A Bad Blueprint: Intelligence Agencies Coopting Private Enterprise
How US Spies Partnered with Private Business for Foreign Adventures
Blackwater founder Erik Prince wants private contractors to replace the US military in Afghanistan. History shows that might be a bad idea. In the 1980s, in the midst of the Savings and Loan crisis and the Iran-Contra scandal, private connections to the CIA kept turning up like a bad penny.
Earlier this week, The New York Times published a story on how top Trump administration officials have asked Erik Prince, the founder of Blackwater, and billionaire Stephen Feinberg, who owns military contractor DynCorp, to come up with alternative plans on how to proceed in Afghanistan.
Perhaps not surprisingly, the two men, who have made untold sums of money off the wars in Afghanistan and Iraq, came up with a plan to rely on private contractors instead of the US military. This story may sound familiar and it usually doesn’t end well.
Last month — after The Wall Street Journal fired Jay Solomon, its chief foreign affairs correspondent, for failure to disclose shady business deals with one of his sources — we published a book excerpt that revealed some juicy details about that source, Farhad Azima, and his unsavory colleagues.
We now present another chapter from that same book — and reading it is like looking under a rock at a hive of activity best done in the dark. As the authors put it,
“But interviews with former CIA employees and bankers convinced us that during the 1980s a private ‘business’ network was actively engaged with our intelligence community in some variety of ad hoc foreign policy adventures. The Iran-Contra affair gave Americans a snapshot look at how it was done — how a group of individuals outside government interfaced with those inside government to fund and carry out politically unpopular foreign policies.”
It was clear then that the lines between state intelligence work, military expedition, and private business (even the news business) were becoming blurred. Today, with so many top corporations under government contract to supply the means of warfare — covert or otherwise — or the means of surveilling even entire populations, with almost every area of private enterprise within the purview of national security, we ask ourselves: Has anything really changed?
The excerpt below is from Chapter 30, “What Happened?”, from Inside Job: The Looting of America’s Savings and Loans by Stephen Pizzo, Mary Fricker, and Paul Muolo. (McGraw Hill, 1989) Please go here to read our first excerpt from this book.
Introduction by WhoWhatWhy staff
… Laced throughout this book have been references to the Central Intelligence Agency and covert activity. We didn’t go looking for it — it found us. During our research we repeatedly ran into people at failed thrifts and banks who claimed to have connections with the CIA, who claimed to be working with the National Security Agency and Colonel Oliver North. It wasn’t the kind of thing we expected to find as we combed through examination reports and financial statements, but there it was — veiled references to the CIA, often discovered in tandem with organized crime.
• While investigating Mario Renda’s operations in Kansas, we ran up against Farhad Azima, a director of Indian Springs State Bank. Azima’s air charter company borrowed from the bank and did business with Morris Shenker and with EATSCO, an air freight company with ties to former CIA personnel.
• When checking out Michael Rapp’s scams, we came across CIA contract pilot Heinrich Rupp, acting as a middleman for arms deals at the same time he was bilking Aurora Bank out of $2 million in cooperation with a Lucchese family associate.
• Then there was Rapp himself, who was a friend of Johnny Roselli, the CIA’s contact with the Mafia in the intelligence agency’s nutty schemes to assassinate Castro. Rapp’s associate William Smith also claimed to be a former CIA agent.
• John Anderson, who defaulted on millions in loans from a variety of S&Ls and banks in the 1980s, had been a business partner with longtime ClA agent Kermit Roosevelt through much of the 1970s. Roosevelt, a CIA mission chief in Iran in the 1950s, headed the U.S. efforts to oust Iranian prime minister Mossadegh and install the Shah of Iran. Anderson and a group headed by Roosevelt owned Paloma Ranch, a 100,000-acre desert ranch west of Gila Bend, Arizona.
• Iran-Contra middleman Adnan Khashoggi was an associate of Mario Renda and borrowed from Mainland and Lamar savings and loans in Texas (leaving them with a $48 million loss). The Houston Post reported Khashoggi also got a $5 million line of credit from Mainland Savings just two weeks before he pumped $5 million into Lake Resources in Switzerland to jump-start Colonel Oliver North’s secret Iran-Contra machinery. He was also an associate of the owner of Summit Savings in Dallas (who was part of the Beebe network), according to the Post.
These stories we have already told you. But there were many more. For example:
• Charles Keating loaned $33.75 million to Covenant House, a New York charity with (according to the Village Voice) connections in Central America to Roberto Alejos, who has been linked to the CIA.
