by Guy Lawson
Even though it was early in the morning, Packouz could see Diveroli was already stoned and scatterbrained.
“It’s going to be a lot of work to source all these items,” Diveroli said. “Frankly, I don’t have time to do it myself. I got to deliver on the Iraq contracts. I can get quotes from my regular guys, like Thomet. But you’ve got to be the guy scouring the Internet for new sources. You can’t leave any stone unturned.”
“Yes, sir, Mr. Diveroli,” Packouz said mockingly.
“I’m serious. This is your shot. The contract is going to be worth at least a few hundred million. This is going to make us both filthy fucking rich.”
Diveroli wanted to talk terms. With his trademark 9 percent margin, the profit on the contract could be as much as $30–$40 million. AEY was unlikely to win the deal, but the sums were so huge they needed to agree up front how they’d split the winnings. Their prior deal was to split profits fifty-fifty. But the Afghan deal was totally different, Diveroli said. There would be financing costs, plus a lot more risk. Diveroli proposed that if they won the contract Packouz would get 25 percent of the profits for any sales that came through sources he found online or through his own research. Diveroli would take 75 percent because he was providing the financing for the deal. It was a new structure but, given the size of the solicitation, a quarter of the profits would still be millions. Packouz readily agreed.
“Do Google searches and find companies that aren’t listed in the usual places,” Diveroli said. “Find the little companies in the Balkans and all over the former Soviet Union. E-mail ’em, fax ’em. Fly over there and give ’em a fucking blow job if you have to. You’re good at drafting official-sounding letters, so put that brain of yours to work. Just get their pricing, and make us some money.”
“I’m on it,” Packouz said, pushing aside thoughts of returning to school—and his uneasiness about being in business with Diveroli.
“Now, you want to hit this bong or what?” Diveroli asked.
For the next six weeks, Packouz was up all night, scouring the Web to find companies that sold Soviet Bloc ammunition. He slept on Diveroli’s couch, surviving on weed and adrenaline. Packouz discovered that the business mentality in Eastern Europe was less than desirable. Instead of trying to provide helpful service to a potential customer who might buy millions of dollars’ worth of goods, the officials he contacted treated him like a pest.
To gain their attention, Packouz told the companies that AEY already had won the contract with the Pentagon. To be taken seriously, he considered the lie a necessity. He also faxed AEY’s firearms license from the ATF, even though it had nothing to do with international arms dealing—it looked official, and he hoped it would impress the Eastern Europeans. Then he’d follow up with a phone call.
“Hello! Is this Ukrspeteksport?” a typical call from Packouz would begin, this one to Ukraine.
“Da” would come the reply.
“Do you speak English”
Unintelligible.
“English, English, USA, USA,” Packouz would say slowly, insistently.
“One moment.”
Mumbled Ukrainian conversation could be heard in the background. Slam: the phone would be placed on a desk. Fifteen minutes would go by.
“Hello” would come a voice.
“Do you speak English?”
“English? One moment.”
Another ten minutes would elapse.
“What do you want?” a man would finally ask.
“I want to buy ammunition. I sent you a fax requesting a price. I haven’t heard back from your company.”
“What kind ammunition?”
“Automatica Kalashnikova,” Packouz would say, using the Russian pronunciation.
“Ah, good. Yes, very good. You buy?”
“Yes. Did you receive my fax?”
“You send fax?”
“Yes.”
“Okay, I check.”
Another five minutes.
“We get no fax,” the man would say.
“I’ll send it again now. Please don’t hang up.”
Packouz would resend the fax. “Did you receive it?”
“One moment please.”
Fifteen minutes.
“We get fax. You buy this ammunition?”
“Yes. For United States government, for a contract in Afghanistan.”
“Okay. I show my deputy director.”
“Yes! Please show the deputy director. My contact information is on the fax.”
“Okay. Good-bye.”
“Wait, wait! What’s your name?”
Click.
Weeks would pass and no prices would appear. Packouz would call again, this time sure to obtain a name at the beginning so he would have a contact to ask for when he inevitably had to call again and again.
