Iran-Contra: The Cover-Up Begins to Crack

By Richard Lacayo

Until last week the Iran-contra scandal seemed ready to fade from the courts, the news and the mind. After costing more than four years and $25.5 million, the investigation headed by special prosecutor Lawrence Walsh was limping to a close. A federal appeals court had overturned Lieut. Colonel Oliver North's felony conviction, and a retrial seemed unlikely. The same outcome seemed possible for former National Security Adviser John Poindexter's conviction.

Then the scandal roared back to life with a series of stunning developments. They suggested that:

-- Top intelligence officials had engaged in covering up the Reagan Administration's attempts to evade a congressional ban on aid to the Nicaraguan rebels by siphoning off profits from secret arms shipments to Iran.

-- The Iran-contra affair may be only part of a broader and previously undisclosed pattern of illegal activities by intelligence agencies during the tenure of Ronald Reagan and his CIA chief William Casey. Sources close to the unfolding investigation of the Bank of Credit & Commerce International told TIME that U.S. intelligence agencies, including the CIA, maintained secret accounts with the globe-girdling financial empire, which has been accused of laundering billions of dollars in drug money, financing illegal arms deals and engaging in other crimes.

The discovery of the CIA's dealings with B.C.C.I. raises a deeply disturbing question: Did the agency hijack the foreign policy of the U.S. and in the process involve itself in one of the most audacious criminal enterprises in history? Items:

-- Alan Fiers, head of the CIA's Central America task force from 1984 to 1986, pleaded guilty on Tuesday to two counts of lying to Congress about when high- ranking intelligence officials first learned of the illegal diversion of funds to the contras. Fiers said he became aware of the diversions and informed Clair George, then the CIA's deputy director for operations, in the summer of 1986. But, Fiers said, George ordered him to deny any knowledge of the transfers when he testified before the House intelligence committee that October. In exchange for being allowed to plead guilty to two misdemeanors instead of more serious felonies, Fiers is now assisting Walsh's investigation. With his help, Walsh will probably seek a perjury indictment of George and perhaps other present and former government officials.

-- Three days after Fiers entered his plea, the New York Times disclosed that Walsh possesses tapes and transcripts of hundreds of telephone conversations between CIA headquarters in Langley, Va., and agents in Central America. The talks occurred during the period when North, former Air Force General Richard Secord and his business partner Albert Hakim were operating their secret arms pipeline. The tapes -- which have been in Walsh's hands for three years -- were recorded on a system that George installed at the agency's operations center in the early to mid-1980s.

In recent months Walsh has used the tapes to prod the memory of North and other reluctant witnesses before the grand jury that is still gamely looking into the scandal. The tapes are expected to furnish evidence that could lead to further indictments. Some transcripts of the recordings have been examined by staff investigators for the congressional Iran-contra committees. But curiously, until last Friday, no member of the Senate intelligence committee was aware of the recordings.

-- Investigators probing B.C.C.I. have told TIME that the Iran-contra affair is linked to the burgeoning bank scandal. Former government officials and other sources confirm that the CIA stashed money in a number of B.C.C.I. accounts that were used to finance covert operations; some of these funds went to the contras. Investigators also say an intelligence unit of the U.S. defense establishment has used the bank to maintain a secret slush fund, possibly for financing unauthorized covert operations. More startling yet, even before North set up his network for making illegal payments to the contras, the National Security Council was using B.C.C.I. to channel money to them. The funds were first sent to Saudi Arabia to disguise their White House origins; then they were deposited into a B.C.C.I. account maintained by contra leader Adolfo Calero.

The Iran-contra affair has been characterized by U.S. officials as a rogue operation managed by overzealous members of the National Security Council. But if Fiers is correct, top-ranking CIA officials not only knew about the operation and did nothing to stop it; they also participated in an illegal cover-up.

One of the first casualties of the disclosures could be the nomination of Deputy National Security Adviser Robert Gates to head the CIA. Though Fiers did not implicate Gates in the deception, some Senators find it hard to believe Gates' claim that he knew next to nothing about the Iran-contra scheme when he served as Casey's principal deputy. Four years ago, that suspicion forced Gates to withdraw after Reagan picked him to succeed Casey, who was dying from brain cancer.

