[House Hearing, 110 Congress] [From the U.S. Government Publishing Office] EXAMINATION OF AEY CONTRACTS WITH THE U.S. GOVERNMENT ======================================================================= HEARING before the COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS SECOND SESSION __________ JUNE 24, 2008 __________ Serial No. 110-119 __________ Printed for the use of the Committee on Oversight and Government Reform Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE 47-390 PDF WASHINGTON : 2009 ---------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HENRY A. WAXMAN, California, Chairman EDOLPHUS TOWNS, New York TOM DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania DAN BURTON, Indiana CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri CHRIS CANNON, Utah DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio BRIAN HIGGINS, New York DARRELL E. ISSA, California JOHN A. YARMUTH, Kentucky KENNY MARCHANT, Texas BRUCE L. BRALEY, Iowa LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina Columbia VIRGINIA FOXX, North Carolina BETTY McCOLLUM, Minnesota BRIAN P. BILBRAY, California JIM COOPER, Tennessee BILL SALI, Idaho CHRIS VAN HOLLEN, Maryland JIM JORDAN, Ohio PAUL W. HODES, New Hampshire CHRISTOPHER S. MURPHY, Connecticut JOHN P. SARBANES, Maryland PETER WELCH, Vermont ------ ------ Phil Schiliro, Chief of Staff Phil Barnett, Staff Director Earley Green, Chief Clerk Lawrence Halloran, Minority Staff Director C O N T E N T S ---------- Page Hearing held on June 24, 2008.................................... 1 Statement of: Parsons, Jeffery P., Executive Director, Army Contracting Command, U.S. Army Materiel Command, and Brigadier General William N. Phillips, U.S. Army, Commanding General, Picatinny Arsenal, Commander, Joint Munitions and Lethality Life Cycle Management Command; Mitchell A. Howell, Executive Director, Ground Systems and Munitions Division, Defense Contract Management Agency; and Stephen D. Mull, Acting Assistant Secretary of State, Bureau of Political Military Affairs, U.S. Department of State................. 47 Howell, Mitchell A....................................... 60 Mull, Stephen D.......................................... 67 Parsons, Jeffery P....................................... 47 Phillips, Brigadier General William N.................... 49 Letters, statements, etc., submitted for the record by: Braley, Hon. Bruce L., a Representative in Congress from the State of Iowa, prepared statement of....................... 88 Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of......................... 41 Howell, Mitchell A., Executive Director, Ground Systems and Munitions Division, Defense Contract Management Agency, prepared statement of...................................... 62 Parsons, Jeffery P., Executive Director, Army Contracting Command, U.S. Army Materiel Command, and Brigadier General William N. Phillips, U.S. Army, Commanding General, Picatinny Arsenal, Commander, Joint Munitions and Lethality Life Cycle Management Command, joint prepared statement of. 51 Watson, Hon. Diane E., a Representative in Congress from the State of California, prepared statement of................. 94 Waxman, Hon. Henry A., a Representative in Congress from the State of California: Letters dated June 18, 2008.............................. 44 Prepared statement of.................................... 33 Staff report............................................. 3 EXAMINATION OF AEY CONTRACTS WITH THE U.S. GOVERNMENT ---------- TUESDAY, JUNE 24, 2008 House of Representatives, Committee on Oversight and Government Reform, Washington, DC. The committee met, pursuant to notice, at 10 a.m. in room 2154, Rayburn House Office Building, Hon. Henry A. Waxman (chairman of the committee) presiding. Present: Representatives Waxman, Cummings, Tierney, Watson, Lynch, Norton, Davis of Virginia, Platts, Issa, and McHenry. Staff present: Phil Barnett, staff director and chief counsel; Kristin Amerling, general counsel; Karen Lightfoot, communications director and senior policy advisor; David Rapallo, chief investigative counsel; John Williams and Theodore Chuang, deputy chief investigative counsels; Russell Anello, Stacia Cardille, and Suzanne Renaud, counsels; Christopher Davis, professional staff member; Earley Green, chief clerk; Jen Berenholz, deputy clerk; Caren Auchman and Ella Hoffman, press assistants; Miriam Edelman, staff assistant; Lawrence Halloran, minority staff director; Jennifer Safavian, minority counsel for oversight and investigations; Keith Ausbrook, minority general counsel; John Brosnan, minority senior procurement counsel; Steve Castor, minority counsel; Benjamin Chance, Adam Fromm, and Emile Monette, minority professional staff members; Patrick Lyden, minority parliamentarian and member services coordinator; and Brian McNicoll, minority communications director. Chairman Waxman. The meeting of the committee will come to order. Today's hearing examines a $300 million contract to supply ammunition to the Afghan Security Forces. This contract is an important one because it relates directly to the success of our mission in Afghanistan. We know a lot about what went wrong after the contract to AEY was awarded in January 2007. We know that ammunition provided by AEY was unserviceable. We know that much of the ammunition was illegal, Chinese-made ammunition. We know that after paying AEY over $60 million, the Army canceled the contract. And we know that last week the Justice Department indicted AEY and its top officials with 71 counts of fraud and related charges. We have also learned that there are questions about the role of the U.S. Embassy in Albania in approving a plan to conceal the Chinese origins of AEY's ammunition. A letter I sent yesterday sought additional information about the Embassy's actions. Today's hearing will examine what is not known: how did a company run by a 21-year-old president and a 25-year-old former masseur get a sensitive, $300 million contract to supply ammunition to Afghan Forces? My staff has prepared an analysis of the evidence that the committee has received, and I would like to ask unanimous consent that the staff analysis and the documents it cites be made part of today's hearing record. Mr. Davis of Virginia. No objection. Chairman Waxman. Without objection, that will be the order. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] 47390.001 [GRAPHIC] [TIFF OMITTED] 47390.002 [GRAPHIC] [TIFF OMITTED] 47390.003 [GRAPHIC] [TIFF OMITTED] 47390.004 [GRAPHIC] [TIFF OMITTED] 47390.005 [GRAPHIC] [TIFF OMITTED] 47390.006 [GRAPHIC] [TIFF OMITTED] 47390.007 [GRAPHIC] [TIFF OMITTED] 47390.008 [GRAPHIC] [TIFF OMITTED] 47390.009 [GRAPHIC] [TIFF OMITTED] 47390.010 [GRAPHIC] [TIFF OMITTED] 47390.011 [GRAPHIC] [TIFF OMITTED] 47390.012 [GRAPHIC] [TIFF OMITTED] 47390.013 [GRAPHIC] [TIFF OMITTED] 47390.014 [GRAPHIC] [TIFF OMITTED] 47390.015 [GRAPHIC] [TIFF OMITTED] 47390.016 [GRAPHIC] [TIFF OMITTED] 47390.017 [GRAPHIC] [TIFF OMITTED] 47390.018 [GRAPHIC] [TIFF OMITTED] 47390.019 [GRAPHIC] [TIFF OMITTED] 47390.020 [GRAPHIC] [TIFF OMITTED] 47390.021 [GRAPHIC] [TIFF OMITTED] 47390.022 [GRAPHIC] [TIFF OMITTED] 47390.023 [GRAPHIC] [TIFF OMITTED] 47390.024 [GRAPHIC] [TIFF OMITTED] 47390.025 [GRAPHIC] [TIFF OMITTED] 47390.026 [GRAPHIC] [TIFF OMITTED] 47390.027 [GRAPHIC] [TIFF OMITTED] 47390.028 Chairman Waxman. The AEY contract shows that the procurement process at the Department of Defense is dysfunctional. There was no apparent need for the contract, no effective vetting of the company's qualifications, and no adequate oversight. The first step in any procurement should be to ask whether the contract is necessary. That is especially true when the contract will cost taxpayers hundreds of millions of dollars. This apparently never happened. AEY acquired its ammunition from stockpiles in Albania and other former Warsaw Pact countries. These countries have surplus ammunition they are trying to give away or destroy. We learned during the investigation that the president of Albania flew to Iraq in 2007 and offered to donate Albanian stockpiles to General Petraeus. It appears that the Army agreed to pay $300 million for ammunition it could have gotten for free. The procurement failure that is the hardest to understand is the selection of AEY. The State Department maintains a Watch List of potential illegal arms traffickers. Both AEY and Mr. Diveroli are on the Watch List. So are AEY's subcontractor and the subcontractor's subcontractor. The State Department official in charge of the Watch List called this a perfect trifecta. But the Defense Department never bothered to check the Watch List awarding the $300 million arms contract. In the source selection decision, contracting officer wrote: ``There essentially is no doubt that AEY would perform in accordance with the delivery schedules and has no history of quality rated problems. Based on this, AEY's initial rating was excellent.'' This was pure fiction. If Army officials had examined AEY's performance under previous Defense and State Department contracts, they would have easily discovered a dismal record of failure. Documents produced to the committee show that Federal agencies terminated, withdrew, or canceled at least seven previous contracts with AEY. Under these contracts, AEY provided potentially unsafe helmets to our forces in Iraq, failed to deliver thousands of weapons, and shipped poor quality ammunition to U.S. Special Forces. Government contracting officials repeatedly warned of poor quality, damaged goods, junk weapons, and other equipment in the reject category, and they complained the company repeatedly engaged in bait and switch tactics that were hurting the mission. One contracting official told us, ``I just don't trust the guy. I couldn't take anything he said credibly.'' He told us that AEY was the single worst company he dealt with in Iraq, saying, ``That was my lemon I had to make lemonade out of.'' In testimony to be delivered today, the witness from the Defense Contract Management Agency continues to assert that, ``AEY had a history of satisfactory performance.'' That is simply ridiculous. Rating AEY's performance as excellent and satisfactory is an insult to the taxpayers. The procurement deficiencies cascaded upon each other. The terms of the contract left out essential details, allowing AEY to deliver ammunition that was over 60 years old. There were few inspections of the quality of the ammunition. This unfortunately is not an aberration. Over the last 8 years we have witnessed a complete breakdown in the procurement process. As the AEY experience demonstrates, it appears that anyone, no matter how inexperienced or unqualified, can win a lucrative Federal contract worth hundreds of millions of dollars. There are profound lessons to be learned from the AEY experience. By examining AEY as a case study of what went wrong and why, we can begin to rebuild our procurement system and protect the interests of the taxpayers. [The prepared statement of Chairman Henry A. Waxman follows:] [GRAPHIC] [TIFF OMITTED] 47390.029 [GRAPHIC] [TIFF OMITTED] 47390.030 [GRAPHIC] [TIFF OMITTED] 47390.031 [GRAPHIC] [TIFF OMITTED] 47390.032 [GRAPHIC] [TIFF OMITTED] 47390.033 [GRAPHIC] [TIFF OMITTED] 47390.034 Chairman Waxman. I want to recognize Mr. Davis for his opening statement. Mr. Davis of Virginia. Thank you, Chairman Waxman, for holding the hearing. Last Friday's indictment of AEY's officials certainly justifies this committee's decision to pursue questions about how and why a small, inexperienced company was awarded a Federal contract worth hundreds of millions of dollars. Obvious evidence of consistently shoddy performance was somehow missed or ignored as substandard or illegally obtained munitions were apparently being sent to Afghanistan. The system eventually caught up with AEY, but it took too long and it cost too much. The failure to root out AEY sooner highlights the difficulties that can arise in trying to capture and use information on a contractor's past performance. That such a bad apple continued to receive Federal contracts only strengthens my belief that a well-maintained data base of current information on prior violations and other relevant information could be a valuable tool for contracting officers. Such a data base was proposed in H.R. 33, and we appreciate Chairman Waxman and the bill's sponsor, Representative Maloney, for working with us to improve the latest version of the bill. It still needs some work, but with derogatory information on performance issues available only to acquisition officials, the data base could provide the tool the Government needs to root out the rotten apples before they can spoil even the most valuable barrels. Perhaps if we had acted faster to put such a system in place we wouldn't be having a hearing today, but other gaps in the contracting system also appear to have played a key role in this fiasco. It is one thing to have the appropriate information on past performance available; it is quite another to be able to use it effectively. In interviews with various