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$Unique_ID{bob01060}
$Pretitle{}
$Title{Iran-Contra Affair: The Report
Chapter 15   The Diversion}
$Subtitle{}
$Author{Various}
$Affiliation{}
$Subject{north
poindexter
diversion
testified
president
arms
casey
contras
allen
memorandum}
$Date{1987}
$Log{}
Title:       Iran-Contra Affair: The Report
Author:      Various
Date:        1987

Chapter 15   The Diversion

     The term "diversion" entered the vocabulary of American history on
November 25, 1986, when the media, covering Attorney General Edwin Meese's
press conference, reported a "diversion of funds" for the Contras from the
Iran arms sales.  The diversion immediately became the focus of the public's
attention:  Whose idea was it?  Who approved it?  When?  Who knew of it?  How
much was diverted?

     The Committees were able to answer these questions, but only partly,
because of contradictions in the record, the destruction of evidence, and
apparent forgetfulness by officials.

     Lt. Col. Oliver North, Vice Admiral John Poindexter, and Richard Secord
all vigorously rejected the term diversion, because it implies that the arms
sales proceeds were earmarked for the U.S. Government, and were
misappropriated.  To North, Poindexter, and Secord, providing assistance to
the Contras was only one of a number of intended uses of those proceeds. North
named several projects that he was planning to finance from the proceeds.
Indeed, Poindexter saw the generation of money for the Contras from the arms
sales as no more exceptional than raising money from foreign countries, which
the NSC staff had been doing with the President's approval for 18 months.
Thus, for North, Poindexter, and Secord, the "diversion" was no diversion.
But that was one of the few things upon which they agreed.

Whose Idea?

     The generation of profits for covert uses from the sale of arms was not a
novel idea when North first seized upon it.  Sophisticated weapons bring
premium prices in the international grey market for arms, and can thereby
create slush funds for improper covert activities that could not be financed
through appropriated money.

     General John Singlaub had presented such a proposal in a memorandum to
North and Director of Central Intelligence William J. Casey during 1985. The
memorandum, prepared by Singlaub's associate, Barbara Studley, defined the
"problem":

With each passing year, Congress has become increasingly unpredictable and
uncooperative regarding the President's desire to support the cause of the
Freedom Fighters despite growing Soviet oppression.  The funds have not been
forthcoming to supply sufficient arms necessary for the Freedom Fighters to
win.

     The "objective" was "to create a conduit for maintaining a continuous
flow of Soviet weapons and technology, to be used by the United States in
support of Freedom Fighters in Nicaragua, Angola, Cambodia, Ethiopia, etc."

     The memorandum proposed a three-way trade in which the United States
would provide high technology equipment to another country, that country would
deliver from its stockpiles military equipment of equal value to a third
country, and the third country would export Soviet-compatible arms to a
trading company at the direction of the United States.  "The United States,"
the memorandum observed, would then be able to dispense the arms to "Freedom
Fighters worldwide, mandating neither the consent or awareness of the
Department of State or Congress."  The memorandum diagrammed the plan.

     North acknowledged receiving this memorandum, but dismissed its
significance.  [Secretary Shultz was shown the Singlaub-Studley plan at the
hearings, he responded that, "t[his] is not in line with what was agreed to in
Philadelphia.  This is a piece of junk and ought to be treated that way."
Shultz Test., Hearings, 100-9, 7/23/87, at 192.]  The Singlaub-Studley plan
was not implemented, but the idea of using sophisticated U.S. weapons to
finance arms for anti-Communist insurgents was known to those working to
support the Contras before any proceeds from U.S. sales of arms to Iran were
first received.

     While Studley was developing her proposal, the Israelis were acting on a
different plan.  According to the Israelis, North proposed in early October
1985 using the excess funds from the TOW missile sales to support pragmatists
in Iran.  North testified, however, only that he had reason to suspect that
the Israelis were using excess funds for covert purposes.

