On the Trail of Nazi Counterfeiters: a CIA historian on Operation Bernhard (2002)

SECRET/X1 Nazi Forgers decided to produce hogus cur- rency in addition to false documents, as part of a broad wartime intelligence campaign: The German counterfeiting scheme ranks among the war's most interesting clandestine activities and involved the high- est officials in the Third Reich. “Had this counterfeiting opera- tion [been] fully organized in 1939 and early 1940,” Holo- caust scholar Rabbi Marvin Hier has commented, the “results of World War II may have been quite different.”4 (U) As it turned out, it took the Germans until 1942 to put Operation Bernhard into. high gear. At Sachsenhausen concen- tration camp near Berlin, SS Sturmbannfuhrer Bernhard. Kruger, oversaw the work of 140 Jewish prisoners trained as forgers. Isolated from the main prison area by barbed wire fences, two barracks were set printers, binders, photogra- phers, and engravers. The Nazis placed a prisoner as the head of each section under the overall charge of Oskar Stein, an office manager and bookkeeper. In addition to sparing their lives, Kruger offered the prisoners better food and other privileges for their hard work. CU) 4 Reuters, “‘Hitler’s Lake’ Yields Counter- feit Currency,” 20 November 2000. (U) 42 SECRET/X1 The German counterfeiting scheme ranks among the war’s most interesting clandestine activities and involved the highest officials in the Third Reich. (U) The Germans faced numerous technical difficulties in counter- feiting British and American money. By mid-1943, the SS had contracted with the Hahne- muhle paper factory in Braunschweig in northern Ger- many to make the special rag needed to replicate British money. The Germans.used ink produced by two companies in Berlin. Wartime shortages, cou- pled with imperfections, limited Bernhard Kruger, in charge of counterfeit- ing at Sachsenhausen concentration camp. (U) the production of British cur- rency. The Germans reportedly printed some 134 million pounds ‘sterling in less than two years, yet Stein estimated that Only 10 percent of it could be considered usable. Efforts to reproduce American currency proved less successful, despite the work of Solly Smolianoff, an experienced criminal forger whom Kruger added to his col- lection of skilled workers at Sachsenhiausen.5 (U) In addition to British and Amer- ican currency, the SS crafted a wide array of forged civilian and military identity cards, pass- ports, marriage and birth certificates, stamps, and other official documents. Reichsfu- hrer Heinrich Himmler reportedly planned to use these forged documents and money to create havoc ‘among the Allies as well as to underwrite Nazi agents throughout the world. Himmler, for example, wanted to drop the imperfect British pourids on the United Kingdom by airplane. These notes “were good enough to fool anyone but an expert,” a postwar report noted. “There- fore, if a large quantity was dumped and the English 5 For Further details on Smolianoff, see Murray Teigh Bloom, The Brotherhood of Money: The Secret World of Bank Note Printers (Port Clinton: BNR Press, 1983) and Murray Teigh Bloom, Money of Their Own: The Great Counterfetters (New York: Scribner, 1957), (U)

government declared them counterfeit, many would say the government was merely trying to avoid redeeming them."® €U) The rapid advance of the Soviet army.in early 1945 necessitated the evacuation of the Jewish counterfeiters from Sachsen- hausen and their transfer to Mauthausen concentration camp in Austria. In mid-April, the Germans again moved the prisoners and machinery to an unused brewery at Redl-Zipf where they hoped to start up production in an underground factory in the mountains. The Nazis had little time to resume counterfeiting before the war came to an end. By the last week of April, the Germans had ordered the inmates to destroy as much of the machinery and the money, and as many of the records as possible. In one of the last desperate acts of World War II, the SS dumped crates Germany: Economic. Manufacture of Boglish Po ind Notes,” 20 June 1945, (In- anal 26 1945; Date “of Distri- bution: 10 July 1945) Report No. B-2832, in Col. William G. Brey, Chief, Foreign Exchange Depository, Finance Division, Office of Military Governmenv/US (here- after cited as OMGUS), to Director, Fi- nance Division, OMGUS, 3 October 1946, enclosing untitled, undated report by Maj. George J. McNally, Chief Coun- terfeit Detection Section, with attach- ments, in Record Group 260, Records of US Occupation Headquarters, World War II, OMGUS Records, Office of Fi- nance Division and Finance Advisor, Central Files of Foreign Exchange De- pository Group 1945-50, Box 451, File 950.31, Currency~Counterfeit Investiga- tions, National Archives and Records Ad- ministration (hereafter cited as NARA). This source is subsequently referenced as McNally Report. (U) In one of the last desperate acts of World War I, the SS dumped erates full of counterfeit money into Lake Toplitz. full of counterfeit money into nearby Lake Toplitz. They then moved the inmates to Ebensee concentration camp. The US Army's liberation of the camp on 6 May prevented the Ger- mans from killing the inmates. Once freed, Operation Bern- hard’s workers quickly scattered.7 (U) Fears of “The Nazi Redoubt” qu) In 1945, the US Army and the Office of Strategic Services (OSS) raced to investigate rumors of a Nazi counterfeiting operation, fearful that such resources might be used to finance an underground Nazi resistance movement." Worries 7 For an account by one of the Jewish in- mates involved with Operation Bern- hard, see Adolf Burger, Unternebmen Bernhard: Die Geldfalscherwerkstatt im KZ Sachenshausen (Berlin: Edition Hei- nrichs, 1992). (U) § The US government also focused on lo- cating other types of Nazi assets that could be used to sustain the enemy. In Project SAFEHAVEN, the State and Trea- sury Departments embarked upon a worldwide effort to locate Germany's hidden resources. The OSS played an important role in reporting on German assets in such countries as Portugal, Spain, Sweden, Switzerland, and Turkey. See: Donald P. Steury, “Tracking Nazi ‘Gold’; The OSS and Project SAFE- HAVEN,” Studies in Intelligence, Vol. 43, No. 2 (1999), pp. 57-71. (U) SECRET//X1 NaziForgers about a last ditch Nazi stand in the Alps had mounted apprecia- bly over the final year of the war. Even as German forces melted and Allied armies swarmed through the shell of the Thousand Year Reich in the spring of 