• At San Marino Savings in Southern California we learned that Wayne Reeder, a major San Marino borrower-defaulter (who also attempted a couple of failed ventures with Herman Beebe and borrowed from Silverado Banking), met in late 1981 at an arms demonstration with three Central American men, one of whom was contra supply officer Raul Arana. The three men were considering buying military equipment from Reeder’s Indian bingo parlor partner, Dr. John Nichols. Among the equipment were night-vision goggles manufactured by Litton Industries and a light machine gun. Nichols had a plan in the early 1980s to build a munitions plant on the Cabezon Indian reservation near Palm Springs in partnership with Wackenhut, a Florida security firm, according to former Reeder employees and published accounts. The plan fell through. In an unrelated deal described in published accounts, Reeder in 1988 purchased the microwave division of Litton Industries, paid no bills after acquiring it, and placed it in bankruptcy three months later. The FBI was reportedly investigating Reeder’s Litton acquisition. John Nichols was a self-described CIA veteran of assassination attempts against Castro in Cuba and Allende in Chile. Authorities said he was a business associate of members of the Los Angeles Mafia. He was later convicted in an abortive murder-for-hire scheme and sentenced to prison.
• A swindler who said he hoped he could get a lesser prison sentence by informing on Herman Beebe suddenly clammed up when he got a presidential pardon, reportedly through the offices of CIA director Bill Casey, according to a federal prosecutor.
• At Flushing Federal, we found an attorney who performed contract work for the CIA in the 1960s, the CIA has admitted. Investigators said he was suspected of laundering large sums of Haitian cash through Flushing.
• During his first week on the job as manager of the credit department for international banking at First National Bank of Maryland in Baltimore, Robert Maxwell was asked to handle the Associated Traders account. Maxwell would later testify that he was told that Associated Traders was a CIA front company and needed certain bank services. Over the next two years Maxwell helped Associated Traders set up a complicated money trail through which the agency financed about $20 million in arms shipments to Central America, Angola, and Afghanistan. (10) But he began to worry that the transactions might be illegal. He asked for documentation to protect himself, and certain bank officers began harassing him until he feared for his safety. In August 1985 he resigned, had a nervous breakdown, and later filed a $4 million civil suit against the bank, the CIA, and Associated Traders (which has folded its tent and disappeared). “It’s just not fair that the CIA can walk in, take a civilian job and just turn it upside down for its purposes,” he told reporters. “Then, they just walk away and deny that the whole thing ever happened…. I just want to prove that they can’t do that. They have to be held responsible for their actions.” The case had not been resolved by press time (Editor’s note: U.S. District Judge William N. Nickerson of Baltimore threw out the lawsuit in 1992 because of the CIA’s concern that secrets might be compromised).
• Dallas millionaire Clint Murchison, Jr., was almost broke by the time he died in 1987, but he tried to hang on partly by borrowing from savings and loans. We ran into him twice, when he borrowed $20 million from First South of Pine Bluff, Arkansas (he defaulted on the loan and First South collapsed in 1986 because of insider abuse, regulators said), and $1.7 million from Tyrell Barker’s State Savings of Lubbock, Texas. But we also discovered that he was a director of a California company that an informant told us was a cover for CIA activities abroad. Robert Maheu, former Howard Hughes aide and longtime CIA contract operator (including arranging the Castro plots with the Mafia), was connected with the same company. When we called the company in 1988 it was still in operation, but when we called again in 1990 it had disappeared.
• Guillermo Hernandez Cartaya, a veteran of the Bay of Pigs, (11) bought Jefferson Savings and Loan in McAllen, Texas (on the Mexican border), from the family of U.S. senator Lloyd Bentsen in the late 1970s, and federal authorities later said the S&L was used for drug-money laundering. Cartaya was convicted of income tax evasion in Florida in 1981 and pleaded guilty to bank fraud in 1983, in spite of an appeal by a CIA agent that Cartaya be spared because of his past service to the United States at the Bay of Pigs. But nothing ever came of a long FBI investigation into the alleged money laundering. (After his conviction, Cartaya sold Jefferson Savings and it was merged with other S&Ls to become CreditBanc Savings, headed by Scott Mann.) Reporter Brian Abas said that when federal prosecutor Jerome Sanford requested the CIA’s files on a Cartaya company, the request was rejected on national security grounds.
• Anthony Kimery writing in Money Laundering Alert, a Miami-based monthly newsletter aimed at bankers, regulators, and law enforcement officials, reported in April 1990 that “well connected intelligence community sources” told him “a significant amount of money obtained through fraudulent means from a number of the nation’s failed S&Ls [especially in Texas] were laundered through the accounts of CIA front companies.” One of Kimery’s sources, whom he described as a former senior CIA official working in Washington, reportedly told him that “cowboys who didn’t know what the hell they were doing” siphoned money illegally from Texas S&Ls to fund unauthorized cover operations.
