What He Needs to Know

By GEORGE J. CHURCH

The messages keep coming at Ronald Reagan, from friends, senior leaders of both parties, veteran public officials belatedly summoned to provide outside counsel, even his wife. Their essence can be put in one word: act. Fire Chief of Staff Donald Regan or CIA Director William Casey, or both, as proof that the Administration intends to make a fresh start. Call the key figures in the Iran arms-contra funds scandal, Oliver North and John Poindexter, into the Oval Office and demand from them an accounting of their activities. But above all, do something. Don't just wait for inquisitive journalists, congressional investigators or, eventually, an independent counsel to force out all the facts about North's sticky web of arms and money dealings. That will only intensify the drip, drip, drip of daily revelations that is wearing away the White House's credibility at an alarming rate.

The President, appearing befuddled by the growing scandal that in one bizarre month has poleaxed public confidence in his leadership, seemed willing to listen but not hear. As former aides cloaked themselves in the Fifth Amendment, and new revelations poured forth, Reagan kept repeating that he wanted all the facts to emerge. Yet he did nothing on his own to break open the mysteries. Revealing an insouciance that is the dark side of his charm, he told a friend, "I watch every day like everybody else to find out what will come out. I'm as puzzled and interested as anybody."

Each week brings new twists on the old Watergate question, the latest being: What else does the President claim not to know, and when will he realize he should know it? He doesn't seem sure whether he authorized the first Israeli shipments of arms to Iran in August 1985; he doesn't seem to know what his former National Security Council point man North did with the profits from the arms deals.

Amid the turmoil, accusations began to surface that there may be yet another shock to come: that some of the profits of the arms-for-hostages deal may have ended up financing pro-contra political advertisements and perhaps even the campaigns of pro-contra congressional candidates. That charge is being made publicly by Democrats who have little evidence and obvious axes to grind, but it is a suspicion that is being voiced within the Executive Branch as well. According to one Government source, the Iranian arms profits were diverted into a political slush fund. According to another source close to the FBI, the bureau is "looking into the possibility of a connection" between money that was supposed to have gone to the contras and "Republican campaign contributions."

Spokesmen at the White House and the FBI say they have no knowledge of that particular inquiry, and those people who have been cited as potential conduits for the funding of political campaigns deny any involvement. But officials note that the investigation into all aspects of the matter is still wide open.

Among the other revelations last week in the murky affair:

-- Former National Security Adviser Robert McFarlane told the House Foreign Affairs Committee that Reagan gave prior approval to a shipment of U.S. arms by Israel to Iran in August 1985. That approval came at a White House session on Aug. 6 or 7, a source who was at the meeting told TIME. As part of a plan to help free U.S. hostages, the President authorized McFarlane to tell the Israelis that the U.S. would replace arms they shipped to Iran. Also at the meeting, according to this source: Regan, Poindexter (who, as McFarlane's deputy at that time, took notes), Deputy CIA Director John McMahon, Secretary of Defense Caspar Weinberger and Secretary of State George Shultz. No written intelligence "finding" justifying this circumvention of the U.S. embargo on weapons to Iran was prepared. Attorney General Edwin Meese said last month that Reagan had learned of the Israeli shipment only after the fact; White House Spokesman Larry Speakes last week amended that to say, in effect, that Reagan could not remember whether he gave an advance green light.

-- Before undertaking his mission to Tehran in May 1986, McFarlane, by then out of the Government but acting as a presidential emissary, went to CIA headquarters in Langley, Va., and received a briefing and a four-page set of negotiating instructions, a source who was involved recounts. That indicates far greater CIA participation in U.S. negotiations with Iran than has yet been acknowledged.

-- Red faced with anger, Shultz disclosed at a public congressional hearing that U.S. Ambassador to Lebanon John Kelly had bypassed the Secretary of State to conduct negotiations for the release of American hostages with, in Kelly's words, "arms to Iran as an inducement." Kelly had reported his results only to the White House, through a CIA "privacy" channel. Sources close to Kelly reveal that McFarlane, in a briefing in Washington, explicitly instructed the ambassador not to discuss the arms-hostages talks with the State Department. McFarlane in public testimony denied giving Kelly any instructions.

