 certificate of competency process, particularly in an t483 acquisition that is awarded on the basis of the 1ow price t484 technically acceptable offer? Any problems? t_485 Mr. PARSONS. Sir, again, for this particular acquisition L486 I am not aware of any issues regarding the competency, the 1,487 certificate of competency with SBA. There v¡asn't any 1_488 engagement at all with the SBA in this acquisition process. L489 Mr. DAVIS OF VIRGINIA. But they weren't competent at the L490 end of the day? t49L Mr. PARSONS. Correct. L492 Mr. DAVIS OF VIRGINIA. Thank you. ]-493 Chairman WAXMAN. Thank you, Mr. Davis.
t47
8
a
1ow
1,494
Ms. Ms.
Watson?
WATSON.
]-495 L496
L497
L498
L499
1_500
l_5 01_
L502
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, r^¡e find that in 2006--it was December--Mr. Diveroli and Mr. Packouz alleged1y 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.
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In ,January of 2OO7 AEY was awarded a ç298 million, two-year contract by the Defense Department. The president of AEY, Efraim Divero1i, \iìras 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. Wellr suppose they were under-age, 16 and 17? I¡lould you not want to be ahrare that they were not adults? And on Friday both of them and three other AEY officials \^¡ere indicted on charges that they concealed the Chinese origins of AEY's ammunition shipments from Albania to
Afghanistan.
1_516
L5T7
1_518
15l_9
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 shoul-d. They are not being
accurate.
r520
!521
L522
L523
L524 L525
L526
L527
I want to ask Mr. Mu11, Were you a\trare of the contract with the Chinese for the qoods? Mr. MULL. The .orrar"]a with the Chinese? Ms. WATSON. Mr. Gin had notified the factory before and after the production of 100 percent inspection of the vests to make sure that there is no Chinese markings anywhere on the vests or on the box, and I understand there were markings
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there. It is kind of like, âs I understand, a bait and switch thing that AEY did, and there is a history of thís kind of thing. I understand that there as some, I guess, relationships and some purchase long before this contract. I¡lere you aware that they \^rere buying these goods from the
Chinese?
Mr. MULL. No, ma'am, I was not. But, because that was 153 5 not part of an export of weapons from the United States and 1536 munitions from the United States, which is what r,.re are so1e1y r537 responsible for regulating, we wouldn't necessarily have been 1s38 aware of that. But, to answer your lraq, ño, I was not aware 153 9 ín this particular case154 0 Ms. IVATSON. Vüel1, the documents that \^/ere obtained by L54L the Committee seemed to show that AEY concealed these Chinese L542 origins by claiming that the vests r^rere made in South Korea 1,543 and were only shipped through China. This is how the AEY L544 official described this plan: "Harry, I just spoke to L545 Efraim, and here is how we could resolve this situation. 1546 Please advise. " 1547 The commercial invoice would show that the shipper is a 154 I south Korean company/ and we have the letterhead, and that 1549 you and your contact in C--meaning Chína--is just the expert
r534
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company
1551
L552
Mr. MuII, again, would concealing the true Chinese origins of goods under a State Department contract be a
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violation of law? 1_554 Mr. MULL. WelI, if someone was exporting Chinese sourced l_555 munitions, we would not give a license to someone to export l_556 munitions from the United States from China overseas; L557 however, again, in the State Department we do not regulate 1558 foreigners deal-ing with one another overseas. 155 9 Ms. WATSON. Accordíng to the indictments of last week, 1-56 0 the Jus.tice Department is examining the Chinese origin of the 1561 ammunition AEY provided from Albania to Afghanistan under the L30¿ Defense Department's $3OO million contract, but the Committee r_563 now has evidence that AEY may have concealed the Chinese 1-564 origins of other goods, including the buIlet-proof vest. 1_56s Mr. Chairman, I suggest that we share with the ,Justice ]-566 Department the information we obtain to make sure that they L567 are aware of it. I am just appalled that we don't have l_568 sharper people, that we are not doing better background l.569 checks. To have a company like this get avray with it and use 1_570 $300 million of taxpayers' money is abominable. 1,571, Thank you, Mr. Chairman. L572 Chairman V'IAXMAN. Thank you, Ms. Watson. L573 Mr. Platts? L574 Mr. PLATTS. Thank you, Mr. Chairman. I appreciate your r575 holding this hearing. r5.76 I want to associate myself with comments from previous ]-577 speakers, especially Mr. Lynch. As he referenced, we