contracting officials involved in the AEY transactions, the impact of the Small Business Administration's Certificate of Competency process surfaced several times. Under that statutory scheme, contracting officials are prohibited from rejecting an offer from small businesses such as AEY only on the basis the company is not a responsible perspective contractor due to negative or marginal past performance. Instead, the matter must be referred to the SBA, which decides whether the firm is eligible for award. While I understand that this program was designed for the protection of legitimate small business firms, it might be useful, in light of this case, to take a careful look at the impact of the process. We should ask whether it has an intimidating impact on contracting officials who might otherwise reject a firm as non-responsible for reasons such as bad past performance, but are reluctant to do so because of the delay and extra paperwork required by the SBA referral process. This case seems to speak volumes about what is wrong with the military contracting process today. Yet again we see poor decisionmaking by overworked and under-trained Army acquisition officials. Over the course of awarding and monitoring 29 contracts worth more than $200 million, someone, somewhere should have heard an alarm bell and looked more closely at what this small company was doing with an implausibly large set of tasks. But we should take care before extrapolating this specific, hopefully unique facts of AEY, and any broad conclusions about the entire acquisition system. This is a sordid tale of greed and ineptitude involving repackaged Chinese munitions, alleged kickbacks to an Albanian government official, and phantom plane crashes. There is little indication the United States routinely purchases ammunition for vintage Soviet weapons from 22-year- old arms dealers, so we should ask what needs fixing while keeping an eye on what needs to keep working in the vast majority of contract transactions to taxpayers can have their money spent efficiently and wisely. Meaningful reforms are based on data, not anecdotes, even sensational ones. Today's testimony should add important information to the public record about the mistakes and waste at the heart of the AEY debacle, and we welcome the witnesses. Thank you. [The prepared statement of Hon. Tom Davis follows:] [GRAPHIC] [TIFF OMITTED] 47390.035 [GRAPHIC] [TIFF OMITTED] 47390.036 Chairman Waxman. Thank you very much, Mr. Davis. We are pleased to have before us today from the Defense Department Brigadier General William N. Phillips, the Commander General of Picatinny Arsenal, Commander of the Joint Munitions and Lethality Life Cycle Management Command, and the Program Executive Officer for Ammunition. He is accompanied by Jeffery P. Parsons, Executive Director of the Army Contracting Command at the U.S. Army Materiel Command. Mitchell A. Howell, Executive Director of the Ground Systems and Munitions Division at the Defense Contract Management Agency. From the State Department we have Stephen D. Mull, Acting Assistant Secretary of State for the Bureau of Political Military Affairs. We also invited officials from AEY, Efraim Diveroli, the president of AEY, and David Packouz, the vice president. Mr. Diveroli and Mr. Packouz are not with us today. Both individuals informed us, through letters from their attorneys, that they would assert their fifth amendment rights against self-incrimination and would refuse to answer questions at the hearing. I ask unanimous consent that both letters be made part of the hearing record. Without objection, that will be the order. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] 47390.037 [GRAPHIC] [TIFF OMITTED] 47390.038 [GRAPHIC] [TIFF OMITTED] 47390.039 Chairman Waxman. In fact, both men were indicted last week on Federal charges of procurement fraud, false statements, and conspiracy, so their Fifth Amendment concerns would appear to be well-founded. I should also note that, as part of their bail conditions, the Federal Court has restricted their travel to the Miami area. Under these circumstances we concluded that it did not make sense to require them to appear today. We are pleased to have our witnesses from the Defense Department and the State Department with us today. It is the practice of our committee that all witnesses that testify before us and those who are accompanying them answer questions under oath, so I would like to ask you all to please stand and raise your right hands. [Witnesses sworn.] Chairman Waxman. The record will indicate that each of the witnesses answered in the affirmative. Why don't we start with Brigadier General Phillips. General Phillips. Mr. Chairman, if I could, I would like to let Mr. Parsons go first, sir. He is the lead for the Army here. He is the Director of the Army Contracting Command, and I am here with him, so, so I would like to defer to Mr. Parsons if that is OK. Chairman Waxman. OK. Thank you. Mr. Parsons. STATEMENTS OF JEFFERY P. PARSONS, EXECUTIVE DIRECTOR, ARMY CONTRACTING COMMAND, U.S. ARMY MATERIEL COMMAND; BRIGADIER GENERAL WILLIAM N. PHILLIPS, U.S. ARMY, COMMANDING GENERAL, PICATINNY ARSENAL, COMMANDER, JOINT MUNITIONS AND LETHALITY LIFE CYCLE MANAGEMENT COMMAND; MITCHELL A. HOWELL, EXECUTIVE DIRECTOR, GROUND SYSTEMS AND MUNITIONS DIVISION, DEFENSE CONTRACT MANAGEMENT AGENCY; AND STEPHEN D. MULL, ACTING ASSISTANT SECRETARY OF STATE, BUREAU OF POLITICAL MILITARY AFFAIRS, U.S. DEPARTMENT OF STATE STATEMENT OF JEFFERY P. PARSONS Mr. Parsons. Chairman Waxman, Congressman Davis, and distinguished members of the Committee on Oversight and Government Reform, I appreciate the opportunity to appear before you and discuss you concerns regarding the award of a contract to AEY, Inc., to supply ammunition to the Afghanistan Army and Afghanistan National Police. The U.S. Army is conducting an extensive review with this contract action to determine if policies, procedures, rules, and regulations were properly followed in the pre-award, award, and post-award phases of the contract. While I did not identify any breaches in policies, procedures, rules, and regulations, we certainly learned a great deal in our review and identified a number of improvements to make to our acquisition process. Here with me today, as you know, is General Phillips, the Commanding General of the Army Materiel Command's Joint Munitions and Lethality Life Cycle Management Command. General Phillips will address some of the improvements we are making in the management and acquisition of non-standard ammunition, to include specifications, packaging, inspection, and acceptance. I respectfully request that our joint written statement be made a part of the record for today's hearing. Chairman Waxman. Without objection, that will be the order. Mr. Parsons. As Executive Director of the Army Contracting Command, I carefully reviewed the contracting process associated with the AEY contract. I reviewed and discussed the source selection process with the contracting officer. I also reviewed relevant documents such as the pre-award survey, minutes from the contract post-award survey, meeting between the ACO and AEY, and post-award documentation to include reports of discrepancy provided by the Combined Security Transition Command Afghanistan. Just recently I visited Afghanistan and had the opportunity to meet with the Combined Security Transition Command Afghanistan leadership and members of the Afghanistan Army. My review indicated that the contracting officer properly followed the contracting process and made reasonable judgments based upon the factual information in her possession. As we have come to learn, however, there was some factual past performance information that was not in the possession of the contracting officer at the time of the contract award. Based upon our review, we identified a number of small contract actions awarded by offices in the Army Contracting Agency where AEY had been terminated for cause in 2006 prior to the award of the contract in January 2007. This information was not visible to the contracting officer, as the dollar thresholds of the terminated contracts did not require the recording of past performance information in accordance with the Defense Federal Acquisition Regulations Supplement. As a result, there were no reports of past performance in the past performance information management system that is used in the source selection process to evaluate an offeror's past performance. Although those terminated actions were not included in the past performance information management system, the solicitation did include FAR-52-209-5 certification regarding responsibility matters, which required AEY to identify whether they had one or more contracts terminated for default in the preceding 3 years by any Federal agency. The provision also requires an offeror to provide immediate written notice to the contracting officer if at any time prior to contract award the offeror learns that his certification was erroneous when submitted or has become erroneous by reason of changed circumstances. Again, AEY did not indicate to the contracting officer that they had several contracts that had been terminated for cause prior to the award of the ammunition contracts. We have informed our procurement fraud attorneys of this situation to determine if AEY provided false certifications during the solicitation phase of the contract. In addition, we have initiated policy changes within the Army that will require the posting of past performance information, regardless of dollar value, for all contracts that have been terminated for cause or default. I believe similar policy changes are being considered at the DOD level, and I would recommend similar policy changes at the Federal level. In my opinion, while there certainly is room for improvement in the way we acquire non-standard ammunition in support of our allies, this case is more about a contractor who failed to properly represent their company and failed to comply with the terms and conditions of the contract, rather than a faulty contracting process. Once the contracting officials at the Army Sustainment Command became aware of performance issues in February 2008, they initiated actions to ensure compliance with the contract. Once matters became known to the Procurement Fraud Division regarding the Chinese ammunition, they suspended them from further Government contracts. Based upon a show-cause letter that the contracting officer issued to AEY and their admission that there was Chinese ammunition provided under this contract, they were terminated for default on May 23, 2008. Last week's indictment of AEY president and several other company officials is yet further indication of a less than scrupulous contractor. The Army is in the process of re-procuring ammunition requirements in support of the Afghanistan Army and National Police. We have issued several contracts to meet short-term, critical needs and will apply lessons learned to our new procurement. We will also pursue re-procurement costs from AEY consistent with the Federal Acquisition Regulations. I appreciate the congressional support of our Army's efforts in providing our Nation's war fighters and allies with quality products and services. We continue to pursue improvements in our contracting process and work force, as demonstrated by our Secretary's commitment to implement many of the recommendations in the Gansler Commission report regarding Army acquisition and program management and expeditionary operations. I look forward to your questions. Chairman Waxman. Thank you, Mr. Parsons. General Phillips. STATEMENT OF BRIGADIER GENERAL WILLIAM N. PHILLIPS General Phillips. Chairman Waxman, Congressman Davis, distinguished members of this committee, it is a privilege to appear before you and to have an opportunity to address the support that we are providing to a key ally. As head of the Joint Munitions and Lethality Life Cycle Management Command, I have sought to gather lessons learned from our experience with AEY and non-standard ammunition and apply them simply to improve our process. In early April, as a direct result of the AEY contract review that Mr. Parsons just mentioned, we established a team of subject matter experts in contracting, program management, and contract administration, which included the Defense Contract Management Agency, who continues to play a key role, as well as the Combined Security Transition Command in Afghanistan. Members of my command have spent the past 2 weeks in Afghanistan and Iraq working with our forces on the ground. We have recognized the need to improve how we acquire non- standard foreign ammunition. Let me again emphasize that we have worked with all our key partners, to include DCMA, to study non-standard ammunition procurement procedures from acquirements to contracts to delivery. As a result, future standards for quality, packaging, transportation, and technical specification elements for non- standard ammunition will more clearly state what we expect from our contractors. These new terms and