Nearly three years after FBI agents raided the Atlanta branch of an Italian bank that provided billions of dollars to Iraq, the mystery surrounding the politically charged case is deeper than ever.
Classified documents and interviews indicate that American officials were aware well before the raid that, late in the Iran-Iraq war and afterward, the Banca Nazionale del Lavoro's tiny branch in Atlanta was funneling huge loans to Iraq's clandestine international arms procurement network.
Yet over a period of more than two years, the Atlanta branch was able to provide Iraq with loans totaling nearly $5 billion--until two disgruntled employees blew the whistle. On Aug. 4, 1989, FBI agents shut down the operation and carted off 10 boxes of records.
Even after the raid, documents show that Bush Administration officials went to great lengths to keep a lid on the case while the government continued to provide assistance to Iraq, and that the indictment of bank officials was delayed for a year.
A policy of assisting Saddam Hussein's regime in the Iran-Iraq war had been conceived during the Ronald Reagan Administration in an effort to slow the spread of radical Islamic fundamentalism in the Mideast. But after the war ended in 1988, President Bush continued the policy in the hope of influencing the Iraqi dictator to soften his threats to his neighbors.
So, was the BNL branch a rogue operation, a scheme masterminded by the branch manager, as the government contends? Or was the bank a pawn in the covert U.S. tilt toward Iraq? Was the Justice Department investigation slowed by pressure from the White House and State Department? Or were promises of an early indictment overly optimistic in the face of a massively complex financial fraud?
Momentum is building in Congress to request an independent counsel to investigate whether federal laws were violated in the Bush Administration's assistance to Iraq in the months leading up to the invasion of Kuwait on Aug. 2, 1990.
While the appointment of an independent counsel remains uncertain, congressional staffers involved in the planning said the BNL case would be at the top of their agenda if an inquiry is conducted.
Such an investigation would focus more attention on President Bush's personal involvement in the use of American economic aid and sales of sensitive technology to strengthen Iraqi President Saddam Hussein before the Gulf crisis.
If the special prosecutor concluded rapidly that Administration officials knew of BNL's activities or obstructed the criminal investigation of the bank, it could cause political trouble for the President in a tough reelection battle. If no wrongdoing were discovered, Administration policy toward Iraq would be less likely to emerge as a campaign issue.
"I think it's crystal clear that our government knew, even though I can't prove it," said Norman A. Bailey, an economic consultant and senior official at the National Security Council in the Reagan Administration. "Five billion dollars doesn't fall between the cracks."
Administration officials argued before a congressional committee last week that the BNL investigation proceeded normally and that nothing was done to interfere with the Justice Department's probe. They also contended that early warnings about Iraqi involvement in the BNL fraud were not conclusive enough to warrant an immediate shut-off in economic aid to Baghdad.
So far, the BNL story remains shrouded in a fog of conflicting accounts, secret documents and an inconclusive and unfinished federal criminal investigation under way in Atlanta.
The unresolved mysteries include how much BNL money was used by Iraq to buy weapons, whether loans guaranteed by the U.S. government were diverted to buy arms and whether the case was connected to the suicide of Italy's military attache in Baghdad a month after the FBI raid.
But the central riddle is whether the manager of BNL's Atlanta branch could have loaned Iraq nearly $5 billion--including $1.9 billion guaranteed by the U.S. government--without the knowledge of his superiors in Rome and the blessing of U.S. officials.
The federal indictment in the BNL case was returned on Feb. 28, 1991, the day after President Bush declared a cease-fire in the Persian Gulf War and a year after prosecutors had first expected the charges to be filed.
As described in the indictment, the scheme was complex, involving thousands of loan transactions around the world recorded on a set of hidden books. The loans were made directly to Iraqi government agencies, such as the ministry in charge of weapons development, and to dozens of American and European companies doing business with Baghdad.
