by Guy Lawson
The US military had worked with foreign militaries in the past, aiding allies in Vietnam and elsewhere, though it had never attempted to create an entire national military in the middle of a war. But the Bush administration wasn’t willing to rely on American soldiers. Private industry would do a superior job, it was believed, and also protect the government from the political complications of a large commitment of American forces. Initially, the Pentagon outsourced the effort to stand up the new Iraqi army and police force through a no-bid contract to an American corporation called Vinnell, a division of Northrop Grumman. Vinnell had done some security work with the military in Saudi Arabia, but the retired American soldiers sent to Baghdad were clueless about Iraq, its culture, and the difficulties of starting an entirely new military. Contracted to create nine battalions of 1,000 men each, at a cost of $48 million, more than half of the first battalion deserted, and authorities in Baghdad soon decided on a new approach without Vinnell—but not before the company collected $24 million for not getting the job done.
The problems with using private contractors weren’t limited to the Iraqi security forces. The US Army’s use of Logistics Civil Augmentation Programs (LOGCAP) meant that many no-bid contracts worth billions were still being given to companies like Halliburton—where Vice President Dick Cheney had been chairman and CEO. Worse, the open-ended, contingency-based contracts didn’t state a fixed value but moved according to expenses incurred by the company, plus an agreed profit margin, an arrangement that encouraged contractors to pad their accounts, if not outright steal. Revelations that Kellogg Brown & Root couldn’t justify more than $1 billion in charges in 2004 alone led to the resignation of the Pentagon’s top civilian overseeing the contract—not because he was caught taking bribes but because he refused to release the funds until the company explained why it deserved the extra billion. Instead, the official was replaced and the money was given to the company—with no accountability or oversight for the discrepancy. Likewise, in the early days of the war in Iraq $12 billion in $100 bills was transported in more than twenty flights from a vault in New Jersey to the Green Zone—only to vanish. The Pentagon’s law-enforcement agency did nothing to investigate or stop this theft.
Inside the Green Zone, in the gardens of what had been the Republican Palace under the rule of Saddam Hussein, a business center was established as the place for private contractors to gather to peruse the various contracts for goods and services posted on the bulletin board each day. Like the scores of other ambitious American entrepreneurs descending on Baghdad to get rich quick, the principals of a small start-up called Custer Battles won a multimillion-dollar contract to provide security at the airport, even though its staff had no relevant experience. Creating sham companies in the Cayman Islands and Lebanon, Custer Battles used fake invoices to grossly inflate its prices. The scam was revealed when a spreadsheet was accidentally left on a conference table in Baghdad, showing that the company had charged nearly $10 million for work that had cost less than $4 million—a markup of 162 percent. But only a whistle-blower lawsuit brought by two employees against the company prompted a Pentagon investigation, and by then Custer Battles had won more than $100 million in contracts from the US government.II
Bremer departed in June of 2004, fleeing a few days earlier than scheduled to avoid a feared assault from insurgents. Authority was passed to an interim Iraqi government. By July, a new strategy was being implemented to stand up the Iraqi military. The Iraqis would be in charge of the task; at least, that was the hope. A small group of Iraqis were flown to America for a three-week crash course in weapons procurement. An Iraqi who’d previously worked as a used-car salesman while exiled in Poland for decades was put in charge, given a budget of $600 million to spend by the end of the year, and let loose to enrich his cronies through no-bid contracts for shoddy, overpriced arms that often weren’t even delivered. Many Iraqi soldiers lacked guns and helmets and bulletproof vests, but the Iraqi procurement officials conspired to buy ancient Russian helicopters that couldn’t fly and armored personnel carriers that couldn’t climb a slight incline because they had only a 150-horsepower engine. The theft and waste had all happened directly under the supervision of the occupying Americans—though nothing was done to stop it.
