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158. Memorandum of Conversation1

SUBJECT

  • Meeting with Iranian Vice Minister of War
  • Iranian Participants
  • Vice Minister of War, General Hassan Toufanian
  • Deputy Minister of War for Armament, LTG Abdol Majid Massumi-Nainii
  • Managing Director, Iran Electronics Industries, VADM Abolfath Ardalan
  • Counselor of Embassy, Youssef Akbar
  • Defense Attaché, Colonel Soltan Mohammad Etemad
  • Military Executive Assistant to VMOW, Major Aliakabaf Zamanian
  • United States
  • Secretary of Defense, Donald R. Rumsfeld
  • Military Assistant, RADM M. Staser Holcomb
  • Deputy Secretary of Defense, Robert Ellsworth
  • Chairman of the Joint Chiefs of Staff, General George Brown
  • Assistant Secretary of State, NEA Affairs, Mr. Alfred Atherton
  • Acting Assistant Secretary of Defense (ISA), Amos A. Jordan
  • Defense Representative, Iran, Erich von Marbod
  • Director, Defense Security Assistance Agency, LTG Howard M. Fish
  • Deputy Assistant Secretary of Defense (Near Eastern, African, and South Asian Affairs), James H. Noyes
  • Deputy Director, NESA Region, OASD/ISA, Glenn E. Blitgen

Preliminary Remarks

The preliminary discussions and pleasantries touched upon the following items:

—General Toufanian’s invitation for Secretary Rumsfeld to visit Iran and the Secretary’s response that he would enjoy doing that some time.

—Secretary Rumsfeld’s visit to Tehran in 1973 while Ambassador to NATO for a regional meeting of U.S. ambassadors.

—Tehran’s growth to more than 4 million people and its problems with traffic and pollution.

—General Toufanian’s long career (42 years) and recall from retirement; similar cases in the U.S. military and diplomatic corps.

Toufanian’s responsibilities for military procurement since 1963 when Iran started shifting from MAP and began purchasing its arms from the U.S.

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—Recent assistance for Toufanian from LTG Massumi who is now taking on more of the procurement activities.

—The recent death of the Chief of the Iranian Air Force, General Khatami, in a hang-gliding accident; General Toufanian’s role as Khatami’s instructor pilot when he first flew; also the Shah’s.

—Mr. von Marbod’s recent audience with the Shah which DefRep subsequently briefed to SecDef.2

Rationale for Iranian Defense Program

Referring to the Shah’s objectives for Iran and why he wanted a strong defense force, General Toufanian noted that parts of Iran had been occupied for a time by the Soviet Union and the British after World War II. Because of Soviet ambitions, it was necessary to strengthen Iran’s defense forces with help from the United States and Iran valued the relationship with the United States.

Iran depended on its friend, the United States, and His Imperial Majesty was thankful to the United States for its help over the years. Mr. Jordan assured General Toufanian that the United States likewise valued the relationship with Iran.

But now, General Toufanian said, we are becoming uneasy about recent U.S. actions. To explain, he would present some historical background. He recalled the Shah’s speech some 34 years ago when he came to power, in which he set forth his goals of achieving “human rights” for the deprived people of Iran—food, clothing, housing. In order to provide these basic needs of the people, it was necessary to develop the economy, and to achieve economic development, it was necessary to assure the security of the country. It was difficult to have security within the country without security in the region. And so Iran had been developing its defenses. Iran had no expansionist aims and had enough territory. But because of Russian ambitions in the region (he also mentioned Russian maps which divided up Iran), it was necessary to strengthen our defense forces. We started to buy our equipment as soon as we were able to pay. We were the first to go to FMS from MAP, in 1964. We adopted an outward-looking policy to assure regional security. We looked to the United States for help as a friend. And Iran has been a real friend to the United States by contributing to the development of regional security.

