Their brief ritual seemed straight out of a James Bond novel.

The American, speaking first, would say in Latin, "Vincit qui se vincit." (He conquers who conquers himself.)

The European man, code-named Dynamo, would reply, "Verbum pat sapienti." (A word is enough for a wise man.)

Then they would match halves of a torn playing card, the nine of diamonds. While this scene may have been common during the Cold War, Dynamo was no common spy.

Documents unsealed in a case settled in Cincinnati federal court last week reveal that the man called Dynamo was paid to spy for the U.S. government even though intelligence reports showed that he was considered a Nazi war criminal in Yugoslavia.

American spymasters also were willing to overlook that Dynamo - a Croatian priest named Krunoslav Dragonovic - had been accused of using loot plundered from Holocaust victims and others to buy new names and new lives for others fleeing Europe, including the notorious Klaus Barbie.

U.S. intelligence agents even arranged, over objections by the State Department, for Dragonovic to visit Cleveland, where newspaper reports show he spoke at St. Paul Croatian Church in 1961 about the plight of Croatian refugees in communist Yugoslavia.

These once-secret documents offer a rare glimpse into a murky, morally quirky era.

They leave no doubt that the United States, fearing Soviet military might, had willingly recruited a Nazi henchman to run a spy network out of an office in Rome near the Vatican, gathering military data from all over Eastern Europe. He used priests, refugees and contacts behind the Iron Curtain to collect intelligence, feeding the Pentagon data about rocket bases, ammunition depots, military plans and rumors that the Soviets had atomic weapons in Yugoslavia.

The Pentagon documents show Dragonovic was on the U.S. payroll in the late 1950s and early 1960s, using the code names Dynamo and SETAF 41.

The records aren't clear what happened to Dragonovic after he left the U.S. payroll, but he apparently was granted amnesty of some sort in Yugoslavia, to which he returned in his later years. He died there in 1983 at age 79.

Ned Lebow, director of Ohio State University's Mershon Center for the study of national security and international law, called U.S. intelligence's recruitment of Dragonovic "absolutely reprehensible."

"He had consorted with people who committed atrocities. He helped war criminals. Then we say forget it, we have to fight communism. That was so stupid it's almost criminal," said Lebow, whose parents perished in a Nazi death camp at Auschwitz.

"People like that weren't interested in helping the United States. They were out simply to advance their own interests and to protect themselves."

Vatican Bank accused

The unmasking of the secret financial relationship between the United States and Dragonovic begins in 1999 with a class-action lawsuit filed in San Francisco that accuses the Vatican Bank, the Franciscan Order and the Swiss National Bank of laundering hundreds of millions in loot taken by Nazi-allied officials from Yugoslavia in 1941-45. The lawsuit seeks restitution. The Vatican has moved for dismissal, which the court must rule on.

In the meantime, attorney Jonathan H. Levy, who filed the class-action suit, also filed a Freedom of Information Act suit against the U.S. government to have Dragonovic's files unsealed. He was hoping to find intelligence files that might show that gold stolen from Ukrainian and Yugoslavian Holocaust survivors had been laundered through accounts at the Vatican Bank.

The Freedom of Information case was transferred from San Francisco federal court to Cincinnati, where Levy lives. It was settled earlier this month after the government declassified 337 pages in Dragonovic's files.

"It's pretty interesting, but it's not like reading a novel," said assistant U.S. Attorney Gerald F. Kaminski, who handled the case.

Former Undersecretary of State Stuart E. Eizenstat led a government panel in the late 1990s that delved into classified U.S. documents about gold and valuables looted by the Nazis. He said Dragonovic has been a shadowy figure since the end of World War II, and up until now there was no proof that he had been on the U.S. payroll.

Eizenstat said Dragonovic's name repeatedly turns up in U.S. and British intelligence records from the late 1940s as someone who controlled a stash of wartime loot. But there was nothing his panel obtained in CIA and Pentagon files that confirmed suspicions that he had been an American spy.

"We tried to get as much material declassified as possible. We still knew there was additional material. They [intelligence agencies] were concerned about protecting their sources," Eizenstat said. "What this shows is that after the war . . . they were often playing both sides against the middle."

Ally of Klaus Barbie

Born in 1903, Dragonovic studied theology and philosophy in Sarajevo. Before turning to the priesthood, he wanted to become an engineer and spent five semesters at a college in Vienna, Austria.

At the beginning of World War II, according to the State Department, Dragonovic was an official in the Ministry for Internal Colonization - the agency reportedly responsible for the confiscation of property in Bosnia and Herzegovina.

In 1943, he went to Rome as a representative of the Croatian Red Cross. After Germany's defeat, he smuggled war criminals to safety, "taking advantage of contacts inside the International Red Cross and other refugee and relief organizations," said the State Department, citing CIA files.