“Before, I sold water, flowers, shoes, cars—but not weapons,” the Iraqi who was eventually put in charge of spending $1.3 billion explained to the Los Angeles Times. “We didn’t know nothing about weapons.”III
In desperation, the US Army decided to use the Pentagon’s own procurement system to arm the Iraqis. A new organization was formed called the Multi-National Security Transition Command, or Minsticky. General David Petraeus was put in charge. A vast array of matériel was needed for the Iraqis—guns, tanks, ammo, mortar rounds. Every day officers from Minsticky posted “wants and needs” in the business center in Baghdad and on the Internet. These deals were open to any qualified bidder—and as an approved contractor on FedBizOpps, that included Diveroli.
Sitting in his tiny apartment in Miami Beach, Diveroli watched longingly as scores of Iraq solicitations appeared on his computer screen. Some of the contracts were for nonlethal goods, like boots and helmets. Some were for lethal matériel, like AK-47s and RPGs. Encouraged by his initial success, Diveroli spent all his waking hours trying to find a way into the Iraq action. He didn’t care what kind of deal he won; he just wanted to get in the game.
As he studied the website, Diveroli learned that the Pentagon had decided to use “nonstandard” weapons for the Iraqi army and police. The term was used to differentiate the two basic forms of arms in the world of war. The Pentagon called Soviet Bloc guns and bombs—based on the metric system and designed for cost-effectiveness and reliability—nonstandard. On the other side was American and NATO-style “standard” weaponry, created for accuracy and lethality and consequently expensive.
Weapons on both sides of the Cold War divide had merits, but there was no debate about price. An American M16 rifle cost at least $1,000. A used Communist AK-47 could be had for a few dollars, or a live chicken in some African countries. According to Donald Rumsfeld’s memoir, Known and Unknown, it cost $107,000 to train and deploy an American soldier, while an Iraqi soldier cost $6,500, and an Afghan soldier was a mere $1,800. This calculation ran through the strategic planning for both wars, with profound implications.
When Diveroli saw a contract to supply ten thousand bulletproof helmets to the Iraqi army, he began to scour the Internet for potential suppliers. Eventually, he found a Korean company willing to sell him the requisite amount for $110 each. Diveroli put in a bid of $125 per helmet and crossed his fingers. Soon after, he received the giddy-making news. He’d won his second government contract on his own—and this one was in Iraq.
But there was a hitch once again: finance. The value of the contracts was $1.25 million, and he needed $300,000 up front to pay for the first shipment. Diveroli’s father couldn’t lend him that much, even if he wanted to. Diveroli frantically looked for someone willing to back him, but the only person who agreed to take the risk had such onerous terms that Diveroli would receive nothing—literally not one dollar—on the contract. Diveroli couldn’t agree to such a deal, even if it meant defaulting on his first Iraq contract.
Unable to find a financial backer and at the end of his rope, Diveroli decided to try one last possibility. When he was living in LA working for his uncle, he’d done business with an older Mormon man in Utah. The transactions had been modest, mostly involving spare parts for Uzis. But the man—Ralph Merrill—had an entrepreneurial streak and the means to finance the deal. Diveroli’s telephone pitch to Merrill lasted three minutes: in return for half of the profits, the Mormon had to risk his money for thirty days. Diveroli would take care of all the details—managing the supplier, overseeing delivery, and attending to the paperwork.
Merrill was conservative: trim and clean-cut, a military veteran in his sixties, he was a lifelong Republican and a devoted father of five who kept to
the strict tenets of his faith. Merrill had made his fortune designing and installing ATMs in banks around the country, but a lifelong interest in guns had led him to start his own arms company after he retired, dedicated mostly to rebuilding AK-47s and Uzis.
Merrill seemed an unlikely partner for a brash teenager like Diveroli. But Merrill was an adventurer at heart. Over the years, he’d been involved in deals to import Uzis from Zimbabwe and AK-47 ammo from China, and along the way he’d developed close relationships with a number of international arms dealers.
Considering Diveroli’s proposal, Merrill reasoned that the Pentagon wasn’t going to refuse to pay for the helmets. After sleeping on it, Merrill decided to back the kid; their prior dealings had gone well, and he liked working with young entrepreneurs. There was also the possibility of bidding on more contracts through Diveroli. Like anyone watching the nightly news, Merrill knew that large sums were being made in Iraq. Diveroli was only nineteen at the time, but he was bright, ambitious, and seemingly trustworthy.