r-553
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traveled together in April and had some conversations L57 9 regarding AEY and their supply. r_580 I want to follow up on the last speaker, Mr. Mu1l, oD 15 81 the issue of the Department of State's role here. It is my ]-582 understanding that Department of State does the licensing for 1583 any firm that wants to engage in brokering sale of arms, 1584 munitions overseas. As part of that process, there is a 1_585 Watch List maintained from intelligence officials, law 1_586 enforcement, other entities, developed. It is also my 1,587 understanding that one or more individuals or entities 1s88 associated with the AEY contract \^rere on that Watch List l_s89 I guess my first question is: given that, how did AEY t_590 get a l-icense? I¡rlas the information that led to them beíng on 1_591 that Watch List investígated before a license was issued? L592 Mr. MULL. Yes. Of the t7 licenses that the State l-593 Eepartment issued to AEY, we consulted with law enforcement r594 agencies that v/ere invol-ved with and lookíng at the 15 95 activities of the company, and we checked with them to make 1596 sure that issuing this license would not obstruct any of L597 their investigations or that it would otherwise break the
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are required by the Arms Expert 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
hle
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illegal that they were proposing, and we confirmed that in consul-tation 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 il1egal, but the fact that they are.under investigation seems some bells would go off that maybe we need to wait until those investigatj-ons are completed before we issue new licenses. Is that not part of the consideration of whether a license is issued or not? Mr. MULIJ. If the company is on the V'Iatch List, yes, a bell will- go off and automatically it will attract more intens.ive attention from our licensing specialists and our compliancing specialists to see if there is anything about that particular case that would be a viol-ation of U.S. law. In those cases where we issued the licenses, w€ made the determination in those discrete cases that there was nothing
i11egal.
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f guess I would add to colleagues who expressed somewhat disbelief that, given the circümstances here, a company with such a small record of engagement in this area was one a Watch List, the age of the company executives combined, that then \,re go ahead and issue a license that leads to a $300 milIion. So I guess my understanding of what scrutiny would result from that Vfatch List is more perfunctory. As long as there is no i11ega1
PLATTS.
Mr.
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the fact that they are under ]-629 investigation isn't going to cause a license to be \,r¡ithheld. 1_63 0 It sounds like it has to be something identified, y€s, they 1_631 are proposing something i11ega1 or y€s, they have done L632 something illegal, not there is lots of questíons here about 1_633 whether they are worthy of this l-icense. t634 Mr. MULL. V'Iell, sir, wê did not issue a license for the l-635 $300 million-r636 Mr. PLATTS. That is a separate contract. r637 Mr. MULL. Right. 1-63I Mr. PLATTS. But you issued a license to allow them to r639 engage in the activity that 1ed to them being able to get
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conduct identified,
contracts.
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Mr. MULL. No. These hrere separate contracts where they sought to export U.S. provided supplied weapons to oversees. Mr. PLATTS. Rioht. Mr. MULL. Ard;. careful-ly vetted to make sure that the things they v¡ere selling overseas was not a violation of 1aw. Mr. PLATTS. Okay. What sharing of information from your V'Tatch List goes to DOD when they are looking at issuing contracts such as this? V'Ihat information that you had that led to them being on a Watch List is shared with DOD?
of what we have on the Watch r_65l_ List comes from intelligence agencies and other classified r652 sources, w€ cannot freely share it. But what we would do-MULL. Because so much
Mr.
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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 g1ad1y--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 woul-d be happy to run that name against our list. If we saw a hit, we would then consult with the originator of the information, sây, Hey can we share this with the Defense
Department?
