Washington Report on Middle East Affairs, August 1987, pages 1, 6-7

Shadows

Did US Government Funds Pay Costs of Pollard Espionage?

By Claudia Wright

Although US prosecutors will officially confirm only that the Jonathan Jay Pollard investigation is "continuing," it appears that they have already turned up a network of US and Israeli accomplices, an elaborate system of bank accounts used by Israel to pay its American spies, and a multi-million dollar foundation which may have used US government money to fund Israeli espionage operations against the United States.

US officials refuse to confirm whether, in addition to Pollard and his wife, Anne, there were other Americans in the Israeli spy ring operated by "Lekem," the Israeli Defense Ministry intelligence unit directed by Rafi Eitan. US prosecutor Joseph E. diGenova has intimated, however, that at the time Pollard began his spying in 1984, "Lekem" already controlled another spy in a key US government position and used stolen US secrets to prepare Pollard for his own operations. US court documents also hint that Israeli embassy officials received advance warning that US investigators were about to arrest Pollard. The warning may well have come from a highly-placed US official of whom Pollard was unaware.

The "Accomplice," the "Associate," and the "Intermediary"

Astonishing information that mainstream US journalists have generally ignored is contained in an indictment, signed March 3 by diGenova. This formally charges Aviem Sella, now a Brigadier General in the Israeli Air Force, of participating in the espionage conspiracy. In the indictment, US prosecutors allege that "in or about the summer of 1984, defendant Aviem Sella, and an accomplice whose identity is presently unknown to the Grand Jury...met with an associate of Jonathan Jay Pollard. Defendant Aviem Sella and his accomplice asked that the associate of Jonathan Jay Pollard facilitate the payment of monies to Jonathan Jay Pollard in consideration of valuable assistance Pollard had provided to Israel. Defendant Aviem Sella, and his accomplice, stated that it would be advantageous to pay these monies to Jonathan Jay Pollard through an intermediary so as to disguise the true source of the monies." In response to questions, US prosecutors say they will not identify the "accomplice," the "associate," or the "intermediary." What is suspected is that "Lekem" hid funds in various bank accounts through which US dollar payments were made to Pollard and for other espionage operations in the US that could not be traced back to the Israeli Defense Ministry. US prosecutors are tracking down Americans involved to determine the scale of Israeli government espionage in the US and to see how long Israeli spying and theft of US military technology may have continued before and after Pollard's arrest.

The prosecutors say Pollard delivered his stolen documents to the apartment of an Israeli embassy employee named Irit Erb, an unindicted co-conspirator who fled the US after Pollard's arrest. US officials identified a second apartment in Erb's building, a few hundred yards from the Israeli embassy, as both an alternate drop-off point for Pollard and the place where he met his controller every month for an assessment of his documents, new instructions, and cash payments. The apartment, which also housed photocopying and photographic equipment necessary to support the Pollard operation, is owned by Harold Katz, an American attorney living in Israel who has served as an adviser to the Israeli Ministry of Defense.

US officials obtained a sealed court order last September to seize the apartment and Bank of Boston accounts belonging to Katz. They returned these assets to Katz in December. Katz, according to his lawyer, denies "any knowledge or participation in the Pollard affair." He concedes that he owns the apartment referred to in the Pollard and Sella indictments, but claims that to his knowledge it was "unoccupied" at the time of the espionage operation. Although he admits knowing Erb, whom he entrusted with a key to the vacant apartment, Katz says that if the espionage operation took place there, "it was without my permission or knowledge. I had no part in the Pollard operation. I passed no monies to the Pollards or to anyone on their behalf. I neither received or handled any documents."

The Washington Post reports that "Israeli government sources...confirmed that Katz played a role in the Pollard affair, but characterized his involvement as 'marginal.'" According to the New York Times, Reagan administration officials believe Katz "has detailed knowledge about the (Pollard) spy ring and could implicate senior Israeli officials." Katz terms such reports "extreme and unfounded." He and his lawyer deny and direct connection between Katz or his personal bank accounts and the Pollard operation.

If Katz's association with the Israeli Defense Ministry, which he admits, involved operations like those of "Lekem," his knowledge of Israeli espionage could be considerably greater than his statements suggest. Katz says he will answer US prosecutors' questions only in Israel, "since I dealt...as an adviser to the Ministry of Defense, with matters sensitive to the government of Israel." Richard A. Green, Katz's lawyer, says US prosecutors have told him Katz is not a "target of investigation." He could not explain why an investigation by US prosecutors of the Pollard espionage operation, which they say dates from mid-1984, would focus on Katz's connection with the Israeli Defense Ministry, which he claims ended in 1983.

The BIRD Foundation

Katz is described as a lawyer in private practice in Israel since 1972, and a director of the Boston-based Healthco International, Inc. A Healthco spokesman confirms that Katz was "very briefly" the company's legal officer before he moved to Israel. He then was elected to the company's board of directors, a post he retains today. Healthco, a retailer of dental supplies and equipment, reported sales of $272 million in 1986. The spokesman said its business with Israel is "insignificant." Another Healthco director is New York financier Preston Tisch, currently US Postmaster-General and a brother of Laurence Tisch, head of the Columbia Broadcasting System (CBS).

