by Guy Lawson
Ralph Merrill recalled that Diveroli told him that Doudnik was a phantom investor willing to put money into AEY—but only on very onerous terms.
“Danny says he can put three million dollars in, but he wants seventy percent of the profit in return,” Diveroli said. “He drives a hard bargain. But he’s the only source I’ve been able to find.”
“That’s disproportionate to what I have in the contract,” Merrill said. “Tell him it’s too much.”
Diveroli promised to try. But he soon called Merrill back with melancholy news. His fictional investor wouldn’t budge.
“I think we’re going to have to take the deal,” Diveroli said. “We definitely need more money. That will leave thirty percent for us to split. We’ll just have to be content with that.”
“You can’t find any other institution that will lend against a government contract?”
“I don’t know of any. We have no collateral.”
Merrill sighed in resignation. It seemed plausible that AEY needed more money to cover the $300 million contract. Thus, in one fell swoop, Diveroli reduced Merrill’s take from 50 to 15 percent. Diveroli gambled that he would be able to doctor the audit when the time came; what mattered was that he’d managed to make millions more for himself, taking his own share from 50 to 85 percent.
/ / / / /
By the end of the summer of 2007, Alex Podrizki only went to the airport in Tirana to check on the repacking operation every few days, primarily just to show his face and protect AEY’s interests and ensure quality control protocols for the ammo were being followed. But the operation was continuing to attract other attention. American Army master sergeant Kristoff Winemiller was assigned to the Defense Attaché Office in Tirana. As part of his duties, he regularly visited the airport in Tirana, including the military side of the facility. In early August, Winemiller went to the military hangar with his Albanian assistant, Tef. Wandering the hangar with Tef, Winemiller watched the repacking operation and wondered what was going on. Dozens of workers were busily taking AK-47 ammo from wooden crates, emptying the boxes, taking the rounds out of their paper wrappers, and then putting them in plastic bags and new cardboard boxes. Piled in the hangar were ammunition tins with Chinese lettering and shrink-wrapped cardboard boxes on pallets. In this manner, more than 30 million rounds of ammo had gone from Tirana to Kabul to be issued to Afghan troops.
Tef told Winemiller that ammo was being repacked by an American company named AEY. The rounds were to be shipped to Afghanistan, and Tef pointed to two ancient Ilyushin 76 airfreight carriers parked on the tarmac, ready to be loaded. Winemiller asked Tef why AEY was buying Chinese ammo. Tef said that the Chinese rounds were older and thus less expensive. Winemiller nodded in understanding—he had no idea about the embargo against Chinese munitions.
Winemiller’s ignorance of the law against acquiring Chinese matériel was matched by that of others in the US Embassy in Albania. Many officials, military and diplomatic, were aware of AEY’s contract and that the company was repacking old, surplus Chinese ammo. To embassy officials, AEY’s contract looked like a great deal for all concerned. None of these officials apparently knew about the China ban—or cared. The same was true in Kabul. Diveroli had predicted that no one in Afghanistan would notice that the ammo was “Chinese.” All that mattered was that the ammo actually got there.
Diveroli’s assessment of the Pentagon’s procurement process was startlingly accurate. Haphazard barely began to capture the disorder and desperation of the procurement system AEY was dealing with. The administration of the contracts was technically the responsibility of civilians in Rock Island, Illinois, a long way from the battlefield. But the ammunition was coming from a country outside America—OCONUS, Outside of Continental United States, in military jargon—so the Army’s munitions team had nothing to do with actually running the contract. In reality, Rock Island was only responsible for processing payments.
Actual oversight was supposed to occur in Kabul. But after awarding the contract the civilians in the Army Sustainment Command in Illinois realized that they had no one on the ground in Kabul to monitor the quality of the ammunition AEY supplied. The contract required acceptance at destination, but it had been proposed that the deal be amended to provide for acceptance at origin. The Army would thus inspect AEY’s shipments in the various countries of origin before it was loaded onto planes to be flown to Afghanistan. If that system had been adopted, American soldiers in Albania would have checked out the rounds at the airport in Tirana.
