In a highly sensitive report seen by only a few U.S. leaders, the CIA three years ago identified five Japanese trading companies it suspected of engaging in illegal sales of Western high technology to the Soviet Union.

Among the five was C. Itoh & Co., the giant trading firm that helped arrange the illegal sale by Toshiba of sophisticated propeller-manufacturing machinery to Moscow. This enabled Soviet submarines to run more quietly and thus be more difficult to detect. If the CIA's 1984 warning had brought a crackdown on C. Itoh, the sale of some of the machinery might have been prevented.

The Central Intelligence Agency report was produced by the Technology Transfer Committee, a special CIA bureau created during the Reagan administration to monitor the legal and illegal flow of Western technology to the Soviet bloc. The report on Japan was one of a series focusing on various countries that sell to the Soviets. It is still classified "Secret/Noforn," meaning "no foreign dissemination," even to U.S. allies.

We reviewed the secret report as part of a lengthy investigation in Tokyo and Washington by Dale Van Atta and our associate, Michael Binstein, that began in 1984.

"In practice, some Japanese trading companies will resort to illegal practices and some will not," the CIA report observed. It then went on to identify five Japanese companies, large and small, that the CIA had reason to believe were making at least questionable -- if not outright illegal -- sales of high technology to the Soviets.

In addition to C. Itoh, the firms named by the CIA were Mitsubishi, Mitsui, Marubeni and Tairiku. These and other Japanese firms have used a variety of stratagems -- including setting up subsidiaries in Singapore and Kuala Lumpur, Malaysia -- to sell high-tech items to the Soviets, the report said.

The 1984 report provided a remarkably prescient description of the skulduggery unmasked three years later in the Toshiba scandal.

"Japanese firms often establish small, expendable dummy organizations to act as their intermediaries with Soviet and East European clients," the report said. "The dummy firm is expendable if the deal falls through for whatever reason. The Japanese parent is able to distance itself in a legal context from financial losses or possibly illegal activities of its surrogate."

This is similiar to what Toshiba tried to do. But Congress didn't buy this, since Toshiba owned 51 percent of the subsidiary it tried to blame. Toshiba had to accept responsibility, and both its chairman and president resigned as a result.

A surprising aspect of the Toshiba scandal is that C. Itoh escaped with a slap on the wrist. The Japanese government banned C. Itoh from exporting machine tools to communist countries for -- incredibly -- three months.

Meanwhile, Japan plans to prosecute Toshiba, and the U.S. Congress has been drafting punitive measures against the company. The $17 million transaction may cost American taxpayers billions of dollars as the Pentagon tries to overcome the Soviet advantage in evading U.S. undersea detection technology.