AARON KARP: There's still a lot we don't know about how those transactions actually worked out. But, very clearly, the American CIA was heavily involved.

RICHARD MERCIER: The possibility of our armed forces personnel being placed in jeopardy as a result of US-sourced firearms is always going to be great.

NARRATOR: The world is awash in weapons. So many weapons in so many countries that people everywhere are beginning to ask where do they all come from.

After the war against Iraq, the United States and

many other nations piously promised to reduce the flood of conventional weapons to and among Third World countries. Yet, conventional weapons move in ever-increasing numbers from one country to another virtually unrestrained. Illicit transfers of conventional arms is referred to as the "black" or "gray market."

Admiral GENE LaROCQUE: Welcome once again to "AMERICA'S DEFENSE MONITOR." I'm Gene LaRocque.

Everyday we learn of new arms sales from one country to another. All kinds of weapons are sold legally in the world. These include all sorts of pistols, rifles, submachine guns, mortars, ships and antitank weapons, even tanks. However, most Americans are totally unaware of the large and growing sale of weapons illegally in the world. These, too, include mostly small arms, but a lot of even larger weapons. These weapons, as they are moved about the world, have created havoc in many countries. Our program is about that subject today.

NARRATOR: There is little agreement on what black and gray arms markets are, how they work, the types of weapons transferred or the value of the arms bought and sold.

Mr. MERCIER: From a US Customs perspective, a black market is the essential smuggling out of the United States of product.

NARRATOR: Richard Mercier is director of the Strategic Investigations Division of the United States Customs Service.

Mr. MERCIER: It means that it circumvents the controls that are in place. It can be done through the hiding of firearms in commercial merchandise or secreting it on your person and smuggling it out of the United States.

Gray market, on the other hand, is when product is legitimately exported and ends up being diverted. It was lawfully acquired, it was lawfully exported. It ends up in another country and then is, in fact, diverted from there.

NARRATOR: When Richard Mercier speaks about product, he is talking about pistols, assault rifles, landmines, submachine guns, mortars, and rocker-propelled grenades; all sold illegally. Many of these weapons are the most modern and lethal in the world.

Mr. MERCIER: The sophistication of those is getting more -- I mean, you're talking about sniper scopes, you're talking about long-range rifles that are capable of hitting targets of a thousand yards or better with extreme accuracy. Those are very much in demand.

NARRATOR: Many weapons made in the United States are considered to be the best in the world.

Mr. MERCIER: US weapons that are manufactured here by the major companies are excellent products. Therefore, they are sought by various people around the world.

NARRATOR: Aaron Karp is former director of the Arms Transfer Project at the internationally renowned Stockholm International Peace Research Institute. He now teaches international studies at Old Dominion University in Virginia. He points out that small weapons are easier to sell.

Mr. KARP: For the most part, the black market means small arms, for the simple reason that weapons cannot be concealed if they get too big.

Mostly what's happening there are old small arms are being sold, often very difficult-to-trace weapons. It's very rare that we see anything moving through the black market much bigger than a shoulder-fired surface-to-air missile.

NARRATOR: When governments sell weapons secretly, they also enter gray markets.

Mr. KARP: Gray market deals usually mean simply arms deals that countries are struggling to keep covert, for one reason or another, typically because they are experimenting. Someone is selling to someone they're not sure they really want to have a relationship with, but they're experimenting, they're trying.

If the United States were to try and open a relationship with Cuba by selling arms, they'd do it very covertly.

NARRATOR: Conventional arms move from one country to another in so many different ways that even the specialists cannot keep track of what is going on.

Mr. KARP: Then there are a lot of deals in the middle, and those are very confusing. Sometimes they seem illegal; they certainly seem unethical. Iran-contra is a classic somewhere-in-the-middle deal. It wasn't clearly legal, it wasn't clearly illegal either, and those are the most confusing and difficult to deal with.

NARRATOR: On the other hand, the Final Report of the Independent Counsel for Iran/Contra Matters did not find the affair confusing. The report concluded that, "The sale of arms to Iran contravened United States Government policy and may have violated the Arms Export Control Act." And, "The provision and coordination of support to the contras violated the Boland Amendment ban on aid to military activities in Nicaragua."

Different agencies of our own government view the sale, transfer or gift of US weapons differently and sometimes work against each other, as was the case in the transfer of arms to Iran.