But no one was comfortable with signing off on AEY’s rounds without proof that the ammo had actually reached Afghanistan. So Rock Island had sent an e-mail to the Defense Contract Management Agency to see if anyone in Kabul could serve as their eyes on the ground for AEY’s deliveries. The DCMA said nothing in the contract required it to get involved—and that the contract called for only “minimal surveillance.” This was a way to avoid bureaucratic responsibility. But the DCMA then assigned Major Ronald Walck to monitor AEY’s deliveries, despite the fact that he had no training in dealing with arms shipments, let alone old, surplus, nonstandard ammunition.
Thus, when AEY’s ammo arrived in Kabul, Major Walck performed a “kind, count, and condition inspection,” but the process on the tarmac was perfunctory because of the dangers of incoming enemy fire; counting the number of pallets, not the rounds, was all Walck could manage. Walck received Certificates of Conformance from AEY stating exactly what was in every delivery. The COC form had lines for quantity, number of pallets, and place and year of manufacture. The line for the provenance of the ammunition was headed “Manufacturer (point of origin).” In this space Diveroli wrote on dozens of COCs, “Ministry of Defense of Albania, MEICO—Military Export and Import Company.” This was literally true, depending on how the word origin was interpreted, as Tirana was literally the place of “origin.” But it meant eliding the fact that the manufacturer of the ammo was Chinese.
In Kabul, AEY’s ammo was then trucked to a facility called 22 Bunkers. If soldiers there had inspected the head stamps of the ammo, they would have seen that the rounds were “Chinese.” The Pentagon had a nonclassified publication called the “Small Caliber Ammunition Guide,” which contained references to the meanings of the numbers on the head stamps of various rounds from around the world. The headstamps indicated the factories in the People’s Republic of China where the rounds had been manufactured—specifically, plants numbered 31, 61, 71, and 661. But the Army officers at 22 Bunkers didn’t look, as Diveroli had predicted. All they cared about was that the ammo worked—and it did.
The lax oversight wasn’t limited to AEY’s contract. In both Iraq and Afghanistan, billions upon billions of dollars were lost as a result of waste, fraud, and abuse. The ad hoc nature of the Army’s efforts led to the kinds of logistical fiascoes that resulted in lost wars. In Iraq, for example, in 2007 the Pentagon’s property books failed to account for 190,000 weapons shipped to Baghdad—110,000 AK-47s and 80,000 handguns. The Army had no consistent system to track weapons received, meaning it was likely even more weapons had been lost or stolen or sold to insurgents. The situation in Kabul was just as bad, if not worse. The American officers who were supposed to be developing systems to secure and track weapons had failed to issue instructions for their proper maintenance and control. No records existed for 87,000 of the 242,000 weapons shipped to Afghanistan—fully a third of the guns delivered. In this context there was zero chance that headstamps would be inspected: it was a war zone.
These statistics weren’t aberrations. According to later investigations, as much as 30 percent of the $50 billion spent on defense contracts in Afghanistan between 2005 and 2011 involved corruption.I Trucking contracts to carry supplies from Karachi, Pakistan, to Kabul, to cite one instance, involved criminal networks, widespread pilferage, and little or no oversight.II The Host Nation Trucking program, funded at $2.2 billion, included a contract for $360 million awarded to Hamed Wardak, the son of the Afghan minist
er of defense. Wardak was in his twenties and attracted to South Beach’s nightlife, much like Efraim Diveroli. He was reportedly paying massive bribes to Afghan warlords and the Taliban to ensure that his trucks wouldn’t be attacked. The practice was commonplace, as American officials knew—in part because the Afghan intelligence services had provided a “very detailed” report on the epidemic of corruption. As much as 20 percent of the money the United States was spending on transport was thus going directly to fund the Taliban—and nothing was being done about it.