conditions have been prepared and have been staffed with industry and other OSD offices for their comments. A request for a proposal has been prepared with these new standards and will be published in early July for industry to respond. Let me add that our response from industry has been very important, and we have sought to capture lessons learned from them and apply that to our request for proposal process. As part of our process and to enforce quality standards of non-standard ammunition before shipment, DCMA and the Joint Munitions and Lethality Life Cycle Command will send trained personnel to the point of origin for non-standard ammunition contracts to verify ammunition type, quantity, and condition. The Army has moved aggressively to address this matter from the first notification of the problems in the field, and our actions have been prompt and fair. We also continue to pursue improvements to our contracting process as a result of this experience. Your Army is committed to ensuring our soldiers and allies are properly prepared to continue the fight against the global war on terrorism. In closing, let me just add that we thank Congressman Waxman and Congressman Davis, thank you and this distinguished committee for your support for our soldiers, our service members, and our allies. I look forward to your questions. [The prepared joint statement of General Phillips and Mr. Parsons follows:] [GRAPHIC] [TIFF OMITTED] 47390.040 [GRAPHIC] [TIFF OMITTED] 47390.041 [GRAPHIC] [TIFF OMITTED] 47390.042 [GRAPHIC] [TIFF OMITTED] 47390.043 [GRAPHIC] [TIFF OMITTED] 47390.044 [GRAPHIC] [TIFF OMITTED] 47390.045 [GRAPHIC] [TIFF OMITTED] 47390.046 [GRAPHIC] [TIFF OMITTED] 47390.047 [GRAPHIC] [TIFF OMITTED] 47390.048 Chairman Waxman. Thank you very much. Mr. Howell. STATEMENT OF MITCHELL HOWELL Mr. Howell. Chairman Waxman, Congressman Davis, and distinguished members of the Committee on Oversight and Government Reform, I appreciate the opportunity to appear before you and discuss your concerns about the Defense Contract Management Agency's contract administration and, more particularly, product acceptance processes for various types of nonstandard ammunition. The contract at issue was for the procurement and delivery of various nonstandard ammunition types for the Afghanistan National Police and the Afghanistan National Army. The contract was awarded in January 2007 to AEY, Inc., located in south Florida. The Joint Munitions and Lethality Life Cycle Management Command, through their supporting acquisitions center at Rock Island, IL, requested a pre-award survey from the DCMA in December 2006. Their request to DCMA was for an analysis of AEY's financial and transportation capability. In January 2007 DCMA found AEY to be satisfactory in both of the evaluated capabilities. AEY had a history of satisfactory performance on similar contracts, showing increasing revenue growth, adequate capitalization, and was considered low-risk for the evaluated capabilities. DCMA conducted a post-award conference in March 2007 with AEY representatives to confirm contract technical, quality, and safety performance requirements. At the meeting it was understood that all ammunition would be off the shelf and previously manufactured. All storage, packaging, and transportation were required to be international best commercial practices. AEY confirmed their understanding of these requirements. The contract's packaging and quality terms and conditions specified by the Buying Command had been utilized in previous contracts without any identified discrepancies. The contract required kind, count, and condition inspection. There was no age limitation on the procured ammunition. Product acceptance took two distinct forms. For domestic sources, acceptance was performed at origin. For outside the continental United States, OCONUS, sources, acceptance was performed at destination. The contract terms allowed the contractor to submit certificates of conformance for OCONUS sourced items. The Federal Acquisition Regulation authorized buying commands to allow contractor use of COCs in lieu of more stringent Government inspection criteria, especially where risk is determined to be low. In addition, the Government maintains its inspection rights, regardless of whether the contract allows for use of COCs or not. The items of concern originated from OCONUS sources. The OCONUS shipments were delivered to the airport in Afghanistan. Due to limitations at the airfield, kind, count, and condition, inspection took place after movement of the ammunition from the air field to the bunkers. Ordinance commissioned and non- commissioned officers conducted that inspection. These officers have specialized ammunition training and the expertise necessary to perform kind, count, and condition inspection. COCs were acknowledged by the ordinance officers at the delivery point. In these COCs, the contractor certified the ammunition provided was in acceptable condition and could be safely fired in an originally chambered weapon or weapon system. Due to the off-the-shelf nature of the OCONUS source non- standard ammunition, DCMA's inspection and acceptance services were very limited. For OCONUS-to-OCONUS shipments, these duties primarily involve processing payment after receipt of invoices and a COC signed by both the contractor and the ordinance officer conducting the inspection. DCMA has been a critical strategic partner in helping the Buying Command fashion a new acquisition strategy for non- standard ammunition. Letters of delegation requiring enhanced scrutiny of non-standard ammunition items have recently been accepted by DCMA. We have already performed some of these delegated functions on short notice in support of urgent ammunition requests. We are confident that the more stringent specifications and corresponding inspection and acceptance requirements will greatly enhance the likelihood that only conforming ammunition will be presented and accepted in the future. DCMA is fully engaged with our Buying Command partners to ensure we continue to improve the processes related to the acquisition and acceptance of non-standard ammunition. In addition to the improvements already mentioned, DCMA's internal realignment enhances our Contract Administration operations. Subsequent to the award of this contract, DCMA realigned into product groupings, including the Munitions and Support System's Contract Management Office facilitating better customer service and subject matter expertise minimizing the potential for situations like this one in an environment of increasing mission and constrained resources. We appreciate the congressional support of our efforts as the Department's primary contract management agency in providing our Nation's war fighters and allies with quality products and services. Again, thank you for the opportunity to appear before this committee today to address DCMA's role in this matter. I will now answer any questions the committee may have. [The prepared statement of Mr. Howell follows:] [GRAPHIC] [TIFF OMITTED] 47390.049 [GRAPHIC] [TIFF OMITTED] 47390.050 [GRAPHIC] [TIFF OMITTED] 47390.051 [GRAPHIC] [TIFF OMITTED] 47390.052 [GRAPHIC] [TIFF OMITTED] 47390.053 Chairman Waxman. Thank you, Mr. Howell. Mr. Mull. STATEMENT OF STEPHEN D. MULL Mr. Mull. Thank you very much, Mr. Chairman and Ranking Member Davis and all the members of the committee, for the opportunity to meet with you today to provide you some background on the Department of State's Watch List for Defense export licensing. The Watch List is managed by the Directorate of Defense Trade Controls [DDTC], and that is part of the Bureau for Political Military Affairs which I lead. The State Department has been responsible for regulating defense trade since 1935 with the objective of ensuring that defense trade supports U.S. national security and foreign policy interests. We carry out our work on the authority of the Arms Export Control Act and the Foreign Assistance Act of 1961, according to the International Traffic and Arms Regulations [ITAR], which includes the U.S. Munitions List [USML]. The USML covers items specially designed for military appraisals, and its 20 categories extend from firearms to the joint strike fighter. The Secretary of State has assigned the Bureau of Political Military Affairs the responsibility for performing this critical national security function for the State Department. The Department's primary mission in this regard is to deny our adversaries access to U.S. Defense technology while facilitating appropriate defense trade with our allies and Coalition partners to allow for their legitimate self-defense needs and to fight effectively alongside U.S. military forces in joint operations. We do this in part by screening all export applications against our Watch List, a large task given the volume of applications handled by the Department. In fiscal year 2007, the Political Military Bureau received approximately 81,000 licensing applications for exports valued at approximately $100 billion. In fiscal year 2008 we anticipate that the trend of an average annual increase of 8 percent will continue. Our Watch List is based on section 38(g) of the Arms Export Control Act, and that directs the Department of State, as designated by the President, to develop appropriate mechanisms to identify persons and entities who are ineligible to contract with the U.S. Government or to receive an export license. The Watch List was created to respond to this section of law, as well as to help us identify other parties who might be unreliable recipients of Defense articles and services licensed by the State Department. The Watch List currently has just under 80,000 entries drawn from a wide array of governmental and other sources. We update the Watch List daily with our compliance specialists, who continuously review intelligence information, law enforcement information, and open source information for relevant material. Public lists such as the General Services Administration's Excluded Parties List, the Office of Foreign Asset Control's specially designated foreign nationals, and the Department of Commerce's Denied Parties List are all part of our Watch List. The Watch List also includes persons who are subject to criminal or civil debarment by DDTC, as well as entries derived from classified intelligence reporting. Additionally, sensitive information regarding ongoing criminal investigations is routinely provided to us by the FBI and Immigrations and Customs Enforcement senior special agents who are assigned and work with us in the Political Military Bureau and to serve as liaison among our agencies. It is important to point out what the Watch List is and what the Watch List is not. The Watch List functions mainly to alert our licensing officers and compliance specialists within DDTC about potential concerns regarding a party to a Defense export license application. The wide range of information and sources used in compiling the Watch List reflects the statutory requirements of the Arms Export Control Act and the wide latitude given the State Department in making the decisions regarding the exports of munitions. Consequently, while some entries clearly determine whether an export may be approved--for example, if a party to a deal is debarred or otherwise ineligible to export--other entries tend to be of a more informational nature and are used in coming to decision on making licensing applications. Consequently, the presence of an entity on the Watch List will prompt further scrutiny and review, but it doesn't automatically entail removal of the party or the denial of a license application. Each license application submitted to DDTC is required by the regulations to include the names of all the parties who are involved in the proposed transaction. All of those parties, both foreign and domestic, are checked against this Watch List. If there is a match, the license application is immediately put on hold for a review by a compliance specialist. If the party in question is debarred by the Department for a conviction under the Arms Export Control Act or otherwise ineligible--for example, if another U.S. Government agency has debarred them from contracting with the U.S. Government--or if they are under criminal indictment, they will be removed and the approved export application or the license will be denied. If the Watch List entry indicates concerns in the activities of a particular party without rising to the level of removal or denial, DDTC's compliance and licensing officers will undertake a careful review and may request additional information from the applicant. Additional or clarifying information regarding the entity may also be sought from other Government agencies. If it appears after review the that original reasons for entering the party on the Watch List have been resolved, the hold will be released and the license will likely be approved without further delay. We find the Watch List to be an effective tool to facilitate coordination with other Government agencies that may have a concern with the particular