Kenneth Timmerman, respected researcher and author of the critically acclaimed book The Death Lobby: How the West Armed Iraq explains:

KENNETH TIMMERMAN: Well, there is a very interesting case that very few people recall any longer than occurred during Iran-contra. In 1985, the Customs Service, one branch of the US Government, was engaged in a sting operation of a group of arms dealers operating out of Orlando, Florida. They were trying to sell TOW missiles and other weapons, Harpoon missiles, to Iran. They closed down the network. They arrested the people that included a former CIA contract employee, put them in jail. Later on, we learned that those very people were, in fact, involved in shipping arms with the approval of the US Government to Iran.

NARRATOR: Nor was Iran-contra the only well-known covert transfer.

Mr. KARP: The classic example is American arms sales to the Afghan mujaheddin throughout the 1980s.

NARRATOR: Published reports indicate that US rifles, antitank and antiaircraft weapons, and rocket launchers were delivered to the Afghan rebels in the 1980s.

Once weapons are sold on the black market, they could easily be traded from one guerilla group to another. Such covert transfers pose another problem: the risk of diversion.

Aaron Karp explains:

Mr. KARP: It's a real problem. Once you sell arms to a sub-national group, you've lost control over them.

NARRATOR: One weapon, in particular, the US Stinger missile, is greatly in demand by terrorist and guerilla groups. They want the Stinger missile because one man armed with a Stinger can shoot down helicopters and low-flying airplanes.

Mr. KARP: The classic problem though are the Stinger missiles that were left in Afghanistan. We don't know how many were left, but a few hundred were. And while a lot have simply fallen apart over time, recovering those has been a huge problem.

NARRATOR: The US Government is now in the embarrassing position of having to buy back the Stinger missile for fear that it could fall into the hands of groups or nations hostile to the United States. Stinger missiles originally sold for an estimated $23,000. According to recent reports, the United States Govern-ment is now offering $100,000 for the return of each Stinger missile, over four times their original cost.

But even that does not match the market value. The current going black market price for a Stinger missile is about $208,000.

And more than money is involved. In 1987, a number of these Stinger missiles found their way on to Iranian gunboats and were fired at US Navy helicopters in the Persian Gulf.

As Richard Mercier reminds us, there is no assurance that weapons will stay with the original recipient.

Mr. MERCIER: Re-exports of US-sourced material, no matter what it is, is always a very vulnerable area from an enforcement standpoint.

NARRATOR: Given the secret and often illicit nature of the worldwide black and gray markets, US Customs officials frankly admit they do not know how many weapons are smuggled out of the United States.

Mr. MERCIER: It is impossible for me as an investigator to tell you how much is leaving the United States.

NARRATOR: Reliable and knowledgeable experts estimate that the illicit arms trade, in violation of arms controls, in US weapons amounts to billions of dollars a year.

Mr. KARP: My own estimate through my own analysis of the arms trade just to non-state actors, to insurgent groups, ethnic nationalists, terrorist cells, all these little substate groups, that total trade is worth at the most about $2.5- to $3 billion per year.

NARRATOR: A British magazine estimated the value of illicit transfers of weapons ranges from $5- to $10 billion a year, if there are wars to fuel demand. Currently, there are about 23 major ongoing conflicts worldwide.

Mr. KARP: In other situations, where it's purely ethnic conflict, then I don't think there's any doubt but supplying weapons perpetuates the fighting.

NARRATOR: Ironically, small arms acquired clandestinely usually kill and maim far more people than their larger conven-tional counterparts. Yet, light weapons don't receive much attention when they are used in relatively unknown regions of the world.

Mr. KARP: In the fighting in Tajikistan in 1992, there are estimates of anywhere from 20,000 people dead to 200,000 people dead.

NARRATOR: The number of government investigations is a good way to judge the amount of arms sold illegally. Reports from the Justice Department and the Bureau of Alcohol, Tobacco, and Firearms show growing illicit arms transfers. There are a number of notorious cases.

By falsifying paperwork, a trading firm in Los Angeles smuggled 87 modern helicopters out of the United States to North Korea, which is barred from receiving US arms exports. These helicopters can easily be converted to military use.

Another well-known case involved a smuggling ring which smuggled US-made F-14 and other aircraft parts to Iran for use in its war with Iraq. These parts were valued at over $10 million.

A report from the Treasury Department's Bureau of Alcohol, Tobacco, and Firearms reported that weapons obtained from the United States are used throughout the world to commit acts of international terrorism.

From 1982 through 1988, individuals attempted to export over 6000 US weapons and other items of military equipment worth close to half-a-billion dollars. This equipment was seized by the US Customs Service, the FBI, and other law enforcement agencies. Last year the Justice Department reported on 183 cases of people charged with illegal weapons exports from January 1981 to April 1993.