“The American soldier in me is repulsed by it,” the commander of the Third Brigade of the Tenth Mountain Division later told investigators. “But I knew it was what it was. It was essentially paying the enemy, saying, ‘Hey, don’t hassle me.’ I didn’t like it, but it was what it was.”III
As events in AEY’s contract continued to play out in the fall of 2007, the Army issued the Gansler Report, an in-depth study of the government’s weapons-procurement procedures. It said the Army’s contracting staff was “understaffed, overworked, undertrained, undersupported, and, most important, undervalued.” The report said that the Defense Federal Acquisition Regulation Supplement—DFARS, which governed AEY’s contract and included the Chinese embargo—was impossible to adapt to fast-changing circumstances in a high-pressure environment. Rigid, legalistic interpretations and the lack of command and control over the process had led to contracting dysfunction on an epic scale.
There was a law-enforcement agency assigned to stop the rampant fraud and theft and incompetence destroying the Pentagon’s procurement systems. The Defense Criminal Investigative Service—or DCIS—had been created in the early 1980s expressly to “protect the integrity of Department of Defense programs and operations by conducting relevant, objective, and timely investigations.”
In this endeavor, the DCIS was failing spectacularly. In Afghanistan, private contractors from America had written to the Department of Defense, complaining about widespread extortion by warlords and how billions in American money was going to the Taliban. These complaints were met with “indifference,” a congressional inquiry would later find. The American military units overseeing the Host Nation Trucking program claimed to have “zero visibility” of how the subcontractors worked. Asked why no investigations were initiated, a lieutenant colonel said the decision was out of his control: “That was way, way, way, way above my level.”IV
But the DCIS would pursue one case with relentless determination. No expense would be spared. All available resources of the DCIS would be applied to ensure that this singular investigation was brought to a successful conclusion. The targets of this costly multiyear investigation were none other than a few stoners from Miami Beach.
In the fall of 2007, Efraim Diveroli was oblivious of this—as of so much else. To Diveroli, things had never been better. AEY appeared to be on its way to becoming the empire he’d fantasized about. The company would be awarded an astounding $201,707,453 in government contracts in 2007. The sheer scale of the business Diveroli was now operating might have daunted him, but it didn’t.
Nor did his unscrupulous business practices give him pause. As his successes increased, Diveroli was accumulating enemies, foreign and domestic—at times bitter, unscrupulous, vicious enemies. In Albania, Kosta Trebicka had sworn revenge and set in motion the investigation of C. J. Chivers of the New York Times. In Baghdad, rival contractors continued a whispering campaign against AEY and Diveroli. They told procurement officers that Diveroli was a Miami drug dealer, using money from running cocaine to buy and sell arms. The cumulative impact of the gunrunner’s youth, bravado, and cutthroat prices meant he was despised by many inside the small world of arms dealing.
Another unknown foe was the grandly titled Blane International Group. The company was in fact a one-man operation, run by Milton Blane, an older man who’d gone into the arms business late in life. After the invasion of Iraq, Blane had vied for contracts on FedBizOpps, frequently losing to AEY. Like the others in the various bidding wars Diveroli won, Blane was mystified by the young gunrunner’s way of winning deals. Diveroli was somehow able to source weapons and ammo for unbelievably low prices. Like others in the industry, Blane figured Diveroli had to be doing something illegitimate, unethical, or illegal—or all three.
In 2005, Blane had secretly approached the Department of State saying he believed that AEY was operating illegally. Blane alleged that Diveroli was labeling Chinese-made AK-47 guns as Eastern European to sell to the Iraq government. Blane claimed that the guns were being shipped from China to Bulgaria, where they were relabeled and repackaged to appear as if they’d been manufactured in Sofia. The weapons were then flown to Baghdad, where unsuspecting officers unloaded the guns and issued them to Iraqis. Many of the weapons were junk, Blane said, and had been rejected by the Army.
If true, Blane’s allegations would be explosive. If what he said was correct, it might explain how AEY had continually been able to underbid its competitors. If Diveroli really had been shipping cheap and shoddy Chinese guns to Baghdad, via Bulgaria, of course his prices would be lower. Chinese weapons were notoriously inexpensive, just as they were known to be inferior in quality to Russian-made guns.