entity. For example, companies under criminal investigation may be Watch Listed to make sure that investigative agency, such as FBI or ICE, is alerted when a company applies for an export application. Such Watch Listing can facilitate a criminal investigation by ensuring communication and coordination among Government agencies. It is also worth noting that such coordination may confirm the suspensions of investigators, but it is also true that such coordination may demonstrate that a particular entity, in fact, is acting within the law, and helps ensure that investigative resources are not wasted on law-abiding companies. Thank you for your interest. I will be happy to answer any of your questions about our Watch List. Chairman Waxman. Thank you very much for your testimony. Without objection, the questioning will commence with a 10- minute round for the majority followed by a 10-minute round for the minority. Either side may reserve any unused time of its 10-minute block for use during or immediately following a 5- minute round by a Member of that side, with this reserved time to be controlled by the chairman and the ranking member, respectively. Without objection, that will be the order. I am going to start off the questions, myself. One of the questions we are trying to figure out at this hearing is: How can a company like AEY get such an important contract for $300 million to provide ammunition to the Afghanistan Security Forces? Mr. Howell, in your written statement for today you explain AEY got the contract because of AEY's strong record of past performance. Here is what you said: ``AEY had a history of satisfactory performance on similar contracts, showed increased revenue growth, adequate capitalization, and was considered a low risk.'' Do you stand by that statement? Mr. Howell. Yes, sir, I do. Chairman Waxman. Well, we did what the Army apparently never did. We looked back at past contracts to see what AEY's past performance under other contracts was really like. One contract that AEY got was a contract with the Multi-National Security Transition Command in Iraq to deliver protective helmets. A U.S. official who examined AEY's shipments wrote, ``The helmets came to Abu Graib by mistake. They were not very good. They had peeling paint, and a few appeared to have been damaged such as having been dropped. When I first saw them, I put them in the reject category.'' The same inspector also wrote this to Mr. Diveroli, the head of AEY: ``Some people got a little wound up when they saw the daily receiving report. They remembered the 10,000 helmets you sold them earlier this year and the junk AKs we still have in the warehouse. Several scenarios were being planned for you, none of them pleasant.'' Another official wrote, ``Bottom line, the helmets are damaged goods and we don't want them.'' General Phillips, does this sound like satisfactory performance to you? General Phillips. Sir, I am going to let Mr. Parsons address that question, but before I do that I would just like to state that when the officer goes in to make an award on a contract they do a thorough review of past performance and they ask DCMA to assist in that process, so---- Chairman Waxman. Well, if you did a thorough performance and someone came back with this kind of report of performance under a previous contract, would you think that sounded like satisfactory performance? Mr. Parsons, maybe you can answer this question. Mr. Parsons. No, I would not, sir. And, as I mentioned in my opening remarks, we have found that, due to dollar value of many of those contracts not being within the reporting threshold, a lot of that information did not get reported. Again, the reason why we are initiating a policy change in the Army to ensure that, regardless of dollar value, that type of information is sent forward. I will say that---- Chairman Waxman. Well, I want an answer to this question and I have limited time. Under another Defense Department contract AEY failed to deliver 10,000 Beretta pistols under a contract for $5.6 million. The contracting official who terminated that contract said this about Mr. Diveroli: ``I just don't trust this guy. I couldn't take anything he said credibly.'' The contracting official added: ``All his reasons continued to build and build, and then it just got to the point where it was the straw and the camel's back, and I said, `Look, no amount of consideration is going to take care of the fact that you have been unable to deliver. You have not had one delivery order come in.' '' Now, hearing that, Mr. Howell, would you think that indicated sound past performance? Mr. Howell. I would not, if I heard those things, say it was sound past performance. But I would also question if those contracting officers, in fact, provided written input to the Excluded Parties List or other reference areas that we could use, in fact, to weigh our evaluation for adequate performance for our contractor. Chairman Waxman. Well, under another contract with AEY, with the U.S. Army Special Operations Command, AEY was supposed to provide the same type of ammunition that it later delivered to Afghanistan. The contracting officer who terminated that contract said that AEY ``failed to deliver acceptable goods, provided no notice of an excusable delay,'' and ``provided inadequate assurance of future performance.'' Does that sound like satisfactory performance, Mr. Howell? Mr. Howell. Absolutely not. Chairman Waxman. The committee also looked at AEY's performance under contracts with other agencies. Under a contract with the State Defense to provide tactical equipment for use in Iraq, including optical sites and weapons adaptors, AEY repeatedly ignored a contracting officer's warnings. In fact, AEY delivered only one item by the delivery date, and it was rejected as a nonconforming substitute. When the contracting officer withdrew the order, this is what he wrote to AEY: ``You are hereby notified that your failure to deliver the listed items has endangered the performance of the Department of State mission. Further, in subsequent correspondence your promises of delivery have not been met. You are hereby informed that the undelivered items are being withdrawn from subject order. The DOS mission can no longer be delayed due to your inability to produce the items as stated in subject order.'' Mr. Parsons, does that sound like satisfactory performance? Mr. Parsons. No, it does not, sir. Chairman Waxman. The award of this contract to AEY despite these numerous examples of contracts terminated for poor performance reveals a fundamental flaw. The system for vetting contractors appears to be broken. It is hard to imagine a less- qualified contractor than AEY, and yet this company was rated excellent by the Defense Department and it was awarded a contract worth $300 million. That is quite amazing to me. I am going to reserve the balance of my time and I am going to yield to Congresswoman Norton her opportunity to ask questions. Ms. Norton. Thank you, Mr. Chairman. Let me go first to Mr. Mull. You are aware, of course, that the Arms Export Control Act requires us to make sure that brokering, arms brokering overseas, is done in light of the national security interests of the United States. I want to look at the Watch List that you discussed in your testimony. When there is an application for someone to be an arms broker, the Government is supposed to check all the parties on the Watch List specifically to see if these are arms traffickers. That is correct? Mr. Mull. Yes. We compare every application for an arms brokering license against the Watch List. Ms. Norton. So this Watch List is very important, and we have learned--and I want to verify this--that everyone involved in the AEY contract was on the Watch List. Let's go first to the buyer, the president, Efraim Diveroli, flagged in April 2006 because of suspected illegal arms trafficking; is that not correct? Mr. Mull. Yes, ma'am, that is correct. Ms. Norton. Although, Mr. Chairman, I would like to put their words on the record of the Watch List that, although Mr. Diveroli was only 21 years old, he has brokered and completed several multi-million-dollar deals involving fully semi- automatic rifles, and here are the operative words--``future license applications involving Diveroli and/or his company should be very carefully scrutinized.'' Mr. Mull, that entry was placed in 2006; is that not accurate? Mr. Mull. Yes, ma'am. And if I might elaborate, we actually first put the company AEY on our Watch List in January 2005. Ms. Norton. I have limited time. I just want to make sure that my questions are predicated on the facts. They are on the Watch List. Now, the middleman, Mr. Mull, was Heinrich Thomet. Now, he was also placed on the Watch List in 2006 before this contract was awarded; is that not correct? Mr. Mull. Yes, ma'am, that is correct. Ms. Norton. Now, the source of the ammunition was Mr. Pinari. He is the head of Albania's military export/import company. He was first listed, according to my information, in 2005; is that not true? Mr. Mull. Yes, ma'am, that is correct. Ms. Norton. Now, we note that the entries of Mr. Thomet and Mr. Pinari came from the CIA and the DIA, and we understand that their information is classified, but the fact that they were on the list in 2005 and 2006 is not classified; is that correct? Mr. Mull. That is correct. Ms. Norton. General Phillips, let me turn to you. The head of the State Department's Directorate of Defense Trade Controls [DDTC] told us that the AEY had ``a perfect trifecta,'' and yet, of course, they were awarded by the Army a $300 million contract. How do you explain awarding the contract to somebody who is on a Watch List that is not classified, sir? General Phillips. Ma'am, the contracting officers that execute the contracts are not required to go and look at the Watch List. I believe that to be true, and I will ask Mr. Parsons to just elaborate on that comment, if he would. Ms. Norton. Wait just a second. Your testimony here is that you didn't check the Watch List because you were not required to check--the contracting officer was not required to check the Watch List. I want to ask you, in light of what we now know, we know the contracting officer did not. And the last thing I am trying to do is to blame it on the contracting officer. The only reason we are having hearings like this is to see what we can do to improve in the future, so I am not trying to say why in the world did you do it. In light of what you now know, would it not seem in the best interest of the United States to either, when you are involved in sales which require a license, to either check the Watch List or, if there is no requirement to have your own internal procedures so that the contracting officer would know to check the Watch List? Or is your testimony that we didn't have the procedures, we didn't have to do it, and we are not going to do it in the future? Mr. Parsons. Mr. Parsons. Ma'am, I don't disagree. What I am not sure of is whether that Watch List is accessible to people outside of the DDTC. I can tell you that there is nothing in the regulation---- Ms. Norton. Mr. Mull, was that Watch List which is not classified, if it had been asked for by the DOD, would they have been allowed to look at the Watch List? Mr. Mull. We often get requests from other Government agencies and we evaluate it. We have to make sure that we don't release any classified information, so---- Ms. Norton. This was not classified. Mr. Mull [continuing]. We would screen in response to a Government agency. We would consider the request and provide what we could. Ms. Norton. Thank you. So this could have been released. It was not classified. Mr. Chairman, I would like to ask if any procedures have, in fact, been set up to check the Watch List, before I sign off. Are there any procedures now within the DOD to check the Watch List now that, of course, you know that you have access to that information? Mr. Parsons. Ma'am, no, there is not to my knowledge, but we will pursue that with the Department of State. Our understanding was that Watch List fed the Excluded Parties List, which is what is required by the contracting officer, but we will engage with the State Department to see if there is a way that we can add that to our procedures. Chairman Waxman. Thank you, Ms. Norton. Your time has expired. I just want to ask a quick question of Mr. Parsons. One of the sources for the classified information was the Defense Intelligence Agency. Do you know now what the entry was? Mr. Parsons. Can you repeat the question, sir? Chairman Waxman. One of the sources for the classification was the Defense Intelligence Agency. Do you know now what the deletion was? Mr. Parsons. With the DIA, no, I do not. Chairman Waxman. You do not. OK. We have another vote on the House floor. we are going to recess for around 10 minutes in order for Members to vote and come back. We stand in recess. [Recess.] Chairman Waxman. The committee will come back to order. I would like to now recognize Mr. Davis for 10 minutes. Mr. Davis of Virginia. Thank