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                                                                                SCANDALS, Page 39

Lone Wolf or a Pack of Lies?


Critics charge that the Bush Administration staged a cover-up
by fingering a single bank official for making unauthorized
loans to Iraq, and there is mounting evidence that he had
accomplices

By STANLEY W. CLOUD/WASHINGTON -- With reporting Jay Peterzell,
Elaine Shannon and Bruce van Voorst/Washington


    Critics of the Bush administration call the affair
"Iraqgate." The Administration's defenders call it a "witch
hunt." Others call it a confusing mess. But whatever the term,
the overeager attempts by the Reagan and Bush administrations
to make friends with Iraq in the years before the Persian Gulf
War -- and later attempts to contain the political damage of
that failed policy -- have become yet another problem for George
Bush as he struggles against increasingly heavy odds to win a
second term.

    Iraqgate is apparently not another Watergate. Despite
superheated rhetoric from some quarters, there is still little
or no hard evidence of massive abuses of power or illegal covert
operations. The role of the Bush Administration seems to focus
mainly on efforts to inoculate itself against political
embarrassment. But that is bad enough, particularly when so many
nominally nonpolitical agencies are involved -- including the
CIA and the departments of State, Justice, Agriculture and
Commerce. And there remains the possibility that evidence of
more serious charges could be brought.

    Democratic Senator David Boren, chairman of the Senate
intelligence committee, last week called for the appointment of
a special prosecutor to investigate the allegations. In a
defensive counter strike, Attorney General William P. Barr
announced that he had asked retired federal Judge Frederick B.
Lacey of New Jersey to investigate the Justice Department's
handling of the case against an Italian bank, Banca Nazionale
del Lavoro, whose Atlanta branch provided $4 billion in illegal
loans and loan guarantees to Iraq. In the meantime the CIA
continues to turn over new files, including one report that U.S.
and Italian officials had accepted bribes in the B.N.L. case.

    The seeds of the affair were sown back in 1982 during the
Iran-Iraq war, when President Reagan approved a "tilt" to Iraq
as part of a campaign to keep either side from dominating the
Persian Gulf region. That same year, the Reagan Administration
scratched Iraq from its list of countries supporting terrorism
and, in 1984, for the first time in 17 years, extended full
diplomatic recognition to Saddam Hussein's Baghdad government.
During the '80s, the U.S. guaranteed billions of dollars in
commodity credits and loans to Iraq, while the CIA began
secretly sharing intelligence information with Saddam.

    After the Iran-Iraq war ended in 1988, President-elect
Bush was faced, according to a State Department study, with
deciding whether "to treat Iraq as a distasteful dictatorship
to be shunned where possible, or to recognize Iraq's present and
potential power in the region and accord it relatively high
priority . . . [with] steady relations concentrating on
trade." Bush eventually, and not without justification, chose
the latter course. On Oct. 2, 1989, he signed National Security
Directive 26, setting out the ways in which closer ties with
Iraq were to be achieved, including "nonlethal forms of military
assistance."

    Such aid was not supposed to conflict with U.S. nuclear
nonproliferation policies, but that did not prevent U.S. firms
from shipping "dual-use" equipment (exports that have both
civilian and military applications) to Baghdad. Between 1985 and
the invasion of Kuwait five years later, the U.S. government
approved 771 licenses for dual-use items destined for Iraq,
ranging from heavy-duty trucks to radar and communications
equipment. Iraq was denied obvious weapon components but could
obtain items like computers. And when Henry M. Rowan, chairman
of Inductotherm Industries Inc., warned Washington that an Iraqi
order to his company might have nuclear military applications,
he was told not to worry and to go ahead with the deal. "Prior
to Aug. 2, 1990," says a senior Administration official with
some hyperbole, "Iraq was treated just like the United Kingdom
or any other country."

    Aug. 2, 1990, of course, was the day on which Iraq invaded
Kuwait, the day Saddam became, in Bush's words, "another
Hitler," the day the U.S. began moving inexorably toward Desert
Storm. It was also the day on which the previous decade's
history of U.S.-Iraq relations began to be seen by some in the
administration as a potential liability. Indeed, the policy had
begun to unravel even before that date. In late July 1989, two
employees in B.N.L.'s Atlanta office contacted the U.S.
Attorney's office in Atlanta. Mela Maggi and Jean Ivey had an
interesting tale to tell: they said B.N.L.'s branch manager,
Christopher Drogoul, had made, according to their estimates,
more than $1 billion worth of unauthorized loans to Iraq.