1945, Gen. Dwight Eisenhower noted that “If the German was permitted to estab- lish [a] Redoubt, he might possibly force us to engage in a long, drawn-out guerrilla type of warfare, or a costly siege.”9 (U) As the noose tightened around the Third Reich, the OSS began to glean bits of information about an intricate German plot to manipulate currencies. In March 1945, the OSS in Bern learned that the former chauf- feur of the Hungarian ambassador to Switzerland had come across a “Herr Schwendt” while traveling through Mer- ano, northern Italy. This “Schwendt” had urged the Hun- garian to get a job in the American or British legations in Switzerland and provide infor- mation to the Germans in return for dollars and pounds to sell on the Swiss black market. Instead, the chauffeur con- tacted the OSS. He said that “Schwendt” lived at Schloss Lab- ers on the outskirts of Merano and that his castle had a radio station and extensive telephone installations. He also reported 9 Joseph E. Persico, Piercing the Reich: The Penetration of Nazi Germany by American Secret Agents during World War IT (New York: Viking Press, 1979), p. 11. (U) SECRET/X1 43

SECRET//X1 Nazi Forgers that he happened to see that “cases full of brand new Italian Lire were being unpacked.” The OSS reported Schloss Labers as a bombing target.'° (S) In April, a German deserter told the OSS in Switzerland that Himmler had formed “Sonderkommando Schwendt” as an independent unit “to pur- chase abroad a variety of objects including gold, dia- monds, securities, as well as certain raw materials and fin- ished products.""' Two weeks ifter VE-Day in May, the OSS intercepted a letter in Switzer- land from what appeared to be a German civilian who had been involved in obtaining the right paper stock for the print- ing of British currency. The letter-writer provided an account of the beginnings of the operation, the firms involved, and the names of sev- eral SS officers who had supervised the production. The author had even visited the pro- duction facility and met the Jewish inmates." (S) 10 “Italy-Bombing Target (Sketch At- tached),” 16 March 1945, B-2037, (no classification stated), in Fritz Schwend, File Records of the Direc- torate of Operations (hereafter cited by name, 201 file number, and DO Records). (S) 1 “Sonder-Kommando Schwendt,” 12 April 1945, B-2460, (no classification stated), in Schwend, File DO Records. (S) "2 McNally Report. (U) 44 SECRET//X1 A former Secret Service agent...McNally soon found his peactime skills in demand in occupied Europe. Military Investigation (U) In early May 1945, US Army Capt. George J. McNally, Jr., received word that US troops in Bavaria had located a factory stocked with boxes of counter- feit British pounds. McNally was assigned to the Currency Sec- tion Of the G-5 Division’s Financial Branch at Supreme Headquarters Allied Expedition- ary Force, in newly captured Frankfurt. A former Secret Ser- vice agent who had specialized in counterfeiting cases before the war he soon found his peacetime skills in demand in occupied Europe. McNally heard that American soldiers and Austrian civilians were busily fishing out millions of dollars worth of British money found floating in the Enns River. Meanwhile, a German army captain in Austria had surren- dered a truck with 23 boxes of British money, valued at 21 million pounds sterling. McNally spent the next eight months untangling the twisted webs of Operation Bernhard that extended into Austria, Czechoslovakia, Germany, and Luxembourg, seeking to uncover how the Germans had compromised the security of the monetary systems of the Allies. (U) In late May, McNally began coordinating his investigation into German currency opera- tions with the British. From intelligence sources in the Micl- dle East, the British already knew that the Germans had been busily undermining their currency. Ata meeting with British officials in Frankfurt in early June 1945, McNally met P. J. Reeves, the munager of the St. Luke’s Printing Works in Lon- don (the British equivalent to the US Bureau of Printing and Engraving). Reeves was visibly perturbed when he saw the amount of British currency that McNally had recovered in Aus- tria. “He began going from box to box, rifling the notes through his fingers. Finally he stopped and stared silently into space. Then for several seconds,” McNally later recalled, “he cursed, slowly and methodi- cally in a cultured English voice, but with vehemence. ‘Sorry,’ he said at last. ‘But the people who made this stuff have cost us so much.’” Indeed, the Bank of England had to recall all of its five-pound notes and exchange them for new ones.*4 (U) '3 George J. McNally, with Frederic Sondern, “The Nazi Counterfeit Plot,” in Secrets and Spies: Behind-the-Scenes Sto- ries of World War IJ (Pleasantville: The Reader's Digest Association, 1964), pp. 507-514. Originally published as “The Great Nazi Counterfeit Plot," in the July 1952 issue of Reader's Digest. (U) 4 McNally, “The Nazi Counterfeit Plot,” p. 507. (U)

McNally, joined by Chief Inspector William Rudkin, Inspector Reginald Minter, and Detective Sgt. Frederick Chad- bourn from Scotland Yard, and Capt. S. G. Michel, a French army liaison officer attached to the Americans, focused on interviewing Germans involved in planning Operation Bern- hard and the concentration camp inmates who produced the fake money. Throughout the summer and fall of 1945, they crisscrossed Europe to interrogate witnesses, including Obersturmbannfubrer Josef Spacil, Kruger’s commanding officer at Sachsemhausen.'' McNally also tried to raise the crates of money that the Ger- mans had reportedly dumped into Lake Toplitz, but a special team of US Navy divers found nothing. '® (U) Drawing on support from the US Army’s Counter Intelligence Corps (CIC), the OSS, and the _US Navy, McNally wrapped up his investigation by early 1946 te: wand-cempleted an-extensive report on the history of Opera- tion Bernhard and the known disposition of the false cur- rency. “Thus,” he wrote, “in 15 Transcripts of interviews with former concentration camp inmates are found in the McNally Report. The apprehension of Spacil by the OSS is recounted in Capt. F. C. Grant, SCI Detachment, Sev- enth US Army, to Commanding Officer, SCI Detachment, Twelfth Army Group, “Weekly Report,” 16 June 1945, LSX-002- 616, in: WASH-REG-INT-163, Record Group 226, Records of the Office of Stra- tegic Services, Box 276, (no folder listed), NARA Chereafter cited as RG 226, OSS Records, NARA). (U) The OSS set out to locate members of Operation Bernhard who could pinpoint hidden Nazi wealth before it could finance underground resistance efforts. 