Lawyers on Front Line in Economic Feud With Iraq

Well before business hours on the morning of Aug. 3, attorney Michael Calabrese was already at work putting the finishing touches on the paperwork for a client who was financing a major new public works project in Iraq.

As the 34-year-old lawyer prepared to fax the draft documents to the New York office of his law firm, Morgan, Lewis & Bockius, he noticed something that had just arrived on the machine.

It was a copy of President Bush’s order banning business with Iraq in response to the previous day’s invasion of Kuwait. One minute, Calabrese had a multimillion-dollar deal on his hands; the next minute, it was off.

It was only the first of many such headaches for Calabrese, and it is representative of the challenges suddenly facing the relatively small cadre of Washington attorneys who understand the arcane corner of the law governing international embargoes.

In this undeclared war with Iraq, lawyers, bankers and business executives have been enlisted as foot soldiers on the economic front. In the end, experts say, they are the ones who will make international trade sanctions translate into real pressure on Baghdad.

History has proven that economic measures can be devastatingly effective and that private interests play a crucial role in their success. In 1980 and 1981, a small group of attorneys representing major banks that held frozen Iranian assets joined with the government in negotiations that finally led to the release of the U.S. hostages in Tehran.

“If we hadn’t put those freeze orders in effect, we might never have gotten those hostages out,” said Lloyd Cutler, who was the White House counsel during President Jimmy Carter’s Administration.

The U.N. trade embargo against Iraq is an unprecedented worldwide effort that offers far greater leverage than earlier sanctions imposed against other countries. But it also involves unique complications.

Answers Sought

The Treasury Department’s Office of Foreign Assets Control said it is being bombarded by more than 500 calls a day from lawyers who pose questions such as these:

* How does a multinational corporation navigate among the more than 20 countries that have agreed to adhere to the U.N. sanctions against Iraq but have interpreted the orders in different ways? In Britain, for example, government orders to freeze bank accounts cover both private citizens’ and Kuwaiti government interests; the United States applies them only to the government.

* Who should swallow the loss when Iraq fails to pay for a load of grain delivered before the trade embargo took effect--the company that sold it or the bank that guaranteed Iraq’s credit?

* Who has legitimate claims to the dozens of shipments worth millions of dollars that have been seized by U.S. Customs to prevent them from reaching Kuwait or Iraq? The shipments range from oil-drilling equipment to flashlights and split peas.

* What about U.S. residents who have deposits in the dozen Kuwaiti-owned banks in this country whose operations are blocked? How do they get the money they need to pay their mortgages or make their payrolls?

If experience is any guide, it could take years--even decades--before some of these issues are resolved. Lawyers say some claims arising from the imposition of the U.S. embargo against Cuba three decades ago remain outstanding.

The task of untangling legal claims arising from the Iraqi sanctions is likely to prove even more complicated when the embargo finally ends because countries around the world are involved in the effort.

Many businesses do not have that kind of time. Cutler, who is now in private practice, said some of his American clients risk going into default on the loans they took out to complete real estate development projects--unless they can get access to funds that they have on deposit in Kuwaiti-controlled banks.

The remarkable degree of international cooperation shown so far will help avert one problem that plagued past U.S. efforts to impose sanctions on countries such as Cuba, Iran and Libya: friction with other countries that are not participating in the effort. Those countries usually consider multinational subsidiaries and bank branches that are located on their soil to be subject to their rules, not those imposed upon the head office thousands of miles away.

In the case of the Iranian freeze, the United States increased its leverage by declaring that its embargo covered assets in overseas branches of U.S. banks. It also declared that those branches could lay claim to Iranian deposits if they were needed to “set off” the funds they were owed by Tehran--a move that put U.S. banks on shaky legal ground, at best.

“We did that knowing it was a close and unresolved legal question” that would provoke numerous challenges in court, acknowledged Warren M. Christopher, chairman of O’Melveny & Myers, a Los Angeles law firm. As a former deputy secretary of State, he was the key negotiator for the U.S. government in its efforts to resolve the crisis.

U.S. officials were able to strike a bargain with Iran before foreign courts had time to rule against them in any of the estimated $3.5 billion worth of suits that were filed against London branches of U.S. banks.