General Brown asked whether the border settlement with Iraq is holding.3 General Toufanian said there is no difficulty at present, but we must realize that communist expansionism has no limits. As evi[Page 466]dence of this, he stated that Russian efforts were present in the division of Pakistan and the emergence of Bangladesh. He also noted the immediate appearance of the Russian Navy in Bangladesh, Soviet activity in Socotra, in the Yemens and Oman, and in Angola, Uganda and Mozambique. SecDef commented that the Soviets have been very busy. Toufanian continued that the Soviets are trying to build a corridor across Africa from which to provide logistical support for their activities in Africa. He noted also the Soviet fleet of 30 ships in the Indian Ocean.

General Brown observed that Soviet activities at Berbera should be of concern to the Shah. Berbera is in a strategic position to influence shipping of oil out of the Persian Gulf and the Soviet base there is growing stronger. Mr. Noyes related his observations from his visit to Berbera accompanying a group of Senators and some journalists who inspected the area. Their visit confirmed Soviet activities to build up a base and communications installation there and the press, which had been rather skeptical, seemed flabbergasted by the experience, but had printed relatively little about the findings.

Iranian Concern Over U.S. Actions

General Toufanian returned to the theme of Soviet activities in the Yemens and Socotra and asked if Iranian support for Sultan Qabus in Oman is good, then why isn’t the United States supporting Iran more? Iran is putting money, manpower and capital investment into Oman and is ready to put more there, so why doesn’t the United States support Iran? General Brown said he hadn’t heard this before and Mr. Jordan asked whether Toufanian was suggesting that the United States had been opposing Iran politically regarding its support to Oman. We were puzzled by General Toufanian’s reference to non-support.

General Toufanian responded that he was referring to costs. The United States is increasing the prices of matériel for Iran greatly. The Spruance class destroyer is an example. The cost escalations are unreasonable. The original estimate was $120 million for each ship. Then it jumped to $238 million, a 100 percent increase! Now it has grown to $338 million per ship! Spare parts prices are another example. The GOI can’t tell what index these increases are based on. Some items have increased in price 100-fold. He had asked Mr. von Marbod and the MAAG for help on this issue. These escalations are really not acceptable.

Agents’ Fees

General Toufanian said that another problem is agents’ fees. Referring to the F–14 case, he stated that he had a contract with DOD that there would be no agents’ fees but then found that Grumman had paid $6 million and was going to pay $28 million more. From what money were they going to pay this?

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By way of background, General Toufanian said that he had come to the United States in September 1973 to obtain a progress report on the F–14 and F–15 aircraft. He visited Grumman on Long Island. Retired Vice Admiral Townsend of Grumman asked Toufanian whether Grumman could place retired Navy Captain Pollard as the agent for the F–14 in Iran. General Toufanian refused, noting that Iran had made no decision between the F–14 and the F–15 and that when the GOI did decide, it would be an FMS case. He did not agree on Pollard. Then Admiral Townsend said that the agent fee could be handled as part of the overhead costs. General Toufanian took the position that there could be no agents’ fees under an FMS case and went to DOD, where he talked to the Secretary of Defense, Vice Admiral Peet who then headed DSAA, Mr. Alne and to Colonel (now Brigadier General) Secord, both of the DSAA staff. General Toufanian requested that a paragraph be added to the U.S. ASPRS to prohibit agents’ fees in the Iranian FMS cases. Such an instruction was issued in November 1973.

General Toufanian stated that after the GOI decided to purchase the F–14, Admiral Townsend swore in the presence of Admiral Peet and Colonel Secord that Grumman had no agents for the F–14. But we now find that several agents fight for their share of the fees. General Toufanian identified the Lavi Brothers as being involved and that Admiral Townsend had signed an agreement with them as an officer of Grumman.

General Toufanian then stated that DOD should cooperate with Iran in this matter. He again asked from what money or source of funds do these agents’ fees come. From Iranian money or from U.S. money? Who accepts the argument that the fees do not come from Iranian funds? This is not correct. Either the fees come from Iranian or from U.S. contracts. It is clearly defined in our own DOD regulations that the companies must consult with the buyer when an agent fee exceeds $1 million. Why didn’t Lavi Brothers consult? SecDef asked who the Lavi Brothers are, to which General Toufanian exclaimed, “Thieves!” and then described them as a binational firm with operations in Iran.