     By the end of November 1985, the Enterprise received a portion of the
arms sales proceeds.  At North's request, the Israeli intermediaries paid the
Lake Resources account $1 million from the proceeds of its August-September
TOW shipments.  According to North and Secord, the money was to cover the
Enterprise's expenses in arranging five shipments of HAWKs to Iran.  But when
the deliveries were halted after one shipment, the Enterprise held $800,000 in
unexpended funds.  North received the Israelis' permission to use the $800,000
for "whatever purpose we wanted," and he directed Secord to spend the money
for the Contras.

     Thus, by early December, the notion that the Iran sales could be used as
a vehicle for financing the Contras was firmly planted in North's mind. On
December 6, 1985, North remarked to Israeli Ministry of Defense officials that
he needed money and that he intended to divert profits from future Iranian
transactions to Nicaragua.  [One of the Israeli officials took contemporaneous
notes of the meeting, recording North's comment.  The two other Israeli
officials at the meeting (which dealt mainly with other matters) did not
recall the comment by North.  Israeli Historical Chronology.]  On December 9,
North recommended to Poindexter that the United States take control of the
arms sales from Israel, and use "Secord as our conduit to control [Iranian
intermediary] Ghorbanifar and the delivery operation."  This mechanism was
adopted in the President's January 17, 1986, Finding, thereby avoiding the
Arms Export Control Act requirement of Congressional notification for Israel
to continue sales to Iran of the U.S. weapons.  The mechanism allowed the CIA
to sell arms to Iran directly or through a "third party" although it did not
authorize or even mention the generation of profits.  Nevertheless, by
permitting the CIA to sell through a third party, the Finding created an
opportunity for profits to be generated and placed in the hands of the third
party - an opportunity that would not have existed if the CIA sold the arms
directly.  So far as the record shows, this possibility was never suggested to
the CIA attorneys who drafted the Finding, nor did Poindexter discuss it with
the President in connection with the President's execution of the January 17
Finding.

     In January 1986, the idea that excess money could be generated by arms
sales to Iran surfaced in another way.  The Israelis had been promised
replenishment of the TOWs they shipped in August-September 1985, but the
United States had delayed action on Israel's request.  When National Security
Adviser Robert McFarlane resigned, North found no agreement on the price
Israel was to pay for the replacements.  Some Israelis thought that McFarlane
had agreed to replenish the TOWs for nothing.  NSC consultant Michael Ledeen
had quoted a low price, even though certain U.S. Government officials wanted
the full price for the more expensive, improved TOWs that Israel wanted.  The
price for those improved TOWs exceeded the proceeds remaining from Israel's
sale of older model TOWs to Iran.  According to North, Amiram Nir, the adviser
to Israeli Prime Minister Shimon Peres, proposed in January 1986 that Israel
use some of the profits from selling additional TOWs to pay for replenishment
of the original 504 TOWs.  [According to the Israeli Financial Chronology, it
was North, not Nir, who made this proposal.]

     When the United States decided in January to sell the additional TOWs
through the Enterprise (not through Israel), North and Poindexter agreed that
part of the profits would be set aside to pay for the replacement of Israel's
previously shipped TOWs.  Thus, the plan to divide up the proceeds of the U.S.
arms sales to Iran was in place when the January 17 Finding was signed.

     North testified, however, that the proposal to support the Contras from
arms sales proceeds was first suggested by Ghorbanifar in late January 1986.
He did not recall discussing the idea in December 1985 with Israeli Ministry
of Defense officials, although he said the "subject may well have come up
before [late January], but I don't recall it."  According to North, during a
meeting abroad with Nir and Ghorbanifar relating to the February 1986 TOW
shipment to Iran, "Ghorbanifar took me into the bathroom and . . . suggested
several incentives to make that February transaction work, and the attractive
incentive for me was . . . that residuals could flow to support the Nicaraguan
resistance."

     The tape of the meeting shows that the idea of assisting the Contras was,
in fact, discussed, not alone with North in the bathroom, but with the whole
group present.  This fact does not negate earlier consideration by North.
Indeed, Ghorbanifar does not seem to have been referring to using the sales
proceeds, but rather to Iran's assisting U.S. interests in Central America in
return for receiving U.S. military assistance:

     Ghorbanifar:

(Laughingly)

And we do everything.  We do with the hostages for free of charge; we do all
terrorists free of charge; Central America for you free of charge; American
business free of charge; [First Iranian Official] visit; . . .  Everything we
do.

