Most of those who knew about the arms deal were in favor of it. And so the deal continued, and the arms trades grew larger. In November, the U.S. agreed to allow Israel to send 150 Hawk anti-aircraft missiles, 200 Sidewinder missiles, and approximately 40 Phoenix missiles to Iran in a series of small shipments.  North began meeting with Amiram Nir, an Israeli political advisor, who he had worked with in the past.

Complications arose, however, because of the indirect nature of the transfer of arms. The U.S. encountered logistical, security-related, and diplomatic problems replenishing the Israeli supply of weapons. Former Airforce Major General Richard Secord, North's partner in dealing with the contras, was brought into the deal by North through these incidents. 

The Enterprise

It was at this point, in November 1985, that the first funds from the arms sales were diverted to the Nicaraguan Contras. Secord and business partner Albert Hakim had established a company called the “Stanford Technology Trading Group International,” commonly known as “The Enterprise,” which the U.S. government used to conduct covert financial operations and which was often used during the Iran arms deals. Of the $1 million Israel transferred to an Enterprise-owned Swiss bank account to pay for transporting weapons, only $150,000 was spent for those purposes. The other $850,000 was diverted, by North, to be used to support the cContras.

The U.S. further tried to exchange weapons with Iran for hostages and money, to varying degrees of success. McFarlane was sent to Iran with Reagan's approval but failed to secure the release of all of the hostages.

On January 17, 1986, President Reagan signed a Presidential Finding authorizing the more direct transfer of arms to Iran. Israel was still involved, serving as the base. Secord and The Enterprise were to serve as a third party to release the U.S. from any liability—the U.S. would sell arms to The Enterprise, which then sold them to Iran. 

The Diversion

At this point, it was in Ghorbanifar's interest to convince the U.S. to continue to deal with him and to continue to sell arms to Iran. Despite the many logistical difficulties they faced and the fact that Ghorbanifar repeatedly failed to deliver the hostages promised, Ghorbanifar pressed the U.S. to continue working with him. North later reported that in January 1986, Ghorbanifar suggested that he divert any extra money made through the deals to aid the Contras. National Security Adviser John Poindexter, who had replaced the retired McFarlane, approved this plan.

In February, North, Ghorbanifar, Hakim, and an Iranian representative, (first name) Kangarlou, met in Germany. There, they worked out a plan: The U.S. would send 1,000 TOWs  to Iran by February 8, and all American hostages would be released the next day. Secord, via The Enterprise, was to pay the CIA and receive money from Ghorbanifar. Another 3,000 TOWs would be sold after the release of the hostages. In fact, theU.S. sent 1,000 by February 27, and no hostages were released.  However, the money was paid, and Secord was able to send a large amount of money to aid the Contras, via The Enterprise. It is clear that North was aware of the diversion because of what is known as the “Diversion Memorandum,” written in April 1986, which clearly spells out what was going on. When the memo was written, North and other U.S. representatives seemed to still believe that if they just complied with the Iranians' demands, at least some of the hostages would be released.

In May of that year, McFarlane and North traveled to Tehran, but no progress was made. Nevertheless, Ghorbanifar continued to press the U.S. to make deals. Ghorbanifar secured the release of a second hostage, Father Lawrence Jenco, in exchange for some spare missile parts, which restored some of the Americans' faith in him. Nevertheless, North and Secord determined that the U.S. had to find an alternate channel for dealing with Iran, and put Hakim in charge of finding one.

The Second Channel and the Nine-Point Plan

At the end of August, Hakim and Secord came into contact with Ali Hashemi Bahramani, a relative of the Speaker of the Iranian Parliament, Akbar Hashemi Rafsanjani, with whom they had met in Brussels. Secord left their hours-long meeting optimistic that they had found a more ideal and reliable contact in Iran.

North met with this group in Germany in October. Each group brought its own seven-point proposal. While the Iranians' plan was sequential—the U.S. would send a small number of weapons, then Iran would release one hostage, then the U.S. would take another small step, etc.—North departed from this approach, asking for large and immediate action on both ends. For various reasons, Hakim was left to deal with the Iranians on his own, and together, they worked out a nine-point plan that was a combination of the various points the different sides had initially brought to the table. The deal he worked out was substantially less beneficial for the U.S. than the one North had in mind.  Hakim's plan was that the U.S. would send Iran 1,500 TOWs, and afterwards, Iran would release “1 ½ hostages.” Iran would pay the U.S. very well, however, and so the plan was approved by the NSC

On October 28, the first shipment of 500 TOWs was sent to Iran.  Iran paid $3.6 million to The Enterprise, only $2 million of which was turned over to the CIA. The rest, after a small amount of expenses, was diverted to the Contras.

The End

Very shortly thereafter, in November 1986, two Lebanese newspapers broke the story of the Diversion, and the news quickly spread. The arms deals came to an end.