http://www.nytimes.com/1987/01/04/business/the-company-as-big-business.html
'The Company' as Big Business
By CLYDE H. FARNSWORTH
January 4, 1987
ON 15 flights early last year, the Southern Air Transport Company's big-bellied aircraft took 406 tons of cargo into El Salvador's Ilopango military airport, the principal transshipment point for Nicaraguan insurgents. Southern Air, a charter airline based in Miami, is a risk carrier, charging premium rates to fly to hot spots that large scheduled airlines will not go near. ''We do spur of the moment, ad hoc work, anywhere,'' said William Kress, a spokesman for Southern Air. The company's role in supplying the Nicaraguan Contras might have remained secret but for an occupational hazard: On Oct. 5, a transport traced to Southern Air was shot down over Nicaragua - and the sole survivor, Eugene Hasenfus, quickly told interrogators that he thought his mission was backed by the Central Intelligence Agency.
Now, as the Congress prepares to take a close look at the recent Iran guns-for-hostages affair, Southern Air's activities are coming under new scrutiny. For it was Southern Air that flew the American weapons to Israel, for shipment to Iran.
But Southern Air - which denies that it does work for the C.I.A. - is not the only company to get involved in covert foreign missions. While no one has taken a recent count of just how many companies are involved, it is well known in intelligence circles that ''the company,'' as the C.I.A. is nicknamed, uses all kinds of private-sector businesses to carry out its own business of gathering intelligence worldwide: transportation, export-import, construction and security-services companies, banks, public relations firms, and thousands of tiny companies that do not do much of anything - except provide cover for C.I.A. activities.
Most companies that do work for the C.I.A. are mere shells, lightly capitalized ''paper'' companies set up for a quick arms purchase or an untraceable financial transfer, and then dissolved. But some are legitimate continuing operations, for which the C.I.A. links are just an incidental part of business. Many companies have a long history of C.I.A. ties: Southern Air was a wholly owned C.I.A. subsidiary not long ago. A few businesses, including an insurance complex, are still owned outright by the agency.
''We get the impression that they have many, many thousands of such companies throughout the world,'' said Michael F. Barrett Jr., counsel for the House subcommittee on oversight and investigations. ''Setting them up is a routine matter.''
MOST experts say these companies - known as ''proprietaries,'' a term left over from an era when most were actual subsidiaries of the C.I.A., rather than simply contracting with the agency, as most do now - are a necessary tool for the agency. ''If you're going to have an intelligence service, you need proprietaries,'' said Senator Patrick J. Leahy, Democrat of Vermont, vice chairman of the Senate Intelligence Committee.
Over the years, Washington policy makers have had intense disagreements about the implications of using private, profit-making companies in sensitive intelligence work. But the policy issue is only part of the problem. For the C.I.A. is a sort of shadow force in the private sector, a barely visible presence whose patronage can give certain favored companies a huge competitive advantage - and consign others to failure. (See box.) Most analysts agree that C.I.A. business is not a big factor in the national economy. ''My impression is that they were never large enough to have a significant impact,'' said Henry S. Rowen, a professor at the Stanford University Graduate School of Business and former chairman of the National Intelligence Council.
But it does cause ripples here and there. ''I'm sure they have a big impact on the Beltway,'' said Robert D. Hormats, a former senior economic official in four administrations, referring to the Washington ring road jammed with high-technology and consulting companies that serve the C.I.A. and other Government clients.
Sometimes the agency acts as a kind of wild card, affecting the economy in unforeseeable ways:
* According to a former intelligence official, C.I.A. objections are among the reasons behind the present interagency review of the proposed sale of the Fairchild Semiconductor Corporation of Mountain View, Calif., to Japan's Fujitsu Company. Fairchild is among the suppliers of classified electronics gear for the C.I.A.'s Langley, Va., headquarters, a few miles inside the beltway. The agency is worried about diffusion of its secrets in Japan, the source said. Paul G. Hirsch, director of information systems for Fairchild, said he had no knowledge of this.
