U.S. Aid to Bank Tied to Iraq Is Questioned : Policy: Leahy criticizes Administration payment of $416 million to Gulf institution that helped finance loan to shipyard owned by Baghdad.

The Bush Administration paid more than $416 million to a Persian Gulf bank after the Gulf War despite evidence that the bank was helping finance a loan to a shipyard owned by Iraq and Libya, it was disclosed Thursday.

The payments to Gulf International Bank were criticized in a letter to the Treasury Department by Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Agriculture Committee, as violations of presidential orders banning transfer of U.S. funds to the two nations.

According to documents, the Administration paid more than $416 million to the bank to honor U.S. loan guarantees for food purchases. The guarantees had been extended to Iraq as part of a prewar effort to influence Baghdad. After its invasion of Kuwait in August, 1990, Iraq defaulted on $1.9 billion in loans, leaving them to be paid by U.S. taxpayers.

The Times disclosed last March that the Administration had gone ahead with paying off loans guaranteed by Gulf International despite evidence that Iraq was one of several Gulf states that owned the bank. The new details released by Leahy provided evidence that the bank also was involved in financing the shipyard for Iraq and Libya when it received the U.S. payments.

A bank spokesman said Iraq’s interest in the bank ended in April, 1992. The spokesman said active Iraqi involvement with the bank ended shortly after the Iraqi invasion of Kuwait.

“To focus on Iraq’s former ownership interest is inappropriate, particularly because Iraq has received no economic benefits from its ownership in GIB since the invasion of Kuwait,” said the spokesman.

But public records indicate that the chairman of an Iraqi state-owned bank was appointed to the bank’s board of directors in April, 1991, two months after the cease-fire in the Gulf War and at the time the bank was receiving the restitution from the United States.

Leahy charged that a second bank, the Arab Banking Corp., also had received more than $145 million from the U.S. government because of Iraq’s default on agricultural guarantees. He said the payments were made despite evidence that Libya owns a substantial interest in the bank.

In his letter to the Treasury Department, Leahy said both Gulf International Bank and Arab Banking Corp. “provided financing for an entity owned in part by the government of Iraq” after the imposition of U.N. sanctions in August, 1990. He said the financing amounted to a $30-million loan to expand the shipyard’s operations in Bahrain.

Leahy charged that the funding by the two banks “raises serious questions about whether the Gulf International Bank and the Arab Banking Corp. are complying with the U.N. sanctions against Iraq.”

The spokesman for Gulf International said he was not familiar with the financing of the shipyard, but insisted that the bank had “cooperated scrupulously on international sanctions against Iraq.” A spokesman for Arab Banking Corp. declined comment, as did a spokesman for the Treasury Department.

In Atlanta, meanwhile, testimony continued in federal court at the sentencing hearing of Christopher P. Drogoul, the former manager of an Italian bank branch there who provided $5 billion in loans to Iraq, including nearly $2 billion for purchases of U.S. food.

Paul Von Wedel, an admitted accomplice of Drogoul’s in the scheme, said he felt certain that officials of Banca Nazionale del Lavoro in Rome knew about the loans. But when pressed, he said he had no firsthand knowledge that the scheme was known to anyone outside the Atlanta branch.

When asked by prosecutor Gale McKenzie whether Drogoul had disclosed the existence of a set of secret accounts detailing the Iraqi loans to anyone outside the branch, Von Wedel said: “No, I’m not aware of him disclosing anything from the gray books to anyone.”

Drogoul’s lawyer contends that his client should receive a lesser sentence or be allowed to withdraw his guilty plea because officials at the bank knew of the scheme. But so far there has been only circumstantial evidence that others may have known.

Waas is a special correspondent; Frantz, a Times staff writer, reported from Atlanta.