9d. disorganization, flight and destruction, ended the most elaborate and far reaching scheme that an invading army ever devised for the wholesale counterfeiting of the money and credentials of other coun- tries.""7 The US military returned the counterfeit British currency to the Bank of England and closed its file on Operation Bernhard. Only small amounts of forged American money were ever found., As far as the Ameyican. military was concerned, Nazi Germany's counterfeiting activity became a curious footnote in the annals of the war. (U) 16 Capt. McNally to Capt. W. A. New, US Naval Forces, Germany, “Recovery of Enemy Materials and Equipment from Inland Waters in Germany and Austria,” 26 September 1945; Capt. New to Capt. McNally, “Enemy. Materials and Equip- ment from Inland Waters In Germany and Austria, Recovery of,” 11 September 1945; and J. H. McDonaid, US Naval Ship Salvage Group, to Cdr. R. P. McDonald, July 1945, in RG 260, OMGUS Records, Office of Finance Division and Finance Advisor, Central Files of Foreign Ex- change Depository Group 1945-50, Box 451, File 950.31, Currency—Counterfeit 1945, NARA. (U) 7 McNally Report, pp. 1-11, with attach- ments and addendum. (U) ‘SECRETI/X1 Nazi Forgers OSS Seeks the Kingpins (U) As the war closed, the OSS, too, set out to locate members of Operation Bernhard who could pinpoint hidden Nazi wealth. before it could be used to finance underground resistance efforts. Working at the same time as, and on occasion in coordination with, the McNally team, OSS/X-2 (counterintelli- gence) already had several hot leads by mid-May 1945. 1st Lt. Alex Moore, an OSS officer assigned to the Sixth Army Group’s Special Counter Intelli- gence (SCD detachment, was the first OSS officer assigned to the counterfeiting case. He took Karl Friedmann, a captured SS officer and member of Opera- tion Bernhard, to Rosenheim near Munich to pick up George Spitz, a 52-year old Austrian Jew whom Friedmann had fin- gered. A prewar art dealer who ‘had lived in the United States as a youth, Spitz was identified as one of the distributors of the counterfeit funds. Spitz admit- ted to Moore that he had worked for the Germans, but claimed that it was under duress because he feared arrest by the Nazis, (S) 8 SCI Sixth Army Group, “Interrogation of Subject, George Spitz," 16 May 1945, (S); and SCI Sixth Army Group, “Sale of Foreign Currency by the RSHA,” 17 May 1945 (S); and SCI, Sixth Army Group, “Agents Used by Lieutenant Moore, SCI 6 AG,” 17 May 1945 (S), in George Spitz, File :DO Records.:(S)s SECRETIX1 -45

SECRET/X1 Nazi Forgers Schloss Labers in nomhern italy —Se hwend she: cl usirters for the distribution of Nazi counterfeit Money. CU) Spitz soon provided extensive leads into the Nazi cumpaign to undermine the Allies’ monetary systems. He recounted to Moore how he had escaped from the Nazis and then obtained false documents from a corrupt SS officer, Josef Dauser, and his secretary, Bertha von Ehren- stein, who worked for the Nazi foreign iptelligence service.in.... Mun ‘Spitz Spit Claitned ‘to have met a German named Wendig in Munich in 1943, who asked him to travel to Belgium to pur- chase gold, jewelry, and pictures. Spitz made six trips and exchanged some 600,000 marks worth of counterfeit English pounds. Moore interro- gated both Dauser and his secretary to check Spitz’s account.!¥ (S) Moore's investigations contin- ued to bring out new details of the Nazi counterfeiting opera- 46 SECRET/X1 tion. By the end of May, the OSS officer had pinpointed Friedrich Schwend (sometimes spelled Schwendt) as Opera- tion Bernhard’s pointman for the distribution of bogus money and identified his various cover names, including Dr, Wendig and Fritz Klemp." According to OSS sources, Schwend had worked from Schloss Labers in northern Italy—the same loca- tion reportecdi by the Hungarian chauffeur—and used couriers to sow counterfeit money through- out Europe. Although not a member of the SS, he took the rank and identity of SS Stur- mbannfubrer Dr. Wendig who ‘Interrogation of Bertha von Ehren- stein,” 25 May 1945; “Additional State- ment of Mrs. Von Ehrenstein,” [undated]; and “Memorandum on Schwend alias Wendig,” 30 May 1945, (no Cha listed), in Spitz, File bod: Records. (43. had died in an It Vian partisan attick in 1944. Schwend's cas- tle was guarded by a detail of Walfen SS soldiers and icenti- fied! as Sornclerstaib-General- kommeando Ill Germantsches Panzerkorps, the Special Staff of the Headquarters of the Third German Armored Corps. (U) Schwend appirently retained one-third of the profits derived from the sale of the counterfeit’ money. He and his underlings used the fake currency to pur- chase luxury items on dhe black marketas well as to buy weap- ons from Yugoskiv. partisans anxious to make money from the arms provided by the Brit- ish and Americans. The Germans, in turn, sold the Allied equipment to pro-Nazi groups in the Balkans. Money distributed by Schwend also went to pay German agents whroud—Elyesa Bazna, a famous German agent in Tur- key known as CICERO, was Born in 1906 and a member of the Nuzi party since 1932, Schwend lived a charmed life. A businessman who had settled in Abbazia, Italy, Schwend had married a wealthy German woman in 1929 whose aunt resided in Argentina. Drawing on family ties, he managed the aunt's business in Latin America and es- tablished numerous contacts throughout Europe and the Americus. In the 1930s, Schwend also established himself as an arms dealer and provided aircraft and other weapons to China. At the outhreak of the war, his contacts and travels drew the attention of the Gestapo and he was arrested as a suspected Allied agent and extradited to Germany from Italy. Sch- wend's ume in prison was short, howev- er, he was released to become the leading salesman of counterfeit curren- cies from Operation Bernhard. (U)

