The U.S. has given Pakistan's main intelligence agency; ISI (Inter Service Intelligence agency), several hundred million dollars since September 11, 2001. Because of fears that much of that money would be stolen, the U.S. insisted that the ISI put most of that money into tangible objects. Thus the U.S. is relieved that ISI is building a large new headquarters complex in the Pakistani capital. This is not to say that ISI officials had no opportunities for payoffs. Nearly a third of the U.S. money was paid as rewards for the capture or killing of wanted Islamic terrorists. The live ones were turned over to the United States. Pakistan says it captured over 600 of these terrorists, but the actual number is believed to be greater. The U.S. did not look closely at exactly who got the reward money.
For several years now, the United States, Afghanistan, India and many Pakistanis, have been pressuring the Pakistani government to reform the ISI, and not just reduce the corruption. The ISI has long been a power unto itself, with its own agenda and many members who support Islamic radicalism. Last year, the government sought to disband the political wing of the ISI. This section was believed be largely responsible for Pakistani support of Islamic, or simply Pakistani, terrorist operations in Afghanistan and India, as well as support for Taliban and al Qaeda in Pakistan itself. The political wing has also served as a domestic spying operation whenever the military was running the country (which is more than half the time.) Pakistan is currently run by a civilian government that came into power a little over a year ago.
ISI has long supported Islamic terrorists, and now Pakistan appears determined to root out "Taliban spies" in the ISI. The problem is that these Islamic radicals have been operating openly in the ISI for three decades, and were put there by the government in the late 1970s, when it was decided that Islamic conservatism was the solution for Pakistan's problems (corruption and religious/ethnic conflicts.) These guys are not just "Taliban spies," but Pakistani intelligence professionals that believe in Islamic radicalism.
The ISI itself was created in 1948 as a reaction to the inability of the IB (Intelligence Bureau, which collected intelligence on foreign countries in general) and MI (Military Intelligence, which collected intel on military matters) to work together and provide useful information. The ISI was supposed to take intel from IB and MI, analyze it and present it to senior government officials. But in the 1950s, the government began to use ISI to collect intel on Pakistanis, especially those suspected of opposing whatever government was in power. This backfired eventually, and in the 1970s, the ISI was much reduced by a civilian government. But when another coup took place in 1977, and the new military government decided that religion was the cure for what ailed the country, and that ISI would play an important role.
Typically, the Pakistani generals seized control of the government every decade or so, when the corruption and incompetence of elected officials became too much for the military men to tolerate. The generals never did much better, and eventually there were elections again, and the cycle continued. The latest iteration began in 1999, when the army took over, and was only forced, by public pressure, to relinquish power last year. Civilian governments tend to be hostile to the ISI, and apparently this is producing a serious effort to clear out many of the Islamic radicals in the ISI. But as recent attempt by the government to take control of the ISI backfired when the generals said they would not allow it. Nothing is simple in Pakistan.
The ISI grew particularly strong during the 1980s, when billions of dollars, most of it in the form of military and economic aid, arrived from the oil-rich Arab governments of the Persian Gulf. All this was to support the Afghans, who were resisting a Russian invasion (in support of Afghan communists who had taken control of the government, and triggered a revolt of the tribes). The Afghan communists were atheists, and this greatly offended Saudi Arabia, and other Arab countries, who feared that Russia would encourage Arab communists to rebel elsewhere. So the resistance to the Russians in Afghanistan was declared a holy war which, after a fashion, it was. After about nine years of fighting the tribes, the Russians got tired of their slow progress (and more pressing problems back home, like the collapse of their economy from decades of communist mismanagement).
The Russians were gone by 1989 (and the Soviet Union collapsed two years later), but the Afghans promptly fell upon each other and the civil war seemed never-ending. This upset Pakistan, which wanted to send millions of Afghan refugees back home. Few of the refugees were interested as long as Afghans were still fighting each other. So the ISI created its own faction, the Taliban, by recruiting teachers and students from a network of religious schools that had been established (with the help of Saudi Arabian religious charities) in the 1980s. The most eager recruits were young Afghans from the refugee camps. The Taliban were fanatical, and most Afghans were willing to support them because they brought peace and justice. But the Taliban never conquered all of Afghanistan, especially in the north, where there were few Pushtun tribes (most Taliban were Pushtuns, from tribes in southern Afghanistan). The Pushtuns were about 40 percent of the population, and had always been the most prominent faction in Afghanistan (the king of Afghanistan was traditionally a Pushtun.)
Although a military junta was again running Pakistan when September 11, 2001 came along, the president of the country, an army general (Pervez Musharraf), sided with the United States, and turned against the Taliban. But many in the ISI continued to support the Taliban, and the army was too dependent on the ISI (for domestic intelligence, and to control Islamic militants that were attacking India, especially in Kashmir) to crack down on the ISI.
Al Qaeda took this betrayal badly, and declared war on the Pakistani government. The ISI was used to seek out and kill or capture most of the hostile al Qaeda operatives in Pakistan. But the ISI insured that Islamic terrorists who remained neutral were generally left alone. The ISI thwarted government efforts to have the army clear al Qaeda out of the border areas (populated largely by Pushtun tribes, there being more Pushtuns in Pakistan than in Afghanistan). But now, in one sense, it's September 11, 2001 all over again. The U.S. has told Pakistan that it is fed up with getting screwed around by the ISI, and if Pakistan doesn't clean out the ISI, and shut down Islamic terrorists along the Afghan border, NATO, U.S. and Afghan troops will cross the border and do it.
Pakistan wants continued U.S. military aid to bolster its defenses against India. But if it suddenly has a hostile U.S. in Afghanistan, and less (or no) military aid, it's general military situation will be, well, not good. While Afghanistan, and the foreign troops there, are dependent on Pakistani ports and trucking companies for supplies, Pakistan is also dependent on the U.S. Navy for access to the sea. Pakistan does not want to go to war with the United States in order to defend Islamic terrorists it openly says it is at war with. Pakistan is being forced to destroy the Islamic radical movement it has nurtured over the last three decades, although it's still questionable if there's enough political will in Pakistan to actually finish the job. ISI critics also call for more police, and more professional and better equipped ones at that. The U.S. is threatening to restrict aid if the Pakistanis do not reform the police and ISI. This story is by no means over.