To get Diveroli started on the helmet order, Merrill agreed to front AEY $200,000 for thirty days, with a 3 percent monthly rate of return. If the deal worked, Merrill would renew the loan every thirty days, on the same terms. The arrangement turned out to be mutually beneficial and highly promising.
“Smooth as a baby’s ass was how the first helmet deal went,” Diveroli recalled. “Ralph immediately said he was interested in doing more business together, particularly if the United States government was the customer. I was, too. So I started bidding on government contracts with him in mind. I had my sights on the big Iraq contracts for weapons and munitions. I knew the government required an enormous quantity of Soviet Bloc arms and munitions—nonstandard arms. I hadn’t even heard of most of the stuff they were after, let alone dealt with the weapons. But I wasn’t going to throw in the towel.”
Diveroli asked Merrill if he knew anyone who could source the different kinds of nonstandard weapons that were appearing in the solicitations. Merrill said he knew a Swiss man by the name of Henri who’d sold him Uzi parts in the past. Merrill and Henri had a good working relationship and had met several times. Merrill started forwarding Diveroli’s e-mails requesting quotes for AK-47s, heavy machine guns, and grenades to Henri. Diveroli had no direct contact with Henri, but he was able to quote aggressively, using Henri’s low prices on surplus munitions.
With Henri’s connections, Diveroli was soon winning multimillion-dollar Iraqi arms contracts. His business model was brilliant. Most companies try to develop more customers as they grow. Not the young gunrunner. Diveroli concentrated exclusively on a single customer: the US government. No organization on the planet spent more money than the Pentagon, he knew.
Like an aspiring samurai, Diveroli set about mastering the art of arms dealing. He had little formal education but was blessed with an intuitive grasp of the art of deal-making as well as the gift of gab. Studying FedBizOpps wasn’t tedious for him—it was the pursuit of a dream.
And it was profitable. Diveroli had virtually no overhead, no staff, and few of the expenses normally associated with running a company. Within months he’d started making serious money, amassing hundreds of thousands of dollars in profit. But Diveroli still maintained a tightfisted lifestyle. He drove an old, junk-box Daewoo Leganza sedan and dressed like a slob. His main expenses were drugs and the tabs he ran up at Miami Beach nightclubs.
The launch of the American offensive called Phantom Fury in the city of Fallujah, Iraq, in the fall of 2004 did nothing to slow the insurgency. Car bombs exploded in markets, suicide bombers attacked American outposts, and soldiers began to refuse to transport goods within Iraq, citing the lack of safety and protection.
As the insurgency intensified, so did the volume of solicitations appearing on FedBizOpps. Like the contract for ten thousand AK-47 rifles Diveroli bid on. Trying to get a price for the guns without relying on Henri, Diveroli found an Italian lawyer who brokered arms deals. Arnaldo La Scala claimed to have “bound” a cache of guns in a warehouse in Croatia—he didn’t own them, but he said he was the exclusive broker. Diveroli bid on the contract using La Scala’s price and his now trademark 9 percent profit margin. And Diveroli won. But when he tried to arrange for delivery of the weapons to Iraq, La Scala said he wasn’t able to get them out of Croatia because the government refused to approve the sale. Diveroli couldn’t accept excuses. He knew the Army didn’t accept excuses. He had to deliver to protect his performance record, as best he could, in the chaos that was enveloping Iraq and grinding flights to a halt because of insurgent RPG fire.
Panicking, as any nineteen-year-old might, Diveroli called Ralph Merrill to ask if he had any other contacts who could supply the AK-47s quickly. Merrill explained that La Scala was really just a broker for Henri, the Swiss arms dealer Merrill was friendly with. Merrill said Diveroli should cut out the middleman and go directly to Henri. He gave Diveroli Henri’s e-mail address and phone number. Merrill said his last name was Thomet, pronounced in the German way—toe-met.