paid in false British currency produced by Operation Bern- haral. (U) Schwend's job was not without risks. The’ Gestapo was on the’ lookout for counterfeiters and black marketers and sometimes “apprehended Schwend’s men by accident. Rivalries among senior German SS- officers, including Himmler, Reinhard Heydrich (first head of the RSHA), Heinz Jost Cfirse head of RSHA’s foreign intelligence sec- tion), Ernst Kaltenbrunner CHeydrich’s successor us RSTIA chief), Heinrich Mueller (head ‘ofthe Gestapo), Otto Ohlen- dorf Cheadl of another RSTTA section), and Walter Schellen- berg Qost's successor in the foreign intelligence section), impacted on many aspects of Operation Bernhard. Main- stream German bureaucnicies, including the Foreign Ministry —and Reichsbank, vehemently opposed any tinkering with the Monetary systems, even those of the enemy. As it turned out, “992 AEE UNAN USEC of cquaterfeit pounds destabilized the already fragile economies of several friendly countries, Italy in par- ticular. (U) As the OSS pieced together the Operation Bernhard network, it made plans to apprehend those participants not already in cus- tody.22 On 18 May, Spitz led Moore to Prien, where they 41 Richard Wires, The Ctceru Spy Affair: German Access to British Secrets in World War IT (Westport: Praeger, 1999), pp. 85-96. (UW) Rivalries among senior German SS officers...impacted on many aspects of Operation Bernhard. located a large collection of trunks and crites belonging to Schwend. Schwend, however, was nowhere to be found.+* Spitz also helped Moore collar persons on the Allies’ wanted list not. associated with Opera-- tion Bernhard, including Heinrich Hoffniann, Hitler's per- sonal photographer, and- Loomis ‘Taylor, the American “Lord Hee Tkiw.” a Nazi colkaborator close to Hitler. (S) On 10 June, the OSS reported that ic had arrested Schwend and started to interrogate him to gain further details about what it culled the “RSHA Financial ‘Operation.”2 The Americans initially held Schwend at the Seventh Army Interrogation Center in Ludwigsburg. Describ- ing Schwend as a “mechanical #2 Ist Lt. Charles Michaelis to Command- ing Officer. X-2/Germany, “Preliminary Statement of Agi Zelenay in Connection with RSHA Operations,” 4 June 1945, Michaelis to Commanding Officer, X- 2/Germany, “Continuation of the State- ment by Agi Zelenay,” 26 June 1945; and Michaelis to Commanding Officer, X- 2/Germany, “RSHA Financial Opera- tions,” 5 June 1945 (no classifications listed), in Spitz, File ji “2s Moore to Commanding Officer, SCI, Sixth Army Group, “Financial Opera- tions of RSHA Amt VI," 22 May 1945 (no classification listed), in $pitz, File Co BO Records. (8) SECRET//X1 Nazi Forgers engineer,” the Center's records note that he “bought machin- ery and tools for factories.” Whether the Army listed Sch- wend in this category out of ignorance or for other reasons is not known, Shortly afterward OSS officers removed Schwend from the Interrogation Center and placed him in Munich's Sta- delheim prison where he remained for three weeks before he relented and spoke to his captors. (U) Meanwhile, Moore had been transferred back to the United. "States and Capt. Charles Michaelis, an X-2 case officer for several OSS double agent Operations in France during the war, began to handle Spitz and Schwend. Spitz impressed Michaelis as “reliable, trustwor- thy and intelligent... [and] + Numerous documents pertaining to the RSHA Financial Operation, Spitz, Schwend, and other members of Opera- tion Bernhard are located in the deckis- sified OSS records at the National Archives. Spitz's classified QUBp file is more complete, containing many early OSS reports on the RSHA Financial Op- erations. (S$) Weekly Status Reports for the Seventh Army Interrogation Center (SAIC) com- manded by Maj. Paul Kubala are found in Record Group 338, Records of United States Army Commands, 1942-, Records of the European Theater of Opera- Uons/US Porces European Theater, Records of the Seventh Army Interroga- tion Center, Box 74, Folder 2, NARA. In- terestingly, Schwend's departure from the SAIC is not found in the Daily Status Reports for that period. The Center pre- pared hundreds of interrogation reports from April until its disbandment in Octo- her 1945. Schwend's name.does not ap- pear in the index of any of these reports. See Seventh Army Interrogation Center, Index of SAIC Reports (6 April 1945 2 Octoher 1945) in Box 73. (U) SECRET//X1 47

“SECRET/X1 Nazi Forgers willing to cooperate.” [n an effort to get Schwend to talk, Michaelis took Spitz to Stadel- heim prison. Spitz “persuaded Schwend that his best chance would be to confess his activi- ties with the RSHA and to cooperate with us.” The OSS judged that “Spitz is primarily responsible for the success of this mission.”?? (S) As an initial act of good faith, Schwend agreed to turn over to the OSS all of his “hidden valu- ables.” Michaelis andl Capt. Eric Timm, the X-2 chief in Munich, accompanied Spitz and Schwend to a remote location in Austria in July 1945, where Schwend uncovered more than 7,000 pieces of French and Ital- ian gold that he had buried only days before the end of the war. Michaelis reported that Schwend estimated that the gold, which weighed over 100 pounds, had a value of $200,000. Michaelis recognized that the “money constituted a possible threat to Allied secu- rity as it could have been used to finance anti-Allied activi- ties.”28 (U) % Capt. Michaelis to Commanding Offic- er, X-2/Germany, “George Spitz,” 25 Tune 1945, X-645 (S), in Spitz, File DO Records. For information about Spitz's use by OSS and the em- ployment of other Operation Bernhard personnel, see Capt. Michaelis to Com- manding Officer, X-2/Germany, “Situa- tion Report on Prospective Penetration Agents,” 29 June 1945, LMX-002-629 (S), in DO Records, Job Box 3, Folder 21, CIA Archives (hereafter CIA ARC). A cony is also filed in Spitz, File Cc DO Records. OSS head- quarters in Germany approved Spitz's use on 12 July 1945. (S) 48 SECRET//X1 Schwend uncovered more than 7,000 pieces of French and Italian gold that he had buried only days before the end of the war. With one successful mission under its belt, the OSS began to use Schwend as a “bird dog” for other hidden assets. In late July, Timm and Michaelis took Sch- wend and Spitz to Merano to visit Schwend’s former head- quarters. The Army’s Counter Intelligence Corps had already rounded up several of Sch- wend's employees who had remained in Merano, but CIC reported that the detainees did not have a clear picture of the overall counterfeiting opera- tion.2? Nonetheless, after further interrogation of one of Sch- wencl's staff still in Merano, the 2 Capt. Michaelis, SCI Detachment/Mu- nich to Commanding Officer, OSS/ X-2/Germany, “RSHA Financial Opera- tions,” 20 July 1945, LWX-50, in WASH- REG-INT-163, RG 226, OSS Records, Entry 108A, Box 287 [no folder listed}, NARA. See also, Capt. Timm to Chief, X-2/Germany, “RSHA Financial Opera- tion,” 20 July 1945, with copies of re- ceipts; and