Legitimate weapons trade fairs tend to stimulate an increase in the covert arms trade by allowing buyers and sellers to meet inexpensively and make deals. In addition, a huge stock-pile of equipment left over from the Cold War, including items from former Warsaw Pact countries, is now available. This is very tantalizing to both buyers and sellers.

Richard Mercier of the Customs Service points out the situation is worse because everyone is in on the act.

Mr. MERCIER: The traffic in arms is getting more difficult because there is a lot more product out there than just US firearms. And the cost of these items, essentially, in some areas has gone down because the market is such that there's a lot more product available from source countries in the Eastern Bloc.

Mr. TIMMERMAN: Well, the first thing is that you have really a burgeoning supply. All of a sudden, you've taken the wraps off of the Soviet Union and every crook, every con man has his finger in the arsenal and is able to ship some of it out to the most unlikely buyers that you can imagine.

Mr. KARP: Any country preparing for war, and every country -- almost every country has, of course, arms itself with immense stockpiles, and small arms and ammunition are very easy to stockpile. Those weapons can easily be traded.

NARRATOR: The clandestine supply network developed for the drug trade is increasingly being used for transportation of weapons. Because the drug network routinely arranges for shipment of large quantities of goods, it can handle the flow of arms.

The dominant motivation for illicit arms deals is profit. Usually, the seller is in it only to make a buck.

Mr. MERCIER: Those people are out for a dollar. They're going to do what they can to circumvent the law.

NARRATOR: Doing business in the black market is very lucrative and very risky.

Mr. KARP: Black market deals don't offer you long-term business. They're once-in, once-out affairs and the risks are tremendous. Established dealers won't go near them if they can. For all the sides involved, the black market is about despera-tion. It's about risk. People don't go near the black market, whether to buy or to sell, if they can avoid it.

NARRATOR: In order to provide an impression of legality, smugglers often resort to falsifying paperwork. Sales are made to appear legal by obtaining government-provided certificates. Aaron Karp explains:

Mr. KARP: A typical end-user certificate is a very simple sheet of paper that has nothing more than a list of the weapons. It identifies the seller and identifies the buyer. The deed to your house is a more elaborate piece of paper, by comparison. But it's of critical importance because it means that in any signifi-cant arms deal, there is an end-user certificate and a government is brought involved.

Mr. MERCIER: We have found in many cases that there is some gray market false end-user certificates out there. A lot of times the export will occur to one country -- a legitimate sale -- then turn around and then it'll be re-exported.

NARRATOR: Merchants who wish to engage in the illicit arms trade are often able to obtain false paperwork from other governments.

Mr. TIMMERMAN: Paraguay was a great place to get EUCs. They cost about $100,000 -- between $100,000 and $150,000. And these were being shopped around by arms dealers all over Europe and all over South America. You could also get them from Panama during the mid-1980s. Turkey was quite a source, at that same time in the mid-1980s. Now I think it's moved more to the Far East. You have Thailand, Singapore, places like that are serving as fake destinations.

Mr. KARP: Now what happens as a result of that though is that it's very tempting, if you're a black marketeer, to try and get an end-user certificate. You'll go to immense lengths to get one; it makes everything legal, much easier. You're not going to go to prison if you have a proper end-user certificate. And you can buy them.

NARRATOR: So pervasive is this practice of obtaining EUCs that the US Government has been forced to prepare a checklist of items to use to identify illegitimate requests for end-user certificates.

The illicit arms trade has also had a corrupting effect on banking and other financial institutions.

Mr. TIMMERMAN: One of the things that I discovered Iraqi arms purchases in the 1980s was the extensive use of banks. The Iraqis would use the Credit Lyonnaise in France. They would use the UBAF bank in France, they would use BNL, obviously, here in the United States and in Italy.

NARRATOR: As Ken Timmerman explains, the Atlanta, Georgia branch of an Italian bank called BNL loaned money to enable Iraq to build up its military.

Mr. TIMMERMAN: BNL was used as a covert source of funding for Iraqi weapons programs and the Iraqis were able to get about $5 billion out of BNL, some of which will be reimbursed by the US taxpayer.

NARRATOR: US taxpayers are paying because the US Government guaranteed some of BNL's loans to Iraq which later defaulted.

BNL was not alone. Still another bank, BCCI, bankrolled arms purchases by Manuel Noriega, Saddam Hussein, and the Medellin drug cartel.

Mr. TIMMERMAN: BCCI has a long and checkered past as a conduit for gray and black market arms sales.

NARRATOR: Ironically, the United States and other countries often help to create illegal weapons markets. When countries are unable to buy weapons legally, they resort to black marketeers for their weapons. Embargoes are instrumental in creating demand. Aaron Karp elaborates:

Mr. KARP: Where there's warfare, there's a demand. And, in particular, for the black market, the key is embargoes. The more embargoes you have, the more the black market grows.

