Justification of Iraq Aid Found Flawed in 1990

An Agriculture Department report used in recent months by the Bush Administration to defend its prewar assistance to Iraq was known to be flawed and incomplete before it was released in 1990, according to internal documents and interviews.

A senior federal investigator cited the deficiencies when he tried to delay release of the report, which stemmed from an inquiry into allegations that Iraq had misused U.S.-backed loans.

Records show that the official complained the report represented an incomplete and “rosy” picture of Iraq’s abuse of the loan program, which included paying bribes to U.S. exporters and possibly trading food for arms. Releasing the report could embarrass the Administration, he warned.

But the Agriculture Department, after pressure from President Bush’s national security adviser, released the report essentially unchanged. It said that the department’s internal auditors had uncovered no evidence Iraq had traded goods bought with U.S. loans for weapons and did not suspend its aid to Baghdad.

“The Administration’s investigation of Iraqi abuses was a whitewash at best,” said Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Agriculture Committee, which has been investigating the Iraqi loan guarantees. “At worst, it was an unsuccessful effort to hide a foreign policy failure.”

Concerns about the accuracy of the Agriculture Department report come in the wake of recent questions about the thoroughness of a simultaneous criminal investigation into a massive loan scheme involving Iraq and the Atlanta branch of Italy’s Banca Nazionale del Lavoro.

The criticism has centered on the apparent failure by U.S. government prosecutors to pursue key evidence and the withholding of intelligence files, possibly to avoid disclosing the extent of Administration aid to Iraq.

The BNL case has become a major issue in the final weeks of the presidential campaign, with Democrats accusing the Administration of a cover-up and Administration officials denying that there was an effort to conceal information. U.S. Atty. Gen. William P. Barr has appointed an outside investigator to examine the BNL matter.

Dissatisfied with the appointment, all eight Democrats on the Senate Judiciary Committee asked Barr on Monday for an independent counsel, who would not report to the Justice Department, to investigate the government’s handling of the BNL inquiry. The House Judiciary Committee made a similar request Friday.

An Agriculture Department spokeswoman declined to comment Monday on the 1990 Iraqi report or the criticisms of it.

The Agriculture Department inquiry that led to the report was initiated in response to evidence uncovered in the BNL investigation. The two sets of investigators even collided later when they tried to interview the same Iraqi officials.

When FBI agents raided the Italian bank’s Atlanta branch in August, 1989, they found evidence of $5 billion in illegal loans to Iraq. Nearly $2 billion had been guaranteed by the Agriculture Department through its Commodity Credit Corp. to promote U.S. farm exports.

Investigators discovered indications early that food bought with the loans may have been traded by Iraq for military goods. They also uncovered evidence that Iraq had demanded bribes from U.S. exporters participating in the program.

Agents from the FBI and the Agriculture Department inspector general’s office pursued the bank case, and internal auditors from Agriculture began to examine the loans.

In early 1990, both teams wanted to interview the same Iraqi government officials, but officials in Washington decided that only one group would be able to interview the Iraqis. The lead agent in the criminal inquiry later testified in court that it was decided that the auditors would interview the Iraqis because both groups believed the Iraqis would lie anyway.

In April, 1990, the audit team interviewed Iraqi officials in Baghdad and examined documents indicating possible misuse of the loans. The documents, however, were in Arabic and never were translated.

In late April, 1990, the first draft of the audit investigation was written and, in an unusual step, sent to the National Security Council at the White House for review. It also was reviewed by Craig Beauchamp, the assistant inspector general for investigations at the Agriculture Department, who immediately found that the auditors did not thoroughly investigate many allegations about Iraq’s abuse of the program.

On May 8, 1990, Beauchamp telephoned Lawrence A. Urgenson, a senior attorney at the Justice Department who was supervising the criminal investigation of BNL. He told Urgenson that the report was a “very incomplete picture of Iraqi involvement” in abuses and warned that the Justice and Agriculture departments “could be embarrassed” by its release, according to Beauchamp’s notes of the conversation, which were obtained by The Times.

Two days later, Beauchamp again complained to Urgenson, saying that the report painted “a rosy picture” of Iraq. He said that he had tried to persuade his superiors to delay the report’s release.

Urgenson apparently took the warning seriously and responded with a letter to Agriculture officials saying that criminal investigators had evidence of Iraqi complicity in criminal abuses of the loan program, including demanding bribes. But the letter did not address whether goods had been traded for weapons.

At the time, Iraq was scheduled to receive another $500 million in loan guarantees. Beauchamp and others were trying to halt the program, but the White House wanted to keep it open to avoid straining relations with Baghdad, according to documents.

On May 18, 1990, Brent Scowcroft, the President’s national security adviser, contacted then-Agriculture Secretary Clayton K. Yeutter and urged him to hold off suspending the loan guarantees, according to internal documents.

Yeutter complied and did not announce the suspension of the program when the audit report was released on May 21. The additional $500 million was still pending when Iraq invaded Kuwait in August, 1990, according to various documents and interviews.

Arthur J. Wade, the lead agent in the criminal case, recently told congressional investigators that additional evidence has been developed indicating that Iraq traded food bought with the guaranteed loans for other goods. The type of goods remains under investigation.

Frantz is a Times staff writer and Waas is a special correspondent.