Capt. Timm, Capt. Michaelis, Ist Lt. Stewart French, and Mrs. Jane Burrell, Memorandum for the File, “RSHA Financial Transactions,” 19 July 1945 (S), in Spitz, File DO Records. (S) 24 Ibid. 29 1" Lt. Edward R. Weismiller, Chief, Op- erations, OSS/X-2/Germany (o X- 2/Washington, “RSHA Financial Opera- tions,” 2 August 1945, LWX-61, enclosing Michaelis to Commanding Officer, OSS/X-2/Germany, “RSHA Financial Op- eration,” 28 July 1945, in WASH-REG- INT-163, RG 226, OSS Records, Entry 108A, Box 287, [no folder listed], NARA. (U) OSS was able to recover nearly $200,000 worth of gold, Ameri- can currency, and diamond rings. (U) By then, both Spitz and Sch- wend had clearly demonstrated their value to OSS. According to Michaelis, Schwend added to his laurels by writing a history of Operation Bernhard.? (U) Shifting Gears (U) As tensions mounted between East and West during the early Cold War, American intelli- gence began to use several former members of Operation Bernhard as agents to collect information extending beyond their wartime activities. In August 1945, Timm reported that “it has been for sometime apparent that a well-balanced network of counter-intelligence and counter-espionage agents must include persons from all spheres of activity.” Timm observed that “the implementa- tion of the penetration agent program wherein the use of former GIS {German Intelli- gence Service] personalities is contemplated remains of criti- cal importance.” With an eye to a resurgent Nazi party, the Munich X-2 chief commented, “such persons are of impor- tance because they are in a position to recognize other GIS Schwend's report has not survived (U)

personalities ancl are logical contacts for any illegal resis- tance group.”3! (S) To target the resurgent Nazi movement, X-2 recruited some 13 agents in Munich and had another dozen under consider- ation. 32 Spitz and Schwend were among Timms stable of assets. Schwend, in turn, brought other Operation Bernhard associates on board, including George Srb, a Czech, and Guenther Wis- chmann, his “salesman” in Slovenia. Wischmann had been arrested in June 1945, but Michaelis was able to obtain his release from prison.*} (S) Timm used Spitz, codenamed TARBABY, in a variety of ways, although initially he was not tasked as a regular agent. In 4 OSS/X-2/Germuany to X-2/Washington, “Semi-Monthly Operations Report, SCI Munich,” 22 August 1945, LMX-010-815 (S), enclosing SCI/Munich to Command- ing Officer, OSS/X-2/Germany, “Semi- Monthly Operation Report SCI Munich,” 15 August 1945 (S), in DO Records, Job C. 2): Box 3, Folder 21, CIA ARC. (Ss) 32 SC] Detachment/Munich, to Com- manding Officer, OSS/X-2 Germany, “Semi-Monthly Operations Report, SCI Munich,” 31 August 1945, G-TSX-2891 (S), in DQ Records, Job 4 Box 3, Folder 21, CIA ARC. (3) 33 Security Control (the successor to X-2 in the new Office of Special Operations, or OSO) in Munich eventually dropped Srb, because of his black market activi- ties and his denunciation by the Czech government as a German collaborator. Wischmann, a sub-source of Schwend's, traveled throughout Germany and Aus- tria, but X-2 in Munich did not use him as a “full-time agent” because of suspi- cions about his dealings on the black market. See various reports in Guenther Wischmann, File. DO Records, (S) During the early Cold War, American intelligence began to use several former members of Operation Bernhard as agents to collect information extending beyond their wartime activities. September 1945, Spitz sup- ported an OSS effort to enlist refeasedl business and banking leaders to provide information on the financial aspects of ille- gal Nazi activities within postwar Germuany.*' Timm felt that Spitz had “an encyclopedic knowledge of all figures of any importance in industry and eco- nomics throughout Europe.”% The Munich X-2 chief recorded Timm to Commanding Officer, OSS/ X-2/Germuny, “Semi-Monthly Opera- tions Report, SCI Munich,” 15 September 1945, G-TSX-3310 (S); Timm to Com- manding Officer, OSS/X-2/Germany, “Semi-Monthly Operations Report, SCI Munich,” 30 September 1945, G-TSX- 3747 (S), both in DO Records, Jot & —] Box 3, Folder 21, CIA ARC;.1" Lt. Sidney H. Lenington, Deputy Chief, SSU/X-2/Germany to X-2/Washington, “Semi-Monthly Reports,” 12 December 1945, LMX-005-1130, enclosing Timm to Commanding Officer, SSU/X-2/Germa- ny, “Semi-Monthly Operations Report, SCI Munich,” 31 October 1945, LMX-005- 1130, in WASH-REG-INT-163, RG 226, OSS Records, Entry 108A, Box 275, [no folder listed], NARA. (S) 35 Lenington to X-2/Washington, “Semi- Monthly Reports,” 12 December 1945, LMX-005-1130, enclosing Timm to Com- manding Officer, SSU/X-2/Germany, “Semi-Monthly Operations Report, SCI Munich,” 31 October 1945, LMX-005- 1130, in WASH-REG-INT-163, RG 226, OSS Records, Entry 108A, Box 275, (no folder listed), NARA. (U) SECRET//X1 Nazi Forgers in late October 1945 that “TARBABY will prepare and submit regular semi-monthly reports on financial and eco- nomic matters, as well as other items of interest which he can obtain.” In this capacity, Spitz provided information on the German Red Cross and the Bavarian Separatist Movement in southern Germany.* (S) By November 1945, Michaelis and Timm had been reas- signed, leaving Sgt. Boleslav Holtsman as X-2’s lone repre- sentative in the Bavarian capital. Holtsman used Schwend to obtain a variety of reports on persons who “might be used by the American intelligence in some way.”3’ Additionally, Sch- wend told Holtsman about the organization and structure of the Czech intelligence service and the exploitation of Jewish refugees by the Soviets. 34 Holts- man was impressed with Schwend’s work in Munich and commented, “His knowledge of personalities and underground % Lenington to X-2/Washington, “Semi- Monthly Reports,” 12 December 1945, LMX-005-1130, enclosing Timm to Com- manding Officer, SSU/X-2/Germany, “Semi-Monthly Operations Report, SCI Munich," 15 November 1945, LMX-005- 1130, in WASH-REG-INT-163, RG 226, OSS Records, Entry 108A, Box 275, NARA. (U) Quote found in AB-43 [Holtsman], "Dr. Robert Scherkamp, Munich, Fuchsstr. 5,” 30 August 1946, MSC-332, LW’K-002-916a (S), in Schwend, File _t.DO Records, Examples of scnwend's report- ing on various personalities are in Sch- wend's 201 file. (S) Reporting on the Czech services and Soviet targeting of Jewish refugees is found in Schwend, File 7 DO Records. (S) SECRET//X1 49

