CIA Arms Deal Sought to Create Cash Surplus

It began as a shipload of weapons for the Nicaraguan Contras, secretly bought in a dark corner of the international arms bazaar from a notorious Mideast terrorist by private agents of White House aide Oliver L. North.

But when the cargo of Polish rifles and grenades and Portuguese land mines finally slipped into a CIA arsenal late last year, it had become part of a “highly unusual” scheme to generate a multimillion-dollar surplus for companies secretly owned by the CIA, sources have told The Times.

The disclosures show that the agency bypassed its normal accounting safeguards in September, 1986, to finance a hastily arranged $2.2-million purchase of weapons from North’s private-sector associates, Richard V. Secord, Albert A. Hakim and Thomas Clines.

Not Previously Reported

The financial details of the deal, uncovered this fall by Iran-Contra investigators but not previously made public, were compared by one official close to the probe to an organized crime money-laundering scheme.

“The mob is probably better at it than anyone else, but these guys weren’t bad,” said a source familiar with the scheme. “It’s a textbook example of how things could go south” without proper management controls.

Although the CIA maintained to Congress that the arms purchase was both legal and proper, senior agency officials were recently told by congressional investigators that the deal points up serious management and regulatory lapses in one of its most secret divisions.

Key agency officials, working closely with a private arms broker who dispensed gifts and performed personal favors for them, tapped secret bank accounts and cash reserves of CIA-owned “proprietary” companies to raise $2.2 million in “off-the-books” money for the arms, sources said.

The same officials, acting as agents of the proprietary companies, then planned to sell the weapons back to the CIA in early 1987 for up to twice the purchase price--thereby creating a $2-million “profit” for the CIA-owned companies.

Handling of ‘Profits’

The “profits” could have been turned over to the government’s general fund, as the CIA later assured investigators they would have been. But official sources speculated that the cash could also have been used as a slush fund for future arms purchases outside normal channels, or secretly banked to make payoffs to people in or out of the agency.

The second phase of the deal was scrapped, however, when The Times first reported the arms purchase last February in its investigation of the Enterprise, the private paramilitary network that North and his associates ran with profits from Iran and Contra arms sales.

Additionally, sources say, investigators have found evidence that North personally lobbied ranking agency officials in 1986 to buy the shipload of weapons from his associates, who were desperately seeking a buyer after having failed to sell them to the Contras. The weapons had been collected on the Erria, the Danish freighter purchased by the Enterprise earlier in 1986.

New Doubts Raised

The evidence of North’s role in the deal raises new doubts, dismissed by the CIA last spring in testimony to congressional intelligence committees, about whether high-level CIA officials ordered the arms purchase to financially reward North’s partners in the Iran-Contra arms deals.

“It was clear that North had gone to several people within the agency on several occasions to try to interest people in buying things--and that included the weapons on the Erria,” one congressional source said. “Those weapons were purchased. Draw your own conclusion.”

It is not known what action the agency has taken, if any, since being informed of congressional findings. A CIA spokeswoman refused this week to discuss allegations of irregularities.

The CIA has not disclosed what it has done with the weapons, although intelligence experts say the agency probably shipped them to the Contras after Congress legalized U.S. aid.

Details From Interviews

New details of the CIA’s arms purchase were assembled this month from interviews with people associated with the controversial transaction and from congressional officials and intelligence experts familiar with new evidence developed by investigators.

The case provided federal investigators with a rare and troubling glimpse of the CIA’s covert weapons procurement operation, a netherworld of dummy companies, secret bank drafts and anonymous arms buyers that spends hundreds of millions of dollars annually to supply U.S.-backed guerrilla wars worldwide.

“The potential for a garden-variety scam was very high,” one knowledgeable source said of the agency’s arms-buying network. “It was like an operation being run by your stereotypical Army supply sergeant in false mustache and secret-agent trench coat.”

Routine secrecy apparently shrouded some questionable relationships between the agency and its private suppliers.

One of those was with retired Army Col. James P. Atwood of Savannah, Ga., who successfully brokered the CIA purchase from the Enterprise after another middleman’s effort had failed. At the time, investigators discovered, Atwood was helping set up a private arms business for the son of a CIA covert procurement official who approved the deal.