In all, the Atlanta branch provided nearly $5 billion in loans and letters of credit to Iraq and firms doing business there. The latest figures show that $1.9 billion of the loans were used to buy American food and were guaranteed by the Agriculture Department's Commodity Credit Corp.
When Iraq invaded Kuwait, and halted payments to foreign creditors, $360 million of the American-guaranteed loans issued by BNL were unpaid. Unless the Department of Justice decides that BNL officials in Rome were aware of the fraud in Atlanta, U.S. taxpayers will wind up reimbursing the Italian bank for the credits it issued to Iraq.
So far, the prosecutors contend that the loans were made without knowledge of bank officials in Rome. They say the scheme constituted a conspiracy that defrauded BNL, which is owned by the Italian government, and resulted in fraudulent statements to state and federal banking regulators.
The Atlanta branch manager, Christopher P. Drogoul, devised the scheme, traveling secretly to and from Baghdad and hiding at least $5 million in kickbacks in Swiss banks, according to prosecutors.
Five of Drogoul's co-workers have pleaded guilty after receiving what one of the defense lawyers, Alan Baverman, termed "sweetheart deals" from the government. Sources here say that Drogoul, facing 30 years in prison, is being pushed to plead guilty, too. The pressure increased late last month when prosecutors persuaded a federal judge to revoke the bond on which he had remained free for the last year.
While agreeing to imprison Drogoul until his trial, the judge took the unusual step of expressing skepticism that the ex-banker pulled off such a massive scheme without assistance.
"I can't believe that somebody who was a branch manager of a bank . . . could move $4.5 billion in the fashion that was done without some type of participation by the people in this country and outside of the country," U.S. District Judge Marvin H. Shoob said from the bench.
Shoob did not elaborate on who might have helped Drogoul, but his assertion raised the possibility that the government has not pursued the conspiracy case to its conclusion.
The comment also underscored U.S. intelligence data indicating that officials in Washington were aware of at least a portion of BNL's activities long before the FBI raid.
Intelligence reports as far back as 1986 show that the United States was monitoring BNL's activities with Iraq, according to two sources familiar with the reports. Intelligence analysts suggested in late 1988 and again in the spring of 1989 that loans from BNL in Atlanta were being used by Iraq to finance purchases of weapons technology, according to the sources.
Confirmation seemed to come just weeks after the FBI raid. An October, 1989, "memorandum of conversation" describing a meeting of senior federal officials in Washington suggested Iraq had diverted Commodity Credit Corp. food loans to acquire military goods and used other BNL loans to acquire "sensitive nuclear technologies."
Government investigators later obtained evidence that some of the loans were used for military purposes, according to court files. "As post-indictment investigations continue, the non civilian purposes for which the Iraqi Ministry of Industry and Military Production used the unauthorized, unsecured and 'off book' funds . . . have become even more evident," said a filing by prosecutor Gail McKenzie.
No Hard Evidence
But senior Administration officials testified last week before a congressional committee that investigators found no hard evidence that the portion of BNL loans guaranteed by the U.S. government were diverted to acquire military goods.
"We have no evidence at this stage that there has been a diversion," said Deputy Secretary of State Lawrence S. Eagleburger.
Officials acknowledged under questioning, however, that Agriculture Department investigators had not translated documents in Arabic that might have shed light on possible diversions for military purposes. Other Administration officials said criminal investigators in Atlanta are still probing possible diversion of American food for arms by Iraq and exchanges of U.S. grain for weapons.
Congressional sources say an independent counsel would be expected to focus the BNL phase of the investigation on the period after the August, 1989, FBI raid and whether the subsequent investigation was obstructed.
The raid created policy problems for the Bush Administration. Evidence from the investigation showed early on that senior Iraqi officials and two government-owned banks apparently played a major role in the BNL scheme.
Classified documents show that the Treasury Department and Federal Reserve Board saw the Iraqi involvement as reason for halting economic aid to Iraq. But the State Department and NSC succeeded in retaining a $1-billion aid package, citing a secret order issued by President Bush in October, 1989, mandating increased economic and political ties to Iraq.