-- An Israeli who participated in U.S.-approved sales to Iran in 1985 of American weapons from Israeli stockpiles reveals that some of the proceeds were originally supposed to be funneled back into Iran to finance groups working to overthrow the Khomeini government. He displayed a memo written to Shimon Peres, then Israeli Prime Minister, which named this ingenious scheme of having the Ayatullah finance his own downfall as one of the goals of the arms sales.

-- An Israeli government minister described to TIME how North had directed the diversion of Iranian arms profits to Swiss bank accounts. His story: stung by the official American announcement that money had been paid by "representatives of Israel" into Swiss accounts controlled by the contras, the three top leaders of the Jerusalem government summoned Amiram Nir, North's liaison in Israel, to tell them what happened. Nir waved a piece of green paper at them. Said he: "This is all I got from Oliver North. This is a name of a Swiss bank and the account number in North's handwriting." His only role, said Nir, was to pass on to the Iranians North's instructions to pay money into that account.

-- North at one point told McFarlane that the diversion of funds to the contras had been approved by his superiors, according to a person familiar with the operation. North accompanied McFarlane on his May mission to Tehran. In Israel after the mission, North attempted to cheer up a despondent McFarlane by telling him that there was some good news: "We" had diverted money from the arms sales to the contras. On Nov. 25, when Attorney General Meese identified McFarlane as one who knew about the siphoning, McFarlane drafted a public statement saying, "I took it to have been a matter of approved policy, sanctioned by higher authority," and read that statement to North over the phone. North's reply: "Of course it's true. You know I would never do anything that wasn't approved."

-- New York Businessman Roy Furmark, a consultant to Saudi Billionaire Adnan Khashoggi, described a financial mystery in an interview with TIME. His story: Khashoggi lined up $25 million in bridge financing for U.S. sales of arms to Iran this year. Toronto Investors Donald Fraser and Ernest Miller, together with some Middle Eastern and European investors, routed the $25 million via Khashoggi into the Swiss account of Lake Resources, Inc. -- $10 million in February and $15 million in May. Why Lake Resources? Says Furmark: "Mr. Khashoggi said Mr. Nir of the Israeli government told him that Lake Resources was the account the Americans had designated for payment." Of the $25 million, $15 million seems to have disappeared. Furmark went to his old friend Casey to ask what happened; Casey insisted to him that Lake Resources was not a CIA account. It appears, in fact, to be the account of a company that was incorporated in Panama (though all its directors live in Switzerland) in May 1985 and officially liquidated on Nov. 10 this year. Suzanne Hesti, listed as president, refuses to say what kind of business the company conducted.

-- In closed-door testimony to the House Foreign Affairs Committee -- which promptly leaked -- Casey disclosed that Furmark had indeed warned him that there were irregularities involving the profits from the Iranian arms deals. Casey got this tip on Oct. 7, more than a month before the contra diversions were publicly revealed by Meese. Casey promptly took the information to Poindexter and, one of his aides says, suggested that "he get himself a lawyer."

At week's end a three-judge federal panel reportedly chose an independent counsel to look into all aspects of the arms-contras affair. He is Lawrence Walsh, 74, a former prosecutor, judge and president of the American Bar Association who was also an American negotiator in the Viet Nam peace talks. Walsh said only, "I absolutely can't comment on anything."

For all these revelations, nothing like the full story of the Iranian arms deals and contra fund diversions has yet emerged. The main obstacle: many of the congressional witnesses who could be most enlightening persisted in pleading their right under the Fifth Amendment to refuse to answer questions. North, who was fired from the NSC staff when the scandal broke, and his former boss Poindexter, the National Security Adviser, who resigned at the same time, have repeatedly been identified as prime movers in the whole mess; they reiterated their refusal to testify last week. Others who did the same: Richard Secord, a retired Air Force general who was deeply involved in funneling aid to the contras and who, it turned out last week, was also involved in arms and hostage negotiations; Robert Dutton, an associate of Secord's; Robert Owen, allegedly a liaison between North and the contras. Robert Earl, a North deputy, came up with a novel reason for delaying testimony to the Senate Intelligence Committee. He pleaded his Sixth Amendment right to be represented by counsel, who, he said, would need a long time to get a security clearance.