General Toufanian then said that the Internal Revenue Service had just called on his son, a doctor, in Columbus, Ohio, inquiring about the Lavi Brothers and their relationship with the son. When the son asked who they were, the IRS agent(s) said that the Lavis had listed the son as a partner in their tax returns. The IRS wanted to know the details but departed when they were told that the doctor is General Toufanian’s son. (The note taker for this memorandum also thought he understood General Toufanian to say that the doctor had received a phone call making an offer of a bribe.) (General Toufanian then repeated some of the dialogue above concerning Grumman and the Lavi Brothers, also mentioning a Mr. Oran of the Grumman firm.)

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In another case involving the sale of H–53 aircraft to Iran by United Technology (formerly United Aircraft), United officials also proposed that retired Captain Pollard be utilized as an agent. General Toufanian told United he would not buy if an agent were involved and United agreed. In talks with Pratt and Whitney (a subsidiary or component of United Technology), they say they have no agents. However, Toufanian has found three Iranian nationals who are agents in this case and they have been blacklisted by General Toufanian.

Returning to the Grumman case, General Toufanian asked how SecDef can accept that Grumman pay $28 million whether from DOD or from Iranian funds? Toufanian maintained that the GOI has all confidence in the FMS system but that he must ask unofficially whether the $28 million goes on the price of the aircraft.

Secretary Rumsfeld responded that General Toufanian had covered a lot of ground, a lot of subjects. The Secretary had been in his new position only about two months and had not been involved in the earlier background; he would have to depend on others concerning the beginnings. He endorsed the good relationships we have with Iran and said that there is no question that to the extent he could, he and DOD would continue to work to defend that relationship. (At this point, Deputy Secretary Ellsworth entered the room, extending his apologies for not arriving sooner because he had been on the Hill.) There is no question that many things can be improved in the relationship between our defense departments.

Regarding cost increases, the Secretary continued, we in DOD encounter the same experience Iran has as we go to Congress for appropriations. Our original estimates are exceedingly low and have been increased as costs of materials and labor have increased, and Congress remonstrates with us for these changes. In addition, as technology changes, our military services want to incorporate improvements into their weapons and equipment and these changes add to the costs substantially. So the problem Iran faces, we face with our own Congress and it is a difficult problem.

Regarding agents’ fees, the Secretary said he did not know the facts but he was concerned. The problem merited exceedingly close attention by our General Counsel and he would see to it. General Toufanian is aware, said the Secretary, that these are private companies, but there is no question that DOD ought to have a voice in these matters up to a certain point. He could not understand why Grumman is paying these fees. Who in the Department of Defense permitted this? We should have known it.

General Toufanian asked why Grumman had not told DOD that Grumman had added agents’ fees, and if Grumman had informed DOD, then why had DOD not told General Toufanian? He was the one [Page 469]who had discovered the fees. How could Grumman pay $6 million in agents’ fees contrary to U.S. ASPR? “It is your ASPR, not mine!”

General Fish explained that we have had the issue of the Grumman agents’ fees under investigation and that he believed no one in DOD had been aware of the fees. When the issue surfaced, DSAA had arranged for the Defense Contract Audit Agency (DCAA) to perform an audit on the F–14 case. DCAA has completed its report and has concluded that funds provided under the F–14 contract came neither from Iranian nor U.S. sources but were paid out of company profits. DSAA has turned the results of this audit and related materials over to the Securities Exchange Commission (SEC) for further consideration.

Secretary Ellsworth pointed out that there was the matter of disclosure of the agents’ fees to Grumman’s stockholders required under SEC rules. General Fish added that Grumman has now made a report to the stockholders.

