TIME: Inside Iran's Secret War for Iraq

A TIME investigation reveals the Tehran regime's strategy to gain influence in Iraq--and why U.S. troops may now face greater dangers as a result

The U.S. Military's new nemesis in Iraq is named Abu Mustafa al-Sheibani, and he is not a Baathist or a member of al-Qaeda. He is working for Iran. According to a U.S. military-intelligence document obtained by TIME, al-Sheibani heads a network of insurgents created by the Iranian Revolutionary Guard Corps with the express purpose of committing violence against U.S. and coalition forces in Iraq. Over the past eight months, his group has introduced a new breed of roadside bomb more lethal than any seen before; based on a design from the Iranian-backed Lebanese militia Hizballah, the weapon employs "shaped" explosive charges that can punch through a battle tank's armor like a fist through the wall. According to the document, the U.S. believes al-Sheibani's team consists of 280 members, divided into 17 bombmaking teams and death squads. The U.S. believes they train in Lebanon, in Baghdad's predominantly Shi'ite Sadr City district and "in another country" and have detonated at least 37 bombs against U.S. forces this year in Baghdad alone.

Since the start of the insurgency in Iraq, the most persistent danger to U.S. troops has come from the Sunni Arab insurgents and terrorists who roam the center and west of the country. But some U.S. officials are worried about a potentially greater challenge to order in Iraq and U.S. interests there: the growing influence of Iran. With an elected Shi'ite-dominated government in place in Baghdad and the U.S. preoccupied with quelling the Sunni-led insurgency, the Iranian regime has deepened its imprint on the political and social fabric of Iraq, buying influence in the new Iraqi government, running intelligence-gathering networks and funneling money and guns to Shi'ite militant groups--all with the aim of fostering a Shi'ite-run state friendly to Iran. In parts of southern Iraq, fundamentalist Shi'ite militias--some of them funded and armed by Iran--have imposed restrictions on the daily lives of Iraqis, banning alcohol and curbing the rights of women. Iraq's Shi'ite leaders, including Prime Minister Ibrahim al-Jaafari, have tried to forge a strategic alliance with Tehran, even seeking to have Iranians recognized as a minority group under Iraq's proposed constitution. "We have to think anything we tell or share with the Iraqi government ends up in Tehran," says a Western diplomat.

Perhaps most troubling are signs that the rising influence of Iran--a country with which Iraq waged an eight-year war and whose brand of theocracy most Iraqis reject--is exacerbating sectarian tensions between Sunnis and Shi'ites, pulling Iraq closer to all-out civil war. And while top intelligence officials have sought to play down any state-sponsored role by Tehran's regime in directing violence against the coalition, the emergence of al-Sheibani has cast greater suspicion on Iran. Coalition sources told TIME that it was one of al-Sheibani's devices that killed three British soldiers in Amarah last month. "One suspects this would have to have a higher degree of approval [in Tehran]," says a senior U.S. military official in Baghdad. The official says the U.S. believes that Iran has brokered a partnership between Iraqi Shi'ite militants and Hizballah and facilitated the import of sophisticated weapons that are killing and wounding U.S. and British troops. "It is true that weapons clearly, unambiguously, from Iran have been found in Iraq," Defense Secretary Donald Rumsfeld said last week.

How real is the threat? A TIME investigation, based on documents smuggled out of Iran and dozens of interviews with U.S., British and Iraqi intelligence officials, as well as an Iranian agent, armed dissidents and Iraqi militia and political allies, reveals an Iranian plan for gaining influence in Iraq that began before the U.S. invaded. In their scope and ambition, Iran's activities rival those of the U.S. and its allies, especially in the south. There is a gnawing worry within some intelligence circles that the failure to counter Iranian influence may come back to haunt the U.S. and its allies, if Shi'ite factions with heavy Iranian backing eventually come to power and provoke the Sunnis to revolt. Says a British military intelligence officer, about the relative inattention paid to Iranian meddling: "It's as though we are sleepwalking."

