By Warren Strobel and Brian Grow
Washington, Dec 10 (Reuters) - After almost four years of allegations that two related helicopter companies in Lithuania and Russia were doing substandard work and should be banned from new contracts, the Pentagon continued to give them business, according to interviews and documents seen by Reuters.
As recently as last month, an Army planning document shows, the service was weighing contracting helicopter overhauls from the firms, which have been the subject of multiple internal warnings and two Defense Department Inspector General reports.
A Pentagon spokeswoman said no work was under way on the project, which is under review.
The Pentagon has been working with Lithuanian company Aviabaltika and a sister Russian firm, the St. Petersburg Aircraft Repair Company (SPARC), for more than a decade to buy spare parts and overhaul Russian Mi-17 helicopters.
Pentagon officials say the Mi-17 helicopters are crucial to the ability of the Afghanistan military to conduct counter-terrorism and anti-narcotics mission as U.S. troops leave, since local pilots have a long history with the rugged aircraft. They have also been supplied to U.S. allies Pakistan and Iraq.
Criticism of the two companies, which are run by the same person and described as a single entity, AVB/SPARC, in Pentagon documents, grew in recent months while the Army continues a review of allegations of overcharging, blocked access to outside quality inspectors and improper advance payments.
That review has lasted more than 14 months. Whether the Pentagon ultimately will continue working with AVB/SPARC remains far from clear given the controversies surrounding the two firms.
The scrutiny of AVB/SPARC comes amid a broader backlash against the Army's more than $1 billion Mi-17 program. Congressional and human rights critics say the program has put the Pentagon in bed with questionable business partners, and they are pressuring the Obama administration to wind it down.
Reuters in August reported that the Pentagon's Defense Criminal Investigative Service was probing an Army aviation unit that oversees the Mi-17 program; ties between Army officials and AVB/SPARC; and potentially improper payments to the firms.
That probe followed a September 2012 audit by the Pentagon's inspector general which found "indications of criminal activity" in one AVB/SPARC project. The report did not elaborate further.
The report added that AVB/SPARC failed to identify improper parts, and took 12-20 months longer than planned to overhaul some helicopters, costing the government $16.4 million. It recommended that the Army consider barring the firms from further contracting.
Jonas Bazaras, Aviabaltika's commercial director, wrote in an email to Reuters that the report's conclusions "are not consistent with actual circumstances." He declined to comment on specific questions regarding the firm's performance.
More recently, a Nov. 6, 2013 Army planning document, a slide presentation on the future of the helicopter program, shows that an Army aviation unit was recommending giving continued work to AVB/SPARC.
The presentation covers a September 2010 contract to overhaul five helicopters in which the Army made advance payments of more than $6 million to AVB/SPARC, in violation of U.S. law and federal acquisition regulations, according to a second, August 2013 Pentagon Inspector General Report and other documents. The work was never completed.
The Army presentation offers three courses of action - continuing the contract to overhaul five helicopters; reducing its scope to two helicopters; or terminating it.
The recommendation is for two helicopters, reducing the work to match funds budgeted, but not yet spent, in the original contract.
Pentagon spokeswoman Maureen Schumann said in an email that no work currently is under way on the helicopter overhauls identified in the document.
Companies can generally not be banned from doing work for the U.S. government without a formal debarment decision. The Pentagon told Congress in August that the Army is still considering the Inspector General's September 2012 recommendation that it consider debarment.
SUDAN AND LITHUANIA
With 2012 revenues of $27 million, Aviabaltika handles helicopter sales and maintenance, and trades in more than 40 countries, according to company reports filed in Lithuania.
It was founded in 1991 by former Soviet military officer Yuri Borisov, who later brought his son, Pavel, into the business. Yuri Borisov also is the president of SPARC, according to the company's website.
Aviabaltika and the elder Borisov have had past brushes with controversy.
Yuri Borisov was the largest contributor to Lithuanian President Rolandas Paksas' 2002 campaign, and the newly elected president granted him citizenship. But a later parliamentary inquiry found Borisov made a series of demands on Paksas, including "destroying" his competitors and to "put in a word for" Aviabaltika with Russian leader Vladimir Putin.
The scandal ended with Paksas's impeachment and Borisov being stripped of Lithuanian citizenship. After a six-year legal battle, Borisov won a residence permit.
Borisov denied such threats, according to news reports at the time, blaming the scandal on Paksas' political enemies. Reuters' attempts to reach Borisov were unsuccessful.
"Only one thing surprised me - that the USA army gives business to his company," said Aloyzas Sakalas, who headed the Lithuanian parliamentary inquiry.
A 2004 Amnesty International report, citing Lithuanian government inquiries, detailed a series of reported dealings by Aviabaltika with Sudan, including the 2001 export of a Russian Mi-8 helicopter to that country which "ran counter to the principles" of a European Union embargo. Lithuania, which was negotiating to join the EU in 2001 and became a member in 2004, later changed its laws to ban such exports.
Aviabaltika "denied all allegations of illicit trade in strategic commodities," the report said.
The company has its defenders. Dave Baskett, a retired Army pilot who says he was involved in the early days of the Russian helicopter program and worked with Aviabaltika, said he inspected Aviabaltika's plant in Lithuania in the mid-1990s and reviewed its books.
Yuri Borisov has "a high degree of personal integrity," he said, adding that most criticism of the company comes from jealous U.S. firms trying to protect market share.
One of the first allegations of impropriety about AVB/SPARC to reach the Pentagon came in 2010 from a U.S. contractor working with the companies.
On a bitterly cold morning in February 2010, three American quality inspectors were blocked from entering a SPARC plant in St. Petersburg, Russia. Inside were Mi-17 helicopters that AVB/SPARC was refurbishing.
A Russian government document seen by Reuters said that the helicopters had been illegally imported from Aviabaltika's facility in Lithuania. Rather than civilian variants of the Mi-17, as AVB/SPARC had told its U.S. counterparts, they were military versions. Russia only allows a state agency to import and export military equipment.
"It would ... be my strongest recommendation that Avia Baltika/SPARC through whatever means necessary be taken off any future list for potential (Pentagon) business," a member of the team wrote to his superiors, some three years ago, in response to the blocked access. Contacted by Reuters, the individual declined to comment.
Seven months after that warning, AVB/SPARC were chosen as subcontractors on the project to overhaul five more helicopters. (Additional reporting by Andrius Sytas in Vilnius, Lithuania, and Phil Stewart in Washington; Editing by Marilyn Thompson, Peter Henderson and Grant McCool)