vroups in Laly. Yugoskevia, and mn Germany is very wide. Per haps reflective of bis ability to get information, X-2 gave Sch- wend the codename FLUSH. (5) Balancing Ends and Means (U) Given their wartime affiliations and posavar opportunism, none of X-2’s assets had clean back- grounds. In the ruins of Europe. (he ugents” atecess SsOUrCES and che pressing need for intel- ligence ouaveighed concerns about their tainted reputations, (S) Nonetheless, files continued ta fill with chimaging informidion as postwar debrictings pro- ceeded. Walter Schellenberg, RSHA’s foreign intelligence chief, was among those who surrendered in 1945. Trans- ferred to Great Britain for interrogation, he offered the Allies a window into German operations from the highest vantage point. Schellenberg told his captors about the intrigues that had riddled the intelli- gence and security organs of the Third Reich and filled in the gaps about Operation Bern- hard. He claimed to have grown X-2/Germany to X-2/Washington, “Re- view of Activity since 10 December 45 to 10 September 46," 17 September 46, L- 010-910, enclosing AB-43 [Holtsman), Munich to AB-51 (Henry Hecksherl, American Zone, “Review of Activity since 10 December 1945 to 10 Septem- ber 1946," 10 September 1946 (S), in DO Records, Job Box 1, Folder 14, CIA ARC. (S) 50 SECRET//X1 Given their wartime affiliations and postwar opportunism, none of [the US intelligence] assets had clean backgrounds. incensed at the kuitude that Schwend enjoyed in dispensing false British currency and described him as “one of the greatest crooks wad inposters.” Because Schwend marketed some of the filse mongy in tere rilarcies controlled by dhe Germans. Schellenberg said chit the Reichshank itself ended up buying same of the counterfeit currency. OS} Neither Schwwend nor Spitz antiatiined alow profile in the ruins of Munich and they soon -attracted attention, Spitz hecame au well-known figure in carly postwar saciety circles. As X-2's sole representative in Munich for most of the period between 1945 and 1947, Holtsman needed to maintain good rela- tions with local officials. According to a 1947 report, he found Spitz's parties to be an excellent way to meet the senior Americans in charge of the city’s military government.”! In turn, Holtsman assisted Spitz in obtaining a vehicle and sup- X-2/London to X-2/Washington, “In- terrogation Report on Schellenberg, 27 June-}2 July 1945," 2 November 1945, XX-9667 (S), enclosing a copy of the British interrogation report, Waker Schellenberg, File J DO Records, (S) TS. ee phes.< Since Eroltsmin dich oot reverve much guidkince or sup- port, he had to scrounge for supplies anda his own ODUrA- tions. CS) Kedid not tike long, however, for Spitz’s past to catch up with him. The Dutch representuive at Munich's Central Collecting Point—which handled an recovered from the Nazis— listed several pieces Of art tnd: rugs Chat Spitz had soldl to Sch- weod during dhe war fn November (946, Edwin Rac, the chict of the Monuments, Fine Aris. and Archives Section of the military government in Biawaria requestech chat Us stuthacities in llaly assist in trecking dow looted Dutch art in chat country, Co include at Security Control/Amercun Zone, to: Forciga Brinch M foe Secucity Coa- (rol/ Washington, “Vresent Contacts of SC Munich, Munich.” Crue aumes), 24 March 1947, FSRO-1545 (8); Chiet, SCU/Americun Zone (0 Foreign Branch M for $C/Washington, "Present Contacts of SC Munich,” (eryptonyms), 19 March 1947, HSC/OPS/34, FSRO-1545:. 5C/American Zone, to Foreign Branch M for SC, “Discontinued Contacts of $C Munich,” (true names), 24 March 1947, FSRO-1548 (S); and Chief, SC/American Zone, to Foreign Branch M, for SC, “Dis- continued Contacts of SC Munich,” Ceryptonyms), 19 March 1947, HSC/OPS/33 all in DO Records, Job C Box 514, Folder 4, CIA ARC. (Hereatter cited collectively as "SC Mu- nich Present and Discontinued Con- tacts.") (S$) Holtsman, Refugee Control Unit, to Whom tt May Concern, "Transportation, Supplies.” 15 January 1947, and Holts man, Relugee Control Unit, to Verkehes- direktion, "Provision of Tires,” 29 May 1947, in Spitz, File DO Records, (S)

search of Schwend’s best-known location in northern Habe Co) In October 1947 ELF. Stach, another Dutch investigator, questioned Spitz al his house tn “Munich about his activities in Holland during the war, Accord: ing to Seach, Spitz “became furious” and denuded to know why he was being sought after, when be wis afew who had been ia the “under- ground.” Spitz, produced a September 1945 fetter of reler- ence front X-2’s Capt. Timm and also told the investigator to check with Holtsmiia, Stich, however, continucd to distrust Spitz and commented. “His of great importance Chatthis cusc should be bitadled: very cure. fully. Spitz is ong of the greatest swindlers.” En January 19-48, Spitz again fell under suspicion for his cole in the looting of art in Europe during the war.* Then, a yeur tater, he drew Edwin C. Rac. Chich Monuments, Fine Arts, and Archives Section, Restintion Branch, Economics Division, Oftice of Military Government for Bavaria, to OM- GUS, Economics Division, Restitution Brinch, Monuments, Fine Arts, and Ar- chives Section, “Art Objects of Dutch Or- igin, now in Italy," 18 November 1946, enclosing R. F. P. de Beaufort, Dutch Representative, to Mr. Rosenbaum, “Res- ticution of Art Objects in Italy to the Netherlands,” 18 November 1946, in RG 260, OMGUS Records, Records of Muse- um, Fine Arts, and Archives Section, Res- Utution Research Records, Box 484, {no folder listed], NARA (hereatter cited as “RG 260, OMGUS Records, MFAA Sec- tion, Restitution Records Research, NARA). (U) 4 HJ. Stach Co Stewart Leonard, “lnter- rogation of George Spitz, Opitzsu. 