you. Mr. Howell, let me ask you, what does it take to be a non- responsible bidder? Mr. Howell. Yes, sir. Mr. Davis of Virginia. I mean, in retrospect you would say these guys are probably non-responsible, wouldn't you, for a $200 million bid? Mr. Howell. I would. Given the facts that we know today, I would tell you that they were a non-responsive contractor. They did not comply with the terms and specifications of the contract, which is a primary metric that we use. They didn't deliver on time, didn't deliver in accordance with the specifications in both the basic contract or the modifications. Mr. Davis of Virginia. Let me just go through another company and ask if you think it is responsible. This is a company that in 2007 paid a $1.1 million settlement for over- billing for aircraft parts, and in 2006 a $30 million payment to settle claims that 100 neighbors in the Santa Susanna Field Nuclear Research Facility were sickened by decades of radioactive and toxic contamination. This was supposed to be confidential, but one of the plaintiffs divulged the terms to local media. In 2004, a $615 million settlement to resolve the Darlene Druin scandal and other pending investigations, if you remember that. In 2003 an $18 million settlement for violations of the Arms Export Control Act and the International Trafficking in Arms Regulations. In 2003 a $6 million settlement for violations of the Arms Export Control Act involving transferred data to China. In 2003 they paid a $4 million fine for violations to the Arms Export Control Act and the International Trafficking Arms control. That is a different violation. In 2003 a $2.5 million settlement for alleged defective pricing. In 2003 a $490,000 settlement for a qui-tam action for false claims. They had had business units suspended from receiving new Federal contracts for an 18-month period from 2003 to 2005. Criminal investigations. But this is the Boeing Corp., but they are responsible under the criteria because they can still deliver; is that how you view it? Mr. Howell. Well, sir, the DCMA's ability to assess prior performance and potential responsiveness is directly limited to the data that we have and can review. Mr. Davis of Virginia. Yes. That is all public data here. And they continue to receive. I guess what I am saying is it is a fairly low bar for companies. Really, debarment or not finding people responsible is basically a fairly low bar, isn't it? Mr. Howell. Yes, sir. Mr. Davis of Virginia. What did DCMA's review entail? Based on their review, a complete award was recommended. AEY was classified as a low financial risk at the time, and the firm was deemed well-managed, efficient, and experienced. Can you find where that information came from? Mr. Howell. Yes, sir. We use a form 1403. That is what the procurement contracting officer submits for a pre-award survey. In that, in section 19 and 20 they have the ability to identify both major and contributing factors that they would like for the agency to examine for us to make a determination. The contracting officer, in accordance with the contract, the type of contract, meaning the priority, non-standard ammunition, previously manufactured, OCONUS-to-OCONUS delivery, requested that we perform a pre-award on the financial, transportation, and accountability aspects of this impending contract. We did that for financial and transportation and the Defense Contracting Auditing Agency conducted the accountability piece of it. Mr. Davis of Virginia. Were they aware that the CEO of this company was in his early 20's? Mr. Howell. I cannot answer that question at this point, sir. Mr. Davis of Virginia. Let me ask you, Mr. Parsons, Mr. Diveroli had some colorful off-the-field incidents, for lack of a better term. What effect do domestic incidents by contractors' presidents have on the awarding of a Government contract? Mr. Parsons. Sir, I have a hearing difficulty, so I just ask that you repeat the question. Mr. Davis of Virginia. What effect to domestic incidents by a contractor's president have on the awarding of a Government contract? Any? Mr. Parsons. As far as his status, himself? Mr. Davis of Virginia. Yes, for his off-the-field incidents. Mr. Parsons. They focus on the company, not on the people who own the company, unless they are on the Excluded Parties List. Mr. Davis of Virginia. A 22-year-old CEO, I don't think he had a college degree--that doesn't send off any bells? Mr. Parsons. Sir, as part of the solicitation process, we don't ask for or even know what the age of the owners of the company are. Mr. Davis of Virginia. Nobody did in the investigation of this or had any idea what was behind the paperwork? Mr. Parsons. Not that I know of. Mr. Davis of Virginia. What if a contracting officer came across a news story where the president was arrested for domestic violence related charges? That would not be something that would necessarily ring any bells, because you look at the total company and not at the CEO? Mr. Parsons. Sir, if that was information that was available to the contracting officer, I am sure that would have caused some questions on their part. But, again, we are not aware of any of that information being available to the contracting officer. Mr. Davis of Virginia. Could they have taken his age into account in deciding whether they could have been selected for an award of this magnitude? Mr. Parsons. Not his age. No. That is not one of the things that we use as a discriminator in awarding---- Mr. Davis of Virginia. How about experience? Mr. Parsons. Excuse me? Mr. Davis of Virginia. Experience is one, though, isn't it? Mr. Parsons. Appearance? Mr. Davis of Virginia. Experience. Mr. Parsons. Experience, yes. Mr. Davis of Virginia. Experience is clearly a criteria, and at 22 the fact of the matter is he didn't have a lot of experience. Mr. Parsons. The information available to the contracting officer indicated that the company had relevant recent experience, that they had started in 1999, had awarded contracts by the Department of Defense starting in 2004, so the contracting officer, again, based on the information that was available to him, felt that the company had experience in providing these types of goods and services. Mr. Davis of Virginia. Obviously they were wrong. You think in retrospect they were wrong, don't you? Mr. Parsons. They were wrong? Mr. Davis of Virginia. Yes. Mr. Parsons. The contracting officer relied, again, on--if that was supplied on a contract that AEY had for---- Mr. Davis of Virginia. Do you think he made a good decision or a bad decision? Mr. Parsons. Based on the information that she had, I think she had---- Mr. Davis of Virginia. I am asking you in retrospect, now that we know all the facts. Mr. Parsons. In retrospect, knowing what we know now, it was not a good decision. Mr. Davis of Virginia. That is all I am trying to get after. I will reserve the balance of my time for this point. Chairman Waxman. The gentleman has 3 minutes. He is reserving that. I want to recognize Mr. Issa. Mr. Issa. Thank you, Mr. Chairman. And thank you very much for holding this hearing. I am going to bifurcate my questions. I think the ranking member has done a pretty good job, a very good job of sort of asking the question of, in retrospect does this award make sense. No, it doesn't. General Phillips, if I can ask you a question, knowing what you know from the record, what tools should have been used to prevent this from happening? General Phillips. Sir, this is non-standard ammunition that we are buying. It is essentially foreign-made ammunition, Soviet Bloc countries, former Soviet Bloc. Some things that we have to do is to make sure that we improve our specifications, the way that we transport this ammunition, our packaging, standards, those kinds of things. And the team that I have established of subject matter experts have taken that on in a very big way and we have developed the standards and the specifications, and we are going to go off and improve those for future buys that we have for non-standard ammunition. We are going to do everything possible to ensure that this doesn't happen again, sir. Mr. Issa. I don't want to disagree with you. Your service in the Army is much longer than mine. But isn't this standard ammunition, just not our standard? General Phillips. Sir, for our standard ammunition---- Mr. Issa. No, no. Please answer the question because I asked it that way for a reason. You know, there are three camps of ammunition in the world. There is the NATO standard, the old Soviet Tricomm standards, and then there is, like, all others. This is not all others, is it? This is basically the old anti- NATO communist block ammunition, AK-47s, a 7.62 that doesn't use the same casing as ours, and so on. It is what we dealt with all the way back in Vietnam; isn't that true? General Phillips. Correct, sir. Mr. Issa. Let me ask you a question, speaking of Vietnam. I was in Afghanistan almost immediately after we had secured it, and I was there with now Chairman Reyes and former chairman of Armed Services, Duncan Hunter, and we were shown by well- meaning, I am sure, Army officers how they were going to train the Afghans, the guys who, to a certain extent, had kicked the Soviets' ass with odds and ends weapons. I know we are not supposed to use that word indiscriminately, but I noticed in the staff stuff I noticed there were some other words like shit ammo, so I figured, you know, kick the Soviets' ass would work very well. So I will limit myself to those two parts of George Carlin's repertoire for today in honor of George's passing. But we were there with Duncan Hunter, and he looked at this stuff, and it was junk, and he asked, are we going to train with this? Oh, no, this stuff is terrible. This is what was turned in. We are paying to have this turned in by Afghans and none of it is useable. He said, well, when are you going to start training these guys? Well, we are looking into procuring weapons. I asked that day what I am going to ask you today, although I asked it with a shorter list. Isn't it true that Bulgaria, the Czech Republic, Estonia, former East Germany, Hungary, Lithuania, Latvia, Poland, Romania, Slovenia, and Slovakia all use this standard historically, have large stockpiles, were known to have large stockpiles, and virtually all of these people, except for Germany, I guess, were part of the Coalition of the willing that went into Afghanistan; isn't that true? General Phillips. Sir, I am not sure. I believe that to be true. Mr. Issa. I said I would bifurcate this thing, but you led me right into the other part. Wasn't this an unnecessary contract, because the truth is if you are going to buy standard ammunition and you have colleagues, allies, friends, people you work with for whom this is still a standard, they know about it. General, let me ask you a question: why are you wasting Federal taxpayers' time writing standards for tricomm rounds when, in fact, all those countries I named have experts who not only have the ammunition and the weapons still in their stockpiles in many cases, but have people who have the expertise, and they are all NATO allies? Why is it in a NATO war in Afghanistan we didn't use our NATO allies' expertise not only in supply but also in inspection? And why aren't you doing it today as part of the fix? General Phillips. Sir, I would simply say that we are required by statute and by Federal regulation that when we enter into agreements with our foreign allies like Afghanistan we use specific policies and procedures that are defined by, in the case of the Army, the U.S. Army Security Systems Command. Mr. Issa. I am running out of time, so let me close with one question that is half comment/half question. You entered into agreements. You didn't go there to do it, but you entered into agreements with Afghanistan that essentially locked out the ability for our NATO allies who had large stockpiles from being the suppliers, either for reduced cost or in-kind. Now let's go back again. If I take a trip to Afghanistan this week and I talk to President Karzai and I ask him, would you be willing to have this product delivered to you from any source that could deliver you high-quality product that your troops could use, do you think he is going to tell me, no, no, we have an agreement, we have a certain standard? Or do you believe that, in fact, the U.S. military in a macro way--and procurement is just the tail end of the macro mistake--made a mistake in Afghanistan that they continue to compound because we made a decision to use the weapons they were used to, and then we didn't work with the people who had the expertise? General Phillips. Sir, I agree with you that we have made mistakes and we need to capture those lessons learned and apply them. The one thing I would like to share with you is that we are doing everything possible to ensure that our very important ally, Afghanistan, gets the munitions that they need, and that is my job, to make sure we do that now and in the future. Mr. Issa. Thank you, Mr. Chairman. I think we have made our point. Chairman