Downplayed by CIA, Paris Incident Has Wide Impact : France: Economic spying affair faded quickly from news. Officials now admit it severely hampered agency.

It was portrayed as a minor incident, a mere embarrassment to the intelligence community: Five Americans--four of them CIA officers--were accused by France in February of conducting an economic espionage operation against the government in Paris.

The French--U.S. allies, after all--expressed outrage. The U.S. ambassador to Paris, Pamela Harriman, summoned by the French to receive an official protest, privately fumed as well.

The affair briefly made headlines, then faded.

But now, U.S. officials quietly acknowledge that the episode has had far graver consequences than the Clinton Administration let on.

The bungled operation forced the CIA to suspend virtually all its operations in France earlier this year, U.S. sources say.

Although it is unclear how long the suspension lasted, it almost certainly hampered the agency’s ability to gather information in France on such far-reaching subjects as terrorism, arms smuggling and the Middle East.

Sources said the suspension was imposed because the effectiveness of the agency’s operations in France had been “severely impaired.”

Indeed, the suspension, ordered by CIA headquarters in Langley, Va., apparently left the agency without a significant presence in one of the world’s most important hubs for espionage in the post-Cold War world. A CIA source said a State Department official warned an agency case officer in Paris not even to conduct clandestine operations against non-French targets inside France.

Furthermore, the Paris fiasco may have had a chilling effect on the CIA’s ability to conduct spying operations elsewhere in Western Europe, U.S. sources say.

CIA sources suggest that the episode so angered the French that they may have shared information about the CIA’s economic espionage activities with other European intelligence services, including those in Germany and Italy.

The incident has prompted an investigation by the CIA’s inspector general, Fred Hitz, who is trying to determine whether agency officials failed to properly notify Harriman of their activities. She has refused to comment on the matter.

The investigation marks at least the second time this year that the CIA has begun an internal probe into whether its officers kept U.S. ambassadors informed about local CIA activities.

Sources say Hitz is also trying to ascertain whether carelessness by the CIA agents in the field was responsible for the operation’s exposure--what the CIA calls in spy jargon “poor trade-craft.”

The Hitz investigation is expected to be completed by the end of the year.

CIA officials would not talk about the case, and no one interviewed in connection with it agreed to speak on the record because most of the information about the episode remains classified.

But the case has frustrated senior lawmakers on Capitol Hill, some of whom complain that the CIA once again failed to keep Congress adequately informed of an espionage operation.

“They didn’t tell us anything before the operation blew,” said one member of the Senate Select Committee on Intelligence, who declined to be identified. “They only told us about this at the time that it was hitting the papers.”

Sources say the case is only the latest skirmish in an economic spy war that has been under way between the United States and France for years.

U.S. officials accuse the French intelligence service of repeatedly conducting clandestine operations to pry industrial secrets out of U.S. corporations, angering both the CIA and the FBI.

The February episode is a striking example of the kind of problem the CIA will face as it tries to adapt to new intelligence priorities now that the Soviet threat is gone, experts say. And in an era when economic competition is paramount, the line between friend and foe is likely to become increasingly blurred.

In the French operation, the CIA was, in effect, spying for Hollywood: At least part of the mission was reportedly designed to determine the strength of the French bargaining position in television and telecommunications trade negotiations. The United States was opposed to French demands to restrict imports of U.S. television programming into Europe.

Sources say the operation was blown when the French uncovered one of the spies, a part-time contract employee with the CIA.

The French then trailed her, eventually connecting her with the four CIA case officers, who were operating under diplomatic cover out of the U.S. Embassy in Paris.

The spy whose cover was first blown had had problems in previous operations, and officials at CIA headquarters in Langley had been reluctant to use her again in this case, sources say.

But the Paris station chief decided to let her participate anyway, sources say--a decision that was questioned after the spy operation was uncovered.

The French never arrested any of the CIA officers and, after the publicity surrounding the case died down, allowed them to quietly leave the country.

Today, it remains unclear whether the CIA has resumed its Paris operations. Although the agency has named a replacement for former Paris station chief Dick Holm, sources could not say whether the new chief has arrived in France.

The potential for spy wars among allies in the post-Cold War era seems to be generating friction throughout Europe.

According to New Republic magazine, CIA Director John M. Deutch was warned during a summer trip to Bonn that German officials would fight CIA efforts to engage in economic espionage inside their country. They also demanded that the CIA scale back its staff in Germany.

Sources say Deutch also traveled to Paris this summer in an effort to smooth relations with both France and Harriman.

But Deutch still needs to mend fences on Capitol Hill, where the CIA’s image is still suffering from both the Aldrich Ames spy scandal and the controversy involving the CIA’s role in Guatemala.

In fact, one senior lawmaker involved in intelligence oversight describes the French affair as a “cooler Guatemala.”

The comparison refers to this year’s probe of the CIA’s failure to properly notify Congress--and two successive U.S. ambassadors--about the agency’s ties to a Guatemalan army officer allegedly implicated in the murder of an American innkeeper in rural Guatemala and in the torture-killing of a Guatemalan rebel who was married to an American woman.

Although lawmakers and others are quick to say that the French case has not raised the same level of anger as did the Guatemala affair, it does underscore the degree to which the CIA still finds it difficult to share sensitive information with Congress and the State Department.

“They [CIA officials] still can’t seem to figure it out for the life of them that the best thing to do is bring us [Congress] in on this kind of thing,” one congressional source said. “When it comes to notifying Congress, they just don’t get it.”

One senior lawmaker also argued that the risks of disrupting relations with friendly countries should, except in rare instances, outweigh the potential rewards of economic spying.

“We are not supposed to be there [in Paris] to spy on the French,” the lawmaker said. “The object of our intelligence activities there should be to find out what’s going on among the people who come to Paris to do business--that is where people meet to arrange arms shipments or to buy dangerous chemicals.”

Congressional sources say that since the Ames and Guatemala controversies erupted, the CIA has been doing a better job of notifying the intelligence committees of potential problems.

But intelligence community sources say that, despite an agreement between the State Department and the CIA, the agency’s station chiefs still often fail to notify ambassadors of ongoing clandestine activities, especially where the U.S. ambassador is a political appointee rather than a career foreign service officer.

“In some cases, there are ambassadors who don’t know what they [the CIA agents] are doing and aren’t informed, and their questions don’t get answered as a result,” a senior Administration official said. “And there are a handful of cases where there is a willful failure by the CIA to keep the ambassador informed.”