     North:

I would like to see that, that at some point this idea . . . and maybe,
y'know, if there is some future opportunity for Central America.  You know
that there is a lot of Libyan, a lot of Libyan and Iranian activity with the
Nicaraguans.

     Regardless of its origin, North believed that using the funds from the
arms sales for the Contras was a "neat idea," and he advocated it to
Poindexter.  He testified that he sought Poindexter's approval upon returning
from the meeting with Ghorbanifar and Nir, and that Poindexter pondered the
decision for at least several weeks.  Poindexter testified, however, that he
approved the diversion idea after thinking about it for only a few minutes.

Who Else Knew - a Study in Contradictions

Presidential Knowledge

     Although both Poindexter and North testified that they never told the
President about the diversion, the substance of their testimony diverges from
there.

     Poindexter testified that he made "a very deliberate decision not to ask
the President" about the diversion in order to "insulate [the President] from
the decision and provide some future deniability for the President if it ever
leaked out."  Although Poindexter asserted that the President would have
approved of the diversion as an "implementation" of his policies, he
nevertheless chose to protect the President from knowledge of the diversion
because it was a "politically volatile issue."  Poindexter testified as to the
success of his efforts to provide the President with "future deniability" of
the diversion.  When Poindexter was questioned about the White House statement
(issued the day after his initial hearing testimony) that the President would
not have authorized the diversion, Poindexter responded:  "I understand that
he [the President] said that, and I would have expected him to say that.  That
is the whole idea of deniability."

     Poindexter testified that he considered the diversion so controversial
that he understood he would have to resign if it ever were exposed.
Nevertheless, he also testified that, in approving the diversion, he did not
consult Casey, a political expert who had managed the 1980 Reagan campaign,
and that, only 2 months after taking office as National Security Adviser, he
made this decision on his own.  Poindexter had been commended in the Navy for
keeping his superiors informed.  He testified that he had never before
withheld information from any of his commanders in order to give them
deniability.  Moreover, McFarlane, for whom Poindexter had worked for 2 years,
assumed that Poindexter would have informed the President.  Preempting a
decision by the President to provide political deniability - which Poindexter
testified that he did - was totally uncharacteristic for a naval officer
schooled in the chain of command.

     Poindexter testified at his deposition that "I told Colonel North
repeatedly not to put anything in writing on the transfer of funds to the
Contras and not to talk to anybody about it."  [In his public testimony -
after North's public appearance - Poindexter attempted to retreat from this
definitive statement in his deposition.  He testified publicly that he did not
recall telling North not to put anything in writing on the diversion.
Poindexter Test., Hearings, 100-8, 7/15/87, at 44.]  Poindexter could not
recall any memorandum that referred to the diversion, stating that he was
surprised on November 24, 1986, to learn that a written document showing the
diversion had been found.  He claimed that he never saw the early April
diversion memorandum before then, although North's secretary Fawn Hall
recalled that Poindexter had returned a draft of that memorandum with
changes.  [In his post-North public testimony, Poindexter softened this
testimony somewhat by stating that "[i]t appears that it is possible that I
saw one [diversion] memo . . . ."  Poindexter Test., Hearings, 100-8, 7/20/87
at 282.]  Even when confronted with a PROF message, dated April 7, 1986, from
North to McFarlane, which referred to the memorandum and stated that
Poindexter had asked North to "lay out arrangements for our boss," Poindexter
maintained that he never asked North to prepare the document.  [He speculated,
however, that North might have prepared such a memo in response to a request
for an outline of the upcoming trip to Tehran in May.  Poindexter Test.,
Hearings, 100-8, 7/15/87, at 44.]  Consistent with this testimony, Poindexter
did not recall North ever telling him in November 1986 or any other time that
all memorandums referring to the use of the arms sales proceeds to support the
Contras had been destroyed.