In February 2006, DCIS investigators had traveled to the headquarters of Blane International—a private residence in a suburb of Atlanta—and dutifully recorded the older man’s tale of Diveroli’s plot to covertly sell Chinese guns.
“Blane stated that he was aware that AEY personnel traveled to China,” the confidential DCIS report said. “Blane further stated that another reason he thought that AEY was acquiring the rifles from China was the price that they won the bid with was below any of the common sources for the rifles.
“Blane told the agents of the AEY/China/Bulgaria/Iraq statement as a possible scenario of what AEY might be up to. However, Blane stated that he had no firsthand knowledge of where AEY was obtaining the AK-47 rifles. The scenario is pure speculation on his part.”
The consequences of this encounter were far-reaching: Blane’s tip—his speculation—appeared to provide the basis for a wide-ranging, two-year federal investigation of Diveroli and AEY. As a result of Blane’s assertions, Diveroli was secretly placed on the State Department’s watch list as an arms dealer suspected of illegal activity. When Diveroli traveled internationally, his luggage was seized and searched at airports—like on his trips to Albania and Ukraine. His laptop computer was also seized. In this way, Diveroli’s rights as a citizen had apparently been breached based on rumors spread by a rival.
But why?
Any investigator assigned to the AEY case should have paused as they listened to Blane’s accusations. Why was Blane telling the DCIS about Diveroli, after all? Was Blane trying to use law enforcement to harm a competitor?
To begin with, Blane’s story didn’t add up. The price of transporting weapons constituted a huge part of the cost of arms dealing, as AEY had learned the hard way in Albania. It would be prohibitively expensive for AEY to fly the guns from China to Bulgaria, repack the arms, and then fly them back to Baghdad. Wouldn’t an experienced investigator understand the practical realities of arms dealing, and see that it cast doubt on Blane’s version of events?
But AEY’s competitors got lucky—very, very lucky. The epic failure of the DCIS to stop fraud in Iraq and Afghanistan had made the agency highly susceptible to the kind of case AEY appeared to be. Diveroli was only twenty-one years old, an absurd fact on its face: How on earth was such a young man able to win a $300 million arms contract? For the DCIS, Diveroli must have looked like easy prey. Going after the serious fraud in Baghdad and Kabul was politically risky and physically dangerous. Pursuing cases there required travel to war zones. It required defying well-connected companies like General Dynamics and Boeing. It risked upsetting lobbyists, retired military officers who’d gone to work for Fortune 500 companies, and the congressmen who depended on the political donations of defense companies. Meddlesome investigations also could anger the Army
itself, as an unnecessary distraction that might slow or stop desperately needed procurement contracts. In a time of war, all sorts of compromises needed to be made. Edicts had come down from the highest levels of government—perhaps even the White House—that law enforcement was not to interfere with the war effort.
By contrast, Efraim Diveroli had no political connections. He had no allies in the business. He had no lawyers or lobbyists. AEY was just down the road from the DCIS office in Tampa Bay—a safe and convenient car ride. The Global War on Terrorism was raging, and the DCIS needed to do its part—and a twenty-one-year-old with a bad reputation in the arms business looked like a perfect target: heedless, brazen, and defenseless.
Diveroli’s rivals got even luckier when the case was assigned to a special agent named Michael Mentavlos. A former Air Force major who’d become a law-enforcement agent as a second career, Mentavlos was in his midthirties, with a pasty complexion, dark hair, a humorless, by-the-book affect, and the glint in his eye of a true believer. Mentavlos had spent the six previous years at Immigration and Customs Enforcement. Along the way, he boasted how he’d mastered the reverse undercover sting. The term referred to a law-enforcement tactic of inventing a criminal conspiracy and then using undercover operatives to entice suggestible people into participating in the plot and thus breaking the law. The strategy was commonly used in terrorism cases, where confidential informants were planted inside mosques with conspiracies concocted by law-enforcement agencies. This was the technique Mentavlos hoped to use in procurement-fraud cases—to lure unsuspecting marks into breaking the law.
