The State Department had put a Miami-based arms dealer on a watchlist of firms not to deal with, but the Pentagon apparently ignored the designation, U.S. Army officials said today during a testy two-hour hearing of the House Committee on Oversight and Government Reform.

Today's hearing followed a New York Times investigation in March that examined how the U.S. military bought hundreds of millions of dollars of munitions for Afghan forces from a questionable Miami-based contractor named AEY Inc. The Times found that AEY's ammunition came from the aging stockpiles of the old Communist bloc, some of which the State Department and NATO have determined to be unreliable and obsolete.

Army contractors didn't notice that AEY and its 22-year-old president, Efraim E. Diveroli, had been placed on the State Department's arms dealer watchlist on April 4, 2006, for "numerous violations of the Arms Export Control Act and contract fraud."

Two other subcontractors for AEY -- Heinrich Thomet, the Swiss president of Evdin, Ltd., a Cyprus-based company that acted as AEY's middleman; and Ylli Pinari, the head of the state-run Military Export Import Company (MEICO), which supplied the ammunition from Albania -- were also found on the watchlist. The reasons for their designations was classified.

In January 2007, the U.S. Army awarded AEY a $298 million contract to supply ammunition to security forces in Afghanistan but much of the delivered ammunition -- collected from across Eastern Europe, including Bosnia, Bulgaria, and Hungary-- was "unserviceable;" made illegally in China; and possibly had its true origins concealed by a U.S. ambassador in Albania, The Post's Walter Pincus reports today.

The State Department's inspector general announced plans today to examine allegations that U.S. Ambassador John L. Withers II approved a plan to remove evidence that the ammunition being supplied by AEY was made in China, The Associated Press reports. The State Department attempted to conceal Withers's role from the committee, congressional leaders charged.

Separately, a federal grand jury on Friday indicted Diveroli on 71 counts, including conspiracy to defraud the government.

"As the AEY experience demonstrates, it appears that anyone -- no matter how inexperienced or unqualified -- can win a lucrative federal contract worth hundreds of millions of dollars," said Rep. Henry A. Waxman (D-Calif.), the panel's chairman.

Army officials at the hearing defended the contract with AEY. The Pentagon had no reason to think the Florida company would fail to provide working ammunition, said Jeffery P. Parsons, executive director of Army Contracting Command. "As a result of our review into this matter, we recognize that changes need to be made in our acquisition of non-standard ammunition," Parsons said.

But committee members were equally quick to criticize the Army's weapons procurement process, which Waxman called "dysfunctional" and Rep. Stephen F. Lynch (D-Mass.) called a "disgrace to the American taxpayers."