4, Munich," 28 October 1947, in RG 260, OMGUS Records, MFAA Section, Restitu- tion Records Research, NARA. (U) fieh-level atreation becuse: ol alcuadoas that he worked: in the Alunieh bkick miurket with August Lon. ob banker and former OSS avenat Cs) Finally, in che spring of 1947, Holtsniin dropped spitz as an agent terming him a security tisk. Pwo veurs hiter, the CEA tersely seamamed up the reasons ina cable: “Spitz’s} activities Holland and Belgium during wan never sitdislectorily clari- fied... Services both Spitz ancl Lenz minimal and reports prats- ing thei services need grain of salt. Both believed (to bel oppartuaists who made most lof] conncetions with Americun officials to further personal positions, which fwerel quite pecearious lind carly clays fof occupation since it {was} kKnowa thac spitz pacicularty had served as stecat for SD (foreign For agmerous cibles between die CIA in Germany and Washington about spitz in 1948, see Spitz, File J Do Records. See also bo 5. FE. Baudouin. Belgian Representative. to Herbert S. Leonard, Chich, MFAA Section, “Informa tion Concerning the Spitz Case,” 5 Au- gust 1948, in RG 260, OMGUS Records, MFAA Section, Restitution Records Re- search, NARA. (S) “In August 1945, August Lenz had worked with X-2 to gain the release of the head of the Bavarian Red Cross, wealthy countess who had been arrested by CIC after an anonymous denuncijt- Gon. Later, he was involved in the INCA operation and also helped to manufac- ture the false Czech and Polish docu- ments (hat American intelligence used to evacuate Anatoli Granovsky, one of the first Soviet defectors. See various cables in Spitz File fu IJ DO Records. For details on the detection, see Anatoli Granovsky, Was @ NKVD Agent: A Top Soviet Spy Tells His Story (New York: Devin-Adair, 1962). (S) Nazi Forgers intelligence service! and possi- bly Gestapo (8) Schawend also cttractedl sora: Hoy. fn Februwy (947, dhe Central latelligence Group in C reported that US mifitcey counterintelligeace personnel wd the leitian police hic raided a aumber of buildings ia Merino in 1946, including Sch- wend’s old headquarters itt schloss Labers. The raid netted large quantities of counterfeit ‘pound notes, which led the Americans to believe that the Germans had a plant still pro- ducing counterfeit dollars and pounds as well as US military occupation seript.49 (S) In 1947, Schwend's situation became more precarious when it Was discovered that he had defrauded what appears to have been the Gehlen Organization, the nascent West German intel- ligence service, then under US Army sponsorship. In early 1947, Holtsman attended a party in Munich where Schwencl $C/American Zone .to Foreign Branch M, “Progress of Munich Operations,” 15 May 1947, HSC/OPS/33, PFSRO-1796 (S), in DO Records, Job Box 516, Folder 5, CIA ARC. (S) Cable, Special Operations to Karlsruhe and Munich, 11 May 1949, Washington 3385. QUT 81161 (S), in Spitz, File —} DO Records. As late as 1959, the US Army and the West German Fed- eral Intelligence Service sought informa- tion from the CIA about Spitz. By that time, the Agency had lost track of the Austrian Jew who played both sides. (S) Intelligence Report, External Survey Detachment, Rome, “Counterteiting Plant in Milan Area," 11 Pebruary 1947. PIR-1095 (5), In DO Records, Job EL Box 288, (no folder listed}, CIA ARC. SECRET//X1 51

SECRET//X1. Nazi Forgers announced that he would soon take a trip “to visit his family in Italy.” From there, he fled to South America. He later wrote two letters to Holtsman from abroad, noting that he would “always remember the Ameri- cans for the kind treatment he received.” Using the name of Wenceslau Turi, a Yugoslavian agricultural technician, on a Red Cross passport issued in Rome, Schwend and his second wife arrived in Lima, Peru, after crossing the Bolivian border in April 1947. The new immi- grants declared their intention to take up farming.*! In fact, Schwend went to work for Volkswagen in Lima and also served variously as an infor- mant for several Peruvian intelligence and security ser- vices.*? (S) Schwend's past caught up with him in South America. In early 1948, Louis Glavan, who had run Schwend’s affairs in Yugoslavia during the war, denounced him in a letter to Gen. Lucius Clay, the US military governor of Ger- many. Schwend had described Glavan in glowing terms to US intelligence in 1946, but, clearly, the two men had had a falling out.3 In Glavan’s letter to Clay— subsequently sent to the Euro- % See “SC Munich Present and Dis¢on- tinued Contacts." (S) 51 “Suspicious Personalities-Wenceslau Turi and Hedda De Turi," 17 February 1948, TPL-263 (S), in Schwend, File C DO Records. (S) Unsigned Memorandum for the Record, “Fritz Paul Schwend,” 7 Febru- ary 1963 (S), in Schwend, File DO Records. (S) §2 SECRET//X1 Years later, reports of Schwend’s counterfeiting activities, drug smuggling, and arms dealings throughout Latin America attracted the attention of numerous intelligence agencies. PP, pean Command's Office of the Director for Intelligence and the ClA—he claimed that Schwend and his wife had moved to Lima using false iclentities and were liv- ing from proceeds derived from counterfeit RSHA funds. Further- more, Glavan fingered Spitz as the individual who had per- suaded the Americans not to investigate Schwend for his Nazi activities. After a preliminary investigation, the CIA concluded that the allegation “comes from a person who may possibly be denouncing Schwend for per- sonal or business reasons. Thus, the reliability of that information should not be taken at its face value until confirmed by other sources.”% The Agency told the 33 In 1946, Schwend had described Gla- van as “capable, intelligent, dependable (though, no doubt, without regard for law or regulations), and [a] daring man open for any proposition... Smuggling is Glavan’s trade, and he can smuggle things, news or people and keep his mouth shut.” Munich, AB-43 (Holtsman]}, “Louis Glavan,” MSC-283, 16 August 1946 (S), in Schwend, File DO Records. (S) 54 See various 1948 cables in Schwend, File J DO Records. (S) 55 Foreign Branch M to Chief of Station, “Fritz Schwend,” 5 February 1948, TPL-W-275 (S), in Schwend, File =I DO Records. (S) Army in January 1948 that it had no contact with Schwend and had nothing to do with his immigra- tion to South America. (S) Years later (U) In the 1960s, reports of Sch- wend’s counterfeiting activities, drug smuggling, and arms deal- ings throughout Latin America attracted the attention of the CIA, the US Army, the US Secret Service, the British Intelligence service, and the West German Federal Intelligence Service. A West German informant in Alg- iers in 1966, for example, claimed to be able to provide fresh samples of bogus dollars produced by Schwend in exchange for “financial help.”% The CIA directed a source in the Peruvian Investigations Police to pursue the lead. Sch- wend denied any current counterfeiting activity, but divulged his wartime role to the Peruvians. When pressed, he continued to deny knowing where the plates for the British counterfeit pounds from Opera- tion Bernhard were buried, although he said he suspected that they might still be located with a cache of RSHA chief % Cable, to Director, Bonn, Info C 2425 November 1966 .£ 3 8023 IN 46069 (S), and Cable, J to, 2 Info Bonn, Director, 28 November 1966, C 0063, IN 47738 (S), in Schwend, File DO Records.