     In essence, Poindexter's story on Presidential knowledge of the diversion
was that he had constructed a situation whereby only he and the President
would know whether the President had been advised of the diversion.  In this
regard, Poindexter testified that he never told North that the President was
not privy to the diversion decision.

     In contrast, North testified that he always "assumed that the President
was aware of [the diversion] and had, through my superiors, approved it."
North estimated that he prepared as many as five or six memorandums in final
form referring to the use of the arms sales proceeds for the Contras.  These
memorandums went "up the line" to Poindexter and covered each actual or
proposed arms transaction for which payment would be received.  The use of
proceeds was described in only one paragraph in each memorandum.  North's
memorandums concluded with the recommendation that Poindexter brief the
President to secure approval for the transfer and provided lines on which
someone could indicate whether the transfer had been "approved" or
"disapproved."  North further testified that he did not recall any instruction
from Poindexter or anybody else not to write and send such memorandums, adding
that "had I been given [such an instruction], I would have followed it."
Instead, North created records such as the surviving copies of the April
diversion memorandum that called for Presidential briefings and approval.  [In
his first deposition before the Committees, James R. Radzimski, the NSC's
System IV Control Officer in 1985 and through October 1986, recalled two such
North memorandums to Poindexter discussing the diversion - one in late 1985,
the other in mid-April 1986.  Radzimski recalled also that the April
memorandum attached a proposed memorandum from Poindexter to the President.
Radzimski Dep., 4/29/87, at 54-57, 68-74.  The Committees directed an
exhaustive search of White House files and computer entries, in which the FBI
participated, but no evidence was found to corroborate Radzimski's testimony.
Further, Radzimski's own document log did not support his recollection.
Radzimski Dep., 8/11/87, Ex. 3.  Accordingly, the Committees recalled
Radzimski for further deposition, where he testified that there was a
"distinct possibility" his recollection "is not completely accurate."
Radzimski Dep., 8/11/87, at 33.]

     North was unequivocal that the April 7 PROF message referred to the
diversion memorandum prepared by him in early April 1986 and uncovered by the
Justice Department in November.  North also testified that Poindexter had
communicated approval either orally or in writing on at least three of the
diversion memorandums, and that he believed that he "had received authority
from the President."  Finally in this regard, he testified that early on
November 21, 1986, he assured Poindexter that all documents relating to the
use of proceeds for the Contras had been destroyed.

     North assumed without asking Poindexter explicitly that the President
knew and approved of the diversion.  North had worked under three National
Security Advisers.  Based on that experience, he concluded that a decision of
this magnitude would be taken only with Presidential approval - a view that
McFarlane shared.

     North told Secord that he had conversations with the President about the
irony that the Ayatollah's money was being used to support the Contras. Secord
testified that: North did not convey these conversations "in a way that I took
it as a joke."  North testified that:  he had no such conversation with the
President, but told Secord otherwise in an effort to lift Secord's spirits.
There is no evidence that North did tell the President about the diversion;
according to White House records, he never met alone with the President.

     North said that he continued until November 21, 1986, to assume that the
President had approved the diversion.  He testified that, on or about that
day, he asked Poindexter directly, "does the President know?"  He told me [the
President] did not."  North testified that the President confirmed this lack
of knowledge on November 25 when the President told him by telephone that, "I
just didn't know."  Robert Earl, North's aide, testified that North had told
him that the President had said "it is important that I not know."  Lt. Cmdr.
Coy, the third office-mate, who was also present, did not recall any
conversation about the President's knowledge.  Fawn Hall testified that North
told her that the President had "called him an American hero" and said that
"he [the President] just didn't know."

     Except for the April memorandum, the memorandums that North claimed he
sent Poindexter are gone.  North testified that he destroyed them.  Three
drafts of the April memorandum were found in various locations in North's
files.  They are identical except for the precise date of the Israeli
September 1985 TOW shipment on the first page.

     Memorandums for the February, May, and October 1986 shipments, describing
the use of the proceeds, do not exist.  If they were prepared, they were
destroyed.

