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Pentagon opens criminal probe of Russian helicopter deals

An MI-17 helicopter flies by an armoured personnel carrier (APC) during the Steppe Eagle 2010 joint tactical military exercise at Ili milita
An MI-17 helicopter flies by an armoured personnel carrier (APC) during the Steppe Eagle 2010 joint tactical military exercise at Ili milita

By Brian Grow and Warren Strobel

WASHINGTON (Reuters) - The Pentagon has opened a criminal investigation of an Army aviation unit that awarded tens of millions of dollars worth of contracts to Russian and U.S. firms for maintenance and overhaul of Russian-made helicopters, according to people familiar with the matter.

The investigation, which has not been made public before, is led by the Defense Criminal Investigative Service. Investigators are examining potentially improper payments by the Army aviation office to contractors as well as possible personal connections between members of the Army unit and the contractors, said the sources, speaking on condition of anonymity.

No charges have been filed.

The maintenance deals are part of a broader Defense Department program that is buying and overhauling Russian-made Mi-17 helicopters for use by Afghanistan. The aircraft are being purchased by the Pentagon from a Russian manufacturer through Russia's powerful state-owned arms dealer, Rosoboronexport, which isn't a focus of the criminal probe. The Pentagon has touted the program - budgeted at approximately $1.1 billion for acquisition of the latest set of choppers - as the quickest way to beef up the Afghan Air Force's special mission wing before U.S. troops withdraw next year.

In addition to the criminal probe of the maintenance and overhaul contracts, investigators with the office of the Special Inspector General for Afghan Reconstruction are also said to be looking at the much more lucrative helicopter-acquisition program. The unit cost of the new helicopters has escalated dramatically in recent years, according to watchdog groups and government documents, from around $10.5 million each in 2009 to $19 million today.

Phil LaVelle, a spokesman for SIGAR, said the office is "in the preliminary stages" of its probe and "is working with other federal agencies relating to the purchase of Mi-17 helicopters for the Afghan government."

Lawmakers in both houses of Congress have demanded the Pentagon halt its dealings with Rosoboronexport, in part because the Russian firm supplies weapons to the government of embattled Syrian President Bashar al-Assad.

Rosoboronexport officials didn't respond to requests for comment. In an interview with Russian news agency Interfax on August 23, Rosoboronexport general director Anatoly Isaikin said some Congressional members' opposition to buying Mi-17s through his firm "is a vivid example of lobbying for the national industry's interests," referring to U.S. defense contractors cut out of the lucrative helicopter deals.

In an Aug 5 letter to General Martin E. Dempsey, chairman of the Joint Chiefs of Staff, 13 U.S. Senators wrote that they had "deep concern over your support for the ongoing Department of Defense procurement of helicopters from Rosoboronexport," given the "real risk of both Russian corruption in these deals and overreliance on a potentially hostile power."

The criminal probe could deal a further blow to support for the Mi-17 program.

FOREIGN PARTNERS

A focus of the current investigation, officials said, concerns ties between the former chief of the Army's Non-Standard Rotary Wing Aircraft office in Huntsville, Alabama, and two Russian-owned subcontractors, Avia Baltika and St Petersburg Aircraft Repair Co, or SPARC. The firms are independently owned and not controlled by Rosoboronexport.

The NSRWA office was formed in January 2010 to oversee all Pentagon contracts related to helicopters not normally in U.S. inventories, including the workhorse Russian Mi-17. That aircraft is widely used by the Afghan, Iraqi and Pakistani militaries, which have close ties with the U.S. armed forces. The unit also manages the current Pentagon contracts to buy new Mi-17s through Rosoboronexport.

NSRWA was led from its inception by Col. Norbert E. Vergez, an Army aviation expert who retired in November 2012. He now works as a senior vice president at Patriarch Partners, an $8 billion New York-based private equity firm run by financier Lynn Tilton. Patriarch owns MD Helicopters, a military and civilian helicopter maker based in Mesa, Arizona.

At Patriarch, Vergez oversees MD Helicopters' contract bidding with the U.S. military and other prospective buyers, according to documents reviewed by Reuters and people familiar with the matter. David Goldin, a spokesman for Patriarch, said Vergez doesn't handle military contracts and oversees only commercial matters.

Vergez did not respond to requests for comment. Goldin said Patriarch Partners hadn't been informed of the criminal investigation involving Vergez. He said Patriarch had been informed of "a civil inquiry" concerning Vergez but has no insight into whether or not it is related to any probe by the Pentagon.

A spokeswoman for the Army's Program Executive Office for Aviation, which oversees NSRWA, referred requests for comment to Pentagon officials in Washington.

The Pentagon declined to comment on the criminal investigation. "The Department will of course fully cooperate with any investigation by DCIS or other appropriate agency," said Pentagon spokeswoman Maureen Schumann in an email.

On Thursday, after Reuters reported on the Pentagon's criminal investigation, the New York Times reported that Justice Department civil attorneys had requested information from Patriarch Partners about the hiring of Vergez.

Citing an unnamed official, the Times reported that the Justice Department requested the information last Friday, and that "the inquiry is expected to examine Mr. Vergez's government activities, his dealings with Patriarch, and how he came to be hired by the firm in February."

