U.S. Failed to Interview Iraq Loan Case Witness : Persian Gulf: Documents show a key middleman said Italian bank officials knew of aid to Baghdad.

A key middleman in the Iraqi bank loan scandal told an Agriculture Department official in the spring of 1990 that executives of Italy’s largest bank had known that a branch in Atlanta provided secret loans to Baghdad, according to documents and interviews.

The information was relayed to prosecutors, the records indicate. However, investigators turned down a chance to question the middleman and decided that bank officials in Rome had been unaware of the loans, greatly restricting the scope of the corruption case.

The disclosure adds to mounting questions about the investigation into $5 billion in loans that helped finance Iraq’s military arsenal before the Persian Gulf War. It also could lend credence to charges that the investigation was deliberately truncated by the Bush Administration for political reasons.

“The failure to interview a key witness in one of the biggest bank fraud episodes in our nation’s history raises serious questions about an Administration cover-up,” said Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Agriculture Committee.

The loans were provided to Iraq between 1985 and 1989 by the Atlanta branch of Banca Nazionale del Lavoro, which is owned by the Italian government. Federal agents discovered the loans in August, 1989, but prosecutors soon concluded that the scheme was carried out by the branch manager without the knowledge of officers in Rome.

The encounter between the middleman and the agriculture official is described in internal Justice Department documents. A spokesman said the department would have no comment.

According to the records, Jordanian businessman Wafai Dajani told a senior Agriculture Department lawyer at a cocktail party in Baghdad in April, 1990, that BNL officials knew of the loans. The lawyer, Kevin Brosch, was in Iraq as part of an audit team examining abuses in U.S.-guaranteed loans to Iraq.

Dajani has extensive international business dealings and is the brother of a former Jordanian Cabinet minister. He served as an intermediary between the Iraqis and BNL, brokering grain sales financed by the bank and guaranteed by the Agriculture Department. He also dealt with BNL officials outside Atlanta, a source close to Dajani said.

In a telephone interview from his London home Thursday, Dajani declined to discuss his conversation with Brosch, although he confirmed that he met the lawyer and they talked about the BNL case.

Brosch was unavailable Thursday, but a senior Agriculture Department official confirmed that he had described the encounter to prosecutors when he returned from Baghdad.

On July 2, 1990, Atlanta prosecutor Gale McKenzie recounted Brosch’s meeting with Dajani in an internal memo and said agents had located Dajani and planned to question him. However, he was never interviewed.

At a court hearing in Atlanta last month, Arthur J. Wade, the senior investigator in the case, said Dajani agreed to talk with prosecutors but was turned down by McKenzie because of undisclosed conditions attached to his offer.

“We did not expect Wafai Dajani to confess to what was going on here,” Wade said. “The interviewing of Wafai Dajani would not have . . . been productive.”

In February, 1991, prosecutors planned to indict Dajani in connection with the loans, according to Justice Department documents. But his name was dropped from the indictment about the time the State Department pointed out Dajani’s ties to King Hussein’s government in Jordan and said charging him might be seen as an effort to punish Jordan for its support of Iraq in the Gulf War.

In recent weeks, the government’s investigation has been marred by numerous disclosures. Federal agents never questioned BNL officials in Rome or examined records there, instead relying on material brought to Atlanta by the bankers. Also, a White House lawyer telephoned the prosecutor early in the inquiry to express concerns and the Italian ambassador pressed the Justice Department to restrict the investigation.

Most recently, it was disclosed that CIA files indicating that Rome officials knew of the loans were withheld from the federal judge handling the case. The CIA and Justice Department have blamed each other for the omission.

Newly obtained records show that prosecutors were worried as early as 1990 that the CIA might have known about BNL’s dealings with Iraq.

“As you well know, experience has demonstrated that CIA knowledge and participation can seriously impact a decision to prosecute,” a senior prosecutor in Atlanta wrote to Deputy Atty. Gen. Mark Richard on July 3, 1990.

The government says the CIA was not aware of the scheme while it was under way, but a special investigator has been appointed by the attorney general to examine the role of the CIA in the case and the overall handling of the investigation by the Justice Department.

U.S. District Judge Marvin H. Shoob, who presided over the BNL case in Atlanta for 18 months, has said Washington officials may have hampered the inquiry either to protect the Italian government from damaging disclosures or to avoid criticism of the Administration’s policy toward Iraq.

Rep. Henry B. Gonzalez (D-Tex.) accused the Administration on Thursday of refusing to provide documents that it promised to Congress about the investigation of the BNL loans to Iraq. In a letter to President Bush, he asked for all records of contacts between the White House and other federal agencies on the BNL case.

“Documents continue to be denied,” said Gonzalez, chairman of the House Banking, Finance and Urban Affairs Committee. “This isn’t cooperation. It’s stonewalling.”

Times staff writer Ronald J. Ostrow contributed to this story.