Nonetheless, the House Foreign Affairs Committee opened the first public -- indeed, televised -- hearings into the affair. The first witness was Shultz, who stressed what he did not know. The Secretary of State said he considered the diversion of funds to the contras "illegal" -- he was the first Administration official to make such a flat statement -- but asserted that his own role in it was "zero." He confirmed his opposition to the Israeli transfers of arms to Iran in 1985, but contended he was told little or nothing of the direct U.S. sales this year. Though the President signed an intelligence "finding" authorizing them on Jan. 17, Shultz did not hear about it until November. Shultz did have one bombshell to toss. After the scandal became public, he asked all State Department diplomats throughout the world to report to him what they knew. He read to the committee a cable he received in response from Ambassador Kelly in Beirut. Excerpts: "I met in Washington, in July or August 1986, with Robert McFarlane, who briefed me on the hostage negotiations involving arms to Iran as an inducement. Between the dates of Oct. 30 and Nov. 4, 1986, I had numerous conversations with Lieut. Colonel Oliver North and Richard V. Secord relating to the hostage negotiations . . . I received and sent numerous 'back channel' messages to and from the White House . . . using CIA communications facilities." Said Shultz: "I am, to put it mildly, shocked to learn this after the event from an ambassador." He called Kelly back to Washington to face questioning.

Sources familiar with Kelly's version of events say that in the briefing Kelly asked McFarlane whether Shultz knew about the arms-hostages talks. McFarlane is said to have replied, "The Secretary is fully informed, but he is completely and totally against it." McFarlane supposedly then instructed Kelly to communicate with no one in the State Department, including Shultz, but to deal directly with the White House.

McFarlane, following Shultz in testifying to the Foreign Affairs Committee, told a very different story. Kelly, he said, had asked for the briefing, and McFarlane spent almost all of it detailing his views on the feuds and factions Kelly would encounter in Lebanon. He mentioned hostages only to remark that if one or more were released, Kelly might be asked to make the arrangements to get them out of Lebanon. Since he was no longer in Government, said McFarlane, "I . . . had no authority to direct anybody to do anything, but would not have if I had the authority."

McFarlane spent much of his time fencing with the Congressmen about his stated assumption that North and Poindexter had acted with "higher authority." McFarlane conjectured that North and Poindexter had interpreted Reagan's undisguised zeal for aiding the contras as giving them an "authority" that did not in fact exist.

The frustrating failure of the full story to come out has set off alarms throughout the political establishment. The President and First Lady met two weeks ago with former Democratic National Chairman Robert Strauss and onetime Republican Secretary of State William Rogers. The meeting had been set up by Michael Deaver, the former White House aide, who has stayed in close touch with Nancy Reagan. Deaver is one of several old friends who are trying to impress on the White House the depth of public unease over Iranscam.

In the view of both critics and allies, Reagan cannot afford to wait until the special House and Senate investigating committees that begin work in January and the independent counsel who may be named this week finally squeeze out the complete story. Whatever credit the President may have gained by asking for those investigations and pledging "full cooperation" is being eroded by piecemeal revelations that only stir suspicions of another cover-up. One piece of evidence: 47% of the respondents questioned in a New York Times- CBS News poll taken last week thought that Reagan was "lying" (the exact word of a question) when he disclaimed all knowledge of the diversion of funds to the contras, vs. only 37% who believed the President to be telling the truth.

But Reagan so far has shown no hint that he is getting the message. He told Strauss and Rogers that he still thought the storm would blow itself out in a week or two. He began his only public comments on the scandal last week with a joke: "Let me just add a few words about the controversy concerning Iran -- or haven't you heard about it?" The American Legislative Exchange Council, which he was addressing, responded with nervous laughter.

Whatever Reagan does or does not do, "all the facts" are bound to come out. In a series of interviews with some of the main participants, TIME has pieced together a clearer picture of how the Reagan Administration got involved in sordid deals to swap arms for hostages and hide the money through a network of shady middlemen to circumvent congressional scrutiny.

On July 3, 1985, David Kimche, then director general of the Israeli Foreign Ministry, came to see McFarlane in Washington. Kimche suggested that the time was ripe for the U.S. to establish communication with elements in the Iranian government who were willing to consider a new relationship. (Kimche has said publicly that McFarlane had approached him earlier with the same idea.) Kimche had already been in touch with the Iranians through a shadowy network: Khashoggi, Manucher Ghorbanifar -- an expatriate Iranian arms dealer -- and Israeli arms merchants were all part of it. The Israeli government, said Kimche, had confidence these Iranian contacts would eventually prevail in the power struggle already beginning in Tehran over the succession to the Ayatullah Ruhollah Khomeini.