When Klaus Barbie, the Gestapo officer known as the "Butcher of Lyon," raced for shelter in Bolivia in 1951, Dragonovic helped arrange his escape. Barbie left Genoa bearing an immigration visa obtained with fake documents naming him Klaus Altman.

One of the newly declassified documents, an Aug. 28, 1959, military intelligence report noting his recruitment as a U.S. spy, said Dragonovic "has been branded a war criminal . . . and would face death if he ever returned to Yugoslavia."

Yet despite that knowledge, Army intelligence officials hired Dragonovic in 1959.

He was 56 when he went to work for the United States. With piercing gray eyes and light brown hair, he stood 6 feet tall. He spoke several languages and usually wore black clerical robes covering his 185-pound frame when he met with U.S. agents. An "operational plan" outlining Dragonovic's mission said he was supposed to collect information for the United States from his own espionage network. But he was also being used to penetrate the Vatican and "provide information of value to this unit from access he has to Vatican Intelligence."

State Department officials say they had no idea he was a spy.

"We never saw the documents alleging that Dragonovic was an agent," said Rita Baker, a State Department employee who worked on the reports about Nazi loot. "I always called him Dragon. We suspected there were a lot of alliances made that couldn't stand the light of day."

William Slany, the Cleveland-born historian who actually prepared the State Department's reports about Nazi loot, said he tried and could not gain access to many classified records about Dragonovic.

"We asked," he said. "We had a security clearance and couldn't get them. Dragonovic was not a nice guy. I think basically they [the intelligence agencies] didn't want to acknowledge any of it."

War stories, plum brandy

But the newly declassified records are clear that American intelligence agents in the 1950s and 1960s knew about Dragonovic's pro-German activities.

Sometimes he even regaled them with war stories shared over a bottle of plum brandy in his apartment.

In a June 1960 account of one late-night rendezvous, two U.S. handlers wrote that Dragonovic openly "spent some time recounting his past experiences" with the Ustasha, the Nazis' puppet government in Croatia.

After hearing him reminisce about a government that was accused of killing 700,000 Jews, Gypsies and Serbs, they said Dragonovic gave them rosaries that had been blessed by the pope. They, in turn, dropped off his monthly payment of 60,000 Italian lire (worth between $100 and $150 then, depending on the exchange rate) from Army intelligence.

"Dynamo continues to be a good friend to this unit," the U.S. agents overseeing Dragonovic reported. "He humbly accepts the money paid him and never complains."

Dragonovic's Cleveland visit probably wouldn't have happened without assistance from U.S. intelligence operatives, the newly declassified documents show.

A two-page memo recounts a March 1961 meeting in Trieste, Italy, between Army military intelligence officers and a State Department consular official about getting around snags in obtaining U.S. travel documents for Dragonovic.

When he did get the visa, Dragonovic spent time in Cleveland, New York and Chicago.

The Cleveland visit included a stop on May 14, 1961, at St. Paul Croatian Church on E. 40th St.. He was billed as a social worker who had been helping Croatian refugees since the end of the war. His speech was to include an appeal for funds to benefit the refugees, according to an article in The Plain Dealer.

There are hints in the declassified records that he may have been involved in other business on his trip.

The records show he wanted Army intelligence in Europe to arrange an appointment with someone called the "Chief," while he was in the United States.

Spies come and spies go

Eventually, U.S. intelligence's relationship with Dynamo soured.

Dragonovic was fired in 1962. His American handlers began complaining that his work product included duplicates of material already collected by other spies.

And, as Ned Lebow of Ohio State suggested, there was reason to be suspicious about Dragonovic's motives - the reports say some of the U.S. funds he was supposed to pass on to other operatives never reached them.

Only recently has Dragonovic begun to emerge as a major figure in State Department reports attempting to trace gold, art objects and other valuables looted by the Nazis.

In a June 1998 report about looted treasures, the State Department said much of the gold and valuables spirited out of the Nazi puppet state in Yugoslavia wound up with Dragonovic. But, the report added, the treasure is "still unaccounted for."

The report said there was evidence that the treasure, worth an estimated $80 million in the 1940s, was used to help "war criminals and other fugitives from justice in Europe after the end of the war."

Dragonovic was labeled the "prime mover" in a ring that issued war criminals identity cards with false names.

Where the case goes from here is still a mystery, said Milosh Milenkovich, a Parma Heights lawyer who was co-counsel on the lawsuit in Cincinnati.

"We're trying to piece together a puzzle that has been classified. We're going back 50 years in time and trying to piece it all back together."

Contact Bill Sloat at:

bsloat@plaind.com, 513-631-4125