“The first prices I got were ridiculously high,” Packouz said. “They insisted on meeting for drinks in Kiev or Sofia in order to have any discussions about lowering prices. I didn’t have the time or money to fly over to meet every shady arms dealer I was contacting. So I just kept moving along, hoping to find suppliers who were more business-friendly.”
Packouz’s efforts paid off. Over time, he accumulated an impressive collection of quotes from different countries in Eastern Europe. The best prices were for large-caliber items like grenades and mortar rounds that he sourced from a Bulgarian company. Packouz and Diveroli agreed that their prices were competitive—or at least it seemed so.
“We knew the big boys were also chasing prices,” Packouz said. “Giant companies like General Dynamics were going to bid on the deal. There were also other little companies like ours. We knew they had to be getting quotes from many of the same companies we were using.
“I knew actually winning the contract was a long shot. I didn’t talk about bidding on it with anyone else. I didn’t want to talk about pie-in-the-sky things. I thought we maybe had a chance. We had delivered this stuff before. And the contract was so vaguely worded. There was so much leeway in the solicitation.”
Packouz and Diveroli figured they could buy old ammo, as long as it wasn’t rusty or obviously exposed to the elements. The rounds had to look okay to pass muster by the receiving officer when they arrived on the tarmac in Kabul.
“If it looked like shit, the Army could refuse to accept it,” Packouz recalled. “That was all we cared about. The Army just wanted to get as much ammo into Afghanistan as quickly as they could. Our job was to accommodate them. It wasn’t like the ammo was for American soldiers. The Pentagon was buying ammo for Afghan soldiers. It seemed like the Army didn’t really care about quality or reliability—just speed and price.”
While Packouz spent all his waking hours hunting for suppliers, Diveroli continued to win other contracts. He didn’t care how the Americans were doing in Iraq or Afghanistan, as long as the contracts kept appearing online—and those only increased as the United States kept trying to solve its troubles by outsourcing.
Despite Diveroli’s indifference to politics, it had a way of intruding in the work of an arms dealer. Like the survey he received in an e-mail from the Army in the fall of 2006. The military wanted to know if AEY had sourced any weapons or ammunition or other war-related equipment from China or Chinese military companies?
Unaware of the purpose of the question, Diveroli replied that he hadn’t purchased matériel from the Chinese. Unwittingly, he wasn’t being entirely accurate. The year before, Diveroli had purchased $300,000 worth of old AK-47 ammunition from an Albanian company for a small FedBizOpps contract. The ammo had been manufactured in China in the 1960s and then shipped to Albania, where it had sat for decades in caves in the mountains outside Tirana. Henri Thomet had brokered the deal, failing to tell Diveroli that the rounds had actually been made in China. At the time, it was irrelevant. The important thing was that the ammo got to the Special Forces in Germany for them to use to train with Kalashnikovs. The deal had gone so well that the Army had written AEY a thank-you letter.
But the geopolitical equation had changed again. In 1989, a ban on selling arms to China had been imposed in the aftermath of the Tiananmen Square crackdown on pro-democracy student protesters in Beijing. The embargo against selling weapons to China had been challenged in 2004, when France and many other European countries advocated lifting the “anachronistic” ban.I The Americans had maintained the ban, justifying the move as a way to protect against the transfer of high-technology weapons. But the reelection of George W. Bush at the end of 2004 had emboldened a faction in the military-industrial complex to lobby for a more belligerent policy toward China. Neoconservatives, triumphant from the campaign, believed China had to be treated as an enemy, even though it had become America’s largest trading partner. “How Would We Fight China” was the cover story in the Atlantic by the influential military writer Robert Kaplan. “The American military contest with China in the Pacific will define the 21st century,” Kaplan wrote. The accumulation of wealth in China, and the concentration of that money in the hands of a small elite, convinced American hawks that any military or territorial ambitions the country held needed to be squashed—by coercion, if necessary.