    B.N.L., founded in 1913, was once the seventh largest bank
in the world, with 54% of its stock currently owned by the
Italian government. Its stately headquarters building at No. 119
Via Veneto stands directly opposite the U.S. embassy in Rome.
A billion-dollar scandal at a bank that large (the actual
amount turned out to be at least four times greater) could have
major international repercussions.

    FBI agents and U.S. bank examiners raided B.N.L.-Atlanta
at the close of business on Aug. 4, 1989, and Bank of Italy
officials secured B.N.L.'s Rome headquarters. While the
investigation was under way, other banks continued granting
credits to Iraq, backed by the Agriculture Department's
Commodity Credit Corp., primarily for the purchase of U.S. rice.
It was also during this period that evidence of high-level
interest in the B.N.L. case and its potential effects on
U.S.-Iraq policy began to emerge. At one point, for instance,
Jay By bee, an assistant to White House counsel C. Boyden Gray,
made an unusual -- and on the face of it, improper -- telephone
call to Assistant U.S. Attorney Gale McKenzie in Atlanta to ask
"what was going on" with the case. Justice Department officials
deny this phone call had any effect. "We're career prosecutors,"
says Gerrilyn Brill, chief assistant U.S. Attorney in Atlanta.
"We're interested in making cases. Nobody made any improper
suggestions. Nobody would have put up with that." In any case,
on Feb. 28, 1991, a 347-count indictment charged Drogoul and
four Iraqi officials with conspiracy, money laundering and
defrauding both B.N.L. and U.S. bank regulators.

    Drogoul, 43, had joined B.N.L. after spending seven years
with Barclays Bank. (U.S. investigators allege that he left Bar
clays after making $2 billion worth of unauthorized loan
commitments.) According to the indictment in the B.N.L. case,
Drogoul and his Iraqi co-defendants had defrauded B.N.L. by
making a series of unauthorized, low-interest loans to Iraq.
About $1.9 billion worth of the loans was backed by Agriculture
Department guarantees, and another $2.1 billion was
uncollateralized commercial loans used by Iraq's Ministry of
Industry and Military Production. Drogoul used intricate
bookkeeping and money-laundering techniques to hide the
transactions from auditors and regulators. In return, the
indictment charged, Iraqi officials paid Drogoul $2.5 million
directly and deposited an additional $2.25 million in foreign
bank accounts for his use. U.S. prosecutors insisted that
Drogoul acted alone; none of his superiors at B.N.L. offices in
New York or Rome was implicated.

    Drogoul, who had written a 122-page confession for his
first attorney, Theodore Lackland, and was facing 390 years in
prison, agreed to a plea bargain. In his written statement he
said, "I cannot state that the bank [in Rome] was aware of our
activities." In interviews with prosecutors, however, Drogoul
did not always stick to that story. More than once, both during
the investigations and later, he asserted that B.N.L.-Rome was
aware of his loans to Iraq at the time they were made. TIME has
learned that several still classified reports support Drogoul
on this point. At first Iraq had accepted loans signed only by
B.N.L. officers in Atlanta, but as the scale of these loans
increased, the Iraqis asked that they be signed by executives
in Rome. The bank agreed, and its headquarters approved funding
for weapons and other purchases.

    The federal judge in the case, Marvin Shoob, and members
of Congress such as Boren were becoming increasingly skeptical
about Justice's insistence that Drogoul had been a lone wolf. As
a result, just before Drogoul's sentencing hearing, Brill asked
Deputy Assistant Attorney General Laurence Urgenson to
double-check with the CIA to make sure there was no hitherto
unknown evidence of Rome's involvement. On Sept. 4 the CIA sent a
letter to the Justice Department implying that it had no more
than "publicly available" information -- meaning unconfirmed
press reports -- that B.N.L.-Rome had been involved. This was
misleading, as the Justice Department well knew. The CIA had
long since shared with Justice a stack of reports, including
several that dealt with the possibility of involvement by
B.N.L.'s main office, although prosecutors did not consider them
of any value.