The Iranian penetration of Iraq was a long time in planning. On Sept. 9, 2002, with U.S. bases being readied in Kuwait, Supreme Leader Ayatullah Ali Khamenei summoned his war council in Tehran. According to Iranian sources, the Supreme National Security Council concluded, "It is necessary to adopt an active policy in order to prevent long-term and short-term dangers to Iran." Iran's security services had supported the armed wings of several Iraqi groups they had sheltered in Iran from Saddam. Iranian intelligence sources say that the various groups were organized under the command of Brigadier General Qassim Sullaimani, an adviser to Khamenei on both Afghanistan and Iraq and a top officer in the Iranian Revolutionary Guard Corps.

Before the March 2003 invasion, military sources say, elements of up to 46 Iranian infantry and missile brigades moved to buttress the border. Positioned among them were units of the Badr Corps, formed in the 1980s as the armed wing of the Iraqi Shi'ite group known by its acronym SCIRI, now the most powerful party in Iraq. Divided into northern, central and southern axes, Badr's mission was to pour into Iraq in the chaos of the invasion to seize towns and government offices, filling the vacuum left by the collapse of Saddam's regime. As many as 12,000 armed men, along with Iranian intelligence officers, swarmed into Iraq. TIME has obtained copies of what U.S. and British military intelligence say appears to be Iranian Revolutionary Guard Corps intelligence reports sent in April 2003. One, dated April 10 and marked CONFIDENTIAL, logs U.S. troops backed by armor moving through the city of Kut. But, it asserts, "we are in control of the city." Another, with the same date, from a unit code-named 1546, claims "forces attached to us" had control of the city of Amarah and had occupied Baath Party properties. A 2004 British army inquiry noted that the Badr organization and another militia were so powerful in Amarah, "it quickly became clear that the coalition needed to work with them to ensure a secure environment in the province."

For many Iraqis in the south, the exile militia groups brought with them forbidding religious strictures. "These guys with beards and Kalashnikovs showed up saying they'd come to protect the campus," says a student leader at a Basra university. "The problem is, they never left." Militants frequently "investigate" youths accused of un-Islamic behavior, such as couples holding hands or girls wearing makeup. "They're watching us, and they're the ones who control the streets, while the police, who are with them, stand by," says a student leader who did not wish to be identified. "From the beginning, the Islamic parties filled the void," says a police lieutenant colonel working closely with British forces. "They still hold the real power. The rank and file all belong to the parties. Everyone does. You can't do anything without them."

Military officials say they believe Iranian-funded militias helped organize a mob attack in the southern township of Majarr al-Kabir on June 24, 2003, that resulted in the execution of six British military-police officers. According to a classified British military-intelligence document, a local militia leader is "implicated in the murder of the 6 RMP [Royal Military Police]." The man heads a cell of the Mujahedin for Islamic Revolution in Iraq (MIRI), a paramilitary outfit coordinated out of the Iranian Revolutionary Guard's base in Ahvaz, Iran. Although U.S. and British officers think it unlikely the soldiers were killed on orders from Revolutionary Guard officers, they agree that the slayings fit within the Iranian generals' broad guidelines to bog coalition forces down in sporadic hit-and-run attacks.

The Iranian program is as impressive as it is comprehensive, competing with and sometimes bettering the coalition's endeavors. Businesses, front companies, religious groups, NGOs and aid for schools and universities are all part of the mix. Just as Washington backs Iraqi news outlets like al-Hurra television station, Tehran has funded broadcast and print outlets in Iraq. A 2003 Supreme National Security Council memo, smuggled out of Iran, suggests even the Iranian Red Crescent society, akin to the Red Cross, has coordinated its activities through the Iranian Revolutionary Guard Corps. The memo instructs officials that "the immediate needs of the Iraqi people should be determined" by the Guard's al-Quds Force.

More sinister are signs of death squads charged with eliminating potential opponents and former Baathists. U.S. intelligence sources confirm that early targets included former members of the Iran section of Saddam's intelligence services. In southern cities, Thar-Allah (Vengeance of God) is one of a number of militant groups suspected of assassinations. U.S. commanders in Baghdad and in eastern provinces say similar cells operate in their sectors. The chief of the Iraqi National Intelligence Service, General Mohammed Abdullah al-Shahwani, has publicly accused Iranian-backed cells of hunting down and killing his officers. In October he blamed agents in Iran's Baghdad embassy of coordinating assassinations of up to 18 of his people, claiming that raids on three safe houses uncovered a trove of documents linking the agents to funds funneled to the Badr Corps for the purposes of "physical liquidation."