The State Department wanted to pursue a more balanced and conciliatory policy, but Defense used bare-knuckle tactics to try to impose an alarmist view of China’s rise. The infighting delayed the release of the annual report to Congress on the military power of China. During the internal dispute, Secretary Rumsfeld issued a “sharp rebuke” to China about its increased military spending—even though the increase in American military spending from 2001 to 2003 in the United States was more than the entire military budget of China.II
By the time Packouz and Diveroli were sourcing the Afghanistan contract in 2006, the hard-line forces in the Pentagon had won the day. The Russians had just been banned from selling to the military for ideological reasons—in that case, American policy toward Iran. China was likewise selling arms to Iran. So now it was China’s turn: the National Defense Authorization Act of 2006 included a new ban on Chinese arms. The 1989 ban that had restricted selling weapons to China was no longer enough; this ban made it against the law for the US government to buy weapons from the Chinese. The original intention of the 1989 embargo was to stop arms deals with China that might involve the acquisition of sophisticated Western technology and systems. Now the intention was purely punitive: the Chinese wouldn’t be able to enrich themselves by selling arms to the Pentagon.
As the law was drafted, it took a strange, even perverse, turn. Instead of referring to weapons of mass destruction or high-tech secrets, it was now stated that the federal government couldn’t acquire any munitions, “directly or indirectly,” from a “Communist Chinese military company.”
The ban apparently included Chinese-made Kalashnikovs, heavy machine guns, grenade launchers—the kinds of arms the Army urgently needed in Iraq and Afghanistan. The ban also included ammunition for those weapons. At least that was what was said in an e-mail the Army sent to the dudes. The notice came in the middle of the bidding for the Afghan contract. AEY and its competitors were scouring the globe, looking for nonstandard ammo to get to Kabul. The e-mail from the procurement office in Rock Island, Illinois, said that none of the munitions could come from China—period.
Earlier in the process, the Army had specifically been asked by one of AEY’s competitors if Chinese ammunition qualified for the contract. The Army had replied that the solicitation didn’t rule out China, provided the munitions met the stated technical specifications. For all the Army knew, or cared, that company had developed its bidding strategy based on Chinese ammunition. But fairness had nothing to do with the process. Nor did the rule of law—not when the government decided the law. One day Chinese munitions were allowed; the next they weren’t.
Sitting in Miami Beach, the dudes didn’t know or care about any of these fine legal questions. They read the Army e-mails and shrugged—at least the rule explained the earlier e-mail they’d received about acquiring Chinese munitions. As it happened, Packouz had sought a couple of quotes from Chinese companies, but nothing had come of the queries. Packouz and Diveroli quickly moved on. Russia was out. Now China was out. Whatever. Packouz amended his standard-form e-mail to Henri Thomet and other potential suppliers to state that Chinese ammunition was now unacceptable.
As the weeks passed and the deadline loomed, Packouz continued to search for sources for huge quantities of twelve-gauge slugs, GP-30 impact grenades, 82 mm mortar rounds, 57 mm rockets—an entire arsenal. But what most concerned the pair was the single largest component of the solicitation—100 million rounds of 7.62x39 mm and 7.62x54 mm AK-47 ammunition. The Kalashnikov ammo order wasn’t the biggest element in terms of dollars—grenades and RPGs were much more expensive and represented a larger portion of the contract, moneywise. But in terms of sourcing and transportation, 100 million rounds of AK-47 ammo was the greatest logistical challenge. The small-arms ammo was also crucial to how the war would actually be fought on the ground. Soldiers and police officers in Afghanistan relied on nothing more than their personal AK-47. They needed ammo in huge volumes, because the Afghans lacked fire discipline and were notorious for shooting at anything that moved. “Spray and pray” was the best way to describe how the Kalashnikovs were used in combat by the Afghans, according to the American trainers embedded with the units.
Hunting for quotes, Packouz got low prices on surplus AK-47 rounds from suppliers in Hungary and Bulgaria. But none could satisfy the entire order of 100 million rounds because of a worldwide shortage of the ammunition. Ironically, the US military’s insatiable demand for AK-47 ammo for Iraq had drained caches in Eastern Europe—at the very moment demand in Afghanistan was at its greatest.