Kimche warned from the start that the Iranians sooner or later would ask for arms. Any faction that came to power would first have to develop a constituency in the Iranian military and Khomeini's Revolutionary Guards, and weapons were the only currency likely to sway them. At the same time, said Kimche, the Iranians thought they could prevail on Muslim fanatics in Lebanon to release American hostages. In fact, said Kimche, the Iranians had outlined to him three separate arrangements under which the hostages might be set free.

McFarlane discussed the Iranian overture with Shultz, Weinberger and Casey -- ironically, at about the time when Reagan, in a July 8 speech, was listing Iran as being first among a "confederation of terrorist states." In mid-July McFarlane, accompanied by Shultz, broached Kimche's ideas to Reagan in Bethesda Naval Hospital, where the President was recuperating from colon surgery. Reagan saw the dangers of an arms-for-hostages swap, but also appreciated the value of new contact with Iran. He bought the idea that arms shipments would be intended to strengthen a group that might eventually be able to wean Iran away from support of terrorism. McFarlane called Kimche in Israel to say the U.S. was interested in seeing what he could work out.

Kimche phoned McFarlane again on July 30 to set up another visit to Washington. He arrived Aug. 2 with some disquieting news: his Iranian contacts had lost confidence in their ability to sway the Lebanese extremists; getting the American hostages released would not be so easy. At the same time, the Iranians were worried about their own vulnerability; they needed arms to cement their position. McFarlane was uneasy about the idea of shipping U.S. arms to people the American government had no contact with except through Kimche. Well, Kimche replied, suppose Israel shipped the arms and asked the U.S. to replenish Israel's stocks? Said McFarlane: "David, let's not kid ourselves. The matter isn't whether or not Israel is entitled to buy weapons from the U.S. The matter is a policy judgment that you are going to start supporting a faction in Iran with weapons and whether that's a sensible thing to do."

McFarlane nonetheless took Kimche's proposal to Reagan, by then back in the White House, in the fateful meeting of Aug. 6 or 7. He made no recommendation, but stressed the positive aspect of the deal: strengthening supposedly moderate elements in Iran. Weinberger was vehemently opposed. How, he asked, could the U.S. be sure of the Iranians' good faith? What political damage would result if the deal were discovered? Shultz argued strenuously against supplying arms, even indirectly, to a nation that the U.S. was condemning as a sponsor of terrorism.

What evolved was a two-part proposal: the U.S. would approve the Israeli sale as a means of gaining influence in Tehran and ask the Iranians to secure the release of American hostages, but would try to keep the two matters separate. "Our purpose has always been not to tilt in this (Iran-Iraq) war," said the President, "and we're not going to contribute to terrorism." But Reagan thought that approving an Israeli sale would not violate those principles, so -- yes, the U.S. would resupply Israel. Oddly, there was no discussion of the types or quantities of weapons to be shipped; neither then nor later did Reagan concern himself with such details.

The next day McFarlane called Kimche. Said McFarlane: "David, this is a very important moment, and let's both understand what the U.S. wants to accomplish here." The U.S., he said, wanted political entree, not an arms- for-hostages swap. Kimche said he understood. McFarlane concluded, "But if Israel chooses to do this, you can expect to buy replacements from the U.S."

Israel made sales in August, September and November of 1985, the last one involving North, an obscure Marine on the NSC staff who had made himself a hero to Reagan by arranging the U.S. seizure of the terrorists who had hijacked the Italian cruise ship Achille Lauro. North talked the CIA into supplying a plane to carry the November shipment, on the pretense that it consisted of oil-drilling equipment. But McFarlane worried that Kimche's dealings with the Iranians were developing into exactly the arms-for-hostages swap the Americans had feared.

On the other hand, intelligence reports indicated that the faction Kimche was dealing with was gaining strength. By then the National Security Adviser was about to resign, but he wanted to settle matters before he left the Government. Flying back to Washington with Reagan from the President's Thanksgiving vacation in California, McFarlane told Reagan the time had come for a decision: contact the Iranians firsthand, find out what was going on and then either press ahead with the project under firmer American control or cancel it. Reagan concurred and convened a Dec. 6 meeting of the NSC, at which it was agreed to dispatch McFarlane to a meeting in London that Kimche had set up for Dec. 8, a Sunday. His instructions: no more arms.