• Michael Riconosciutto, convicted in Seattle of conspiring to manufacture drugs, with a documented history of association with arms dealers (and whose father was an associate of Robert Ferrante at Consolidated Savings), told us, “We helped the CIA move money around and in return for that they allowed us to continue to do business in our traditional way.” Riconosciutto claimed to have been part of the “October Surprise” operation — (later shown to be a total fabrication.)
• Just as we were going to press an attorney called to say that he had been visited by a frightened woman with documents who said her job at a Southern California savings and loan had been to prepare fake home mortgages for the purpose of laundering money from certain larger savings and loans to a major brokerage house and to the contras.
In early 1990, after an eight-month investigation, Peter Brewton, a reporter for the Houston Post, exposed a series of S&Ls that appeared to have been used for covert activity and subsequently failed:
• Peoples Savings and Loan in Llano, Texas, loaned $3 million to Ray Corona and $2.3 million to his associate Harold White in in 1984. (Corona repaid his loan; White did not.) Corona was a drug smuggler who owned Sunshine State Bank in Miami, a bank that S&L regulators later described in testimony as a Mafia bank. One of Corona’s associates in the drug-smuggling ring was, according to the report of a congressional committee, Frank Castro, a Cuban exile trained by the CIA, who later trained contras. (12) Castro and associates had a contra supply network that has been linked in congressional testimony and media accounts to Oliver North’s operation and the CIA.
• Herman Beebe financed Harvey McLean to found Palmer National Bank, three blocks from the White House, with Stefan Halper, whose former father-in-law, Ray Cline, had been a deputy director of the CIA. Palmer National Bank made loans to customers who then used Palmer National to channel the money to a Swiss bank account controlled by White House aide Colonel Oliver North. North then used the Swiss bank account to provide military assistance to the contras.
• (13) Adkinson was said by Kuwaiti sources (Kuwaiti investors who said Adkinson participated with another group of Kuwaitis in arms sales to Iraq in the early 1980s) to be an international arms dealer. (14) Adkinson was a business associate of Miami attorney Lawrence Freeman, who had a history of CIA-Mafia ties and pleaded guilty to laundering drug money in 1989. Adkinson and Freeman left a trail of dead and damaged financial institutions in their wake.
You can conclude from these relationships that there are a lot of people who — at some time or another — have had some kind of formal or informal business with the CIA, Defense Intelligence Agency, or National Security Agency. And you would be right. You can also conclude that it’s a small world after all, and people who know each other aren’t necessarily working together. You would be right on that count, too. But interviews with former CIA employees and bankers convinced us that during the 1980s a private “business” network was actively engaged with our intelligence community in some variety of ad hoc foreign policy adventures. The Iran-Contra affair gave Americans a snapshot look at how it was done — how a group of individuals outside government interfaced with those inside government to fund and carry out politically unpopular foreign policies.
This privatized intelligence network really took root during the Carter administration after many of the so-called cowboys (those within the agency responsible for covert operations) were cleaned out by CIA director Stansfield Turner. Finding themselves on the outside, the cowboys kept in touch with the handful of covert officers left at the CIA. Together they quietly kept the agency’s covert operations alive. “The covert people at the agency simply cut the president, CIA director [Stansfield] Turner, and the NSC [National Security Council] out of the loop,” said Gary Sick, Carter’s national security advisor for Iranian affairs.
When Reagan was inaugurated in 1981, his CIA director, William Casey, an old hand at the Office of Strategic Services (OSS), wanted to reinvigorate covert operations. But rather than bring back the cowboys, he left the underground network in place. Many of them had discovered they could make good money in the private sector, and that saved Casey a lot of headaches with Congress. After all, he needed to get guns to the Afghan rebels, he needed to contain communism in Central America and Angola, and the Iran-Iraq war — which suited the United States and Israel just fine — deserved plenty of discreet support and encouragement. An independent covert network could be very useful. But it had one big problem: money. Casey could not fund its activities out of the CIA budget without going to Congress, where there was considerable opposition to covert operations, (15) so the cowboys had to cover their own operating expenses. They started businesses (often airlines, arms sales, drug smuggling, or money laundering, which seemed to be the things they did best) and showed up at savings and loans to borrow money which they often didn’t pay back. Other people in and out of government had other priorities, and private operations sprung up to accommodate them.
The Scottsdale (Arizona) Progress reported on one such operation, attempted by Major General Singlaub’s troops in 1985 and revealed in an internal memorandum later made public in a court case. (16) The memo proposed the formation of a private company staffed with former CIA and military personnel to provide support (parts, maintenance, training, personnel) for contra air operations.