Kaltenbrunner’s papers near Lake Toplitz in Austria.*” (S) In 1969, a trace done by the US Army turned up a 10-year-old report on Schwend in which the German claimed to have written “various American authorities charging that, during confine- ment by CIC in 1945, he was robbed of a considerable amount of money and that much of his immediate personal property was confiscated and never returned.” Given the late date of Schwend's allegations, the Army was unable to investigate and found nothing in its files to substantiate them.** (S) In a bizarre epilogue to a bizarre life, the Peruvian government took Schwend into custody fol- lowing the murder of a wealthy businessman in early 1972. Papers found in the victim's possession revealed the extent to which Sch-_ wend had blackmailed Peruvian officials, traded national secrets, and broken currency laws.*” Although Schwend was initially released, his life began to unravel. A Peruvian court subse- quently convicted him of smuggling $150,000 out of the 5? Cable, Tito Director, 11 October 1963, C1 4632, IN 37627 (S), and James Angle- ton to Chief, United States Secret Service, “Frederick Schwend,” 21 October 1963 (S), in Schwend, File — DO Records. (S) 58 An unconfirmed statement in CIA records indicates that at least one OSS of- ficer may have materially gained from his work on the Operation Bernhard case. See Headquarters Liaison Team, US Army Intel- ligence Center, to Deputy Director for Plans, “Schwend, Frederico (Fritz)," 19 Au- gust 1969 (C), in Schwend, File 2 DO Records. (S) country and he was given a two- year prison sentence.™ Then, in 1976, Peru deported Schwend to West Germany, where he landed in jail once again when he could not pay a $21 hotel bill.' The German and Italian governments still held a warrant for Schwend’s arrest in connection with a war- time murder, but decided not to prosecute. Schwend was freed, but left homeless.*? He returned to Peru only to die in 1980. (S) Weighing Operational Decisions (U) Shortly after the war, the Strate- gic Services Unit wrote a classified history of the OSS dur- ing World War I. The pursuit of the Operation Bernhard counter- feiters was fresh in the minds of the compilers who hailed it as a yreat success story for the OSS because it recovered large sums of money and other valuables.“ Yet for all of the positive attributes of that financial opera- tion, the project clearly linked American intelligence with some The publicity surrounding Schwend's ar- rest exposed infamous SS officer Klaus Bar- bie's hideout in Peru, leading to Barbie's eventual extradition to France in 1983 to face justice for his war crimes. In late 1972, the New York Times, citing a London Daily Express series on Martin Bormann, report- ed that South America provided refuge for four major Nazi war criminals: Schwend, Klaus Barbie, Josef Mengele, and Walter Rauff. See “Paper Identifies 4 Nazis Said to be in South America,” New York Times, 1 December 1972, p. 11. (U) Reuters, “Nazi in Bolivia Called Chief of Peruvian Currency Ring,” New York Times, 7 December 1973, p. 7. In addi- tion to Schwend, the Peruvian prosecu- tor indicted Klaus Barbie and four other individuals. (U) S| Reuters, “Nazi Forger's Bad Bills,” The Washington Post, 14 July 1976. CU) SECRET//X1 Nazi Forgers Friedrich Schwend in Peru. (U) unscrupulous characters. Useful to the Americans in 1945 as Europe lay in ruins and the Cold War loomed, Friedrich Schwend and George Spitz were among the most prominent of the agents-of- opportunity who—for decades after the war—profited from their association with the OSS. Their cases illustrate the perennial chal- lenge of balancing ends and means in the complex world of intelligence operations. (U) “2 In 1955, an Italian court had sentenced Schwend in absentia to 24 years in prison for having ordered Louis Glavan to kill Theophic Kamber, an Operation Bernhard agent who had embezzled some of the counterfeit money in 1944. While this con- viction was later overturned, Italian offi- cials still sought Schwend!’s arrest, as did West German authorities under an Interpol warrant. Lt. Gen. Marshall S. Carter, DDCI to DD/P, Memorandum Number A-279, 1 August 1963, ER 63-6111 (S), in Sch- wend, File DO Records. (S) 3 “Nazi Plotted to Cripple British, Ameri- can Economies,” Los Angeles Times, 7 April 1980, p. 22. (U) Strategic Services Unit, History Project, War Report of the OSS (Office of Strategic Services), Vol. II, The Overseas Target, with new introduction by Kermit Roosevelt (New York: Walker and Company, 1970), pp. 353-354. (U) SECRET//X1 53