Mr. PLATTS. So that is something you are discussing 1-666 today, but as of today the information that leads to the 1667 Department of State to be concerned about individuals or 1-668 entities to put them on a Watch List, DOD today has on access L669 to that information? 1,67 0 Mr. MUITL. We receive on multiple occasions from many t67t different Government agencies who are aware of the Watch t672 List, they contact us and ask us to check, and so we have 1673 done that in the past. ]-674 Mr. PLATTS. But there is no standard protocol that if you put somebody dealing with the sale or brokering of 1,67 5 L676 ammunition or hreapons on a Watch List, that there is no 1677 automatic sharing with DoD that buys a l-ot of ammunition and
]-665
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tó
that there is not an automatic sharing, hey, just so 1679 you know, this entity or this individual has been put on our 1_680 ülatch List, so you may want to take a closer look if you are going to purchase, including a $300 million contract? That 16 81_ 1682 doesn't happen today? 1_683 Mr. MULL. No, sir. We do not push out the information, 1684 but if we are contacted we-1_685 Mr. PLATTS. I think that is one of the problems, that 7686 one branch of our Government has information that raises some L687 concerns is not automatically sharing it with another entity 1688 within our Government that is engaged in the purchase of the L689 underlying product, ammunition and arms. I appreciate that 1690 that dialogue is beginning on how to strengthen that, and I t69L think that is what we are after in this oversight hearing. ]-692 How do we make sure this doesn't happen again. L693 Mr. MULL. Yes. Sir, íf I might, one of the concerns 1,694 that we have, wê have close to 80,000 entities on this list, 1695 and much of the information is controlled, and so we wouldn,t ]-696 know. Much of it comes from other classified controlled ]-697 sources. I¡üe would need the originator of the information, s permission to push that out, and so it would be difficult on 16 98 1,699 a list that lonq-170 0 Mr. PIATTS. My time is up. Given the level- of t7 0L classified clearance in the Department of Defense equal to 17 02 anyone at Department of State, wê should be able to find a
]-678
\^reapons,
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way to share that information in a seamless fashion.
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I thank each of your for your testimony, and also for your service to our Country. Thank yoü, Mr. Chairman Chairman VüAXMAN. Your time is up. Mr. Braley? Mr. BRALEY. Thank you, Mr. Chairman. There have been a number of disturbing issues raised by thís investigation, but Mr. Mu11 r want to talk to you about one that specifically relates to the rore of the u.s. Embassy in Albania and the potential coverup of the countries of origin of this ammunition. Yesterday Chairman lVaxman sent a letter to Secretary Rice asking about reports that the u.s. Ambassador and other officials at the u.s. Embassy at Al-bania 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 ]:,arry 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 aids 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 removi-ng Chinese ammunition from its original packaging before sending it to Afghanistan. According to
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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
1730
L731.
the following day.
Although Major Harrison was , tvery uncomfortable,, with these actions, he told the committee that "the Ambassador
agreed that this would alleviate suspension of wrongdoirrg.',
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1734 L735
Mr. MuI1, f know you were invited here today to testify 1,736 about the watch List, but do you have any further information 1-737 from the State Department regarding this specific issue? L738 Mr. MULL. No, sir, I do not. All I know is what I read L'739 in the chairman's letter yesterday and in the press accounts yesterday, and I do know, while I am personally not aware of 1,7 40 17 41_ any wrongdoing on the part of the management of our Embassy 1"7 42 in Tirana, I do know that the State Department plans to 17 43 respond to these serious allegations in the appropriate 17 44 channel once they have col-lected the information. 17 45 Mr. BRALEY. WelI, 1et me just ask you then 17 46 hypothetically, assuming that a u.s. Ambassador to a country t7 47 like Albania had sat in a meeting like the one r described L748 and was ahrare that an intentional act was being committed to t7 49 conceal the identity of the country of origin in violation of 1,7 50 U.S. military procurement requirements, would you agree that t75r that would be a bad thing for that Ambassador to do without
]-752
reporting?
