Despite the strong opposition of the Reagan administration, the Democratic-controlled Congress enacted legislation, known as the Boland amendments, that prohibited the Defense Dept., the Central Intelligence Agency (CIA), or any other government agency from providing military aid to the contras from Dec., 1983, to Sept., 1985. The Reagan administration circumvented these limitations by using the National Security Council (NSC), which was not explicitly covered by the law, to supervise covert military aid to the contras. Under Robert McFarlane (1983–85) and John Poindexter (1985–86) the NSC raised private and foreign funds for the contras. This operation was directed by NSC staffer Marine Lt. Col. Oliver North. McFarlane and North were also the central figures in the plan to secretly ship arms to Iran despite a U.S. trade and arms embargo.

In early Nov., 1986, the scandal broke when reports in Lebanese newspapers forced the Reagan administration to disclose the arms deals. Poindexter resigned before the end of the month; North was fired. Select congressional committees held joint hearings, and in Dec., 1986, Lawrence E. Walsh was named as special prosecutor to investigate the affair. Higher administration officials, particularly Reagan, Vice President Bush, and William J. Casey (former director of the CIA, who died in May, 1987), were implicated in some testimony, but the extent of their involvement remained unclear. North said he believed Reagan was largely aware of the secret arrangement, and the independent prosecutor's report (1994) said that Reagan and Bush had some knowledge of the affair or its coverup. Reagan and Bush both claimed to have been uninformed about the details of the affair, and no evidence was found to link them to any crime. A presidential commission was critical of the NSC, while congressional hearings uncovered a web of official deception, mismanagement, and illegality.

A number of criminal convictions resulted, including those of McFarlane, North, and Poindexter, but North's and Poindexter's were vacated on appeal because of immunity agreements with the Senate concerning their testimony. Former State Dept. and CIA officials pleaded guilty in 1991 to withholding information about the contra aid from Congress, and Caspar Weinberger, defense secretary under Reagan, was charged (1992) with the same offense. In 1992 then-president Bush pardoned Weinberger and other officials who had been indicted or convicted for withholding information on or obstructing investigation of the affair. The Iran-contra affair raised serious questions about the nature and scope of congressional oversight of foreign affairs and the limits of the executive branch.

See B. Woodward, Veil (1987); T. Draper, A Very Thin Line (1991).