Efraim Diveroli, the 22-year-old Miami Beach arms dealer, is already under investigation for allegedly selling banned Chinese munitions to the U.S. government.

Now Diveroli's firm, AEY, is being singled out as an example of fraud and mismanagement in how the federal government awards contracts to small and minority-owned businesses.

Sen. John Kerry, chairman of the committee on Small Business and Entrepreneurship, said AEY won as many as 50 contracts worth $298 million, in part because of its designation as a small disadvantaged business -- a status reserved for people belonging to certain minority groups who can prove their net worth is under $750,000.

There's no evidence that AEY ever asked for the special status or would have been eligible. Diveroli's grandfather is Italian -- not one of the minorities singled out under the program.

The incident sheds light on what some business advocates contend are efforts to inflate contracting numbers in order to exaggerate the government's commitment to small and minority-owned firms. Since 1995 there have been 13 government investigations and two private studies that have turned up abuse and mismanagement in the federal contracting system.

Kerry sent letters to the Department of Defense, the State Department and the Small Business Administration Thursday asking about the error.

''Lack of oversight of contracting programs within the federal government is allowing companies like AEY Inc. to erroneously access hundreds of millions of dollars in contracts as an SDB,'' Kerry wrote to SBA Administrator Steven Preston. The lapses are ``undermining a program created to level the playing field for small disadvantaged businesses.''

The SBA in Washington says it has no record that AEY ever applied for SDB status.

AEY would not comment, and Diveroli's lawyer did not immediately return calls.

A review of the Federal Procurement Data System, which provides information on government contracting, found AEY was first identified as an SDB in June 2006 by the State Department and Army. It ultimately received the SDB designation 33 times on contracts worth $224 million. The company received another 19 awards during the same period without being labeled an SDB.

In the past, government auditors have blamed such errors on ''miscoding'' and typos.

''That's the same excuse the government has been using for the last six years,'' said Lloyd Chapman, president of the American Small Business League, which follows contracting issues. ``It's not accidents, it's not data entry errors, it's a well-orchestrated attempt to misrepresent the volume of contracts that go to small businesses and minorities.''

The government has the goal of channeling 23 percent of all contracts to small firms and 2.5 percent of contracts to SDBs. SDBs are usually owned by blacks, Hispanics, Asians or Native Americans. Other ethnicities can qualify only if they show a ''preponderance of evidence'' that they are disadvantaged.

While the government routinely misses its small business goal, it has done better hitting the SDB target.

In fiscal 2006, the most current year available, SDBs won $23 billion worth of contracts, or 6.8 percent of all government contracts.

But Chapman said there's evidence those figures are bloated with firms like AEY.

''For everyone that's caught there are hundreds that get away with it,'' he said.

Similarly, a 2005 investigation by The Miami Herald found that of the top 20 small-business contractors in Florida, more than half exceeded the SBA's basic definition of a small business.

AEY hit the news last month when an Army contract worth up to $300 million was suspended after it was discovered the company was allegedly passing off aging Chinese-made ammunition as Hungarian.

The bullets were destined for Afghanistan, but the transaction may have violated a ban on sales of Chinese munitions to the U.S. government. Now Diveroli is under criminal investigation and expected to appear before a congressional committee later this month.

''Faulty contracting procedures and deficient safeguards are no excuse for putting troops in Afghanistan and Iraq in greater danger,'' Kerry wrote. ``The Bush Administration needs to explain how and why this mistake occurred . . . and what steps they are taking to make sure that it never happens again.''

Source:  http://www.miamiherald.com/business/story/491358.html