Waxman. Thank you, Mr. Issa. Mr. Cummings. Mr. Cummings. Thank you very much, Mr. Chairman. General, I just want to ask you a few questions. One of the things, as I listened to the testimony and reviewed all the documents, there are four things that seem to be going on here: serious communication problems, some serious incompetence, phenomenal carelessness, and a culture of mediocrity. General, we reviewed documentation from the Defense Department involving quite a few previous contracts your agency had with this company, AEY. What struck me was the number of times AEY failed to perform and then came up with outlandish excuses for why it didn't fulfill the contract. Let me give you a few examples. In 2005 AEY was awarded a contract to provide munitions to the Iraq Security Forces, including 10,000 Beretta pistols. Mr. Diveroli was only 19 years old at the time. We interviewed your contracting officer for this contract, and he told us that when Diveroli failed to deliver the weapons, he just started making up wild excuses. This is your contracting officer, now. This is what he said: ``Diveroli said the German government was interfering in the delivery of these Italian-made pistols. He said that the transport planes couldn't fly because of bad weather. He even said that there was a fiery plane crash that destroyed the documents necessary to secure an export license needed to ship the goods.'' But that wasn't all. Mr. Diveroli said at one point that he failed to deliver the weapons because a hurricane hit Miami, FL, where AEY was based. He told a contracting officer that they had no water and that his life was just terrible. Well, as it turns out this wasn't true. In an interview with the committee staff, this is what your contracting officer told us: ``We could tell there was no hurricane in Miami. It wasn't like we didn't have the internet in the Green Zone.'' General, are you concerned that Mr. Diveroli would make up such excuses like this on important Government contracts, major contracts? General Phillips. Sir, I appreciate your insight. I have not heard those allegations that you just went over in terms of the nine millimeter contract and others, but certainly it raises issue as to Mr. Diveroli, himself. In hindsight, if we had had knowledge, Army contracting, the contracting officer for the contract we are discussing, had knowledge of that and those instances in the past performance, that would have weighed in the decision that---- Mr. Cummings. That is why I started off my discussion by saying one of four things, of four, are happening here. There are some serious communication problems; wouldn't you agree? General Phillips. Sir, I think when Mr. Parsons mentioned up front that in past performance and sharing that information, that we have to improve the way we do that. I would agree, sir. Mr. Cummings. So you did not know about this information that I just cited when this $300 million contract was awarded? You didn't know? General Phillips. Sir, I did not. Mr. Cummings. Mr. Parsons, did you want to say something? Mr. Parsons. Sir, again, the information that the contracting officer had was limited from the standpoint of past performance. She did get a questionnaire on past performance answered by the Joint Contracting Command in Iraq and Afghanistan. Many of those issues that you just identified were not highlighted in that past performance review. Mr. Cummings. It is interesting that when Mr. Diveroli said a hurricane hit Florida and made his life terrible he was justifying his failure to perform on one of three contracts that your team was supposed to be reviewing to assess his past performance, and yet you didn't even talk to the primary contracting officer on the contract; is that right? Mr. Parsons. Sir, that is information I am not aware of. Mr. Cummings. Well, we did talk to him, and this is what he said. He told us, ``I couldn't take anything Diveroli said credibly.'' He concluded that Diveroli was lying to him. That is his statement. And this wasn't the only person telling us this. Another contracting official became suspicious when AEY sent helmets accompanied by a cryptic Chinese document supposedly showing they were safe. This official told us, ``I just don't trust the guy.'' And there are many more examples like this. It just seems like if you didn't know this, then we have a fundamental problem with the way we do business. The entire system must be broken. I heard what you said, General, about the corrections that you plan to make, but I don't know that those corrections deal with the four things that I talked about--the communications problems, incompetence, carelessness, and a culture of mediocrity. I am hoping that the things you said will correct this, but I am going to tell you I don't have a lot of faith. Chairman Waxman. Thank you, Mr. Cummings. Mr. Lynch. Mr. Lynch. Thank you, Mr. Chairman. Mr. Chairman, I want to thank you for holding this hearing, and I want to thank the ranking member for his work, as well. This is very important. You know, there has been some reluctance, I think, of the panel, and I appreciate your coming in here and testifying, but there has been a reluctance on the panel to criticize what happened here. I just want to go on the record to say that all of us have spent a lot of time in Iraq and Afghanistan and we have seen the excellence with which our military has performed. The events here that we are speaking of today are a disgrace. They do not meet the standards of those men and women in uniform that we have seen repeatedly in our visits to Iraq and Afghanistan. That is the great sin here. This does not meet acceptable standards, not even close. I am not hearing that from the panelists. I am hearing hedging, I am hearing some defenses about information not being available. This kid was 19 years old, 19 years old. He gets a $300 million contract, taxpayers' money from the United States of America. That is a disgrace. I don't hear that from the panelists. I am hearing defense of different individuals. Has anybody been fired for this? Can I ask the panel, anybody get their walking papers for what has happened here? Has anybody been fired? Mr. Parsons. No, sir. No one has been for instance fired. Mr. Lynch. I am sorry? Mr. Parsons. No one has been fired. Mr. Lynch. Well, that is a shame. That is a shame because in the private sector somebody would be without a job because of this. I have to ask you, as well, I know the two individuals were indicted, but it looks like, based on the information here, because the standards are so lax, it doesn't look like they broke the law. It looks like these guys could walk, even though they are indicted, because there are no standards for age of ammunition, and they knew it, so I am very concerned about that. I hear and I read that the contracts have been canceled, terminated. Now, I was in Iraq at the Taji Weapons Depo a few weeks ago and I asked the commanding general there about the AEY contract. He said, Yes, they are shipping in to us. So myself and Mr. Platts from Pennsylvania actually asked the general to give us a detail, and we went around and started opening up some crates. They were all AEY contract. It looks like they are still performing in this contract. That doesn't jive with the testimony and the documents that I have before me. Can you tell me, is AEY still performing on some contracts in Iraq? Mr. Parsons. Sir, I am not aware. I will have to get back to you on whether they are still performing on a contract in Iraq. Mr. Lynch. That is not good enough. Mr. Parsons. I can tell you on this---- Mr. Lynch. That is not good enough, sir. Mr. Parsons [continuing]. Ammunition contract they are not. Mr. Lynch. I will get back to you--that is not good enough. Considering what these kids did to the American taxpayer, there should be no question in anyone's mind that these contracts have been terminated. That just sends the wrong signal to these contractors that someone could do this and still get paid and still perform under other related contracts. I mean, this individual, Efraim Diveroli, had seven contracts that were unsatisfactory previous to this. What bothers me is that a lot of this information was laid out there. The sourcing committee on this most recent contract declared that he was unsatisfactory. Then the defense contracting officer changed that assessment, changed it from unsatisfactory to good and allowed the contract to be granted. So I would be asking if there was an investigation regarding that individual who turned the recommendation around after we had all the information before us. The fact that I think, based on what I saw with my eyes, AEY is still performing contracts for the U.S. Government. That is based on my own assessment in person in Taji and Iraq with Mr. Platts and some others. Also, there is another individual here, Mr. Merrill. It appears, at least from the documents in front of me, that you asked for verification and assessments from individuals about the way these contractors performed. One of the things that gets me is that in assessing how a contractor performed you asked the vice president of AEY how are you doing. He has a major financial interest in this company, and he filled out the form and said we are doing great. You asked the vice president of the company to do an assessment of his company. How do you think that is going to come back? I mean, that is just a systemic gap here. I wish we weren't at this point. I think we have to scrap this whole system and come up with something that is more worthy of our men and women in uniform, because this has taken resources away from them, it is basically stealing taxpayer dollars, and it is putting them in jeopardy. I am beside myself. I am absolutely beside myself about this whole deal. All the money and time we are spending here, this is a mess. It is a mess. It is a disgrace. Chairman Waxman. The gentleman's time has expired. Mr. Lynch. I will yield back. Thank you, Mr. Chairman. Chairman Waxman. Thank you. Mr. Davis of Virginia. Mr. Chairman, let me claim my 3 minutes, if I could, really quick. Chairman Waxman. Yes, sir. Mr. Davis of Virginia. Could I just ask why this was a requirements contract as opposed to a multiple-award IDIQ or something like that? Why was this vehicle chosen? Mr. Parsons. Congressman Davis, it is my understanding, after talking with the contracting officials on this, that when they were discussing the requirements for the Afghanistan ammunition they could not get the customer to specify a minimum amount of ammunition that they would need to place a minimum order against an IDIQ contract. So instead they elected to use a requirements contract, which doesn't require us to necessarily award a minimum requirement. Mr. Davis of Virginia. OK. Now, this was a small business that got the contract at the end of the day. Who checked to see if their certification was accurate? Is this the contracting agencies? Is it the SBA? Or is it a competitors' complaint? How does that work? Mr. Parsons. Sir, the contractors certified in their certification representations that they were a small business. The contracting officer verified that they were a small business and coded that in the Federal procurement data system as a small business. Mr. Davis of Virginia. That could have been protested if somebody wanted to protest, but it was not in this case, right? Mr. Parsons. The small business size was not a factor in deciding. This contract was open to large businesses and small businesses. Mr. Davis of Virginia. Right. But if a small business competes in this, don't they have an advantage? Mr. Parsons. What was that last part again? Mr. Davis of Virginia. If a small business competes, it isn't there some advantage to that? Mr. Parsons. Correct. Mr. Davis of Virginia. What is the difference between a small business and a small disadvantaged business? Mr. Parsons. Sir, the small disadvantaged business are those companies that meet the qualifications of the Small Business Act for being identified as disadvantaged for either minority status or for other aspects of it. I don't have a complete list off the top of my head on what those are, but there is definitely something that has the difference between the small business and small disadvantaged business. Mr. Davis of Virginia. I know what it is. What is your understanding of the certificate of competency process and the role of the SBA? Mr. Parsons. Sir, my understanding is that if there is a question on the part of the contracting officer regarding the responsibility of the small business, they go to the Small Business Administration and ask for a certificate of competency for that small business. Mr. Davis of Virginia. Now, when a contracting officer has to interface with officials from SBA, what are the procedures? Do they just ask for it and the SBA then will do appropriate checks? Mr. Parsons. Yes. They correspond directly with the Small Business Administration and give them all the particulars regarding the issue and wait for the SBA to make an assessment. Mr. Davis of Virginia. So how much