Those misgivings appeared to have faded when George Bush chose Gates to replace William Webster. But the mounting questions about the scandal could put his nomination on hold. The Senate intelligence committee, which had expected to begin its hearings on Gates this week, decided to hold off. Members may want to question Fiers, George and perhaps others about what Gates may have known. If the committee's uncertainty drags on, it could run into the August congressional recess, which would delay hearings until September.

Sensing the threat to Gates' confirmation, Bush rushed to defend his nominee. He implored the Senate not to leave Gates "twisting in the wind" through the summer. "Get the men up there who are making these allegations," Bush demanded. "Isn't that the American system of justice -- innocent until proven guilty?"

But Gates is just one more figure twisting in a resurgent storm. Suddenly a number of unanswered questions assume a new urgency. Just what did Ronald Reagan -- and George Bush -- know? And when did they know it?

Beyond that, the discovery of the secret intelligence-agency accounts in the renegade B.C.C.I. raises a whole new set of unsettling possibilities. The most serious is that U.S. spymasters may have been undertaking unauthorized covert operations and all the while furthering the ends of B.C.C.I. By providing clandestine services for intelligence agencies in numerous countries, B.C.C.I. was able to cloak its activities in an aura of national security and thereby stave off investigations from banking officials in the U.S. and abroad.

In 1988 Gates is reported to have told a colleague that B.C.C.I. was "the bank of crooks and criminals." Yet when customs agents investigated the bank in 1988, they found "numerous CIA accounts in B.C.C.I.," says former U.S. Commissioner of Customs William von Raab. Those, he says, were being used to pay agents and "apparently to support covert activities."

Senate investigators, who have known of the agency's links to the bank, have demanded an explanation from the CIA -- so far, without getting a satisfactory response. One question they might ask is whether the CIA link to B.C.C.I. explains the Justice Department's slowness in pursuing its case against the bank. Last year the Justice Department tried unsuccessfully to persuade the Florida state comptroller not to lift B.C.C.I.'s license to operate in that state.

Armed with Fiers' testimony and the treasure trove of CIA phone tapes, Walsh is likely to seek more indictments. In addition to George and perhaps other CIA officials, there are two potential targets outside the agency: former Assistant Secretary of State Elliott Abrams and Donald Gregg, now U.S. ambassador to South Korea. In his plea Fiers says he lied to Congress at a Senate intelligence committee hearing on Nov. 25, 1986. On the same day, Abrams testified that no one at the State Department knew of the diversion of funds. A few days later, when Abrams made a second appearance before the lawmakers, Democratic Senator Thomas Eagleton of Missouri angrily accused him of having lied earlier. "You've heard my testimony," Abrams said during their exchange. "I've heard it," Eagleton replied, "and I want to puke."

Fiers may also implicate Gregg, a onetime CIA officer who served as a foreign policy adviser to then Vice President Bush. Gregg was a close friend of Felix Rodriguez, another former agent, who became a crucial link in the North pipeline to the contras. But Gregg has repeatedly denied before Congress that the office of the Vice President recruited Rodriguez. One tantalizing entry in North's diary indicates that on Jan. 9, 1986, North and Fiers had a phone conversation about Rodriguez. It reads, "Felix talking too much about V.P. connection." Was the reference to Gregg or to Bush?

Walsh's biggest worry may be that the Senate intelligence committee will call Fiers and George as witnesses at Gates' confirmation hearing. Last July a federal appeals court set aside North's 1989 conviction on the ground that some witnesses who testified against him may have been influenced by his congressional testimony about Iran-contra. That testimony could not be used against North in court because Congress had granted him immunity. Concerned that future Senate testimony by Fiers or George might also be put beyond his reach by a grant of immunity, Walsh last week issued a pointed warning to the committee not to imperil his case. "Our investigation has reached a point of significant breakthrough," Walsh said. "To jeopardize this progress in a vain hope of getting quick facts as to an individual nomination would be regrettable."

In one respect, at least, Walsh is right: an individual nomination is no longer the central issue. The main questions now focus on whether the intelligence community covered up illegal acts and how high the conspiracy reached.

With reporting by Jonathan Beaty/New York and Bruce van Voorst/Washington