    On the day Drogoul was to be sentenced, Congressman Henry
Gonzalez, who had been looking into the case for two years,
announced that he had a summary of classified CIA cables
regarding B.N.L.-Rome's knowledge of the banker's activities.
Judge Shoob immediately asked for an explanation. Deputy
Assistant Attorney General Urgenson requested that the CIA
declassify the Sept. 4 letter so it could be given to Shoob
along with the report and the cables that had gone to Gonzalez.
According to Urgenson, CIA counsel George Jameson acknowledged
that the letter was misleading and asked whether the CIA should
redraft it. Urgenson says he replied that if the CIA wrote a new
letter, the agency should "be mindful of the fact that if you
change [it], you have to explain why you made the change."

    CIA lawyers would later claim that Urgenson's statement
was a form of political pressure. Urgenson denied the
assertion. Meanwhile the Senate intelligence committee had begun
looking into the obvious contradictions between what the CIA was
telling the Justice Department and what it was telling Gonzalez.
Boren was not pleased with the agency's apparent dissembling.
He was even more upset when he learned that on Sept. 30, the day
before Drogoul's sentencing hearing ended, the CIA had
discovered six more classified documents relevant to the case.
By this time Drogoul had a flamboyant new Georgia attorney named
Bobby Lee Cook, who argued that the banker was an innocent pawn
of Rome and Washington. An investigation by an Italian
parliamentary committee leaned toward the same conclusion. Shoob
thus allowed the Justice Department to cancel its plea-bargain
agreement with Drogoul. But U.S. prosecutors still believe they
were right. Says Brill: "[Drogoul] had confessed to the crime
over and over again. It was only when Bobby Lee Cook came in
that he denied he was guilty."

    But, if guilty, did he act alone? In July 1990 B.N.L.'s
president, Giampiero Cantoni, approached U.S. Ambassador Peter
Secchia in Rome and asked whether the ambassador could persuade
Washington to elevate the U.S. investigation to the "political
level." Secchia forwarded the request to Washington by cable.
In an interview last week with TIME's Rome bureau chief John
Moody, the ambassador insisted that neither he nor Cantoni had
meant to interfere with the investigation. Said Secchia: "Taking
it to a `political level' meant that it should go to the
Cabinet level. Taking it to a political level doesn't mean take
it to a higher level so they can squash it. It means taking it
to a higher level that will understand how damaging this can be
to the Italian-American relationship. That's how Cantoni
intended it. In my 3 1/2 years here, not once did anyone
pressure me or ask me to do anything other than what was
reported in that Cantoni cable. They simply wouldn't risk it."

    Whatever the Italians would or would not do, the Bush
Administration has been decidedly reluctant to disclose the
record in this case. For example, TIME has learned that the
National Security Agency has highly classified intercepts of
international communications that -- at least in retrospect --
seem to be relevant. Neither these nor the CIA reports were
disclosed to Drogoul's attorneys. The CIA is still dribbling out
classified cables to Congress and the Justice Department. In
addition, a month after Iraq's invasion of Kuwait, the Commerce
Department sent Congress falsified records of licensed truck
sales to Iraq. The trucks had originally been listed as
"designed for military use." The falsified records changed that
description to "commercial utility trucks."

    Moreover, an intelligence source has told TIME that cables
sent by the CIA station in Rome between September and November
1989 contain information suggesting B.N.L.-Rome did have
knowledge that the Atlanta branch was an important conduit of
huge loans to Iraq. One cable, for example, reports that when
the Italian steel firm Danieli sought a loan from B.N.L.-Rome
to build a steel mill in Iraq, the letter of credit was finally
issued not by Rome but by Atlanta, although Danieli had no
previous contact with that branch and although the amount
exceeded B.N.L.-Atlanta's authorized limit for loans to Iraq.
It is worth noting that this report resembles what Drogoul told
U.S. investigators after the raid on B.N.L.-Atlanta.

    On Oct. 5, Judge Shoob suggested that top officials in the
departments of Justice, State and Agriculture, as well as those
in the intelligence community, were trying "to shape this case."
That's one view of all the foot dragging and bungling. Another
comes from the Justice Department's Ur genson. "This case is
radioactive," says he. "Anything you do is going to be
criticized."