General Toufanian stated that Grumman says to DOD that the fees have not been charged to either Iranian or U.S. funds, but he wanted to know, then, to whom they were charged. He reemphasized that he had told Grumman there would be no agents’ fees permitted. He pointed out, further, that Grumman had suddenly agreed to an increase in the agents’ fees from 10 percent to 20 percent as they pertained to services in connection with F–14 spare parts. On a contract of that size, this represented a substantial amount of money.

Secretary Rumsfeld commented to General Fish concerning his statement that he did not believe anyone in DOD had knowledge of the F–14 agents’ fees before the issue was surfaced, saying that seemed hard to believe, given the networks that exist in DOD.

General Toufanian stated that two payments of agents’ fees totalling nearly $6 million, one for $3 million and one for $2.9 million, had been made by Grumman, “100 percent against ASPR.”

Secretary Rumsfeld wondered why we couldn’t dig into the matter further with a view to correcting the situation. General Fish commented that we must be very precise in what we are saying or intending, noting that no agents’ fee had been paid under the funding of the contract, so far as DOD knows. The Secretary replied that that was exactly his point—that we needed to know more. Mr. Jordan stated to General Toufanian that there was no question that we wanted to clear up the matter in the interests of our relationship with Iran which we value.

General Toufanian said that if DOD will support him he will go to court and cut 20 percent out of the funds for Grumman and that Grumman must be punished. “You support me; I will help you.” His Imperial Majesty (HIM) is not unreasonable. When I first went to HIM to cut 20 percent in Iran’s payments, he said no. He did not wish to [Page 470]bankrupt Grumman after Iran had already paid $75 million to prevent the firm from going bankrupt.

Secretary Rumsfeld asked General Brown for his thoughts on the matter. General Brown said that a lot of money was involved, that it is probably spread out in various hands and that we ought to dig into the issue. The Secretary said he agreed and told General Toufanian that he was ordering DOD and General Counsel here and now to dig into the matter further and to determine if there is something more we could do. General Fish added that the arrangements had already been made for a meeting of Grumman officials with DOD officials and General Toufanian (on 26 January) before he returns to Iran. It would be difficult to get all the books (records) on this matter (Lavi Brothers, for example). He thought Grumman was anxious to settle.

Secretary Rumsfeld said, further, that DOD and General Fish should look into the regulations and the laws to try to preclude this kind of thing and that we should work to get regulations made into law. The ITARS should also be revised. To the extent possible, we should tighten the regulations. General Toufanian thanked the Secretary for issuing these instructions.

Iranian Oil Exports

General Toufanian said there was another serious problem which dealt with the export of Iranian oil. Citing price escalations in several FMS cases, he noted that the Shah had nevertheless approved them. But the oil trust is not lifting enough oil from Iran. Oil exports have dropped by 1.5 million barrels per day under what they are supposed to lift. This situation, if not corrected, will make reductions in Iran’s military programs necessary.4 This will oblige His Imperial Majesty to leave his outward-looking policy and confine Iran’s defense contribution to its own borders.

HIM had decided to buy six Spruance class ships to help establish security in the Indian Ocean. But if the oil exports are dropped, we must leave this program. What will happen? Who will help?

Referring to the traditional US-Iranian friendship, he commented that if some country is clearly a friend of the United States and making efforts to help her, we would anticipate that the United States would recognize this. We expect the United States to realize the difference between real friends and those who claim to be friends but embargo their oil.

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When the oil embargo occurred, Iran was under some pressure but did not embargo. Some of those who did embargo are now cutting oil prices under the table. HIM is the only regional leader who announced clear support for the U.S. presence in Diego Garcia. We are afraid that gradually the U.S. will leave countries to the communists one by one and that, one day, the United States will find itself alone with its atom bombs.

If the United States will take the 1.5 million barrels of oil that Iranian exports have dropped, we can continue with our defense programs and our contribution to regional security. Otherwise we will be obliged to review our political/military policy and revise our programs either by cancellations or reductions.