* The C.I.A.'s casualty and life insurance complex was originally capitalized at $4 million in 1962, after the failed Bay of Pigs invasion of Cuba spurred action to provide death and disability benefits for agents whose cover would be blown by participation in the C.I.A. or Civil Service retirement plans. By 1974, the complex had assets of more than $30 million, according to a 1976 Senate committee report and even by conservative estimates, the figure is now several times that. These assets are invested in offshore time deposits of American banks, long-term interest-bearing securities and common stocks.
* Much of the money appropriated to the C.I.A. each year - the agency's budget is estimated at $2.5 billion to $3 billion - is deposited in banks here and abroad to cover operational needs. Since these accounts often maintain balances much larger than the amount needed to offset banking costs, they can be an important source of bank profits. The First National Bank of Chicago is among the banks named in government documents as holding C.I.A. accounts, but Anthony B. Zehnder, a bank spokesman said he could not confirm any relationship with the C.I.A.
* Where companies connected with the C.I.A. compete with private enterprises, they may cause significant damage. One case that came to light involves the failure of at least 15 small, nonscheduled airlines in the 1960's following the C.I.A.'s purchase of Southern Air to conduct some of its risky business in Central and South America. The C.I.A. insisted that Southern Air bid on military transport contracts, to help maintain its cover as a civilian airline. Over three years, $250 million of military transport contracts went to verted to Southern Air and five other airlines that knew of its C.I.A. link.
Private-sector businesses help the C.I.A. in many different ways. They provide the agency's Office of Logistics with many of its technological needs, from super computers to super bugging devices. They purchase weapons, foreign armaments and technical devices; conduct security investigations; buy real estate; insure uninsurable risks; train foreign police forces, and run airlines in remote areas.
Adm. Stansfield Turner, who directed the C.I.A. during the Carter years, said the proprietaries are needed to provide cover for C.I.A. operations: ''You run into some anomalous situations when you are trying to make people live in two environments at once. Little things like a paycheck and I.R.S. accounting can give away their second identify, and so you make changes in an innocent way to help them keep their cover.''
But mixing statecraft and profit can create real trouble.
''The proprietaries have been one of the sources of the problems the agency has run into over the years,'' said Admiral Turner. There is always a risk, he said, that the businessmen brought into an operation will persuade intelligence agents to take actions that do more to increase profits than to help the operation, a phenomenon he referred to as ''the tail wagging the dog.''
And in this case, the tail may be bigger than the dog. While exact figures are impossible to come by, most analysts say that the agency's outside activities probably involve more peoactivities probably involve more people than its internal activities.
By the last estimates, made in the 1970's at hearings of the Senate Select Committee to Study Intelligence Activities, the C.I.A.'s wholly owned companies employed 20,000 people -while the parent agency had only 18,000 employees. According to committee estimates, the agency had a gross annual income of $1.6 billion.
The Select Committee was established to investigate a series of abuses by the C.I.A. and its proprietaries, from infiltration of civil rights groups to interference with the Allende Government in Chile. Amid growing criticism - and with the end of the Vietnam War lessening the agency's transport needs subsidiaries - the C.I.A. sold off its free-wheeling airline proprietaries.
Although the C.I.A. has fewer subsidiaries now, and contracts out most of its business to specialists with intelligence ties, analysts say outside businesses' role in agency projects has increased markedly under WilC.I.A. directors in decades. Some experts say there may be more people involved now than in the 1970's.
''The agency uses fewer wholly owned subsidiaries and more private contractors, but the range of activities is little changed, and the volume of business could be 10 times higher than in our day,'' said L. Fletcher Prouty, a retired Air Force Colonel who ran many of the covert activities in the 1960's as chief of special operations with the joint chiefs of staff.
As a result of the furor over the sale of arms to Iran - and the ongoing debate about the exact roles played by the C.I.A., Manucher Chorbanifar, an Iranian arms dealer, and Adnan Khashoggi, a Saudi financier - Congress may set new limits on the use of outside businessmen in C.I.A. actions.
''Some people in the C.I.A. tend to forget they're still working for a Government entity that needs to follow certain rules and accountability,'' said Senator Leahy, adding that the intelligence panel would probably consider the problem next year. ''I know a lot of the proprietaries around the world,'' he said. ''I've talked to the people who run them. But now,'' after this Iran operation, ''I want more assurances that they're not handling things that we've agreed they can't do.''