The result was skyrocketing prices. New rounds were selling for as much as thirty-five cents each. For decades, new AK-47 ammo had sold for around ten cents, with even the highest-quality rounds going for less than twenty cents. With both Russia and China banned from selling to the US government, the cost of supplying new ammo would be prohibitive, the dudes knew.
Old, surplus cartridges could be had much cheaper—the cheaper and older, the better. But finding such a huge stockpile seemed impossible. AEY would have to laboriously piece together different sources—10 million rounds from one supplier, 5 million from another. How could the tiny company hire enough staff in time to deal with the logistical problems of managing so many suppliers and airfreight companies? AEY’s bid had to be submitted within weeks.
As ever, Henri Thomet had a brilliant answer. Thomet said he could get AEY the entire order in surplus ammo from one source. Even better, Thomet’s price was four cents a round—barely one-tenth the cost of new AK-47 rounds. If the ammo was good enough quality—if it was serviceable without qualification; if it went bang and traveled out of the barrel—it was possible that AEY would be able to seriously underbid the competition.
Thomet’s supplier for all of the 100 million rounds was MEICO, the Military Export Import Company, the Albanian government’s arms-dealing company. The dudes knew about MEICO. The year before, AEY had brokered a deal with MEICO for a relatively small amount of AK-47 ammo for American Special Forces stationed in Germany.
Explaining how he was able to get such a great price, Thomet said that he was extremely well connected in Albania, being friendly with the prime minister, as well as the defense minister and the official in charge of MEICO. Thomet had “bound” the ammo in Albania—he was the exclusive agent for one of the biggest stockpiles on the planet. That meant that Thomet could give AEY an exclusive, which was another fantastic advantage over the other bidders.
The structure Thomet proposed was classic for shady arms deals. His shell company in Cyprus, Evdin, would purchase the ammo from MEICO, instead of AEY, to ensure that Thomet wasn’t cut out of the deal. At least, that was the express rationale. But it also meant that Thomet didn’t have to disclose the real price he was paying MEICO for the ammo, so Diveroli wouldn’t know Thomet’s true profit
margin. Likewise, Diveroli wouldn’t disclose to Thomet the price he was going to charge the Pentagon.
In reality, Thomet was paying the Albanians 2.2 cents per round, or barely half of what AEY was paying. An obvious implication for such a huge gap between the price Thomet was paying the Albanians and what he was charging AEY—nearly double the amount—was that money from Evdin could be used to pay kickbacks and bribes to Albanian military officers and politicians. Doing business in notoriously corrupt countries like Albania almost inevitably included bribes and kickbacks. Thomet could handle this matter discreetly, which was especially important at that moment, as Albania was slated to be admitted to NATO in 2007 and scandal had to be avoided at all costs. Evdin also provided a degree of insulation for AEY: the dudes wouldn’t have to directly grease palms in Albania, which would violate foreign-corrupt-practices laws in the United States. AEY’s involvement, in turn, provided a layer of protection for the Pentagon—though Packouz and Diveroli didn’t fathom that they might be part of a much larger game.
To calculate its final bid, AEY needed to figure out the cost of transportation—a particularly hard number to determine because of changes in the price of oil. Often the cost of flying weapons to a war zone was greater than the price of the arms themselves. Delivery of the AK-47 ammo from Albania was going to require dozens of flights, along with scores of flights from Hungary and Bulgaria, where AEY had sourced other munitions. Finding freight airlines, obtaining the necessary overflight permissions, getting proper end-user certificates, complying with regulations on moving hazardous materials like ammunition—the logistics presented an immense challenge.
Thomet had an answer for that, too. To tend to the logistics of flying a mountain of ammunition to Afghanistan, Thomet had teamed up with a veteran Israeli soldier named Sammy Avivi—a decorated war veteran who’d been injured in combat multiple times.III To enable AEY to bid on the Afghan deal, Avivi was put in charge of coming up with a price for airfreight. After weeks of research, Avivi said it would cost $63,000 for every flight from Tirana to Kabul. This seemed like another good price—although the dudes had no way of knowing what quotes their competitors were getting.