$5-Billion Loss Riles Even Oil-Rich Kuwaitis : Scandal: Parliament’s probe of public funds poses the most serious challenge ever to the ruling family’s power.

This is a country of oil and sand and money, lots of money, and if a little bit of it disappears every now and then, that’s called the cost of doing business.

Kuwaitis, in this land of tinted-glass Mercedes-Benzes and ubiquitous cellular phones, know about moving money around international capitals. Financial scandals--an eyebrow-raising tale of a corrupt sheik or a few extra million pocketed on a real estate deal--add spice to a Kuwaiti business lunch.

But even the most seasoned Kuwaiti financiers have been stunned by the latest fiscal scandal to unfurl its twisted tentacles in the halls of the Finance Ministry: news that the secretive, powerful Kuwait Investment Office--one of the largest institutional investors in the world, at one time controlling $100 billion in public funds--lost $5 billion on its investments in Spain.

That’s lost . As in, nobody knows where the money went, or if they do, they don’t agree. They do know that about $2 billion of it poured into Spain and disappeared during the time that Kuwait was occupied by Iraq, and the office’s new management alleges that some of it may have been siphoned into the pockets of Kuwaitis who didn’t believe they’d ever have a country to go home to again.

Kuwait, for once, is outraged.

“Nobody can believe it. $5 billion?” said a writer for the Kuwait newspaper Al Qabas, whose pages contained daily accounts of the unfolding scandal until the government banned coverage at the end of January. “$2 billion, OK; we can accept that. We can live with that. But $5 billion?”

Nor is it the only money that went traveling during the Persian Gulf War. Government investigators charge that about $100 million may have been illegally collected by the management of the Kuwait Oil Tanker Co., which allegedly leased huge oil tankers at a discount and rented them to the government at a premium.

Then there’s the $20 billion in bad debts that left Kuwait’s banks reeling at the end of the war, forcing the government to move toward buying up the debt--amid revelations that 90% of the money was owed by perhaps 1,000 wealthy Kuwaitis, some of them members of the ruling Sabah family, whose average debt was about $17 million apiece. As many Kuwaitis cynically put it: These are people who need interest-free government buyouts?

Kuwait’s new Parliament, seated last fall for the first time since the ruling emir disbanded it in 1986 when it began poking at an earlier money scandal, has begun trying to unravel the financial skulduggery. And to many it is becoming clear that the lapse in the seating of the Parliament, followed by the invasion of the tiny oil emirate by Iraq in August, 1990, became an opportunity for a few to pocket a lot.

“With Parliament out of session, there was a question of whether you’d ever have a public body with oversight authority you’d have to answer to, and with the war, you began to wonder whether you’d even have a nation to answer to,” said a Western economist based in the Kuwaiti capital.

Kuwait’s 50-member Parliament, which has rapidly become the most vigorous in the Middle East, has demanded details about the investment scandals and salaries paid to a variety of public officials, raising the most serious challenge ever to the power of the ruling family.

A new investment law passed by the assembly last month requires immediate reporting of all public investments, even those involving companies in which the government has as little as a 25% interest, and imposes penalties of up to life in prison for persons guilty of embezzling public money.

The respected Middle East Economic Survey dryly compared the new law to “locking the stable door after the horse has bolted.”

Members of the influential Muslim bloc in Parliament lost a bid to impose Islamic law--chopping off the hands of those caught stealing from the public till--although the proposal attracted some public support.

“These people must be punished,” millionaire businessman Ali Matrouk declared at a recent nighttime tea-and-smoking session with his friends. “We have jails; are they only for common thieves? And if they are guilty, why not cut their hands?”

Kuwaiti law-enforcement officials, hounded by Parliament, were so intent on catching those responsible for the recent scandals that they recalled an outbound Kuwait Airways flight in midair recently, believing that the wife of one of the suspects was aboard. When the plane landed back in Kuwait city, it turned out the passenger was another woman with the same name.