Katz is also legal counsel to the US-Israel Binational Industrial Research and Development (BIRD) Foundation. BIRD provides seed-money grants for joint US-Israeli ventures involving new industrial technologies, processes, and products. The foundation was created by agreement of the Israeli and US governments on March 3, 1976 with an original endowment of $60 million. One-half of this endowment was to be contributed directly by the US government as a set-aside from the Economic Support Fund (ESF) appropriated by Congress. The other half was to be provided by Israel. According to Article VII of the agreement, this was to be "derived from accelerated payments to the United States of Israel's Public Law 480 debts." These are loan repayments by the government of Israel for past US food aid. In short, all of the funds were appropriated by or owed to the US government.

Endowment funds were to be deposited with the Bank of Israel, and invested in obligations issued or guaranteed by Israeli or US government agencies. According to the establishment agreement, investment decisions were to "maximize earnings consistent with their security and liquidity." Foundation documents show that these endowment funds were earning interest last year at a rate of 5.4 percent. In 1984, a second sum of $50 million was made available to the foundation. It has been earning interest at 8.8 percent.

BIRD documents assert that the foundation finances its operations from investment income and from royalty payments that have begun to accrue, as successful projects reach commercial viability. In its annual report for 1986, the foundation estimates operating expenses at about $381,000. The BIRD Foundation agreement permits withdrawals from the endowment account of "not more than 90 million Israeli pounds." At the time the agreement was prepared in 1976, this was equivalent to $9 million. US officials monitoring BIRD say many of the foundation's loans are now being repaid, but there has been no public accounting of these funds.

Dr. Abraham I. Mlavsky is listed in its 1986 report as BIRD Foundation director. Like Katz, Mlavsky has worked in Massachusetts, where he was executive vice president of Mobil Solar Energy Corporation. BIRD's board of governors consists of ex-officio representatives of the Israeli and US governments. The senior Israeli is the director-general of Israel's Ministry of Industry and Trade. US members represent the departments of Commerce, Treasury, and State. Applications for BIRD Foundation Grants by Israeli and US companies are assessed by the US Bureau of Standards and Israel's Ministry of Industry. BIRD is headquartered in Tel Aviv. Although it is a joint venture with the US government, it has no US office of its own. Instead it is represented in New York by the Israel Investment Authority and by the Israeli embassy in Washington, whose minister for economic affairs sits on the BIRD Foundation board.

Mystery Surrounding BIRD Accounts

BIRD is one of several joint US-Israeli ventures established in the late 1970's. But little is known about it either in Congress, which provided the endowment funds, or the State Department, which oversees its operations. US officials say they do not have detailed accounts of its financial operations and a normally well-informed congressional official in charge of Middle Eastern affairs admits he has "never seen a report on any" of these groups.

The 1986 BIRD annual report summarizes 135 projects and feasibility tests funded since 1978. These include efforts in agricultural technology, medical systems, and computer electronics and software. BIRD's establishment agreement bars defense-related projects.

The report lists total grant payments through 1986 of $29,945,000, and royalty receipts of $2,523,000. BIRD documents show a discrepancy between total income received by the foundation since 1978 of $37,747,000, and total outlays (operating expenses and grant disbursements) of $31,676,000. The difference is larger than the set-aside BIRD officials might have made for grants awarded but not yet paid.

An Israeli accounting firm, Bayly, Millner & Co. of Tel Aviv, audits the foundation but has no office in the US. When Jordan Baruch, American adviser to the board, was asked for a copy of the audit report, he said: "Even if I did (have one), I couldn't release it." Dr. Edward Brady, a US Department of Commerce official who attends the bi-annual board meetings, confirms that "an auditors' report is presented to the board once a year...the Foundation ought to have been audited recently. I haven't seen details." The office of John Negroponte, the State Department representative on the board, says he does not have a copy of the auditors' report; his staff also say it has not seen recent financial statements.

The congressional act to appropriate money to endow the BIRD Foundation is unprecedented. Congress normally insists that appropriated funds be fully expended, not invested. The lack of US government supervision of the foundation's operations is also unusual. Baruch, who was a Commerce Department official during the Carter administration and who was one of the initiators of the BIRD idea, claims that Congress appropriated the endowment money in accordance with terms of the US-Israel agreement that "specified the rate of return." In fact, the text of this agreement allows the BIRD director, Mlavsky, considerable discretion. When asked if the present five to eight percent rates return on the investment were normal or low, Baruch responded that investment is "very stringently controlled." The State Department official monitoring BIRD says he does not "know how investment is regulated." The Israeli adviser to the board on investment is Dan Tolkowsky, managing director of Discount Bank Investment Corporation Ltd. of Israel. He is a former Israeli Air Force Brigadier General.

US prosecutors investigating Katz's alleged involvement in Israeli espionage in the US decline to say whether they believe funds to pay for "Lekem" operations in the US could have been drawn from the government funds used to endow the BIRD Foundation and pay its operating costs. Nor would the prosecutors say whether their investigation of Katz's personal bank accounts has extended to the bank accounts operated by the BIRD Foundation.

It is possible that, as a result of the Katz connection with both the BIRD Foundation and Pollard's handlers, US government funds provided to the foundation paid all or part of the costs of the Pollard operation to steal US government secrets. In an interview with Katz published by the Jerusalem Post, Katz withheld mention of his association with the BIRD Foundation, and Katz's Washington attorney declined to provide any information about his client beyond what Katz has already said publicly.

Claudia Wright is the Washington, DC correspondent for a number of European publications and author of the recently published Spy, Steal, and Smuggle: Israel's Special Relationship with the US.