Pipeline Deal: How Private Citizens Use Public Power

Even jaded bureaucrats like to flaunt their White House access, and former national security aide Roger W. Robinson was positively beaming on the afternoon of June 24, 1985, after returning from the West Wing office of then-National Security Adviser Robert C. (Bud) McFarlane.

“Guess what,” he crowed to friends. “I just met with Bud and a Swiss billionaire.”

Indeed he had. He had failed, however, to notice the real power in the office.

Seated with McFarlane and Bruce Rappaport, a Geneva oilman promoting a $1-billion Iraqi pipeline project, was E. Robert Wallach, Rappaport’s lawyer and the man who, in later months, would direct efforts to persuade the U.S. government to put its stamp of approval on the deal.

The unfolding story of those efforts, now being studied by independent counsel James C. McKay in his investigation of Atty. Gen. Edwin Meese III, is an object lesson in the ways that private citizens use public power to advance their own ends.

For this Administration, the story is an old one. Central to the Iran-Contra affair was White House support for the private arms deals of Richard V. Secord and Albert A. Hakim. The Wedtech Corp. scandal--which led to Wallach’s indictment on racketeering, fraud and conspiracy charges in December--mushroomed after reports that the small, South Bronx-based private firm was able to apply White House pressure to win a Pentagon contract.

In the pipeline operation, some observers question the White House’s decision to bypass the State Department--the usual channel for foreign policy matters--to pursue an overseas venture of less than vital national interest.

As in the Iran-Contra affair, one U.S. official noted, the Administration ignored its diplomats and turned to the National Security Council to run a foreign operation. This time, it sought to unite Iraq and Israel--Middle East enemies for four decades--through the services of a Swiss oilman and an American attorney general.

Favors Under the Table

The episode also underscores the NSC’s use of under-the-table favors that have produced political or financial benefits for private citizens by skirting procedures designed to make policy on the basis of national interest, not personal gain.

The principal players in the pipeline deal--Iraq, Jordan, Rappaport, the giant construction firm Bechtel Group Inc. and a parade of bankers--had the money and expertise to stretch a steel pipe 590 miles across a desert in the middle of a potential Mideast war zone.

What they sorely needed was the stamp of political and financial stability that would make the venture not just feasible, but profitable. Only the American government could provide that.

Wallach, a San Francisco personal-injury attorney, knew little about pipelines and nothing about Rappaport before the two men met a few months earlier. He did, however, have something about which he frequently and openly boasted: a personal friendship with a man who could open doors, the attorney general of the United States.

Political Clout

“The rest of the team didn’t have any political clout,” one private participant deeply involved in the pipeline deal said last week. “Wallach did.”

He employed that clout in efforts to revive the pipeline deal on at least two critical occasions, in May and September of 1985, when the project faced certain death without U.S. government aid. Along the way, according to sources close to the project inside and outside the government, an above-board business deal reported widely in trade journals and international press took on a tinge of secrecy and political influence that surprised even some of its backers.

“Working legitimately, you could have gotten a legitimate amount of government support for this,” one participant said. “I was damned proud of it. It was a heady feeling to be in a project that involved cooperation between old enemies and might help lead to peace.”

The old enemies, Iraq and Israel, were the reason Wallach’s White House influence was viewed as vital to the pipeline deal.

A Free Flow of Oil

U.S. backing for the pipeline appears to fall in line with the Administration’s long-standing policy of maintaining a free flow of oil from the region. At the same time, however, that support could have added significant weight to Iraq’s side of the scale in its seven-year war with Iran. While the United States remains militarily neutral in the conflict, the Administration has openly blamed Iran for continuing the war.

Iraq, for its part, was desperate to replace two major export routes for its domestically produced oil, both lost in its war with Iran. Iranian air strikes destroyed Iraq’s Persian Gulf oil terminals in 1980, and Iran’s ally, Syria, had denied Iraq the use of its pipelines in 1981.

The proposed Iraq-to-Jordan pipeline, which ended at the Red Sea port of Aqaba, Jordan, was to be their successor. The San Francisco-based Bechtel had studied the project in 1983 and had even sought help from a U.S. government agency, the Overseas Private Investment Corp., in insuring the line’s terminus at Jordan.

OPIC, a quasi-private firm, provides long-term “political risk” insurance for U.S. companies’ projects in volatile foreign nations where commercial insurance companies are wary of staking their money for more than a few years. OPIC was willing in principle to insure the Jordan terminal if the pipeline was built.

A Sticking Point

But Israel was a sticking point. Israeli jets had destroyed Iraq’s only nuclear reactor in a surprise 1981 air strike. Iraq refused to join the pipeline project without an ironclad guarantee that Israel would not attack this facility as well.

“We felt we couldn’t obtain those guarantees,” Bechtel spokesman Al Donner said last week. “So we went looking for someone who we felt could.”

The man they found in January, 1985, with help from Japanese business contacts, was Rappaport--professional oil baron, longtime friend of the Israeli prime minister at the time, Shimon Peres, and a staunch backer of Jerusalem. Rappaport became a partner, receiving certain oil rights at both ends of the pipeline in exchange for obtaining “security guarantees” from Israel.

Within weeks, sources say, he produced a letter from Peres expressing support for the project. But that was not enough.

