Davis Spy Crisis: Top U.S., Pakistan Spooks in Talks

The CIA has opened direct negotiations with its Pakistani counterpart, the Directorate for Inter-Services Intelligence (ISI), in an effort to secure the release of one its contractors who is standing trial in Pakistan for double murder. Officials familiar with the discussions told TIME that the negotiations began on Wednesday when Lieut. General Ahmed Shuja Pasha, the director-general of the ISI, received a call from CIA Director Leon Panetta. Panetta's call came just a day after the U.S. and Pakistani military leaderships met for a prescheduled meeting in the Gulf emirate of Oman, where the case of the CIA contractor was also discussed. Leading up to the meeting, Admiral Mike Mullen, head of the U.S. Joint Chiefs of Staff, had spoken with Pakistan Army chief Gen. Ashfaq Parvez Kayani at least three times about the contractor.

The case of Raymond Davis, a former special operations soldier who had been working with the CIA as a contractor in Pakistan, has sent relations between the two countries to a dangerous low. Davis is standing trial in the eastern city of Lahore, accused of killing two Pakistanis who had been pursuing him last month. The controversy has caused an uproar in Pakistan, particularly after Washington insisted that Davis should be released under diplomatic immunity because he was acting in self-defense, holds a diplomatic passport and a valid visa. In Pakistan, few are persuaded. A fierce wave of anti-Americanism has arisen, with many Pakistanis disputing whether diplomatic immunity applies. For the powerful Pakistani military and its spies, there are also concerns about the activities of Davis and other contractors operating in the country.

For the ISI, the Davis affair has offered a rare opportunity to exercise leverage over the CIA and even the civilian government of President Asif Ali Zardari. "It's the first time that the CIA has been caught with its pants down," says a Pakistani official. The ISI had faced a series of embarrassing allegations in recent years. "This is an unequal relationship," adds the official. "The Americans bully because Pakistan is in the weaker position. And Pakistanis retaliate in an effort to increase their leverage. It is somehow built into an unequal relationship with a junior partner not being comfortable playing the role a junior partner."

Davis, according to Pakistani officials, had been spying on Lashkar-e-Taiba (LeT), an outlawed militant group that has been involved in the anti-Indian Kashmir insurgency, and other "Punjabi jihadi groups." LeT is also believed to be responsible for the November 2008 Mumbai massacre. Pakistan has so far refused to hand-over the group's leaders. The LeT's chief, Hafiz Saeed, is supposed to be under house arrest but still manages to appear occasionally to lead public rallies.

The CIA and the ISI appear to be at odds over the nature of LeT's activities. "The CIA had told the ISI that it believes that LeT is working with al-Qaeda," said a senior Pakistani official familiar with the discussions. In response, the ISI is said to have denied this was the case. According to the official, the CIA subsequently enlisted the services of contractors, like Davis, to independently establish whether the link existed.

The CIA, however, had not secured authorization from the ISI for the contractors to operate in Pakistan, Pakistani officials said. However, there were no established rules, either. "The ISI never said that the CIA or the Department of Defense couldn't have contractors," said a senior Pakistani official. "They weren't there with Pakistan's authorization, but they were there with Pakistan's knowledge. The ISI knows who these people are, but they want to control them, they want to know what their assignment is."

The ISI has said publicly that it had no knowledge of the contractors, and has alleged that the pro-U.S. government of President Zardari secretly slipped them into the country. Officials close to Zardari deny the charge. Davis, said a senior Pakistani official, was issued his first visa in October 2009, for a period of three months. Subsequently, he was granted two extensions in Islamabad. "When visas are processed in Islamabad, they are vetted by the Foreign Office, the ISI, and the Ministry of Interior," says a senior official. "Of course they knew who he was."

The current negotiations over Davis's fate, says a senior Pakistani official familiar with the discussions, are trying to hammer out an agreement whereby there would be some "face-saving" for the Pakistanis in exchange for the American's release. Initially, the ISI had floated the suggestion that Washington relax its demands that Davis be released under diplomatic immunity and offer compensation to the victims' families. Under Pakistani law, "blood money" is recognized as a means of settling a case of murder. "The two sides are trying to put it back into the box," says the senior official.

At the heart of the dispute is an enduring history of mistrust. The CIA, said a Pakistani official, does not trust the Pakistanis enough to take them at their word. The problem, the official said, is that even if the U.S. were to agree to withdraw all contractors, the ISI would not allow CIA case agents to investigate the activities of groups like LeT. "Pakistanis have to figure out whether we want to look upon the U.S. as an ally or an adversary," said a senior Pakistani official, lamenting the tumultuous nature of the relationship with the U.S.

And, in the background is the future fate of Afghanistan. The army and the ISI, Pakistani officials said, were frustrated with the lack of progress over negotiations toward an endgame settlement there. Pakistan covets a role as the principal interlocutor with militant groups like the Afghan Taliban. Last year, General Kayani hand-delivered a 14-page document outlining Pakistan's view. "The U.S. has said that it understands their concerns," says a western diplomat. "But that's not the same as agreeing with those concerns." By applying pressure over Davis, the Pakistan military hopes to increase its bargaining power.

Toward that end, Zardari aides allege, the ISI is also looking to cut the civilian government down to size and control the relationship with the U.S. The president's aides accuse the ISI of being behind an orchestrated campaign of leaks to the local and international press that have whipped up anti-Americanism and painted the Zardari government as being too weak-kneed before U.S. demands. "They're also sending a message to the U.S.," said a Zardari aide. "They are saying, 'Deal with us, not the civilians.'" Since assuming power, Zardari has been forced to cede ground repeatedly to the powerful generals.

Some officials and analysts believe, however, that the army is in danger of overplaying its hand on this occasion. "This issue, with this [U.S.] Congress, could become really more problematic than anything we've had," says Christine Fair, assistant professor at the Edmund A. Walsh School of Foreign Service at Georgetown University. "The Pakistanis have been very ungracious about American support. We've been the biggest donors in terms of flood relief. And yet, the Saudis and the Chinese who've donated a fraction of that get all the genuflection."

"There are people in this town," adds Washington-based Fair, "who are simply saying, 'F--- this, let's just call Pakistan the enemy.' They are saying Pakistan is supporting the killing of our troops in Afghanistan, they're supporting the LeT, they call [the rogue Pakistani nuclear scientist] AQ Khan a national hero. The fact that the CIA is coming to this conclusion should be very worrisome for Pakistan. For years, the CIA was the only organization in this town that would defend the Pakistanis."