Currying Favor

Moreover, a series of congressional depositions of CIA employees and others revealed that Atwood had curried favor with CIA covert procurement officials in the past with personal gifts varying from watches and buckets of shrimp to rare chrome-barreled Chinese AK-47 rifles.

Atwood, who was granted immunity to give sworn testimony to congressional investigators, ultimately received $180,000 and 3 million rounds of ammunition as apparent commissions for the transaction. He refused to be interviewed by The Times.

The latest disclosures also renew lingering questions about why the agency bought the arms in the first place.

As previously reported by The Times, North’s Enterprise bought the weapons with $2.2 million in proceeds from secret sales of arms to Iran.

The purchase of the Polish rifles and grenades was arranged through Manzer Kassar, a European-based arms smuggler to the Palestinian Liberation Organization. Administration officials identify Kassar as a known associate of Abu Nidal, the architect of the 1985 Christmas massacres in airports in Rome and Vienna, among other notorious attacks.

Gray-Market Monopoly

But in the summer of 1986, Kassar, with an apparent gray-market monopoly on Polish-made arms, was selling to North, one of America’s most ardent anti-terrorists, and his agents. At the time, with a congressional ban preventing direct U.S. military aid to the Nicaraguan rebels, the Enterprise intended to sell the weapons to the Contras.

So sure of success were the Enterprise’s private partners--Secord, Hakim and Clines--that they paid themselves more than $860,000 in advance commissions for the deal by tapping accumulated profits from the Iran arms sales, according to the congressional Iran-Contra committees.

However, Congress lifted its Contra aid ban soon after the cargo was put aboard the Erria, and rebel leaders were no longer in the market for high-priced private arms supplies. That left the Enterprise with what was suddenly a very bad investment: a shipload of weapons without a buyer.

Faking Malfunctions

With the Erria buying time by faking mechanical malfunctions in Lisbon, Emmanuel (Manny) Weigensberg, a Secord associate and Montreal arms dealer who had brokered some of the earliest secret arms shipments to the Contras in 1984, approached the CIA to drum up interest in an agency purchase. But officials say the CIA rejected the offer, and covert procurement officials explained to investigators later that they didn’t trust Weigensberg.

The Erria crew faked more malfunctions, possibly even sabotaging some of the ship’s machinery, according to Portuguese port authorities. The ship’s operators in Copenhagen volunteered to dump the cargo in the Atlantic.

Apparently concerned about the soured deal, John M. Poindexter, North’s boss at the time as President Reagan’s national security adviser, directed North via computer message to keep the pressure on William J. Casey, then the CIA director, to “make things right for Secord.”

Officials say congressional investigators could not establish with certainty that Casey or other senior CIA officers intervened to force the purchase of the shipload of weapons. One informed source noted, however, that at one point even North tried to “peddle the arms to the CIA.

“You would think someone would have asked questions when North came around,” he said. “Ollie’s . . . trying to sell guns. Where did he get a boatload of guns?”

Atwood approached the CIA in early September and offered to sell the Erria arms cargo. He reportedly warned that if the CIA failed to act quickly, the entire cargo might be sold to Kassar and end up in the hands of international terrorists.

Atwood, who, according to acquaintances, has been known to attend social events in Savannah with a gun concealed in his sock, had done business with the CIA before. Once when the covert procurement officers urgently needed bomb-sniffing dogs, he came up with six Chesapeake Bay retrievers in 24 hours, a find worth a reported $100,000.

“He was a professional ferret--a scavenger,” said a former congressional official. “When the agency needed something, he could find it.”

To the agency’s buyers, he also had a reputation for his gifts. At least one covert procurement official quietly returned a desk pen set to Atwood in a brown paper sack. More often, however, the gifts were not returned.

‘Baubles’ Dispensed

Atwood was not alone in this practice. Investigators found that “a lot of other people dealing with covert procurement” also passed around “baubles,” two knowledgeable government sources said.

It is not clear what prompted the CIA to act so quickly on Atwood’s offer to sell the Enterprise’s weapons. But within two days, the deal was approved by top officials in the agency’s administration division, sources said.