In 1986, when President Ronald Reagan imposed a similarly sweeping freeze on Libyan assets in response to Tripoli’s alleged involvement in terrorism at European airports, U.S. interests were not so lucky. London’s High Court ruled that the Libyan Arab Foreign Bank was entitled to recover $292 million in deposits from the London branch of Bankers Trust of New York--despite the bank’s argument that its hands were tied by the U.S. order.

“We shoot ourselves in the foot frequently when we try to impose our laws extra-territorially,” said Frank Logan, a partner in the Los Angeles law office of Milbank, Tweed, Hadley & McCloy. Logan, as a legal representative of Chase Manhattan Bank, played a key role in the negotiations with Iran.

Deals Get Through

With the major banking capitals of the world participating in the embargo of Iraq, however, those problems should not arise unless the unity of the international coalition begins to fracture, Logan and other legal experts said.

Inevitably, no matter how tight governments and businesses try to draw their nets, some transactions get through.

It took years for the U.S. government to discover that West German companies assisted Libya in building plants that could make poison gas--in violation of international agreements. Belgian firms were accused of forging documents to disguise the fact that goods were being shipped to Libya after first being sent to other places.

So far, government officials say, they do not have a handle on how large the overseas assets of Kuwait and Iraq may be.

Sorting out Kuwait’s foreign assets, more than $100 billion by even the most conservative estimates, presents a particularly difficult challenge, many attorneys said. That is because the government is largely indistinguishable from the vast royal family that has controlled Kuwait since the 1760s.

While the United States and its allies want to keep Iraq from controlling those assets, it is almost as important to ensure that Kuwait’s government in exile has what it needs to continue operating.

The same goes for Kuwaiti citizens.

“All of a sudden, I’m stuck here with my assets and my accounts frozen,” said one Kuwaiti businessman who was on a business trip to the United States when his country was invaded. “We have some relatives over here and some friends. We have to count on them.” He asked that he not be identified for fear of jeopardizing the safety of his family at home.

And consider the plight of the 32-member crew of the Kuwaiti tanker Gas al Kuwait. The multinational crew set sail for Houston more than two months ago, well before the hostilities began. U.S. Customs officials allowed them to unload a cargo of butane in Houston on Aug. 4 but refused to allow the ship to return to Kuwait, where it could fall into Iraqi hands. Now, the tanker sits in international waters off Galveston, awaiting a decision on its fate.

U.S. firms also stand to suffer.

“I have heard from several companies that are owed money by Iraq. Whether they will ever see it, I don’t know,” said John Ellicott, a partner with the law firm of Covington & Burling in Washington.

Abiding by Sanctions

Westway Merkuria, an export firm in Englewood Hills, N.J., has $12 million worth of rice, originally bound for Iraq through the port of Aqaba, Jordan. Now, it sits in New Orleans, detained by U.S. Customs.

An official of the company said it will “comply 100% with the law,” but he complained: “We have a sale, at a price guaranteed by the U.S. government. We don’t understand why we should be prevented from honoring the contract.”

Calabrese, the Washington attorney whose client lost the public works deal, said most firms are willing to abide by the sanctions.

“Every multinational company that I have dealt with in the past 15 days has been uniformly interested in complying with the embargo rather than skirting it,” Calabrese said. But he added, “It means a lot of people are out a lot of money.”

The Treasury Department is working overtime to sort out the various problems. Already, the Office of Foreign Assets Control has issued blanket authorization allowing the completion of transactions such as sales of oil that were loaded before imposition of the embargo.

U.S. financial institutions have also been allowed to accept deposits and clear checks on the accounts of Kuwaiti-controlled firms, as long as they can assure the government that Iraq will get no profit from those transactions.

Overall, Calabrese said, the government has done “a wonderfully efficient job. . . . They will resolve questions relating to millions of dollars of trade over the phone.”

But problems remain--and will for a long time. After all, said attorney Mark Kantor, “snarling things up is part of the idea behind the (government) order.”

Times staff writers J. Michael Kennedy, in Houston, and Douglas Jehl, in Washington, contributed to this story.

BACKGROUND

For nearly a decade, Washington and Tehran have been trying to untangle the financial disputes arising from a U.S. freeze on Iranian assets, imposed after militants seized U.S. hostages in 1979. In May, the two nations announced a tentative accord on 2,370 claims against Iran, totaling $105 million, and 108 small Iranian claims. But about 200 claims, including the biggest and most complex, were left outstanding, to be resolved by a special tribunal at The Hague.