So far, only one of the primary suspects, a man under investigation in the Kuwait Oil Tanker Co. fraud, is in custody, and officials say he has returned $6.2 million to the government. His cars and his wife’s jewels were seized.

But it is the Kuwait Investment Office’s huge losses in Spain that are proving the most elusive, and confounding, to international and government investigators, and the KIO’s former directors, including two cousins of the Kuwaiti emir, Sheik Jabbar al Ahmed al Sabah, remain outside the country.

The KIO controlled the government’s mammoth Fund for Future Generations, billions of dollars of accumulated oil wealth that was supposed to sustain the desert emirate in the years ahead when the oil wells run dry.

After its creation by the present emir during his tenure as finance minister, the KIO earned an international reputation for shrewd money managing, turning $2 billion in investments in the 1970s into $80 billion by 1980.

But under the guidance of financial wizard Ali al Khalifa al Sabah, another cousin of the emir who served as finance and oil minister during the 1980s, the KIO began engaging in what many economists describe as a “fast-buck strategy,” focusing on a policy under which the agency would buy a company, see its share price appreciate, sell it off to a holding company and take the profits to an outside tax haven such as Switzerland.

In places like Spain, the KIO became not just an investor but a manager, and Kuwait’s Grupo Torras SA holding company there controlled companies in fields ranging from chemicals to tourism. At its peak, KIO had investments in Spain worth up to $7 billion; more recently, their value was $5 billion. But a recent report from Salomon Brothers, the U.S. investment bank, put Grupo Torras’ worth, after it sought court protection from creditors, at a negative $400 million.

“We’re confronting a catastrophe,” admitted Ismail Shatti, head of the parliamentary Finance Committee, which is probing the fiscal scandals.

“We have lost $5 billion. This was because of mismanagement. It has disappeared, because the shares have become zero. But right now, we can’t say there is crime in the investment there, at least not all of it. We can talk about half a billion dollars. . . . Where has this half-billion gone? Is it stolen, or simply disappeared? We believe all of this mismanagement was an introduction, let’s say, to steal money in a very clever way. But to prove that--this is the most difficult job.”

KIO’s former managers say they were the victims of a bad Spanish economy; a fruitless attempt to protect Kuwait’s investments by throwing good money after bad, and the result of the Gulf War, when KIO’s holdings became the national treasury-in-exile, responsible for both financing the government and mobilizing international support for the war.

In the 18 months after Iraq invaded Kuwait, KIO officials poured between $2 billion and $2.5 billion more into the Spanish companies, money that subsequently disappeared. Where did it go? Into an attempt to recapitalize the failing companies, as loans to cover cash shortages and to buy shares to bolster stock prices? Or worse?

Spanish bankers, in past press interviews, have claimed to have information that billions were spirited out of the country into offshore companies. Kuwaiti investigators say there is evidence that the KIO was also managing investments for private Kuwaiti investors who may have benefited from insider information about upcoming KIO acquisitions.

Now the parliamentary Finance Committee is trying to find firm answers even to the question of who really controls the KIO.

“In general, this office is not controlled by the national audit office. It is not even controlled directly by the minister of finance,” said Shatti, the committee chairman. “Who controls it?” He laughed, and rattled his prayer beads, and shrugged. “We don’t know.”

The question of the hour in Kuwait city has become how high the investigation will go, or be allowed to go--and for how long. If members of the Royal Family are implicated, will they be prosecuted? And will the feisty Parliament, disbanded once before when criticism of government financial dealings became too vigorous, be allowed to do its work?

“Lots of people think it may go up to Sheik Saad (al Abdullah al Sabah, the crown prince),” a Kuwaiti banker said. “There are big rumors now that the emir will dismiss the Parliament. But people think, really, he can’t do it. The emir would lose international opinion for Kuwait.”

Saad has told the Parliament that anyone found guilty in the Spain investment case is going to jail, no matter who he may be.

Most observers say the Royal Family appears to believe that it will be able to contain the scandal within acceptable limits. “If you like, it’s a bloodletting that they don’t believe will turn into a hemorrhage,” one foreign envoy said.