Casey's Knowledge

     Discrepancies about Casey's knowledge of the diversion also abound.
Poindexter testified that he "purposely" did not discuss the subject with
Casey.  Poindexter's reasoning was that Casey frequently had to testify before
Congress and he did not want to place Casey in a position of having to lie.
Poindexter further testified that he had no indication that Casey was aware of
the diversion aspect of the arms sales operation.

     North, on the other hand, testified that he "had consulted very carefully
with Director Casey [about the diversion], and he . . . was very enthusiastic
about the whole program."  He stated that he had told Casey of the plan to use
the proceeds for the Contras before the fact, and that he had reviewed with
Casey (probably in February 1986) at least one memo referring to the diversion
before sending it "up the line" for Presidential approval.

     While still at the NSC, North made inconsistent statements about Casey's
knowledge.  He told Earl in the spring of 1986 that Casey knew.  But on
November 23, when questioned by the Attorney General, North omitted Casey from
the list of persons privy to the diversion.  According to North, this omission
occurred after Casey had suggested a "fall guy plan" in which North and, if
necessary, Poindexter would take the blame.

     Another CIA official, Charles Allen, became aware as early as January or
February 1986 of the possibility of a diversion.  Allen effectively acted as
Ghorbanifar's CIA case officer from their first meeting in January 1986.
Allen's notes record that, early in their relationship, Ghorbanifar told him
that money could be generated from the arms sales to support the Contras and
other activities.  Allen found Ghorbanifar's statements so "far-fetched" and
"trivial" that, although he recorded them in his notes, he did not report them
to his superiors.  [Later in the year, George Cave of the CIA grew suspicious
when he learned that the Iranians were paying significantly more for the U.S.
arms than the CIA was receiving, and heard speculation of a diversion to the
Contras.  Cave stated in his deposition that he did not report these
concerns.  Cave Dep., 4/17/87, at 158-59.]

     By the end of August, Allen had focused on the inflated pricing of the
arms sold to Iran and the possibility that money might have been diverted to
the Contras.  Allen shared his concerns that same month with Richard Kerr, the
CIA's Deputy Director of Intelligence, who had succeeded Robert Gates.
According to Kerr, Allen told him that the United States had overcharged Iran
in the sale of HAWK parts and that the excess money had possibly been diverted
to assist the Contras.  Kerr said that, as best he could recall, Allen did not
explain why he believed that funds might have been diverted to the Contras.
Kerr told Allen to monitor the situation and keep him apprised of further
developments.

     Kerr recalls that he recounted Allen's diversion speculation to Gates,
who told Kerr that he also wanted to be kept informed about the matter. Kerr
took no further steps.  [Gates told the CIA Inspector General that he could
not recall the meeting in which Kerr apprised him of Allen's suspicions.
Kerr Int., 9/23/87, at 6-7.]

     Allen remained "very troubled in September that the operation was to spin
out of control."  On September 9, he met with North following a meeting
between North and Poindexter on the Iran initiative.  North told Allen that
the First Channel into Iran was to be shut down, and that the Second Channel
had "flourish[ed] into full bloom."

     Allen was surprised by this information.  He returned to the CIA "very
nonplussed because I couldn't figure out why we would so abruptly shut down
the first channel unless we had a very good plan for shutting it down in a way
that Ghorbanifar and other creditors of Ghorbanifar would feel assuaged
. . . .  Nevertheless, the next day Allen reported this conversation to Casey
matter-of-factly and without comment, including a flat, unexplained
observation that "[t]o cut Ghorbanifar out, Ollie will have to raise a minimum
of $4 million."

     On October 1, Allen took his worries to Gates.  He told Gates that the
Ghorbanifar channel was a "running sore," and that he was concerned that the
Iran initiative was "going to be exposed if something isn't done."  He also
told Gates that "perhaps the money has been diverted to the contras."
According to Allen, Gates was "deeply disturbed by that and asked me to brief
the Director."  When Allen briefed Casey a week later, he found that Roy
Furmark - a business associate of Saudi entrepreneur Adnan Khashoggi's and
former client of Casey's - had been there before him.

