THE SOLDIER SPIES

By DOUGLAS WALLER/WASHINGTON

It was the summer of 1989, and plans were in the works for the U.S. military invasion of Panama. But the problem was that the CIA and its agents were not in place to watch dictator Manuel Noriega. There was, however, a spy the U.S. could turn to -- in this case a young man, the son of European immigrants, who passed himself off as an international merchant willing to do business with the pariah regime. Noriega had him over for dinner and intimate talks. (The spy had ingratiated himself by presenting the general with a bust of his hero, Napoleon Bonaparte.) As proficient as he was, the American agent did not work for the CIA. He was a U.S. Army sergeant posted to a top-secret military unit. "They are the agents no one talks about," says a senior Pentagon officer. Now TIME takes an exclusive look at these little-known and, until now, barely supervised secret agents of the Pentagon.

In the past six years, the military has deployed its clandestine units of spies in Panama, the Persian Gulf and Somalia, among other places. The U.S. Army, Navy and Air Force operatives, who number nearly 1,000 (compared with the CIA's 5,000), will be centralized by October under the existing Defense Intelligence Agency, an outfit that for the most part analyzes the data collected by the CIA, the Pentagon's satellites and defense attaches at U.S. embassies. Centralized discipline is designed to correct past problems of rogue agentry and wasteful spending.

The new division of the DIA will be given a bland name: the Defense Humint Service (humint is spy jargon for human intelligence -- that is, information collected by agents on the ground). The CIA will oversee the intelligence targets of this new branch of agents. "They'll send a lot of guys out who just look like military men in suits," sniffed one veteran cia officer. Still, the military's spy operations have delivered crucial intelligence to the Pentagon in the past.

DIA officials refused to be interviewed on the new service. The Pentagon, however, has admitted that it is "retooling" the separate spy programs run by the various services into one system so as to eliminate waste and overlap. Indeed, a huge amount of money is already being poured into military intelligence. While the CIA gets most of the attention, the large majority of America's $28 billion-a-year intelligence budget is consumed by the Defense Department and its expensive spy satellites. (The Pentagon also has 13,000 intelligence analysts, in contrast to the cia's 1,500.)

In the early 1980s, Pentagon investigators discovered that Army intelligence units, operating outside the normal chain of command and under loose financial controls, had rented lavish hotel rooms for operatives and bought first-class airline tickets and, in one case, a hot-air balloon and Rolls-Royce for surveillance reasons. An audit of one military-intelligence program in the early 1990s found it had spent $25 million for recruitment purposes and had enrolled only one new foreign agent. When Air Force General C. Norman Wood was the U.S. European Command's top intelligence officer in 1988, he said, "I never was really sure what these units were doing in my theater." But the units' information has often been vital to successful operations. Before U.S. forces landed in Haiti last year, naval intelligence officers interviewed merchant-ship captains who had recently steamed into the harbor at Port-au-Prince. That intelligence let the U.S. know the Navy's heavy ships, packed with military vehicles for the occupiers, would not get stuck in the mud just short of the dock. In the mid-'80s, Army intelligence officers uncovered an extra North Korean division that spy satellites had missed, as well as an agreement Iraq had made with China to build a secret nuclear reactor. In 1993 military spies helped capture a lieutenant of Somali warlord Mohammed Farrah Aidid. Last December dia officers working through private brokers bought parts of a Russian SA-10 air-defense missile system from Belarus, a former Soviet republic. The system is being dissected to see how U.S. Air Force planes can evade radar.

The Pentagon is no more immune to intelligence failures than the CIA. In 1989 dia officers thought they had pinpointed Noriega and Colombian drug kingpin Pablo Escobar Gaviria at an island hacienda off Panama's Pacific Coast. When Delta Force commandos were dispatched to scout the site, they found only a cinder-block shack with squealing pigs in the backyard.

But commanders often find CIA intelligence of marginal use on the battlefield. For example, when General Norman Schwarzkopf landed in Saudi Arabia just before the Gulf War, the cia station chief in Riyadh assembled an elaborate briefing on Saddam Hussein and politics in Iraq. The first thing Schwarzkopf wanted to know, however, was whether his tanks could travel on the sand west of Kuwait or would a more feasible route have to be mapped out.

Generals prefer to have their own soldiers as spies. The CIA, they argue, too often depends on paid informants. In such cases "you're dealing with a traitor," says Dave McKnight, a former intelligence officer for the U.S. Special Operations Command. "When you replace him with an American soldier, you have a patriot watching the target."