Iraqi Loan Case Sparks Cloak-and-Dagger Feud : Investigations: Probe opens window on turf wars and intrigue among CIA, Justice Department and FBI.

Flying back to Washington on Oct. 9 from Los Angeles, Atty. Gen. William P. Barr received word that the Justice Department and CIA were blaming each other for withholding crucial information from an Atlanta judge in a bank fraud case involving $5 billion in loans to Iraq.

Aides said that Barr immediately ordered the Justice Department’s public integrity section to investigate--with the aid of the FBI--this latest in a series of controversies surrounding the highly sensitive case of Banca Nazionale del Lavoro, which is owned by the Italian government.

But three days later, to his dismay, Barr read news accounts that said that the FBI was conducting the investigation and that its director, William S. Sessions, had pledged to Senate Intelligence Committee Chairman David L. Boren (D-Okla.) that Justice would not take part in the inquiry. Since the FBI reports to the Justice Department, that would be unusual. (Later, Sessions declared, he had said only that the investigation would have no political interference.)

That same night, ABC News reported for the first time that the Justice Department was investigating Sessions for possible improprieties, some of them involving his wife and executive assistant. After learning of this inquiry, some officials asserted that Justice was retaliating against Sessions.

This tangled web illustrates the extraordinary dispute--even for this election year--involving the CIA, the Justice Department and FBI that has surfaced over the Atlanta bank loan case. It provides a rare window on the inner workings, turf struggles and intrigue among the agencies.

The clash is occurring, some suggest, as key players are trying to hold on to their jobs in a possible change of Administrations, as longstanding feuds are being played out and as lawmakers on Capitol Hill are moving to protect the agencies they oversee.

Already the furor has forced Barr, who has asserted that the Justice Department can investigate any matter fairly, to reach outside the department and name a retired federal judge to look into the handling of the complex BNL case by the CIA and Justice.

The case has centered on prosecution of Christopher P. Drogoul, manager of the Atlanta branch of the Italian bank, as mastermind of the scheme to provide illegal loans to Iraq. Federal prosecutors had decided not to move against officials at the government-owned bank’s Rome headquarters. But at a sentencing hearing for Drogoul, who had pleaded guilty to charges in the case, Judge Marvin H. Shoob, concluding that evidence may have been withheld pointing to knowledge of the scheme at BNL headquarters, ordered a trial for Drogoul.

Two possible motives have been advanced for the Administration to purposely hide knowledge of the loan scheme by high officials of the Italian bank. One is to avoid disclosing details of the Bush Administration’s tilt toward Iraq in the years before the Persian Gulf War and the other is to shelter the Italian government from embarrassment.

“I don’t think the Justice Department has been shaken by anything this bad since the Saturday Night Massacre,” said Rep. Charles E. Schumer (D-N.Y.), a House Judiciary Committee member. He was referring to former President Richard M. Nixon’s 1973 firing of Watergate special prosecutor Archibald Cox, which led to the resignation of then Atty. Gen. Elliot L. Richardson and Deputy Atty. Gen. William S. Ruckelshaus.

The charge that the Justice Department’s investigation of Sessions is linked to the FBI chief’s inquiry into the handling of the BNL case--Barr had asked for the FBI’s help--does not appear to stand up.

The allegations against Sessions, his wife, Alice, and executive assistant Sarah Munford center around charges that they used government phones for personal purposes, that Sessions may have avoided paying District of Columbia taxes improperly and other ethical improprieties.

The inquiries began last summer after allegations by both an author doing a book on the FBI and an anonymous letter writer claiming to be a former FBI agent. That was long before the interagency dispute over the BNL case broke out.

Although the investigation of Sessions does not appear to be linked to the BNL case, Rep. Don Edwards (D-San Jose), chairman of the House Judiciary subcommittee on civil and constitutional rights, which oversees the FBI, charged that the leak of the Sessions investigation violated department rules and was designed to intimidate the FBI chief.

It was learned, however, that at least one news organization was pursuing the Sessions’ investigation on Oct. 8--the day before Barr ordered the joint Justice-FBI inquiry into how the BNL case was handled.

Moreover, if the leak was from the Justice Department, it would not have helped Bush’s tough-on-crime claim. “That’s the last thing we’d want out at this point,” said a political appointee at the department.

Nevertheless, it is an open secret that high Justice Department officials have little regard for Sessions’ performance, preferring to work through Deputy FBI Director Floyd Clarke.

And Alice Sessions emphasized a similar point in an interview with the San Antonio Light Thursday. She said that her husband was the victim of a smear campaign being waged by enemies inside the FBI. Two weeks earlier, she told friends that the Justice Department was trying to run the FBI.

But at a press conference Friday Barr, when pressed by a reporter, expressed confidence in Sessions.

Adding to the tangled web, Frederick B. Lacey--the retired judge named by Barr to investigate the handling of the BNL case by the CIA, Justice Department and FBI--volunteered at the same press conference that he regards Sessions as a “straight arrow” and said that he would not have accepted Barr’s appointment without Sessions’ approval. Lacey said that he would try to determine who leaked information about the investigation of Sessions.

The complex battle appears to extend well beyond the three agencies, reaching even to Capitol Hill. For example, a senior Administration official, contending that Boren has been more critical of Justice than the CIA in the BNL dispute, said he believes that the Intelligence Committee chairman sides with the CIA because of his “natural” desire to protect the agency he oversees.

Boren, in an interview, brushed aside the suggestion, pointing out that his panel’s investigation began by examining why the CIA had provided misleading information in a letter to the federal judge handling the BNL case.

“The first witnesses we put under oath were CIA officials,” Boren said. “The only reason we got to Justice was that when we called the CIA people in and said: ‘Why did you send a letter that you knew was inaccurate?’ they said, ‘We were strongly advised to do so by Justice.’ ”

CIA Director Robert M. Gates, whose confirmation by the Senate depended heavily on Boren’s support, ordered his agency’s inspector general to conduct its own inquiry into the conflict on Oct. 7. That investigation has complicated Justice’s efforts to establish who is responsible, because often the questioner “with the first bite at the apple” obtains the most revealing answers, a source close to the inquiry said.

After it emerged that the CIA had withheld critical information in the BNL case, Boren contacted CIA headquarters and tracked down Gates in Eastern Europe. Boren told Gates that the matter was so serious that he should come back and take charge of it. So far Gates has not taken his advice.