The State Department downplayed the seriousness of the BNL investigation despite a classified department cable in September, 1989, suggesting that the Italian Embassy in Baghdad might have been involved in the scandal.
A former Italian military attache in Baghdad committed suicide on Sept. 12, 1989, and the cable quoted an unidentified source as saying the suicide came as a direct result of the officer's implication in the BNL scandal.
The source, described in the cable as someone with "intimate ties to the Italian Embassy in Baghdad," also said the Italian Embassy "is under strong suspicion of complicity" in the scandal.
The following month, BNL's top two officers asked the American ambassador in Rome to raise the case "to a political level" and to "achieve some kind of damage control," according to a classified account of the meeting.
A report last month by an Italian parliamentary commission concluded that BNL officials in Rome knew a considerable amount about the extensive Iraqi business conducted at the Atlanta office and suggested that Bush Administration officials were aware of the activities. The report reached no conclusions about Italian government knowledge.
There are other indications that Drogoul's operation had approval at some level. At the time of the FBI raid, Drogoul was vacationing in France. He holds French citizenship and could have remained there, out of reach of American authorities. But he returned to Atlanta and was interviewed voluntarily several times in August and September of 1989 by federal agents and banking regulators.
"He didn't seem to feel that it was wrong to have done what he did," former FBI agent Joseph W. Hardy testified at a hearing last month. "I got the feeling he didn't feel like it was a criminal act."
Had No Protection
The stance fit with Drogoul's earlier assertions to his colleagues at the Atlanta branch. Alan Baverman, who represents a former BNL employee who has pleaded guilty, said Drogoul repeatedly told co-workers he had approval for the Iraqi loans from senior bank officials in Rome.
"Don't worry. Everybody important knows," Drogoul supposedly said.
Luigi Sardelli, Drogoul's superior in New York until early 1989, said in a recent interview that the Atlanta banker went around him and was in direct contact with the bank's managing director in Rome.
Sardelli conveyed suspicions about the Atlanta operation to Rome in late 1988 and sought a special examination of the branch. But Sardelli said a bank examiner told him, "I'm not going to Atlanta. I've been told to examine your expense accounts."
Drogoul turned out to have no protection, however. Senior Administration officials testified last week that Atlanta prosecutors planned to issue indictments as early as Nov. 15, 1989. The date was pushed back, but documents show that the prosecutors then intended to indict Drogoul and others as early as February, 1990. An investigator acknowledged in an interview last week that the indictment was written and prepared for a grand jury by that February.
But a federal official in Washington familiar with the case said the Atlanta team was unable to assemble a solid case in the early going. "It's one thing to make sexy assertions," said the official. "It's another to prove them."
In the days just before the indictment in 1991, records show the State Department persuaded the Justice Department to reject plans to indict the Central Bank of Iraq. The diplomats reasoned that it would be easier to work with moderates within Iraq after the war if the government bank were not indicted.
Defense attorneys in Atlanta raised the possibility that U.S. officials permitted BNL to operate because the loans fit with the policy of two Administrations to assist Iraq. A defense motion sought records showing that "Bush Administration officials knowingly utilized BNL-Atlanta to militarily arm Iraq."
Prosecutors responded that they had no information that senior U.S. officials knew about or approved the transactions. With all the defendants except Drogoul pleading guilty, the issue has not been pursued in the Atlanta courtroom.
Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee, has spent two years investigating the government's handling of the BNL case. He suspects that BNL was affected by U.S. policy toward Iraq.
"Based on the committee's investigation, it is likely that foreign policy consideration played a key role in the delay of the BNL indictment," said Gonzalez, who called for the independent counsel last week. "The Congress and the public have the right to know the truth about the failed U.S. policy toward Iraq and how the BNL scandal affected that policy."