Southern Air was not the only private company implicated in the Iran affair. Lake Resources Inc. - a Panamanian shell company set up in May 1985, about two months before the first shipments of weapons to Iran, and dissolved a week after the White House confirmed the sales -was far more typical of the sort of operation the C.I.A. uses.
Such shell companies maintain the fiction that they are going businesses by keeping bank accounts, generating business correspondence, retaining accounting records for audits, filing tax returns, and sometimes even obtaining bogus employee identification numbers. They usually have only $5,000 to $10,000 in capital, with a roster of taciturn lawyers as directors, officers and shareholders.
Lake Resources' most important asset was an account in the Swiss Credit Bank, where the profits from the weapons sale were deposited an account controlled by Lieut. Col. Oliver L. North, the National Security Council official who was dismissed when the White House disclosed that the profits had gone to the Contras. While most C.I.A. businesses are shells, some legitimate ongoing enterprises have also maintained C.I.A. connections for decades. Many of the companies sold off in the 1970's retained some ties to the agency.
For example, shortly after E-Systems Inc. bought Air Asia, a former C.I.A. airline, William F. Raborn, a former director of the C.I.A., joined the board of E-Systems, a Dallas-based company that makes electronic and aerospace systems. Although officials of E-Systems declined to discuss their relationship with the C.I.A., the company is widely thought to be a leading supplier of intelligence paraphernalia.
The C.I.A.'s connection with Southern Air, too, goes back for years. The C.I.A. bought Southern Air outright in 1960, paying $307,000 as part of an effort to beef up its air transport capacity. In 1973, the C.I.A. sold its airline to Stanley G. Williams, who ran the company for the agency, for $5.1 million - rejecting an unidentified buyer's offer of $2 million more.
The sale was financed by what was described in one affidavit as an ''unconventional loan'' from the First National Bank of Chicago, guaranteed by the C.I.A. In 1979 Mr. Williams sold it to the present sole owner, James H. Bastian, who was the carrier's lawyer during the C.I.A. years. Mr. Bastian had served on the board of Air America, once the agency's largest wholly owned company, with assets of $50 million.
SOUTHERN Air's connections apparently have not hurt. The airline now has 25 planes and 540 employees, almost double that of a year ago, and its earnings -$907.000 in the third quarter of 1986, and $1.24 million in the second quarter - have risen sharply. United States Government business is only part of Southern Air's work. Over the last two years company logs show that it has been flying between Luanda and the diamond mining towns in northeast Angola under contract to Guernsey IAS, an Irish air cargo company. A senior State Department official said the department had learned that the airline was ferrying Cuban soldiers: ''We told them this was against American law, and they stopped it,'' he said.
Mr. Kress said he knew nothing about this activity. He also denies that Southern Air is part of a C.I.A. network. ''I'm tired of denying all the rumors that we're working for the C.I.A.,'' he said. Asked why the reports persist, he replied, ''I guess people really like spy stories.'' Mr. Kress stresses Southern Air's less splashy business, including an overnight air express package service, Burlington Air Express, out of Fort Wayne, Ind.
Not all of the companies the C.I.A. uses are in such high-tech fields as electronics or airlines. Robert R. Mullen & Company - a well-known Washington public relations firm that has represented such clients as the American Bar Association, the American Automobile Association, and the Church of Jesus Christ of Latter-day Saints - provided slots for covert C.I.A. agents in Washington and in the firm's offices in Mexico City, Kuala Lumpur and the Hague, until the firm's cover was blown in 1973. E. Howard Hunt Jr., a C.I.A. operative convicted of conspiracy after the Watergate break-in, was at one time a writer in the Washington office.
Another firm that helped the agency in this way, according to Congressional sources, was Bishop, Baldwin, Rewald, Dillingham & Wong, a Honolulu investment firm that was involved in a securities fraud case. After the firm declared bankruptcy in July 1983, court documents showed that the C.I.A. had paid $2,700 of its phone bills. The C.I.A. acknowledged that it had a ''slight'' involvement.