When Diveroli called Thomet, the Swiss broker said the Croatian AK-47s couldn’t be shipped to Iraq. But Thomet said he had access to another stockpile of AK-47s in Bosnia. Relieved, Diveroli was able to get the guns to Baghdad and reap a nice profit. It was another breakthrough. Diveroli was now dealing directly with a serious arms dealer who had high-level contacts throughout the Balkans. In a business that revolved around relationships, Diveroli had just acquired a major-league connection.
But the AK-47 shipment had a problem. Nothing major—the kind of thing that happened often in the gun trade, especially in the unfolding disaster of the war in Iraq. The Bosnians had slipped a thousand substandard AK-47 rifles alongside nine thousand good-quality guns that were delivered to Baghdad. Getting guns to pass muster with the procurement officers in Iraq usually wasn’t hard: as long as the guns worked, they were okayed. Serviceable without qualification was the term of art on FedBizOpps. It essentially meant the guns had to fire, no matter how old they were or where they came from.
The poor quality of weapons being issued to the Iraqis was one of countless double standards on display in Baghdad. Often American soldiers were armed with the latest high-tech weapons, and ammunition was plentiful; when IEDs began to rip apart Humvees, soldiers campaigned to have their vehicles “up-armored.” The benighted Iraqis got ancient Serbian AK-47s, Polish tanks that didn’t start, and the cheapest, nastiest surplus ammo private contractors like AEY could find in dank bunkers in Eastern Europe.
A thousand of the Bosnian guns Diveroli shipped failed to meet even the abysmal standards the Army applied to Iraqi matériel. When the guns were rejected, Diveroli insisted that Thomet get the Bosnians to send replacements, which duly arrived in Baghdad. The faulty weapons were then “abandoned” in the field. There was no way for Diveroli to know what happened to them, if he’d cared to find out, just as there was no reliable method for the Army to ensure they didn’t wind up in the hands of the enemy.
Elections in Iraq early in 2005 only quickened the daily thrum of roadside bombings, kidnappings, and sectarian fighting between Sunni and Shiite Muslims. The violence caused a thrilling upswing in business for AEY, and the Swiss broker became Diveroli’s ideal collaborator. Thomet provided a “delivered” price. This meant that he took care of the logistics—the packing and shipping, obtaining the necessary permissions to transport hazardous goods, as well as the chartering of the planes to carry the goods to Iraq. Despite millions being spent on security, simply landing at Baghdad International Airport was extremely perilous, due to insurgent RPG and sniper fire; then followed the six-mile ride to the Green Zone along Route Irish—or ambush alley, as it was known. Thomet was able to navigate these obstacles with a skill and discretion Diveroli didn’t possess. In the Balkans, men like Thomet used bribes, kickbacks, and numbered Swiss bank accounts as standard operating procedure, or so everyone in the business assumed—including, inevitably, the Pentagon.
At the time, Diver
oli’s buddy David Packouz was plying his trade as a massage therapist and taking a couple of chemistry classes at a local college. Alex Podrizki was still finishing an undergraduate degree in international relations. After he graduated, Podrizki had planned to join the US military, to follow in his veteran father’s footsteps. But the invasion of Iraq had appalled Podrizki as a naked theft of Iraq’s oil fields based on lies about Saddam Hussein’s alleged connection to the attack on 9/11. Podrizki had become radicalized politically, attending protests and questioning America’s role in the world. Over time, as the lack of weapons of mass destruction in Iraq became apparent, David Packouz had come to share his friend’s dim view of the war. Efraim Diveroli had a different response.
“Do I agree with the Iraq War?” Diveroli asked Packouz and Podrizki one night as they passed a bong around. “Do I think George Bush did the right thing for the country by invading Iraq? No. But am I happy about it? Absofuckinglutely. I hope Bush invades more countries, because it’s good for business.”
The dudes rolled their eyes. Among his friends, Diveroli’s act was a running joke—but it was getting old for Alex Podrizki.