information does the contracting officer share, and how knowledgeable does the SBA have to be in understanding the nuances of a specific acquisition? Mr. Parsons. I am not certain, sir. Mr. Davis of Virginia. OK. How frequently does the SBA effectively reverse a contracting officer's responsibility determination during the processing? Do you ever see that? Mr. Parsons. Again, sir, I do not know. Mr. Davis of Virginia. Have you ever seen it? Mr. Parsons. I have never seen the SBA reverse one, no. Mr. Davis of Virginia. What challenges does your agency have with the SBA certificate of competency process, particularly in an acquisition to be awarded on the basis of a low price, technically acceptable offer? Mr. Parsons. I am not certain. Mr. Davis of Virginia. You don't feel you have any challenges, or do you have challenges with the SBA certificate of competency process, particularly in an acquisition that is awarded on the basis of the low price, technically acceptable offer? Any problems? Mr. Parsons. Sir, again, for this particular acquisition I am not aware of any issues regarding the competency, the certificate of competency with SBA. There wasn't any engagement at all with the SBA in this acquisition process. Mr. Davis of Virginia. But they weren't competent at the end of the day? Mr. Parsons. Correct. Mr. Davis of Virginia. Thank you. Chairman Waxman. Thank you, Mr. Davis. Ms. Watson. Ms. Watson. I want to thank the chairman very much for having this hearing today, and I thank the panelists for coming forth. As we look into the background, we find that in 2006--it was December--Mr. Diveroli and Mr. Packouz allegedly beat a valet parking attendant, resulting in charges of battery and possession of a stolen or forged document against Mr. Diveroli and a battery charge against Mr. Packouz. In January 2007 AEY was awarded a $298 million, 2-year contract by the Defense Department. The president of AEY, Efraim Diveroli, was 21 years old at the time that the contract was awarded, and the vice president, David Packouz, was 25 years old. I just heard one of the witnesses say that we don't look at age. Well, suppose they were under-age, 16 and 17? Would you not want to be aware that they were not adults? And on Friday both of them and three other AEY officials were indicted on charges that they concealed the Chinese origins of AEY's ammunition shipments from Albania to Afghanistan. If the investigation revealed that there was a contract to buy Chinese goods, which would be illegal in this regard, how is it that the Department of Defense and the contractors did not know the background that I just read? Somebody is not doing the work that they should. They are not being accurate. I want to ask Mr. Mull, Were you aware of the contract with the Chinese for the goods? Mr. Mull. The contract with the Chinese? Ms. Watson. Mr. Jin had notified the factory before and after the production of 100 percent inspection of the vests to make sure that there were no Chinese markings anywhere on the vests or on the box, and I understand there were markings there. It is kind of like, as I understand, a bait and switch thing that AEY did, and there is a history of this kind of thing. I understand that there as some, I guess, relationships and some purchase long before this contract. Were you aware that they were buying these goods from the Chinese? Mr. Mull. No, ma'am, I was not. But, because that was not part of an export of weapons from the United States and munitions from the United States, which is what we are solely responsible for regulating, we wouldn't necessarily have been aware of that. But, to answer your question, no, I was not aware in this particular case. Ms. Watson. Well, the documents that were obtained by the committee seemed to show that AEY concealed these Chinese origins by claiming that the vests were made in South Korea and were only shipped through China. This is how the AEY official described this plan: ``Harry, I just spoke to Efraim, and here is how we could resolve this situation. Please advise.'' ``The commercial invoice would show that the shipper is a South Korean company, and we have the letterhead, and that you and your contact in C''--meaning China--``is just the export company.'' Mr. Mull, again, would concealing the true Chinese origins of goods under a State Department contract be a violation of law? Mr. Mull. Well, if someone was exporting Chinese sourced munitions, we would not give a license to someone to export munitions from the United States from China overseas; however, again, in the State Department we do not regulate foreigners dealing with one another overseas. Ms. Watson. According to the indictments of last week, the Justice Department is examining the Chinese origin of the ammunition AEY provided from Albania to Afghanistan under the Defense Department's $300 million contract, but the committee now has evidence that AEY may have concealed the Chinese origins of other goods, including the bullet-proof vests. Mr. Chairman, I suggest that we share with the Justice Department the information we obtained to make sure that they are aware of it. I am just appalled that we don't have sharper people, that we are not doing better background checks. To have a company like this get away with it and use $300 million of taxpayers' money is abominable. Thank you, Mr. Chairman. Chairman Waxman. Thank you, Ms. Watson. Mr. Platts. Mr. Platts. Thank you, Mr. Chairman. I appreciate your holding this hearing. I want to associate myself with comments from previous speakers, especially Mr. Lynch. As he referenced, we traveled together in April and had some conversations regarding AEY and their supply. I want to followup on the last speaker, Mr. Mull, on the issue of the Department of State's role here. It is my understanding that Department of State does the licensing for any firm that wants to engage in brokering sale of arms, munitions overseas. As part of that process, there is a Watch List maintained from intelligence officials, law enforcement, other entities, developed. It is also my understanding that one or more individuals or entities associated with the AEY contract were on that Watch List. I guess my first question is: given that, how did AEY get a license? Was the information that led to them being on that Watch List investigated before a license was issued? Mr. Mull. Yes. Of the 17 licenses that the State Department issued to AEY, we consulted with law enforcement agencies that were involved with and looking at the activities of the company, and we checked with them to make sure that issuing this license would not obstruct any of their investigations or that it would otherwise break the law. We are required by the Arms Export Control Act to make decisions on these applications for export licenses according to certain criteria laid out in the Arms Export Control Act. In the licenses that we did approve, there was nothing illegal that they were proposing, and we confirmed that in consultation with the appropriate law enforcement agencies. Mr. Platts. Maybe I am misunderstanding the intent of that Watch List. It is not that they are proposing anything illegal, but the fact that they are under investigation seems some bells would go off that maybe we need to wait until those investigations are completed before we issue new licenses. Is that not part of the consideration of whether a license is issued or not? Mr. Mull. If the company is on the Watch List, yes, a bell will go off and automatically it will attract more intensive attention from our licensing specialists and our compliance specialists to see if there is anything about that particular case that would be a violation of U.S. law. In those cases where we issued the licenses, we made the determination in those discrete cases that there was nothing illegal. Mr. Platts. I guess I would add to colleagues who expressed somewhat disbelief that, given the circumstances here, a company with such a small record of engagement in this area was on a Watch List, the age of the company executives combined, that then we go ahead and issue a license that leads to a $300 million contract. So I guess my understanding of what scrutiny would result from that Watch List is more perfunctory. As long as there is no illegal conduct identified, the fact that they are under investigation isn't going to cause a license to be withheld. It sounds like it has to be something identified, yes, they are proposing something illegal or yes, they have done something illegal, not there are lots of questions here about whether they are worthy of this license. Mr. Mull. Well, sir, we did not issue a license for the $300 million---- Mr. Platts. That is a separate contract. Mr. Mull. Right. Mr. Platts. But you issued a license to allow them to engage in the activity that led to them being able to get contracts. Mr. Mull. No. These were separate contracts where they sought to export U.S.-provided supplied weapons to overseas. Mr. Platts. Right. Mr. Mull. And we carefully vetted to make sure that the things they were selling overseas was not a violation of law. Mr. Platts. OK. What sharing of information from your Watch List goes to DOD when they are looking at issuing contracts such as this? What information that you had that led to them being on a Watch List is shared with DOD? Mr. Mull. Because so much of what we have on the Watch List comes from intelligence agencies and other classified sources, we cannot freely share it. But what we would do---- Mr. Platts. Even with DOD? Mr. Mull. That is right, because we have to respect the originators of the classified information. The originator ultimately determines who can see it. So what we do gladly--and Mr. Parsons and I were talking about this during the break-- that if there were an entity or a person that any part of the DOD was looking at for consideration for a contract, if they provided us with the name or the person we would be happy to run that name against our List. If we saw a hit, we would then consult with the originator of the information, say, Hey can we share this with the Defense Department? Mr. Platts. So that is something you are discussing today, but as of today the information that leads to the Department of State to be concerned about individuals or entities to put them on a Watch List, DOD today has no access to that information? Mr. Mull. We receive on multiple occasions from many different Government agencies who are aware of the Watch List, they contact us and ask us to check, and so we have done that in the past. Mr. Platts. But there is no standard protocol that if you put somebody dealing with the sale or brokering of ammunition or weapons on a Watch List, that there is no automatic sharing with DOD that buys a lot of ammunition and weapons, that there is not an automatic sharing, hey, just so you know, this entity or this individual has been put on our Watch List, so you may want to take a closer look if you are going to purchase, including a $300 million contract? That doesn't happen today? Mr. Mull. No, sir. We do not push out the information, but if we are contacted we---- Mr. Platts. I think that is one of the problems, that one branch of our Government has information that raises some concerns is not automatically sharing it with another entity within our Government that is engaged in the purchase of the underlying product, ammunition and arms. I appreciate that dialog is beginning on how to strengthen that, and I think that is what we are after in this oversight hearing. How do we make sure this doesn't happen again. Mr. Mull. Yes. Sir, if I might, one of the concerns that we have, we have close to 80,000 entities on this List, and much of the information is controlled, and so we wouldn't know. Much of it comes from other classified controlled sources. We would need the originator of the information's permission to push that out, and so it would be difficult on a list that long---- Mr. Platts. My time is up. Given the level of classified clearance in the Department of Defense equal to anyone at Department of State, we should be able to find a way to share that information in a seamless fashion. I thank each of your for your testimony, and also for your service to our country. Thank you, Mr. Chairman. Chairman Waxman. Your time is up. Mr. Braley. Mr. Braley. Thank you, Mr. Chairman. There have been a number of disturbing issues raised by this investigation, but Mr. Mull I want to talk to you about one that specifically relates to the role of the U.S. Embassy in Albania and the potential coverup of the countries of origin of this ammunition. Yesterday Chairman Waxman sent a letter to Secretary Rice asking about reports that the U.S. Ambassador and other officials at the U.S. Embassy at Albania approved a plan to conceal the Chinese origins of the ammunition that AEY supplied to the Afghan Security Forces. The committee received this information from Major Larry Harrison, the Chief of U.S. Office of Defense Cooperation in Albania. During an interview with this committee, he stated that the Ambassador and his