BusinessWeek – June 11, 2007
How Iran and other nations routinely obtain restricted military technology from the U.S. Department of Defense
TO FRIENDS AND FAMILY, Reza Tabib had seemed an inspiration, proof an immigrant could launch life anew. The son of an Iranian judge, Tabib was a flight instructor at John Wayne Airport in Orange County, Calif. He spoke four languages and could be counted on for level-headed advice, and a laugh.
Agents with the Pentagon’s Defense Criminal Investigative Service discovered Tabib had another talent: procuring restricted aircraft and missile parts for the Iranian military. On May 7, a federal judge in Santa Ana, Calif., sentenced Tabib, 52, to two years in prison for trying to help Iran acquire components for the F-14 Tomcat fighter jet, the swept-wing plane once used by the U.S. and flown by Tom Cruise’s character in Top Gun. The pro-Western Shah of Iran, before his fall in 1979, had acquired 80 of the jets. Today Iran is the only country flying the aging planes, and the U.S. forbids anyone from shipping F-14 hardware to the Middle Eastern nation.
Law enforcement officials say Tabib and an associate easily obtained thousands of Tomcat components that originated from a surprising source: the online company that works with the U.S. government to auction off surplus military equipment to the public.
Defense and homeland Security Dept. investigators say they are pursuing dozens of similar cases in which restricted equipment has slipped through the military’s system of selling surplus equipment. Investigations of F-14 parts bound for Iran led law enforcement agents in March to four entire Tomcats housed at two California airfields. A nearby Navy installation had improperly sold three planes to a scrap dealer. Small museums eventually bought them. The fourth plane was sold for $4,000 to Paramount Pictures for use on the TV drama JAG. In case after case, investigators have found sensitive military equipment and parts in warehouses of front companies or the homes and briefcases of middlemen striving to make deliveries to potential adversaries. Despite precautions contained in policy and law, carelessness, antiquated record-keeping, and failures to confirm the identities and intentions of buyers have contributed to a glut of made-in-the-USA military goods on the global black market. Authorities say many parts have made it to Iran, as well as China and Syria.
One current investigation, triggered by a search in 2005 of a suspect building in California, casts an even more disturbing light on the Pentagon’s permeability. When Defense investigators moved in on their target, they found the expected cache of F-14 parts, apparently bound for Iran. But they were astounded to discover the components were the very ones intercepted during another investigation two years earlier. The parts even had evidence tags still attached to them from the previous case, in which three people were convicted of shipping aircraft and missile parts to Iran. Returned to the Pentagon, the F-14 hardware had been resold and once again was headed for Iran, says Rick Gwin, the Pentagon special agent heading the continuing investigation. “My reaction,” he says, “was extreme, to say the least.”
Each year, the U.S. military disposes of millions of excess items: boots, boats, computers, and plane parts among them. Those that aren’t destroyed because they’re too sensitive, or given away to other government agencies, are typically sold in eBay-like online auctions run by private contractor Government Liquidation. The Pentagon assigns each surplus item a unique 13-digit number and a code indicating whether it should be destroyed or sold. Some sensitive items can still be auctioned, but only to buyers willing to sign paperwork restricting how the purchase can be used and by whom.
The sorting, scrapping, and selling is handled by Government Liquidation and another unit of publicly traded Liquidity Services Inc., based in Washington, D.C. Since 2001, Government Liquidation has had the exclusive contract to sell military equipment the Defense Dept. no longer wants. Last year, the company auctioned off about 19 million items. Some 613,000 registered users, mostly small businesses, can bid on them at the Web site govliquidation.com. The company keeps up to 30.5% of the proceeds, which often amount to only pennies to the dollar of the military’s original cost. In the second quarter of 2007, sales and disposal of military surplus accounted for 58% of the parent company Liquidity Services’ revenue of $49.3 million. (Sales of surplus equipment from 350 corporate clients account for the remainder.)
Government Liquidation says that it scrupulously follows Pentagon regulations. But undercover investigators from a special unit of the Government Accountability Office, the investigative arm of Congress, have recently demonstrated just how easily a person can obtain sensitive parts from the Defense Dept.
In a report published last July, the GAO said its investigators made multiple purchases on Government Liquidation’s site that shouldn’t have been possible. They acquired body armor enhancements currently used by American troops, test equipment for guided missiles, and electronic components for the F-14. All told, the investigators identified thousands of instances in which restricted items that should have been retained by the military or destroyed had instead been sold to the public online. In other cases, GAO investigators posing as military contractors made purchases in person, walking out of the Defense Dept.’s surplus-property warehouses with metal mounts for shoulder-fired guided missiles and other sensitive equipment.
2,669 ‘SENSITIVE MILITARY ITEMS’
The GAO blamed both the Pentagon and its contractor. “Sensitive military equipment items are still being improperly released by the Defense Dept. and sold to the public, thus posing a national security risk,” the GAO report concluded. Government Liquidation, the GAO said, fails to verify the classifications of sensitive equipment and has sold items that should have been returned to the military or destroyed. The combined effect is that the government sometimes doesn’t know to whom it’s selling or what buyers intend to do with military technology.
Liquidity Services hinted at the extent of its potential liability in a 10-K filing with the Securities & Exchange Commission on Dec. 22, 2006. The company noted law enforcement investigations that could involve 79 buyers who purchased 2,669 items between November, 2005, and June, 2006. “These buyers may have acquired these sensitive military items from us,” the company stated. “If an investigation alleges that we engaged in improper or illegal activities, we could be subject to civil and criminal penalties.” The company nevertheless has denied any wrongdoing.
Responding to revelations about black market F-14 parts sales, the House of Representatives on May 17 passed legislation that would bar the Pentagon from selling any F-14 components. The Senate is expected to take up the measure in June. In an Apr. 9 letter to Senator Ron Wyden (D-Ore.), a co-sponsor of the legislation, Government Liquidation says it has decided to stop selling F-14 parts to “ensure that Iran does not receive such parts through any avenues, including the Defense Dept. surplus sales.” The letter adds that the company “always has sought to put national security ahead of commercial profit.”
The Pentagon, for its part, has asked Government Liquidation to develop better ways of tracking inventory. “They came to us and said, can you help us fix this?” says Government Liquidation spokeswoman Julie Davis. Bar code guns have replaced hand transcription of long classification numbers and paper records. New computer databases and centralized warehouses will help ensure more consistency, Davis says. “The systems in place are far superior to anything that’s been in place before,” she adds. Spokeswoman Dawn Dearden of the Pentagon’s Defense Logistics Agency agrees, saying safeguards are now adequate. The Pentagon has “significantly reduced the availability” of sensitive items and has tightened restrictions on who can walk away with parts, she says.
Representative Christopher Shays (R-Conn.), another supporter of the F-14 parts legislation, isn’t convinced. “They’ve got a long way to go,” he says. John P. Ryan, a former U.S. Secret Service agent who has overseen the GAO’s investigation of the Pentagon and Government Liquidation for four years, notices some improvement in surplus military sales. But sensitive goods can still fall too easily into the wrong hands, he says. “The system is vulnerable.”