Now we've got a lot more embargoes: All of Yugoslavia, Haiti. Right now on Mozambique, Angola are embargoed. North Korea is embargoed. Cambodia. All of these places where you have embargoes, you get black markets springing up as a result.

A black market is, to a large extent, the mirror image of an embargo.

Mr. MERCIER: What the net result is is that whenever a law is set up that says you can't do something, you're going to have a group of people out there who see a means by which to acquire criminal proceeds, so that they will in fact be involved in smuggling.

Embargoes are, in effect, a means by which those procurement networks and those sales and marketing networks will always see as an opportunity to try to market their ware.

NARRATOR: If the illegal arms trade is driven by the laws of supply and demand, what hope is there of reducing it?

Mr. MERCIER: There has to be a degree of realism as to what you can do.

NARRATOR: The US Customs Service and other enforcement agencies have a nearly impossible task.

Mr. MERCIER: Whether it be an airport, or a seaport, or the land border, someday just go down to that port. Go out to Dulles airport here in the Washington area, or the port of New York, and look at a ship and think about the fact of how difficult it is to decide which container on that ship, or which passenger leaving out on that flight, which car to try to look into as it crosses one of our land borders.

NARRATOR: Even though enforcement is difficult, the United States is far and away the most diligent nation when it comes to dealing with the illicit arms trade.

Mr. TIMMERMAN: I think the Customs Service has really done a magnificent job trying to break up quite a number of black market and gray market, but black market primarily, arms- supplying networks.

NARRATOR: Aaron Karp agrees.

Mr. KARP: The United States has consistently taken a leading role in controlling illegal arms transfers. Which is not to say the United States doesn't have a problem, but the American government has been pretty forthright in dealing with it.

NARRATOR: It may well be that reducing the demand for weapons is a better solution than controlling the arms trade. Aaron Karp looks at the long-term prospect.

Mr. KARP: The key to reducing the black and gray market is changing the nature of international conflict. These markets are demand-driven. People out there believe they are fighting for their survival. They take these wars very seriously and they will desperately search for weaponry.

If you want to really reduce the black and gray market, you have to do something to isolate and reduce the severity of ethnic conflict. That's the key.

NARRATOR: In the short term, however, there are other actions that can be taken. Aaron Karp offers a few recommendations.

Mr. KARP: There's a lot you can do. The most important thing you can do is get governments to take their own laws seriously. Most governments don't practice judicious law enforcement in this area.

A more powerful United Nations arms trade register would do much to distinguish gray from black, to make everyone aware of the kinds of transactions that are going on.

NARRATOR: The UN Register of Conventional Arms released its second report last year.

Mr. KARP: What really needs to be done is to require governments to list with the United Nations all shipments of weapons, regardless of what kind of weapon it is, but above a certain threshold, a $100,000 perhaps, maybe a quarter-million dollars. Doing that alone would significantly affect the trade in the weapons of most relevance to the actual fighting.

NARRATOR: Based on his past extensive reporting, Ken Timmerman is less optimistic about the prospects for control.

Mr. TIMMERMAN: I don't see any way of regulating the gray market, or the black market, except through the press.

NARRATOR: At the present time, those who traffic in illicit weapons are doing a bang-up business responding to a worldwide demand. The small arms and light weapons acquired through the black and gray markets -- while they may not inspire the same fear and respect that larger conventional, nuclear, or chemical weapons do -- have been responsible for the killing and wounding of millions of people.

Is it possible to reduce this trade? Should governments have restrictions placed on their ability to ship arms covertly?

There are no sure answers, but one thing seems clear: As long as the illegal arms trade exists, arms dealers will be making a killing.

Admiral LaROCQUE: Well, certainly, it's true that all weapons are designed to kill and to destroy, and increasing numbers of people today are being killed by illicit arms. But interestingly enough, the large legal transfer of weapons seems to get all the attention. And yet, as the number of nations increases in the world, the ethnic strifes increase and civil wars break out in various parts of the country, it is these illicit, illegal transfers of weapons which are causing the greatest number of deaths in the world.

It is also very important, I think, to suggest that governments, if they really wanted to, could do something to reduce this illicit transfer of weapons, either by regulation, better surveillance and better control of their own exports. I think in the future that we can look forward to more attention being paid to this very serious matter because it is on the increase and, until governments do something about it, people everywhere in the world will be killed and maimed by the continued illicit transfer of weapons.

Until next time, for "AMERICA'S DEFENSE MONITOR," I'm Gene LaRocque.