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Mr. MULL. Sir, I am reluctant to answer a hypothetical question, because r can imagine there míght be circumstances in which covert activity ís involved of the transfer. I
would- -
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]-757
Mr. BRALEY. I am just going to have to stop you right L758 there. I am having a hard time understanding how a covert t7s9 activity would justify an íntentional violation of u.s. Iaw. t7 60 can you explain any situation where that would be acceptable? t7 61, Mr. MULL. I think any violation of U.S. J-aw by any U.S. L7 62 Government official is unacceptable L7 63 Mr. BRA,LEY. What potential remedies are available 17 64 against a U.S. Ambassador who participates or aIlows the t7 6s concealment of a country of origin of ammunition that is L7 66 being shipped to an a1ly of this Country? 1,7 67 Mr. MULL. Sir, I am afraid I personally can,t provide t7 68 you the ans\¡¡er to the question because f don, t work on t7 69 disciplinary matters or investigative matters outside of the 1,770 arms export business from the United States, but I would be 177t pleased to take your question back to the appropriate 4772 authorities. 1773 Mr. BRALEY. I would appreciate that r774 [The information follows: ]
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CoMMITTEE INSERT
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Mr. Braley, would you yield a second? r777 Mr. BRALEY. I would. I77 I Ms. WATSON. As a former Ambassador, you would be 1779 recalled from your post in no time. That is the remedy. 1_780 Thank you, Mr. Chairman. t7 8L Mr. BR-A,LEY. Reclaiming my time, the other question L782 raised in the letter that Mr. Waxman sent yesterday to the t7 83 Secretary of State is that the Embassy apparently concealed L784 information about this meeting from the Committee, and the 1_785 Committee specifically asked for informatíon about meetings j.786 between Embassy officials and the Albanian Defense Ministry, 1,7 87 as well as any information about any interventions into AEY, s
Ms.
WATSON.
1_788
repackaging operatíon.
L7 89
Although Major Harrison argued internally that the
Department should inform of us of those activities,
1790
he
was
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92
1793 ]-794 1795
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1797
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overruled, and he provided documents contemporaneously to back up his story. Chairman Waxman made a nehr request yesterday for all the documents relating to this meeting and for a series of interviews with the Ambassador and his top aids. Mr. MuIl, can you teII us whether the State Department intends to comply with that request voluntarily? Mr. MULL. Sir, I am sorry, I can't ansr^rer the question. I don't know what the intention is of the senior Department leadership, except that we will respond to the Chairman's
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request through the appropriate channel.
1_
Mr. BRALEY. WeII, let me tel1 you why this is so serious 1803 and why this Committee takes this so seriously. A BBC News 1804 report says that Major Harrison was replaced in his position 1_805 in the Embassy on.June 9th. Do you know if that is true? L806 Mr. MULL. That is the first I have heard of it, sir. 1-807 Mr. BRALEY. General, Mr. Howe11, do you have any 1808 knowledge of whether that occurred? 1-809 General PHILLIPS. No, sir. 1-8l-0 Mr. HOWELL. No, sir, I don't l_811Mr. BRALEY. The reason why that is important is because t8L2 Major Harrison was a Defense Department official, and if 1B 13 there was any retaliation against Major Harrison that would l8]-4 be a serious issue, particularly since,.June 9th was the very 1_81_5 same day he was interviewed by this Committee. l_81_6 Mr. Chairman, I would certainly hope that the Committee t8t7 will look closely into this matter and follo$/ up on any 181_8 further investigation to protect Major Harrison as a 819 potential whístleblower.
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L820
1,821,
Chairman
VüAXMAN.
Thank you very much,
Mr. Braley.
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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 r^¡as no history
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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 20OS because of late deliveries and poor quality, an Army contract for gun scépe 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 lraq Security Forces because the company failed to deliver the goods, including 10, OOO 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 i_i_ different
General PHTLLIPS. Sir, I believe your comments and what you described are true, but when you go back and you look at
L84I contracts?
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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-ahrard survey that was done by the Defense
Contract Management Agency.
]-849
1850
Mr.
TIERNEY.
Let's take a look at that.
