Did the Army Blow Off DCAA's Warnings About the Stoner Arms Dealers?

By Nick Schwellenbach

The new issue of Rolling Stone magazine has a great inside look at how two South Florida stoners built an arms trading network—and how their illicit deals with the Defense Department delivering defective Eastern European and Chinese ammo and grenades to Afghan forces landed them in Club Fed. The article offers a lot of insight into how Efraim Diveroli and his partner David Packouz of AEY Inc were able to snag a $300 million deal to supply the Afghan National Army (ANA) and Afghan National Police (ANP) after having won only relatively tiny contracts previously. 

The House Oversight and Government Reform Committee under the Chairmanship of Henry Waxman (D-CA) investigated the episode some years back, concluding:

The evidence before the Committee shows that the AEY contract can be viewed as a case study of a dysfunctional procurement process. At nearly every turn, Defense Department officials made serious mistakes that have cost the taxpayers tens of millions of dollars. The documents and interviews show that there was a questionable need for the contract, an inadequate assessment of AEY’s qualifications, and poor execution and oversight of the contract.

But at least one key Pentagon agency thought the company was shady from the start and questioned AEY's ability to adequately carry out the much larger contract: the Defense Contract Audit Agency (DCAA). Here's the skinny, from a very credible Pentagon source with knowledge of the incident:

...for a contractor new to government business, we will perform a financial capability audit regardless of the type of procurement—FAR Part 12 or FAR Part 15. The contracting officer needs to be assured that the contractor has the financial cash flow to support performance under the contract regardless of contract type. But contracting officers do not always use our advice—case in point is AEY (the company run by the 23 year old that obtained arms from China). We determined that AEY did not have the financial capability to perform the contract—the company had virtually no financial records, but the Army awarded the contract anyway.

There are some more details on the failure of the Army to heed DCAA's advice and to more fully include them in the process included in a Panel on Contracting Integrity report to Congress.  A seeming contradiction between our source and the report is whether DCAA weighed in before the contract was awarded or not.  However, since AEY won progressively bigger task orders -- essentially new orders for goods or services -- off the contract they won, in a way these views are not entirely inconsistent: DCAA may have been brought in after the contract was awarded, but weighed in before the bigger task orders were made.  From the Contracting Integrity report:

A review of the award of the ANA and ANP ammunition contract shows two distinct points where the contracting system failed. First, the initial source selection team did not venture beyond the information presented to it. The team took into consideration only information presented by AEY. The Defense Contract Audit Agency (DCAA) was not requested to perform a financial capability audit until after the contract was awarded, and was unable to complete the audit because AEY could not provide sufficient financial data and support. Had the source selection committee taken steps to seek out other instances of AEY’s performance or delve into the company’s background, it would have found a history of non-performance and a company that had been tied to illegal activity.

Source selection teams should be required to actively seek out information regarding the past performance of companies in conjunction with DCAA and other agencies responsible for providing data on companies seeking Government contracts.

By the way, in January of this year, DCAA was cut out of the business of performing financial capability audits. POGO opposed this move publicly in February.

Nick Schwellenbach is POGO's Director of Investigations.

Image by Flickr user doyoubleedlikeme, used under Creative Commons License.

See also: 

• The Continuing Saga of the Munitions Maven from Miami Beach
• 22-Year-Old Arms Dealer Scandal Exposes Flaws in Federal Contracting

Comments

[Mike]

Yes - DCMA was well aware of the financial and accounting issues before contract award. So much for DCMA's financial capability team that is suppose to assess the financial position of any company before receiving a government contract. Guess they failed in this case and yes, they ignored DCAA, but what else is new. Expect more of the same and only to get worse now that DCAA no longer performs financial capability audits. Note to Director Fitzgerald. AEY is a classic example of why DCAA needed to retain responsibility for financial capability audits.

[AD]

Another example of someone confusing "past performance" with "experience" and "responsibility".