In a statement, Tilton told the Times that she and Patriarch were cooperating fully with the Justice Department inquiry. "MD and Patriarch are squeaky clean," the statement said. Patriarch spokesman Goldin told the Times that Vergez approached Patriarch about a job on April 2012 "with written authorization from an ethics officer to do so." Outside attorneys vetted Vergez's hiring, Goldin told the Times.

Asked to comment, Goldin referred Reuters back to the text of the Times report.

OVERCHARGED

The probe of the Army office was prompted by a separate 2012 audit by the Pentagon inspector general. The audit found that Avia Baltika and SPARC had denied Pentagon quality-assurance personnel access to its overhaul facility, and had overcharged the military for parts and repairs on U.S.-owned Mi-17 helicopters under an earlier contract with Northrop Grumman. Northrop declined to comment.

"As a result AVB/SPARC aircraft overhaul took 12 to 20 months longer than planned, failed to identify unsanctioned parts that must be replaced, and cost the U.S. Government $16.4 million in unnecessary costs," said a summary of the IG's audit, released in September 2012.

Avia Baltika, based in Kaunas, Lithuania, and SPARC, based in St. Petersburg, Russia, are owned by a Russian entrepreneur named Yuri Borisov and his son, Pavel. The two firms are the only privately owned Russian firms that conduct maintenance, repair and pilot training for Russia's Mi-17 helicopters.

Yuri and Pavel Borisov didn't respond to requests for comment. Jonas Barazas, head of Avia Baltika's export department, said in an email: "The facts given in the report of the DODIG are not consistent with the reality," but declined to elaborate further.

The 2012 audit summary recommended that the two firms be suspended or banned from receiving new U.S. contracts. The Army is currently reviewing that recommendation, according to an Army document seen by Reuters. The document noted that the firms could not be barred from new work until a decision is made. It is unclear if the two firms have received additional subcontracts since.

The full 161-page audit report has not been made public. But the unreleased version of the full report, parts of which were read to Reuters, says that the audit "identified questionable transactions" related to AVB and SPARC, thus prompting the investigation.

One person familiar with the probe said the transactions under scrutiny included potential overpayments by the Army unit to AVB and SPARC.

A Huntsville-based company named Science and Engineering Services has played a key role in the Mi-17 program, as a lead contractor on maintenance and overhaul work for the choppers. Among the companies it hired to perform work were Avia Baltika and SPARC. It is these subcontracts that the Pentagon investigators are probing.

During Vergez's tenure, Science and Engineering Services was awarded at least $97 million worth of Mi-17 contracts under which Avia Baltika and SPARC served as subcontractors, according to Pentagon contract records. It remains unclear whether SES figures in the probe.

Ralph Pallotta, chief operating officer of Science and Engineering Services, said the company wasn't aware of the DCIS investigation and hadn't been contacted by investigators. "We have no reason to believe we're involved in any way," he said in an email.

A LETTER TO RUSSIA

Pentagon records indicate that in June 2011, Vergez wrote a letter to a Russian military official, using Department of the Army letterhead, to discuss Science and Engineering Services and its Russian subcontractors.

The letter concerned a $30 million Pentagon contract awarded to Science and Engineering Services to overhaul five Mi-17 helicopters for Pakistan. The project was being blocked by Russian officials. They had determined that Avia Baltika and SPARC, the subcontractors, lacked authorization to work on military aircraft.

In the letter, dated June 6, 2011, Vergez wrote that he would order more funding for "engineering services" to be added to a separate Pentagon deal to buy 21 new Mi-17 helicopters for Afghanistan from state-owned Rosoboronexport - provided that the Russians unfreeze the Pakistani overhaul work being led by Science and Engineering Services.

Investigators are examining the offer because they believe it may have circumvented normal contracting procedures. To complete the arrangement outlined in the letter, said a person familiar with the probe, Vergez would have had to tap funds earmarked for a deal involving Afghanistan to help out contractors in a separate deal for Pakistan. A program manager in Vergez's position wouldn't have authority to take such a step, which would effectively change the terms of competitively bid contracts after the fact, according to a person familiar with the matter.

In a response three weeks later, the Russian official rejected the deal, writing that it was "impossible" under Russian law because Science and Engineering Services had not worked through Rosoboronexport on the deal and because subcontractor SPARC was not licensed to work on military aircraft.

Pallotta of Science and Engineering Services said he has no recollection of the Vergez letter to Russian military officials.

DCIS investigators are also examining a possible personal tie between Vergez and Pavel Borisov, former managing director of Avia Baltika and SPARC and son of the companies' owner, according to people familiar with the matter.

Public records and Pentagon documents show that Vergez had a connection to a Huntsville house once owned by Pavel Borisov.

From April 2011 until January 2013, the telephone number at a four-bedroom house in an affluent neighborhood of Huntsville was registered in the name of Bert Vergez. The house was owned by Pavel Borisov at that time, according to public records reviewed by Reuters.

The reason for the link between Vergez's name and the Borisov home is unclear. Other public records show Vergez owned a separate property at the same time.

(Reporting by Brian Grow in Atlanta and Warren Strobel in Washington. Edited by Michael Williams)

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