How Russia infiltrated Australia’s spy agency

Sam Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. With Russia at war with Ukraine. Keeping our secrets safe from Moscow is vital. But history tells us Australia hasn’t been very good at spying on spies and knowing when our agencies have been infiltrated. Today, investigative reporters Sally Neighbour and Margo O’Neil on an ASIO mole who sold our intelligence to the Russians and why our spy agency kept it secret for so long.

Sam Hawley: Margot and Sally, let’s start this story in 1983. On one given day of that year, there’s a celebration at an ASIO office in Sydney. There’s a gathering to bid farewell to a man who served with the spy agency for 30 years. It’s, you know, it’s a big deal, isn’t it, Sally?

Sally Neighbour: Yeah. So the guy who’s leaving is called Ian George Peacock. He’s 60 years old. He was the head of Counter-espionage in New South Wales, so a senior operational role. And all his mates gather around, all his workmates to say farewell to him because he’s leaving after all this time. Little do they know…. In fact, no one suspects for one second… That he’s been spying for the Russians for the past 5 or 6 years.

Sam Hawley: You can really picture it, can’t you? All these people, you know, really paying tribute to this man and not knowing that actually he’d been betraying them and not only them, the whole nation.

Sally Neighbour: Yeah, absolutely. And we’ve spoken to some of his colleagues. I mean, most people still don’t know this. This is a very tightly held secret. There’s very few people even within ASIO who know this, and many will be shocked to learn who the traitor was. And they’ve been really devastated. We spoke to some of them about the impact on them of having learned that this man was just betraying them and their country for all of these years. One of them was Harry P Russell, who writes spy novels these days, and he was really quite emotional still about the impact of the betrayal on him.

Sally Neighbour: What was your reaction when you learned that there was a traitor in your office, in the team that you worked on?

Harry Russell: Hate. Utter frustration at realising that the best years of my life were spent working for an opponent.

Sam Hawley: So it’s really upsetting for these members of ASIO who worked with this guy, isn’t it, Margot?

Margot O’Neill: When you think about it, and it was one of the surprises for Sally and I that they kind of feel like their careers were meaningless. Not only was their work against the Soviets continually frustrated, but they felt like they were working for the enemy because all the details, all their secrets were being passed over. And at the same time, this guy would have been reporting on them, their personalities, their families, their friends back to Moscow. So, the betrayal is at a deeply personal as well as professional level.

Sam Hawley: So why on earth was Ian Peacock doing this? What was his motive?

Margot O’Neill: So in the intelligence world, they describe motivations as being part of an acronym, mice, which is money or ideology, or you’ve been compromised or ego. For this guy, it was mainly money.

Sam Hawley: So how did ASIO not know that there was a mole in their midst?

Sally Neighbour: Well, this guy was a very professional operator. He was trained in espionage and counter-espionage and surveillance and counter-surveillance. And the thing is, he was running the counter espionage unit in New South Wales, so he knew exactly where the bugs were, who they were watching, who they were tailing, who they had warrants out against. So he was able to basically fly under the radar. But after a few years they started to realise that pretty much every operation that they did targeting the Russians. So, for example, targeting illegal KGB spies in Australia or diplomats who were suspected of trying to recruit people. Every operation they mounted would just fall through for no clear reason. And when this happened, week after week, month after month, year after year, people did start to suspect that there was a traitor in the ranks.

Neil Fergus, security specialist: Red alarm bells are going everywhere. This was a critical asset.

Sally Neighbour: So one of the people we interviewed was Neil Fergus, who’s a very well known security specialist, and he described exactly how the mole was able to get away with it.

Neil Fergus, security specialist: We’re talking about a mole who was an experienced operations person. This person was highly skilled.

Sam Hawley: It’s important, isn’t it, to remember as well that it wasn’t just Australia’s secrets that he had access to… It was also our closest allies?

Sally Neighbour: Exactly. And that’s the reason why this mole was so very valuable to the KGB. So valuable, in fact, that the then head of the KGB and later head of state, Yuri Andropov, was regularly briefed on what the mole was providing.

Neil Fergus, security specialist: The mole had access to Five Eyes material, and it was a doorway, if you like, or a window into what was going on in the United States and Canada and the United Kingdom for a few years. This was gold for them. Metaphorical gold

Sally Neighbour: For at least a couple of years. He was their only insight, their only access into the Five Eyes Intelligence partnership between Australia, the US, the UK, Canada and New Zealand.

Neil Fergus, security specialist: There was no doubt that the Five Eyes material was of particular significance back in KGB head office. Everything they’re doing is being compromised by the mole.

Sally Neighbour: He had access to pretty much all of the most highly classified records of Australia’s security and defence relationship with the United States and Britain. And remember, this is the time when the Cold War was at its height and the world was really at times on the brink of a nuclear war.

Sam Hawley: Mhm. And how was he getting the information to Moscow? How did he do it?