We will have to cancel the Spruance program. We will not buy the AWACS. We wanted to buy six. General Toufanian was sure that DOD knows the value to the United States of the information that those AWACS could provide concerning the Indian Ocean area. Iran would not buy 300 F–16s, and DOD must realize the impact of 300 F–16s on the security of the area. They would not buy 100 AMST aircraft or join in the production of that aircraft. In addition, they would have to reduce drastically the $10–$15 billion electronics-communications program (Seek Switch and Seek Sentry).

Turning to the I–Hawk program (Peace Shield), General Toufanian stated that the original price for eight battalions had been quoted at $270 million but had jumped to $444 million when the LOA was signed; today it has reached $800 million. Nobody in DOD can say at what level these increases will stop. We would be happy if someone could say that $1 billion would be the end of it. HIM has told Toufanian that these increases have damaged or destroyed certain civilian programs.

In summary, General Toufanian said, we deeply appreciate the U.S. help we have received. We want to continue on a friendly basis. We have confidence in the U.S. Government, in DOD and in the FMS system. But we now have a serious problem: the cost increases, the agents’ fees, and the reduced oil exports. It is really a political-military problem. If we are forced to revise our policy and programs, it is not in our joint interest. HIM feels that he must tell the United States what we think. The issue depends on what the U.S. decides.

In response, Secretary Rumsfeld said that General Toufanian had been very direct and candid. It was useful to have gained these insights into what the common problems are and to communicate in order to clarify uncertainties. The Secretary said he could understand that it is difficult to make judgments about priorities of efforts in the country’s programs and that it is especially difficult when security is one of the elements to be considered. As he had noted earlier, DOD has had tremendous escalations of our own to cope with in the Defense budget as [Page 472]a result of cost growths and technological growth. Other products such as oil have also gone up and that has increased our costs, too. On agents’ fees, the Secretary said he was making a commitment that we would get into the matter and that DOD would deal with it in a straightforward manner on the basis of the possibilities open to us. It is in both our interests. It is also in the interest of the United States to have a healthy rather than an unhealthy Iran. The Secretary then asked Mr. Atherton if he cared to comment.

Mr. Atherton said that he endorsed SecDef’s remarks. Secretary Kissinger had been informed concerning the problem and had instructed the Department of State to look into the matter. There are no easy answers. Regarding Iranian oil exports, Under Secretary Robinson is working on the question and has communicated the results of initial efforts to analyze the problem.

General Toufanian asked Mr. Atherton if he agreed that 90 percent of the profits from the oil exports will go to the West. Mr. Atherton responded that he did not have a percentage to offer. General Toufanian stated that it was possible for Iran to sell the oil to Eastern Europe but that Iran did not want to do this. Iran wants to be both our good customer and our good supplier. Mr. Jordan told General Toufanian that we are looking at the problems of increasing U.S. lifting of Iranian oil. A number of agencies are involved and the process will take time.

The meeting ended with General Toufanian expressing his thanks for our close cooperation. Secretary Rumsfeld expressed his pleasure at meeting General Toufanian and hoped that the follow-on discussions with the Services would serve to clarify the situation further.5

  1. Source: Washington National Records Center, OSD Files: FRC 330–79–0049, Box 70, Iran 091.112, 1976. Secret. Drafted by Glenn Blitgen and approved by Jordan. The meeting was held in Secretary Rumsfeld’s dining room at the Pentagon.
  2. See footnote 2, Document 156.
  3. See footnote 4, Document 121.
  4. In a lengthy undated briefing memorandum to Rumsfeld on Toufanian’s visit, Jordan advised that Toufanian would press the argument that Iran would be forced to curtail its defense programs if oil exports were not increased. (Washington National Records Center, OSD Files: FRC 330–79–0049, Box 70, Iran 091.112, 1976)
  5. Following the meeting, to ensure clarity, Toufanian gave Rumsfeld a copy of his remarks, which was sent to the Embassy in Tehran in telegram 3542 from the Secretary of Defense, January 20. (Ford Library, National Security Adviser, NSC Middle East and South Asian Affairs Staff: Convenience Files, Box 6, Iran Military (2))