top aides held a late-night meeting with the Albanian Defense Minister to discuss how to respond to a request by the New York Times to visit the site where AEY was removing Chinese ammunition from its original packaging before sending it to Afghanistan. According to Major Harrison, who was at that meeting, the Albanian Defense Minister ordered one of his top generals to remove all evidence of Chinese packaging before the site was inspected the following day. Although Major Harrison was ``very uncomfortable'' with these actions, he told the committee that ``the Ambassador agreed that this would alleviate suspicion of wrongdoing.'' Mr. Mull, I know you were invited here today to testify about the Watch List, but do you have any further information from the State Department regarding this specific issue? Mr. Mull. No, sir, I do not. All I know is what I read in the chairman's letter yesterday and in the press accounts yesterday, and I do know, while I am personally not aware of any wrongdoing on the part of the management of our Embassy in Tirana, I do know that the State Department plans to respond to these serious allegations in the appropriate channel once they have collected the information. Mr. Braley. Well, let me just ask you then hypothetically, assuming that a U.S. Ambassador to a country like Albania had sat in a meeting like the one I described and was aware that an intentional act was being committed to conceal the identity of the country of origin in violation of U.S. military procurement requirements, would you agree that would be a bad thing for that Ambassador to do without reporting? Mr. Mull. Sir, I am reluctant to answer a hypothetical question, because I can imagine there might be circumstances in which covert activity is involved of the transfer. I would---- Mr. Braley. I am just going to have to stop you right there. I am having a hard time understanding how a covert activity would justify an intentional violation of U.S. law. Can you explain any situation where that would be acceptable? Mr. Mull. I think any violation of U.S. law by any U.S. Government official is unacceptable. Mr. Braley. What potential remedies are available against a U.S. Ambassador who participates or allows the concealment of a country of origin of ammunition that is being shipped to an ally of this country? Mr. Mull. Sir, I am afraid I personally can't provide you the answer to the question because I don't work on disciplinary matters or investigative matters outside of the arms export business from the United States, but I would be pleased to take your question back to the appropriate authorities. Mr. Braley. I would appreciate that. [The prepared statement of Hon. Bruce Braley follows:] [GRAPHIC] [TIFF OMITTED] 47390.054 [GRAPHIC] [TIFF OMITTED] 47390.055 Ms. Watson. Mr. Braley, would you yield a second? Mr. Braley. I would. Ms. Watson. As a former Ambassador, you would be recalled from your post in no time. That is the remedy. Thank you, Mr. Chairman. Mr. Braley. Reclaiming my time, the other question raised in the letter that Mr. Waxman sent yesterday to the Secretary of State is that the Embassy apparently concealed information about this meeting from the committee, and the committee specifically asked for information about meetings between Embassy officials and the Albanian Defense Ministry, as well as any information about any interventions into AEY's repackaging operation. Although Major Harrison argued internally that the Department should inform of us of those activities, he was overruled, and he provided documents contemporaneously to back up his story. Chairman Waxman made a new request yesterday for all the documents relating to this meeting and for a series of interviews with the Ambassador and his top aides. Mr. Mull, can you tell us whether the State Department intends to comply with that request voluntarily? Mr. Mull. Sir, I am sorry, I can't answer the question. I don't know what the intention is of the senior Department leadership, except that we will respond to the chairman's request through the appropriate channel. Mr. Braley. Well, let me tell you why this is so serious and why this committee takes this so seriously. A BBC News report says that Major Harrison was replaced in his position in the Embassy on June 9th. Do you know if that is true? Mr. Mull. That is the first I have heard of it, sir. Mr. Braley. General, Mr. Howell, do you have any knowledge of whether that occurred? General Phillips. No, sir. Mr. Howell. No, sir, I don't. Mr. Braley. The reason why that is important is because Major Harrison was a Defense Department official, and if there was any retaliation against Major Harrison, that would be a serious issue, particularly since June 9th was the very same day he was interviewed by this committee. Mr. Chairman, I would certainly hope that the committee will look closely into this matter and followup on any further investigation to protect Major Harrison as a potential whistleblower. Chairman Waxman. Thank you very much, Mr. Braley. Mr. Tierney. Mr. Tierney. Thank you, Mr. Chairman. You know, I am trying a little bit here to understand how the Defense Department came to the conclusion that AEY's past performance was excellent and that there was no history of quality-related problems. If you just look at the report that we put together and some of the information, they had an Army Special Forces Command contract for ammunition terminated in 2005 because of late deliveries and poor quality, an Army contract for gun scope mounts terminated in 2006 because of its failure to deliver after two extensions, a State Department contract for weapon systems terminated in 2007 because they provided the wrong items. The Defense Department terminated four delivery orders under a larger contract to supply munitions to Iraq Security Forces because the company failed to deliver the goods, including 10,000 Beretta pistols. General, I am curious. How can there be a conclusion that there is no history of poor performance when the Government agencies had terminated at least 11 different contracts? General Phillips. Sir, I believe your comments and what you described are true, but when you go back and you look at the decision that the contracting officer made, based upon the information that was available to that contracting officer, she made a reasonable decision based upon the information that she had, the past performance information, and the pre-award survey that was done by the Defense Contract Management Agency. Mr. Tierney. Let's take a look at that. They did talk to her. She was interviewed, and she said she had never heard of those terminations. That, I guess, is what is stunning on that. She said she checked the Army's Past Performance Management System data base--I would think that should have had the information--and there was no negative information about AEY. So I guess, General, if that system has such serious flaws, what has been done to correct that? Mr. Parsons. Sir, if I may, I will address that. We are initiating policy changes in our past performance reporting to ensure that type of information, regardless of dollar value of the contract, is captured. Part of the problem we have today is past performance reporting is only required when these types of contracts are $5 million or more. Many of the contracts I believe you describe were below that threshold, and so there was no requirement to do the reporting. However, what we are going to initiate is, when there is evidence that the contractor is not complying with terms and conditions of the contract and is terminated for default or terminated for cause or a show cause letter is issued for poor performance, that will be recorded in the past performance data system in the future. Mr. Tierney. I mean, it is unbelievable that it wouldn't have been done in the past. I mean, who is responsible for that, and do they still have their job? Who is responsible for keeping that list up and keeping it accurate? Has there been any accountability for the fact that these past performance problems weren't even on that list? Mr. Parsons. The contracting officer is required to update past performance information on those contracts that meet the threshold, so that is the contracting officer requirement, commonly shared with the program office. But, again, in our review of many of the contracts where they have been terminated for default, none of those contracts met that dollar threshold. Again, that is a hole in the system that we have to repair. Mr. Tierney. You know, the Beretta pistols were $5.6 million, as has been pointed out to me. I think some of those did hit the threshold. Mr. Parsons. Sir, that information is new. I am not aware of that $5.6 million contract or when that contract was actually terminated. Mr. Tierney. I guess that is the problem: nobody else was, either. Mr. Parsons. None of the ones I saw were that threshold. Mr. Tierney. Let me change directions here just for a second. There is a fellow named Mr. Ralph Merrill who was also indicated last week. According to an e-mail that he sent back in March 2006, he identified himself as the vice president of AEY. Mr. Howell, did you know that Mr. Merrill was a vice president of that company in 2006? Mr. Howell. Not at the time, no, sir. Mr. Tierney. Later that year in December 2006 Mr. Merrill was involved in helping AEY obtain its $300 million contract with the Defense Department to provide ammunition to the Afghan Security Forces. In December 2006 he stated he would support AEY's efforts to perform on the contract by reserving $1 million as working capital to be dispensed against purchase orders. He did this as the president of a company called Vector Arms. Mr. Howell, that information was submitted to your agency during its survey of the company AEY's financial capability. Your agency was informed that he had a financial interest in the success of that contract; is that right? Mr. Howell. Yes, sir, as far as I know. Mr. Tierney. OK. Now, the committee talked to the contracting officer who ordered that ammunition contract, and she told us that Mr. Merrill even joined Mr. Diveroli in a meeting with her discussing the requirements of the contract. She said Mr. Merrill identified himself as a consultant to the company at that time. So we probably don't have any problem with him being vice president/financial backer/consultant, but the fact of the matter is the Department awarded the contract based on the conclusion that AEY had an excellent past performance, and in part that conclusion was issued on questionnaires that were submitted to contracting officials on only three of AEY's contracts. So I guess one problem would be they only went to three of the prior contracts to get information. But one of the questionnaires was sent to Mr. Merrill, whose company had a prior contact with him, and, of course, Mr. Merrill gave him excellent reviews. He had a conflict of interest. There is something wrong here where you are asking somebody that has a huge financial stake in a current contract that is being sought and asking him about past performance on contracts that he also had an interest in. How can you get an unbiased and objective assessment of past performance from someone who has a financial interest in the contract? Mr. Howell. First, sir, at the time, as I mentioned, we had no knowledge that the gentleman was a vice president of the company, but when we conducted our pre-award---- Mr. Tierney. He represented himself as a vice president of the company. He sent an e-mail to you telling you he was vice president of the company in March 2006. Mr. Howell. Sir, I am not sure of the timing of that correspondence---- Mr. Tierney. March 2006. Mr. Howell. I am not sure of the timing of that correspondence as it related to the timing of the pre-award survey. Subsequent to the request for pre-award survey, we looked at several financial aspects of the company. That was one of them. And the rating was that they were financially capable of conducting a brokerage operation. Mr. Tierney. And you made that decision based on three questionnaires of the companies, at least one of which had a very serious conflict of interest. I think that is the issue here. You have to do something, I would hope, with regard to that process to make sure that doesn't continue to happen. Mr. Howell. DCMA has begun a review of all of its processes related to that, and we are looking at the implementation of different policies that will prevent those occurrences in the future. Mr. Tierney. I yield back, Mr. Chairman. My time has expired. Chairman Waxman. Thank you very much, Mr. Tierney. Gentlemen, we thank you for being here and answering our questions, and we hope this hearing will serve a constructive purpose, because what we have been talking about is not a proud day for contracting for our country. We stand adjourned. [Whereupon, at 12:12 p.m., the committee was adjourned.] [The prepared statement of Hon. Diane E. Watson follows:] [GRAPHIC] [TIFF OMITTED] 47390.090 [GRAPHIC] [TIFF OMITTED] 47390.091 [GRAPHIC] [TIFF OMITTED] 47390.092