The Office of Strategic Services was the predecessor of the CIA and it was headed by General William Donovan. An important person in that organization was Allen Dulles.
Dulles came from a prominent family, studied at Princeton University and in 1916 became a State Department diplomat. After receiving a law degree in the 1920’s he became a successful New York lawyer with the firm of Sullivan & Cromwell. His political position in the 1930’s was for intervention on the side of the British.
During the war Dulles joined the OSS and in November 1942 he was sent to Berne, Switzerland to head the OSS station on “Hitler’s doorstep”.
Berne was a hotspot of agent activity both Allied and Axis. The goal of the OSS was to recruit informants and gather intelligence on European affairs. Especially important was the need to recruit German agents to report on that country’s internal condition and policies. The Berne station also had contact with members of the German resistance.
Obviously there was a need for absolute secrecy in communications between the Berne station and Washington. Unfortunately for the Americans it seems some the OSS communications were read by the Germans and their Hungarian allies.
Since OSS was in the business of dealing in secrets such a security compromise must have had important consequences.
The British learned through an agent of theirs that OSS codes were compromised and were distrustful of the OSS organization.
Moreover the OSS people were warned by General Schellenberg of the SD that their codes were being read but instead of doing something about it they decided it was a provocation…
Let’s take a look at the rather limited amount of information available:
From ‘The secret front: the story of Nazi political espionage’ by Wilhelm Höttl, p268
In the autumn of 1944 the Headquarters of the Secret Service in Berlin received its first intimation that an American office existed in Switzerland, the duties of which appeared to be more than those of a normal Intelligence Center. The head of it was a lawyer name Allen Welsh Dulles, who had become prominent at the end of first war as a member of the American diplomatic service in the Versailles peace treaty negotiations, and particularly in the Austro-Yugoslav disputes. The fact that he had been installed in the American Legation in Berne, gave some indication of his real activities. And from his wireless messages to Washington that were picked up and for the most part deciphered and passed to the Germans by the Hungarian monitor service, the German Secret Service was able to obtain accurate knowledge of his views on the great problems of world politics. Unlike the American Minister in Berne, who forwarded to Washington as established facts the wildest and stupidest rumors, which emanated from Germany, Dulles showed himself to be only a man of high intelligence, but also an implacable enemy of Bolshevism, whose opposition was based on knowledge, reasoned argument and clear-sighted vision. This unequivocal attitude seemed to their group, which had for years sought contact with an authoritative American organization, to offer the very chance they had been seeking so long. They set about trying to get in touch with Dulles. Through the intermediary of an Austrian industrial magnate and the German Deputy Air Attache in Berne they quickly succeeded in doing so.
Höttl was head of SD foreign intelligence for Southeastern Europe.
From ‘U.S. intelligence and the Nazis’ by Richard Breitman, p25
By the time the COI became the OSS in 1942, high officials had recognized the value of having a well-stocked base in neutral Switzerland, nearly surrounded by the Axis powers, prepared to defend itself if attacked, but otherwise steering a delicately balanced course. Switzerland had so many economic links with both Germany and Italy that there was bound to be leakage of information through corporate channels. Prominent exiles from Nazi Germany in the country still had lines of information into Berlin. The Swiss government, the International Red Cross, and the Bank of International Settlements might each yield some Nazi secrets if the right people plied their officials. Dulles had just the right qualifications. He almost left for Switzerland too late the journey was strewn with obstacles, and Dulles barely made it across the French border before Germany shut off this route in response to the Allied invasion of French North Africa. Dulles was given the cover of being special assistant to the American minister in Bern, Leland Harrison. Dulles had regular contact with Embassy officials, including Harrison; he even used some State Department codes when his own facilities for communication with Washington were overloaded.
To prove his bona fides, Schellenberg also gave Hewitt another message for Washington: the Gestapo was “onto” Allen Dulles’ espionage work in Bern. They were feeding him false information from informants, and they had broken his codes. Both items turned out to be essentially false—apparently designed to disrupt Dulles’ effective operations. Dulles made little secret of what he was doing, but he was good at separating valuable informants from Nazi plants, and his codes were never broken. He recognized Schellenberg’s ploy.
Schellenberg was head of SD foreign intelligence. During the war he tried to come in contact with allied personalities who could promote a peace initiative between the Reich and the Western Powers. It seems the information he gave Dulles was supposed to prove he was not a provocateur but the outcome was the exact opposite.
From ‘History of MI-6’, p511:
The potential for disaster was demonstrated by Dulles's first contact with the Abwehr representative, Hans Bernd Gisevius, in January 1943, which he reported back to Washington on a cypher which the British ascertained (through their Polish agent Halina Szymariska) had been broken by the Germans. In the middle of April Dulles told Vanden Heuvel that he had seen Gisevius, who had just returned from Berlin and had told him that forty large flying boats had recently been built in Rotterdam to be used for the heavy bombing of London manned by suicide squads. Despite having been alerted to the problem with the cypher, Dulles had reported this to Washington in two telegrams. Dansey thought that Dulles had been 'stuffed' by a deliberate piece of German disinformation. Clearly agitated, he told Vanden Heuvel: 'could you report to the fool [Dulles] who knows his code was compromised if he has used that code to report meetings with anyone, Germans probably identified persons concerned and use them for stuffing. He swallows easily.
British report ZIP/D-S/G.9 of 10th April 1943 mentions the OSS M-138 strip:
What can we conclude from the information presented so far?
First of all the OSS station used diplomatic codes when their own systems were overloaded or simply for reasons of convenience. The Germans could read State Department codes Gray, Brown, A1, C1 and the M-138 strip. OSS messages enciphered with these systems were vulnerable in 1941-44.
The OSS also had available their own codes, which included a set of M-138 strips. It seems that at least in 1943 this was read by the Germans.
OSS communications were read not only by the Germans but also by the Hungarians. It is not clear what systems the Hungarians could decode. However Höttl praised the work of their codebreakers in his book.
The information we have uncovered so far points to considerable security problems for OSS communications from Berne. The full story however is not known.