“I see this company as being self-supporting and capable of generating revenue through maintenance contracts, pilot training and possibly back-hauling of civilian cargo,” the memo read.
“In addition, I believe a civilian company involved in this type of operation is far more plausible and also carries a small deniability factor where the U.S. government is concerned. It would certainly go down with the Congress and the public better as opposed to having a government agency involved.” (The proposal was abandoned, according to a Singlaub spokesman, when North and retired Air Force major general Richard Secord beat them to it.) (17)
When the CIA, or one of its private sector contractors, wanted to run guns or have money laundered, they turned to the kinds of people who do such things for a living — psychopaths, crooks, and the mob. Wasn’t that risky? Not really. In fact, though it may have resulted in some “spoilage” (money stolen from the operation by the contractor), it actually lessened the chance of “blow-back” — agency exposure. The agency had to have known, for example, that Heinrich Rupp was pulling a $2 million scam at Aurora Bank with mobster John Napoli, Jr. Yet they did nothing.
Would the CIA look the other way if they knew one of their contractors was doing something illegal? We asked a former CIA covert officer. “The CIA would not only want to continue to use their services, but they would not want to bring attention to that person,” he told us. “They may want to use that person again.”
Former CIA agent David MacMichael said he believed agency officials were aware that their contractors were bilking financial institutions to fund covert operations as well as to line their own pockets. In fact, MacMichael said, once a contractor was on board, the agency actually allowed them to get into a position of committing an illegal act to get them “on the hook.” Then when an operation blew up; the contractor was cut loose. “When a contractor gets caught, all their ‘friends’ disappear. It happens over and over again,” MacMichael said.
Another former cowboy, who spoke on the condition that his name not be used, agreed it was entirely possible that the agency knew how its contractors were funding their missions. “I will not dismiss the charge that operations could have been funded by looting S&Ls if it paid for contra operations,” he said.
A number of illegitimate operators were attracted to this network when they discovered they could get a lot of mileage out of throwing around the initials “CIA.” Frequently when we tried to get our arms around one of these covert deals we found ourselves saddled with these sleazy, unreliable sources. Their often outrageous stories always had to be weighed against the possibility that they were just trying to explain why they’d been caught in the vault.
But a retired CIA covert agent told us, “The agency likes things that way. The wilder and crazier and sillier the story, the more they like it. The agency indulges people to come up with that. It’s the best defense.”
Until federal investigators — with the power to subpoena and examine secret bank records — traced the missing S&L money, something they were noticeably reluctant to do, it was going to be almost impossible to find out exactly what all the spookery was about. (At press time the House Permanent Select Committee on Intelligence had not yet released the results of its investigation into the matter.) But we did know that deregulation created enough chaos to accommodate just about anyone’s purposes. And taking out loans from federally insured institutions, giving the money to the contras or the Afghans or the Iraqis, and letting federal insurance pick up the losses did have the flavor of what Ollie North might have thought was a “neat idea.”
The CIA categorically denied any involvement in the looting of savings and loans, of course, “The CIA does not violate U.S. laws and would not participate in fraudulent activities,” said their spokesman. Maybe so, but if the agency wanted to maintain that it did not know what Heinrich Rupp and some of the others were up to, maybe it should take the “I” out of its initials.
CHAPTER 30 ENDNOTES
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10. Richard Brenneke says he used to move money for the CIA through First National.
11. The CIA-sponsored invasion of Cuba, which failed.
12. One of its biggest borrowers was Leonard Pelullo, whose company tried to buy Sunshine when federal regulators were attempting to close it down. The Los Angeles Times reported in December 1990 that the FDIC was trying to collect $30.6 million from Pelullo and his company stemming from the collapse of Sunshine State Bank. At the same time, the Times reported Pelullo got control of Transcon Trucking for $12 and within 19 days the company was out of business. A bankruptcy trustee charged that Pelullo siphoned millions of dollars out of Transcon, but Pelullo ridicules the allegations.
13. He was part of a trio that included John Riddle, another Houston developer who had ties to both Vernon Savings and Southmark and San Jacinto Savings and Loan.
14. According to Richard Brenneke.
15. Especially after Congress passed the Boland Amendment — which stopped all aid to the Nicaragua contras — in December 1982. After that time aid to the contras was prohibited or restricted until free elections were held in Nicaragua in 1989.
16. Filed in Florida in 1986 by the Christie Institute.
17. Singlaub’s office at the time, before he moved to Colorado, was next door to Charles Keating, Jr.’s office in Phoenix.
Related front page panorama photo credit: Adapted by WhoWhatWhy from statues (Bernard Spragg. NZ / Flickr – CC0 1.0).