What investigators found curiously absent in that approval were the customary purchase orders and funding requisitions.

Under normal rules, arms purchases are conducted by a maze of proprietary companies--CIA-owned firms masquerading as ordinary businesses that use CIA-allotted money laundered through a series of banks.

Regulations require that each deal be approved by the CIA’s operations division, which draws up arms “shopping lists” for its various guerrilla armies, and by the administration division, which controls agency bank accounts and allots money for the purchases. The proprietaries are allowed by written charters to keep a reasonable amount of “working capital” but are required to turn over profits from legitimate operations to the government.

Used Secret Accounts

But in this case, the CIA’s operations division did not request the purchase, and administration division officials allotted no congressionally approved funds. Instead, sources said, they turned to the $3 million accumulated in the secret accounts of some of the proprietaries.

Using more traditional means, they disguised the funds through a series of domestic and foreign bank transactions before using other CIA shell companies to pay Atwood, his partners and shipping operators the $2.2-million purchase price.

Atwood, who had never managed such a large arms deal with the agency, needed the logistical and financial assistance of an outside firm: Merex, a major West German trading company with U.S. operations in Texas and Virginia. A Merex shell company, Overseas Trading Consultants, was listed as the buyer on shipping documents, a role that would normally have been filled by a discreet CIA proprietary had not the transaction been so rushed.

On Sept. 15, 1986, the Erria, seaworthy again after repairs to a bogus ailment, sailed to the munitions loading docks at Cherbourg, France, where its cargo was transferred to a second Danish freighter, the Iceland Saga.

Transferred to New Ship

Sources said it was the CIA that insisted the arms cargo be transferred from the Erria to a new ship--apparently to distance the agency from Secord and the Enterprise.

Payments were transferred to all of the appropriate bank accounts as soon as the loaded Iceland Saga pushed away from the Cherbourg docks on Sept. 20.

Most of the funds have since been accounted for by various investigators. One that remains a mystery, however, is a $180,000 payment to Atwood, an apparent commission for his role in the transaction.

Despite a grant of immunity from prosecution, several reliable sources said, Atwood, citing fears for his life, refused to answer questions about the bank account in Vienna into which that commission was placed

Nearly Everyone Gained

On the surface, almost everyone benefited from the first phase of the arms deal: The Enterprise had been bailed out of a bad investment, and the CIA got a bargain. By the most generous estimate, the $2.2-million arms shipment had a fair market value of up to $5 million.

Only the agency’s proprietary companies, which had put up $2.2 million of their working capital to buy the arms, were now in financial straits. Three informed officials said the agency had planned to resolve that crisis by going through standard CIA purchasing channels to buy the arms again--from its own companies--with money appropriated by Congress.

Using requisitions and spending authorizations, the repurchase would have been made at the weapons’ fair market value, not at the $2.2-million price the proprietaries paid. Such a deal would have replenished the firms’ depleted capital and left them with excess millions.

“The procurement guys suddenly would have had enormous discretionary funds available,” said a source familiar with the pricing scheme.

The agency was still in the process of putting together a complete pricing list early this year when press accounts of the CIA purchase first appeared and congressional investigators, as one source said, “raised hell and shut them down.”

CIA Defended Deal

The CIA reportedly strongly defended the deal before investigators. Sources said officials argued first that the agency got “a tremendous bargain” on Atwood’s fire sale of the Enterprise’s weapons. Later, however, they maintained that it was CIA policy to buy arms at fair-market value so that it would not procure more arms than Congress had intended.

Investigators relayed to top CIA officials and to congressional intelligence committees their concern about covert procurement management failures revealed by the deal, according to two sources. “The bottom line,” one said, “is that the CIA treated covert procurement as a backwater. . . . It was badly supervised.”

Another source, a former federal official familiar with the investigation, said the inquiry made it clear that federal regulations were either ignored or were too weak.

“Procurement is a problem in almost any large company and government agency when there are insufficient controls,” the former federal official said. “And when you have an operation managed covertly, it makes it all the more possible to run things without proper management controls.”

Staff writer Larry Green in Chicago also contributed to this story.