A former Iraqi official and member of Saddam's armored corps, who identifies himself as Abu Hassan, told TIME last summer that he was recruited by an Iranian intelligence agent in 2004 to compile the names and addresses of Ministry of Interior officials in close contact with American military officers and liaisons. Abu Hassan's Iranian handler wanted to know "who the Americans trusted and where they were" and pestered him to find out if Abu Hassan, using his membership in the Iraqi National Accord political party, could get someone inside the office of then Prime Minister Iyad Allawi without being searched. (Allawi has told TIME he believes Iranian agents plotted to assassinate him.) And the handler also demanded information on U.S. troop concentrations in a particular area of Baghdad and details of U.S. weaponry, armor, routes and reaction times. After revealing his conversations to U.S. and Iraqi authorities, Abu Hassan disappeared; earlier this year, one of his Iraqi superiors was convicted of espionage.

Intelligence agencies say Tehran still funds various political parties in Iraq. Documents from Iranian Revolutionary Guard Corps files obtained by TIME include voluminous pay records from August 2004 that appear to indicate that Iran was paying the salaries of at least 11,740 members of the Badr Corps. British and U.S. military intelligence suspect those salaries are still being paid, although Badr leader Hadi al-Amri denies that. "I've told the American officers to bring us the evidence that we have a deal with Iran, and we will be ready, but they say they don't have any," he says.

What remains murky is the extent to which Iran is encouraging its proxies to stage attacks against the U.S.-led coalition. Military intelligence officers describe their Iranian Revolutionary Guard Corps counterparts' strategy as one of using "nonattributable attacks" by proxy forces to maximize deniability. What's uncertain, says a senior U.S. officer, is what factions within Tehran's splintered security apparatus are behind the strategy and how much the top leaders have endorsed it. Intelligence sources claim that Brigadier General Sullaimani ordained in a meeting of his militia proxies in the spring of last year that "any move that would wear out the U.S. forces in Iraq should be done. Every possible means should be used to keep the U.S. forces engaged in Iraq." Secret British military-intelligence documents show that British forces are tracking several paramilitary outfits in Southern Iraq that are backed by the Revolutionary Guard. Coalition and Iraqi intelligence agencies track Iranian officers' visits to Iraq on inspection tours akin to those of their American counterparts. "We know they come, but often not until after they've left," says a British intelligence officer.

Shi'ite political parties do not dispute that the visits occur. And a steady flow of weapons continues to arrive from Iran through the porous southern border. "They use the legal checkpoints to move personnel, and the weapons travel through the marshes and areas to our north," says a British officer in Basra. Top diplomats and intelligence officials know that some Iranian officers are providing assistance to Shi'ite insurgents, but it's dwarfed by the amount of money and materiel flowing in from Iraq's Arab neighbors to Sunni insurgents.

Western diplomats say that so far, the ayatullahs appear to be acting defensively rather than offensively. An encouraging sign is that even Shi'ite beneficiaries of Tehran exhibit strains of Iraqi and Arab nationalism; and many have strong familial and tribal ties with the Sunnis. "We are sons of Iraq. The circumstances that forced me to leave did not change my identity," says Badr leader al-Amri. He's proud of his cooperation with the Revolutionary Guard to battle Saddam but says it extended only "to the limit of our interests." An informed Western observer thinks that while those groups maintain a "shared world view" with Tehran, much as Brits and Americans share each other's, they are now trying to balance their interests with those of their backers and are eager to wield power in Baghdad in their own right. "I think you'll never break a lifelong relationship," says the senior U.S. military officer, "but as time goes by, as they become politicians fighting local issues, they will change."

That may be true. But Iran shows every sign of upping the ante in Iraq, which may ultimately force the U.S. to search out new allies in Iraq--including some of the same elements it has been trying to subdue for almost 20 years--who can counter the mullahs' encroachment. The Western diplomat acknowledges that Iran's seemingly manageable activities could still escalate into a bigger crisis. "We've dealt with governments allied to our enemies many times in the past," he says. "The rub, however, is, Could it affect [counterinsurgency efforts]? To that I say, 'It hasn't happened yet, but it could.'" The war in Iraq could get a whole lot messier if it does.