     As discussed more fully in Chapter 18, Furmark and Casey met on October
7, Although Furmark knew of Ghorbanifar's speculation about the diversion, it
is not clear that he shared this speculation with Casey. Furmark's testimony
before the Senate Select Committee on Intelligence is somewhat inconsistent on
this point.  North testified that Furmark had told Casey in early October
about the speculation surrounding the diversion to the Contras.

     In any event, according to North, the meeting with Furmark triggered
Casey to instruct North "that this whole thing was coming unraveled and that
things ought to be 'cleaned up'. . ."  In response, North testified that he
"started cleaning things up"; he "started shredding documents in earnest after
[this] discussion with Director Casey in early October . . . ."

     When Allen and Gates met with Casey on October 7, Casey did not mention
that funds might have been diverted to the Contras.  According to Gates,
however, "Allen shared his speculation with the Director about the possibility
that some of the money was being diverted to the Contras.  The Director told
him to put all of that down on paper."

     Allen's October 14 memorandum did not expressly allege that the profit
from the arms deals might have gone to the Contras.  Instead, the memorandum
recorded Ghorbanifar as stating that, "some of . . . [the] profit was
redistributed to other projects of the US and of Israel."

     At Casey's direction, Allen and Furmark met on October 16.  However, it
was not until a subsequent meeting on October 22 also at the CIA, among Allen,
George Cave (also of the CIA), and Furmark that Furmark raised, for the first
time with Allen, the possibility that funds might have been diverted to the
Contras.  Allen and Cave reported the substance of this latter meeting to
Casey, who appeared "deeply disturbed" by what he was told.

     Allen and Cave then jointly prepared a memorandum for Casey to send to
Poindexter.  This memorandum referred to Ghorbanifar's accusation, which
Furmark had repeated, that some of the "bulk of the original $15 million price
tag was earmarked for Central America."  The memorandum "laid out starkly
. . . that Ghorbanifar had made allegations of diversion of funds to the
Contras."

     Although Casey spoke to Poindexter by secure telephone about the October
22 meeting, the Allen-Cave memorandum never reached Poindexter. According to
Allen, the memorandum "fell into the wrong outbox," and was not discovered
until November 25.

     Allen and Furmark met once more, on November 6.  By this time, the
publicity of the Iran initiative had occurred.  The following day, Allen
prepared a memorandum for Casey which reported, among other things, that
Furmark had again alerted Allen to the link between he overcharges on the HAWK
spare parts and the diversion.  On this point, Allen concluded reassuringly
that "much of what they know is speculation and cannot be proven."

     At Furmark's request, Casey met with him again on November 24 at CIA
headquarters.  Furmark and Casey reviewed the finances of the Iran arms
transactions, and established that the transactions had resulted in excess
money.  Casey told Furmark that he did not know where the excess had gone.

     Before Casey suffered a stroke on December 15, 1986, he maintained that
he had not known of the diversion prior to the Attorney General's press
conference.  He died on May 6, 1987.

How Much Was Diverted?

     Even the amount of arms sales profits that were used, and that were
intended to be used, for the Contras 15 the subject of contradictory
testimony.  The Committees have concluded that at least $3.8 million of the
$16.1 million in arms sales profits were used for Contra assistance.
Poindexter testified that he believed the entire surplus was used for that
purpose.  In contrast, North testified that the surpluses were to be used for
a number of other covert projects, and that Secord and his partner, Albert
Hakim were entitled to a fair profit.

     Secord and Hakim testified that no agreement existed on how much of the
money would be used for the Contras: it was within their discretion whether to
accept or reject any request for expenditure by North.  North and Poindexter
were both surprised that the Enterprise still has more than $8 million.
Poindexter was repeatedly told by North that Secord was losing money, and he
assumed that all of the Enterprise 5 funds had been spent.

     Whatever the amount or expectations, the diversion did occur.  Money
generated by arms sales authorized by a Presidential Finding for only one
covert purpose - the Iranian initiative - was used for a wholly different
covert purpose - Contra support.  Arms-for-hostages also became
arms-for-Contras, a purpose that was not authorized by any Finding and that
was proscribed by the Boland Amendment for appropriated funds.