Three C.I.A. agents were among the investors who lost $22 million in the collapse: Jack Kindschi, a former head of the Honolulu office, J. Rardin, his successor, and R. Richardson, a covert agent. Despite these investments, which violated C.I.A. policy and earned reprimands for the agents, Congressional investigators concluded that Bishop Baldwin was used only as an address for covert agents and was not a C.I.A. money-laundering proprietary as Ronald R. Rewald, the firm's president, alleged.
Other court records, from Australia, suggest that the C.I.A. was involved in international banking as part of its money-moving operations. Nugan Hand, a Sydney investment bank, was founded in 1973 by an Australian, Frank Nugan, and an American, Michael Hand.
After it failed in 1980 Mr. Nugan was found shot dead and Mr. Hand vanished. A Sydney police report said Mr. Hand had business dealings in the late 1960's and early 1970's with the C.I.A.-controlled Air America and the C.I.A.-connected Continental Air Service, creating a ''strong inference that Hand's intelligence activity was with the C.I.A.'' It continued, ''There is some evidence to suggest that Hand retained his U.S. intelligence ties through the 1970's and into the 1980's.''
The bank - which astoundingly had increased its assets to $1 billion from $1 million in three years - employed a large number of retired American military and intelligence officers, and its legal adviser was former C.I.A. director William E. Colby. Mr. Colby's business card was the only thing found in Mr. Nugan's pockets when his body was discovered. The C.I.A. denied any involvement with the bank, but senior intelligence analysts here said that whether or not it had formal C.I.A. links, the company performed important financial services for the agency.
VICTIMS OF A C.I.A. CONSPIRACY?
It was more than 20 years ago, but Ralph W. E. Cox Jr. says the memory of how his company was forced out of business still rankles.
Mr. Cox's company, U.S. Overseas Airlines, was one of 15 small airlines that failed in the early 1960's - victims, he says, of a conspiracy by the C.I.A., which had recently acquired Southern Air.
''They wiped us out,'' said Mr. Cox, who now, at 71, manages a camping ground in Cape May, N.J., a few miles from the Cape May County Airport, which was home base for his carrier. ''We continued to try to operate. We couldn't conceive that our Government would do things like that. We were grounded Sept. 24, 1964, and forced into bankruptcy two years later. We didn't know until 10 years later what had really happened.''
What happened, Mr. Cox and others say, is that $250 million of Military Air Transport contracts were diverted from their companies to Southern Air and five other airlines that learned of the secret link between C.I.A. and Southern Air and, in a quiet blackmail, demanded the military contracts as their price for keeping quiet about the connection.
The C.I.A. will not discuss it. ''We never discuss matters of this kind,'' said Sharon Foster, a C.I.A. spokesman. But the agency's role in the failure of the small airlines came to light in Government documents, obtained through Freedom of Information Act requests by Mr. Cox and others, and in 1976-77 testimony before the Senate Small Business Committee. The documents show a substantial diversion of military business in the early 1960's to Southern and five other carriers - most now defunct - alleged to be aware of Southern Air's C.I.A. connection.
Mr. Cox, a World War II Navy pilot, says his company had revenues of $11.6 million in 1960, before the C.I.A. cut into his business. He and operators of the other failed airlines charge that the C.I.A. deprived them of their basic marketplace rights by conspiring with officials of the Government agencies that gave out the transport contracts, and with the airlines that knew the Southern Air secret.
Led by Mr. Cox, Richard D. Neumann of the defunct California Air Charter Inc. and Amos Heacock, head of Air Transport Associates, another failed carrier, the former airline operators have spent years fighting for redress. They have filed suit in several Federal courts, claiming damages of $540 million. They have written formal letters of complaint to the C.I.A., and petitions to the Civil Aeronautics Board. But all of their claims have been rejected.
While they still feel victimized, the owners of the failed airlines have given up the battle. ''It costs too damned much to fight the Government,'' said Mr. Neumann, who is now back in the aviation business in California. ''They can put 200 attorneys against you and tie you up for 10 years. We don't have those resources.''