Margot O’Neill: Dead drops. And for those in Sydney, it’s just a great… It’s an amazing sort of story. They assigned a specialist agent runner called Yuri Shmatkov to run him and then they set up dead drops in places like Centennial Park and Watsons Bay. They had a hiding place. They’d leave the documents and then Shmatkov would later on put the money in another place. So they were doing exchanges. They only occasionally met face to face.

Sam Hawley: Mm Sounds very much like something you’d see in a movie… And it takes a long time, doesn’t it, for ASIO to uncover who it is? John Blaxland from the ANU, he basically says they weren’t very good at trying to figure it out.

John Blaxland, Historian: So the problem was that our principal national counter-espionage counter-intelligence agency was dropping the ball on counter-espionage and counter-intelligence.

Sally Neighbour: Well, they got the first concrete tip that there was a mole in 1980 and they mounted an investigation. But it was, by all accounts, a very mediocre investigation, not very thorough. And inexplicably, ASIO concluded that while there probably was a mole, he wasn’t within their own ranks. And John Blaxland, the official historian of ASIO, is quite scathing in the way he describes ASIO’s handling of this.

John Blaxland, Historian: The fundamental task that ASIO had been set up for as spy catchers they were failing in.

Margot O’Neill: He says actually that it was such a blokey, boozy, club-like atmosphere, you know, you didn’t to get into ASIO didn’t depend on what you knew, but who you knew. And once in you’re all mates. No one really suspected each other.

John Blaxland, Historian: Everybody knew each other and everybody kind of gave each other a degree of benefit of the doubt….

Sam Hawley: And so when did they actually identify that it was Ian Peacock, and then what happened?

Sally Neighbour: Well, it was really only after the end of the Soviet Union, fall of the Berlin Wall, when there was something of a rush of defectors to the west, that they began to get more and more clues. And finally, by 1995 and this is a full 12 years after the moles retired, almost 20 years after he began his treachery, that they’re finally able to identify who the mole was. So you can imagine there must have been back-slapping and whooping in the ASIO office when they got to that point, but they’ve kept it secret all these years. It’s never been revealed publicly.

Sam Hawley: Amazing. And I gather that they then tried to get him to acknowledge that he was the mole?

Margot O’Neill: Yes, there was there was… there were years of meetings with him because what would you want? You would want to know what were the secrets? How much has been compromised? Tell us what you told the Russians. But he denied all the allegations, refused to cooperate. So when he died in 2006, he took his secrets to the grave.

Sam Hawley: Oh, my gosh. It’s a fascinating story. But why do we care about this all this time later? You know, what’s the significance now of this mole being in ASIO all that time ago?

Margot O’Neill: Well, I think a few things, right? First is, you know, you’ve got to learn from your history. But secondly, the current ASIO director General, Mike Burgess, says that foreign espionage activity in Australia is back on. It’s at an all time high… It’s the Russians, Chinese and the rest. It’s worse than it’s ever been.

Mike Burgess, ASIO Director General: This means ASIO is busier than ever before, busier than any time in our 74 year history. Busier than the Cold War. Busier than 9/11….

Margot O’Neill: So, you know, you have to be on your guard. And Neil Fergus, of course, points out that mole hunts never end.

Neil Fergus, security specialist: The point is, we have an extremely aggressive Russian intelligence service operating to the same old rules or lack of rules, if you prefer. It’s alive and it’s happening, and that’s why ASIO needs to be on its game. The mole hunt is never over.

Margot O’Neill: The original mole may have retired in early 80s, but in the mid 90s they’re realising there could still be a mole inside ASIO.

Sally Neighbour: And the other thing is that these events happen 40 to 50 years ago and ASIO and the Australian Government will still not talk about them, will still not release any information. The ASIO investigation is still top classified in other countries. Books have been written and documentaries made and streaming series made about spies and moles. But in Australia we have this obsessive fixation with secrecy and really, you know, investigative journalists like ourselves have to try and bust through that. And that’s part of our aim in doing this program.

Sam Hawley: It’s a grave security breach that’s still obviously reverberating today. And it’s really important as well, isn’t it, because when Russia is at war with Ukraine, we’re meant to be working really, really closely with our Five Eyes partners. What do the security experts you’ve spoken to think needs to happen now?

Sally Neighbour: Well, they think that ASIO needs to be more vigilant than ever, and they make the point that once again, Russia is a vicious, murderous, anti-democratic power. And we we’re seeing that in Ukraine. We see that in the murders of defectors and dissidents by the Russian authorities. And so, you know, the Russian enemy is probably more dangerous and more of a threat to our democracy than it has been in decades. So that’s an absolutely critical danger for everyone to be aware of and for our security services to be right on top of.

Sam Hawley: Sally Neighbour and Margo O’Neill are investigative journalists. You can catch their full Four Corners report on iview. ASIO wouldn’t be interviewed or answer Four Corners’ written questions. This episode was produced by Veronica Apap, David Coady and Sam Dunn, who also did the mix. Our supervising producer is Stephen Smiley. I’m Sam Hawley. ABC News Daily will be back again tomorrow. Thanks for listening.