McFarlane met first with Kimche; North attended. McFarlane told the Israeli that Reagan was willing to continue political contacts with Iran, but as for further arms sales, "David, we just can't do it." Kimche argued that the Iranian connection had too much value to abandon, but McFarlane insisted, "This has veered from its original purpose."

On Sunday afternoon Kimche took McFarlane and North to a meeting in a London apartment. The Iranian contact turned out to be not very direct: it was not a government official but Ghorbanifar, the expatriate arms dealer. Yaacov Nimrodi, an Israeli arms merchant, was also present. Kimche had represented Ghorbanifar as being politically astute, but McFarlane found him to be a "man of no integrity" who was obsessed with arms and insensitive to the political concerns of the U.S. McFarlane returned to Washington and gave a pessimistic report to the NSC. Shultz was traveling in Europe but sent advice to "not have anything more to do with this." McFarlane believed the Iranian arms deal was dead.

He was wrong. On Jan. 7, 1986, shortly after McFarlane left the Government, Reagan convened another NSC meeting. According to Shultz, nothing was put to a vote and no formal decision was announced. But, says the Secretary, he could sense that the trend of the discussion was going in favor of additional arms sales. Still opposed, Shultz made little effort after that to find out what was happening; he told the Foreign Affairs Committee, "I . . . kick myself" for not being more aggressive.

What did happen was that Reagan signed the Jan. 17 intelligence finding authorizing arms sales from U.S. stockpiles. CIA officials say Casey took the lead in pressing for the finding to make sure the agency had authority to assist what had become an NSC operation. Reagan at the same time ordered Casey not to tell Congress. Poindexter and North held a series of secret meetings with Iranians.

McFarlane came back into the picture in April, when his successor Poindexter phoned him to suggest a mission to Tehran. Poindexter believed the U.S. had an agreement for the release of all remaining hostages. On May 28, after his CIA briefing, McFarlane, along with North, NSC Middle East Specialist Howard Teicher and George Cave, former CIA deputy station chief in Tehran, flew to Iran. As soon as he arrived in Tehran, McFarlane phoned Washington and learned that no hostages had been released. Things went downhill from there. During three days of talks the American quartet met only officials who appeared to have little constituency or influence. McFarlane returned to the U.S., made a negative report to the NSC and once more believed the Iranian connection was broken. At about the same time, Shultz has said, Casey and Poindexter told him the operation had been "stood down."

$ Wrong again. Ollie North kept arranging arms sales. There were at least four: in February, May, July and October. Three hostages eventually were released: the Rev. Benjamin Weir in September 1985, Father Lawrence Jenco last July and David Jacobsen in November. But three more Americans were kidnaped in Lebanon beginning in September. Even so, Reagan clung to his Iranian initiative to the bitter end. In his Nov. 19 press conference, after the storm had broken, the President voiced a wan hope that diplomatic contacts with Iran could continue, and Shultz had to practically bludgeon the President into announcing that there would be no more arms sales.

Meanwhile, where did the money go? Attorney General Meese, in announcing that $10 million to $30 million had been diverted to the contras, said North was the only Government official with "precise" knowledge of how the siphoning was arranged. Arms seem to have been supplied to the contras by a bewildering network of front corporations operating, supposedly, with private donations. The big mystery is that very little seems to have come out of the contra end of this complicated pipeline. Some of the arms-sale money may have stuck to the fingers of the many intermediaries. And some may still be sitting in Swiss bank accounts. The Justice Department last week asked the Swiss government to freeze two accounts to assist an American criminal investigation; it named North, Secord and Albert Hakim, an Iranian-born business partner of Secord's, as people suspected of fraud.

However much or little the contras got, the siphoning presumably violated a congressional prohibition against direct or indirect U.S. military aid to the Nicaraguan rebels. But the central Administration blunder was to get suckered into arms deals that violated stated, and sound, American policy against terrorism. Now, though, the problem is to avoid growing public suspicion of a cover-up that could indeed paralyze the Reagan presidency. The only way to avoid that is to make sure that all the facts really are forced out, and fast.

With reporting by David Beckwith and Barrett Seaman/Washington and Raji Samghabadi/New York