- Associated Press - Sunday, March 2, 2014

WASHINGTON (AP) - The ties between a former Army colonel and a Russian entrepreneur are at the heart of a criminal investigation into a program that supplies American allies with Russian helicopters.

Federal agents are examining why an obscure Defense Department acquisition office in Alabama that was run by Col. Bert Vergez repeatedly championed Yuri Borisov’s companies despite their dismal record on a prior contract to refurbish Mi-17 choppers, according to interviews and documents obtained by The Associated Press.

When Borisov insisted on being paid millions of dollars extra for overhaul work his companies were late on, Vergez supported him.

When Borisov sought a new multimillion helicopter overhaul contract, it was Vergez’s office that approved the deal.

When auditors from the Pentagon inspector general’s office were uncovering signs of illegal activity, it was Vergez who pitched a plan to install new engines on Mi-17s bound for Afghanistan - an arrangement that promised millions of dollars in revenue for Borisov.

Borisov’s companies, AviaBaltika Aviation and Saint Petersburg Aircraft Repair Company, are still technically eligible to receive federal contracts. The inspector general’s audit recommended that the Army take steps to debar or suspend them, but no such action has been taken more than a year later.

The FBI and Defense Criminal Investigative Service are leading the inquiry. Representatives for both agencies declined to comment.

Neither Vergez, who retired from the military in November 2012, nor Borisov returned phone calls seeking comment for this story.

It is not clear when the two men first met.

Vergez, 48, spent 25 years in uniform before retiring from military service. In 2001, he was assigned to the Army command in Huntsville, Ala., that manages the service’s aviation budget.

Born in 1956, Borisov served in the Soviet military for 10 years and launched his aviation companies in the early 1990s. AviaBaltika is based in Kaunas, Lithuania. Saint Petersburg Aircraft Repair Company, better known as SPARC, is headquartered in Russia.

In Lithuania, Borisov is well known for his flamboyant lifestyle and a scandal that led to the impeachment in 2004 of Lithuania’s president, Rolandas Paksas. Paksas was unseated after Borisov, his campaign’s top financial backer, was linked to the Russian mob.

No charges were ever filed against Borisov, but the U.S. embassy in Vilnius, Lithuania’s capital, kept a close eye on him and his businesses. Tom Kelly, then the embassy’s deputy chief of mission, called AviaBaltika “infamous” in a cable published by the Wikileaks website.

Nevertheless, concerns about Borisov’s companies slipped through the cracks. By 2008, AviaBaltika and SPARC were part of a large defense contract held by Northrop Grumman to support U.S. counterterrorism activities.

AviaBaltika and SPARC were tasked with overhauling 10 Mi-17 helicopters, part of the U.S. strategy to defeat al-Qaida and other extremist groups. The Pentagon has acquired dozens of new and used Mi-17s to give to Iraq, Afghanistan, Pakistan and other countries in the fight against terrorism.

But Borisov’s companies ran into trouble. A $38 million job to refurbish the 10 Mi-17s ballooned to more than $64 million and helicopter delivery dates were badly missed, according to the Pentagon inspector general’s audit.

Government contracting officers kept paying the bills for what auditors described as unquestioned and unnecessary costs. AviaBaltika and SPARC charged exorbitant rates for helicopter replacement parts. For example, a storage battery cost just over $13,000, more than 500 percent above the price from other companies.

Jonas Bazaras, AviaBaltika’s commercial director, said in an email that the audit’s findings “are not consistent with the reality,” but declined to comment further.

Quality control inspectors from the U.S. government and Northrop Grumman were repeatedly refused access to SPARC’s facilities in Russia. A Northrop Grumman executive wrote in a February 2010 memo that the denial “clearly demonstrates that AviaBaltika and SPARC are totally unfit to be entrusted with business that can flow down to them on behalf of the U.S. government.”

In early 2011, U.S. government management of the overhaul work by AviaBaltika and SPARC’s shifted to an Army acquisition office in Huntsville headed by Vergez.

Vergez supported AviaBaltika and SPARC’s bid for $11 million in additional compensation, even though the auditors found no evidence a required cost analysis had ever been completed. The companies argued that the delays in overhauling the helicopters were not their fault, but caused by another contractor’s failure to supply replacement parts. As a result, AviaBaltika and SPARC said they incurred expenses they should not have had to absorb, the records show.

Ultimately, AviaBaltika and SPARC received $1.2 million. The money stopped flowing after Pentagon officials in Washington instructed Vergez’s office to make no further payments, according to a person familiar with the transaction but not authorized to be identified as the source of the information.

Despite their past performance, in April 2011, AviaBaltika and SPARC won another contract to overhaul five more Mi-17s, the records state. Nearly $14 million has been spent on the new contract even though the helicopter overhauls have not been completed, according to an Army budget document.

Just a few months before Vergez retired from the Army, he pitched a plan through which Science and Engineering Services, a government contractor in Huntsville, would acquire new Ukranian-built engines for Mi-17s the U.S. was buying for Afghanistan. AviaBaltika was the licensed distributor for the Motor Sich engines in the U.S. and stood to earn millions of dollars.

But the plan stalled after Vergez retired. Only two engines have been acquired so far.


Associated Press writers Liudas Dapkus in Vilnius, Lithuania, Gary Peach in Riga, Latvia, and Associated Press researchers Judith Ausuebel and Rhonda Shafner in New York contributed to this report.


Follow Richard Lardner on Twitter: https://twitter.com/rplardner

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