They did talk
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to her. She was interviewed, and she said she had never 4852 heard of those terminations. That, I guess, is what is 1_8 53 stunning on that. She said she checked the Army's Past 1854 Performance Management System database--I would think that t_855 should have had the information--and there r,,ras no negative l_856 information about AEY. 1857 So I guess, General, if that system has such serious 1_858 flaws, what has been done to correct that? l_859 Mr. PARSONS. Sir, if I may, I will address that. We are 1_860 initiating policy changes in our past performance reporting 1861_ to ensure that that type of information, regardless of doIlar L862 value of the contract, is captured. Part of the problem we 1_863 have today is past performance reporting is only required 1-864 when these types of contracts are $5 million or more. Many of 1-865 the contracts I believe you describe were below that ]-866 threshold, and so there was no requirement to do the r867 reporting. However, what \Àre are going to initiate is, when ].868 there is evidence that the contractor is not complying with IB69 terms and conditions of the contract and is termi-nated for L870 default or termínated for cause or a show cause letter is L87L issued for poor performance, that will be recorded in the r872 past performance data system in the future. 1,873 Mr. TIERNEY. I mean, it is unbelievable that it wouldn't L874 have been done in the past. I mean, who is responsible for 1-875 that, and do they stÍ11 have their job? V'Iho is responsible
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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 got 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 informatíon is nehr. I am noc aware of that $5.6 míllion 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 r^rere that threshold. Mr. TIERNEY. Let me change directions here just for a second. There is a fe11ow named Mr. Ralph Merrill who was also indicated last week. According to an e-mail that he sent back in March of 2006, he identified himself as the vice president of AEY.
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Mr. Howel-l, did you know that Mr. Merrill was a vice president of that company in 2006?
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Mr. HOWELL. Not at the time, no, sir Mr. TIERNEY. Later that year in December of 2006 Mr. Merrill was involved in helping AEy obtain its g3oo million contract with the Defense Department to provide ammunition to the Afghan security Forces. rn December of 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 ca1Ied Vector Arms.
Mr. Howe11, that information was submitted to your 1913 agency during its survey of the company AEy, s financial t9t4 capability. Your agency was informed that he had a financiar 1_91_s interest in the success of that contract; is that right? 191,6 Mr. HOWELL. Yes, sir, âs far as I know. L9t7 Mr. TIERNEY. Okay. Now, the Committee talked to the 1_918 contracting officer who ordered that ammunition contract, and 19t9 she told us that Mr. Merrill even joined Mr. Diveroli in a
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meeting with her discussing the requirements of the contract.
she said Mr. Merrill identified himself as a consultant to
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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
company
the
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AEY had
an excellent past performance, and in part that
conclusion was issued on questionnaires that \¡rere submitted
to contracting officials on only three of AEY's contracts. 1-929 So I guess one problem would be they only went to three 1_93 0 of the prior contracts to get information. But one of the 1931 questionnaires was sent to Mr. Merrill, whose company had a 1"932 prior contact with him, and, of course, Mr. Merrill gave him 193 3 excellent reviews. He had a conflict of interest. There is ]-934 something r^rrong here where you are asking somebody that has a L935 huge financial stake in a current contract that is being r936 sought and asking him about past performance on contracts 1-937 that he also had an interest in. How can you get an unbiased r- 93I and objective assessment of past performance from someone who ]-939 has a financial- interest in the contract? ]-940 Mr. HOWELL. First, sir, ãL the tim.e, âs I mentioned., rr're t94r had no knowledge that the gentleman was a vice president of L942 the company, but when we conducted our pre-award-]-943 Mr. TIERNEY. He represented himself as a vice president 4944 of the company. He sent an e-mail to you telling you he was ]-945 vice president of the company in March of 2006. L946 Mr. HOWELL. Sir, f am not sure of the timing of that
4947
correspondence- -
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I am not sure of the timing of that correspondence as it related to the timing of the pre-award
HOVüELL.
Mr. Mr.
TIERNEY. March 2006.
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survey. Subsequent to the request for pre-award survey, we L952 looked at several financial aspects of the company. That was 1_953 one of them. And the rating was that they were financially L954 capable of conducting a brokerage operation. 1955 Mr. TIERNEY. And you made that decision based on three ]-956 questionnaires of the companies, at least one of which had a 1-957 very serious conflict of interest. I think that is the issue 1_958 here. You have got to do something, I would hope, with 1_959 regard to that process to make sure that that doesn't 196 0 continue to happen. t96r Mr. HOWELL. DCMA has begun a review of all of its 1962 processes related to that, and we are looking at the 1-963 implementation of different policies that will prevent those 1,964 occurrences in the future. 1965 Mr. TIERNEY. I yield back, Mr. Chairman. My time has
1-966 1,967
expired.
Chairman WAXMAN. Thank you
very much, Mr. Tierney.
1,968
Gentlemen,
r^Ie
thank you for being here and answering our
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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. [V'Ihereupon, at 1-22L2 p.m., the committee r^ras adjourned.J