“Rappaport could bring assurances that Israel wouldn’t attack the pipeline, but why would Iraq and Jordan trust him?” said Eric Garfinkel, OPIC’s general counsel, who has reviewed the affair since taking the post last year. “They needed something from someone who wasn’t so close to Israel.”

Politically Touchy

“Something” included insurance for the politically touchy project so that financiers could recover their investment should Israel break its pledge not to attack it. Without insurance, investors would not participate and Iraq and Jordan would not allow construction.

In February, 1985, Rappaport hired Wallach as an attorney to work with Bechtel and other American interests on the project. As Meese acknowledged last week in a public statement, Wallach came to him seeking help on the pipeline. On June 24, Wallach and Rappaport met privately with McFarlane at Meese’s request.

Sources say McFarlane called in his aide Robinson, then head of the National Security Council’s international economic affairs office, and gave him a single charge: to find a way to insure the pipeline so that it could be financed and built. The project was to be a closely held secret, U.S. sources quote McFarlane as saying; not even the CIA was to be told about it.

Three days later, Wallach and Rappaport were retracing Bechtel’s tracks at OPIC. This time, however, the object was not simply to cover the risk to the terminal at Aqaba, but to draw up an insurance package for the entire project--end to end.

Brush With Oblivion

Wallach had rescued the pipeline from its first brush with oblivion. But the task ahead remained daunting, OPIC officials now say.

OPIC’s guidelines bar it from providing more than $150 million of insurance to a single project; the pipeline required $400 million to $450 million. There was another drawback: Since OPIC was insuring an investment and not the project itself, the agency had nothing to salvage from the pipeline should it be destroyed.

Nevertheless, OPIC’s president, Craig A. Nalen, said last week: “We felt this project was more important than most, and we do hundreds every year. The fact that the NSC took a personal interest in it certainly made me look at it more closely.”

“It was considerably larger than we were used to dealing with,” one OPIC official familiar with the project said. “I remember Wallach stating that it was very important and that it had clearance at high levels in the White House.”

OPIC aid was worth more than a simple insurance policy to the pipeline venture, agency officials agree. Its insurance costs about the same as commercial policies, $1.50 or $2 per $1,000, but it brings with it a halo of U.S. commitment--one that would have reassured Iraq and Jordan, and that may have eased the task of attracting financial backers.

“By getting OPIC approval, you’ve got the imprimatur of the U.S. government,” Garfinkel said. “And I think that makes a difference from the parties’ standpoint. The stamp of government approval, U.S. involvement, makes things seem safer.”

The pipeline deal consumedOPIC and NSC attention through the summer, but with little progress. The partners traveled overseas and back seeking private insurers who would participate in an OPIC-led guarantee, but found few takers, according to current and former U.S. officials close to the project.

By September, those officials say, OPIC and Wallach had arrived at a tentative package: It would provide $150 million in insurance, and at least one private insurer, said to be New York-based Citicorp, would offer another $250 million, enough to see the pipeline through the four to five years needed to recover investors’ money. Backing that up would be a $150-million “salvage package” aimed at bailing out OPIC and others should the project be destroyed in a war.

‘Money for Salvage’

“They wanted money for the salvage package from anybody and everybody,” one private source said. “They were looking for Rappaport to put up some of it, for Bechtel to put up some of it and for Israel to put some up.”

A series of draft letters of commitment for Israel and others were drawn up but never signed or even distributed, that source said. One reason, according to several people, was that Rappaport backed out of a tentative commitment to help fund the salvage package, threatening to kill the entire deal.

It was at that point, knowledge-able sources say, that Wallach was again called on to exert his influence to rescue the project.

With the package crumbling, “Wallach proposed using U.S. aid to Israel as a security package” in its place, one OPIC source said. The proposal had serious problems, including the likely need for congressional approval and the question of whether one Congress could commit U.S. aid that a future Congress would legally control.

“When Wallach asked what it would take to persuade us, we said that the only agency that could render a legal opinion would be the Department of Justice,” one source said. “And he said: ‘That can be arranged.’ ”

Doubts About Maneuver

OPIC’s chief lawyer, Robert B. Shanks, expressed doubts about the maneuver, sources said. Nalen, OPIC’s president, put it this way: “What we were trying to abort--to shed light on--was that unusual scheme, and I use that word ‘unusual’ carefully.”

OPIC asked Meese to produce a legal opinion on the plan. Meese referred it to an aide in the Justice Department’s Office of Legal Counsel, Allan Gerson, who produced a letter that sources say suggested alternative ways of packaging the deal.

Some call the action questionable. Acting as a private citizen on Meese’s behalf, Wallach had interviewed Gerson for his job at justice years earlier. Gerson also did not inform his superior, Ralph W. Tarr, who normally approved all opinions coming out of the office.

Meese said last week that the matter had been “properly referred” but did not explain why Tarr was not informed.

OPIC officials never saw the Gerson opinion, and the agency apparently dropped out of the pipeline effort soon afterward. But Wallach remained, sources say, and shifted his efforts from the financial to the political sphere.

In October, he and Meese met with Peres as the prime minister visited Washington for talks with President Reagan. Days later, Wallach and a National Security Council aide delivered another letter of agreement to Peres in New York, where he was addressing the United Nations. And roughly a month later, Peres returned a letter to McFarlane, legally pledging not to attack the pipeline and to commit U.S. aid as a security bond for the project in return for certain environmental concessions at the Aqaba terminal.