Middle East With a Little Help from Friends

By Richard Hornik

The man who now threatens the peace of the Middle East was on the ropes himself just a few years ago. Saddam Hussein's forces were on the verge of being overrun by Iran's fanatical Revolutionary Guards, and in spite of billions of dollars in aid to Iraq from other Arab states, his weaponry was insufficient, his coffers were empty and his credit rating was abysmal. Despite an informal embargo, the world's armsmakers were willing to sell Iraq practically anything -- for a price. Eventually Saddam found benefactors in the West: nations more fearful of an Iranian victory than of him. France supplied an estimated $12 billion worth of military hardware between 1981 and 1988. Iraq was able to buy sophisticated technology for its missile- development program from willing, or gullible, firms in Britain, Italy, Germany and the U.S. To finance those purchases, the cash-strapped Saddam needed a friendly banker. He found at least two: the Atlanta branch of Italy's largest bank and Uncle Sam.

This month a federal grand jury in Atlanta is expected to hand up indictments in connection with almost $3 billion in unauthorized loans funneled to Iraq through the local branch of the Rome-based Banca Nazionale del Lavoro. Although the individual credits themselves were not forbidden, their sum total violated state and federal banking regulations, as well as those of the home bank in Italy. Federal investigators are reportedly trying to ascertain if BNL Atlanta extended a credit to a British-based company accused of trying to procure for Iraq elements of a triggering device for an atom bomb, a transaction uncovered by a joint U.S.-British sting operation last March.

The U.S. Government connection surfaced when it turned out that a fourth of the export credits extended by BNL had been backed by the Commodity Credit Corporation. The CCC, an arm of the Department of Agriculture, provides guarantees to spur sales of U.S. farm products. But the department's own inquiry revealed that the CCC had no idea whether the credits it had backed were used to purchase U.S. farm commodities that actually reached Iraq, or were resold to third countries for hard currency. Possibly some of the credit guarantees backed shipments of nonagricultural products like transportation spare parts.

In Italy BNL officials attempted to pin the blame on a rogue branch manager in Atlanta. But the trail has also led to accusations that BNL credits were used to finance sales by Italian and other Western firms of equipment for Iraq's Condor 2 missile, an intermediate-range nuclear-capable missile. But uncovering the full details about how the loans were used has proved extremely difficult: as much as $500 million of the credits that BNL Atlanta approved, say Italian sources, do not carry the names of specific companies, making it impossible to determine what they financed.

The indiscretions of BNL and the CCC were badly kept secrets. Says Italian Senator Francesco Forte, a member of a parliamentary commission investigating the BNL affair: "It was widely known in Italy that the way to finance operations with Iraq was through Atlanta." Regulatory negligence in the U.S. banking industry was common during much of the past decade. Congressional watchdogs had been complaining for three years about reports that CCC credits were not carefully supervised. And the Reagan and Bush administrations consistently turned a blind eye to Iraq's pursuit of missiles and chemical weapons. Says W. Seth Carus, a missile-proliferation expert at the Naval War College Foundation: "The U.S. clearly decided to help Iraq in its fight with Iran."

But U.S. assistance apparently did not end when the war did in 1988. Even after the potential misuse of CCC guarantees was disclosed, and despite Iraq's worsening financial condition, the Bush Administration approved an additional $500 million credit line for this year under the same CCC program. Officials argued that any previous problems involving diversion or misuse of its guarantees had been solved.

In spite of Saddam's noisy saber rattling this year, Washington has done nothing to tighten controls over exports of equipment with potentially dangerous applications. The State Department has not declared Iraq a "country of concern," a classification that would impose tighter export controls on a long list of items that might have military applications. In the absence of such a classification, the Commerce Department is currently considering "on a case-by-case basis" 63 applications for licenses to export suspect equipment. The department did belatedly drop Iraq from the itinerary of a special aerospace trade mission by American firms to the Middle East, but the Administration's stance is still ambivalent.

U.S. officials claim that it is better to maintain good relations with Iraq than to isolate it -- the same argument Bush has used to justify continued sales of high-tech equipment to China. But Iraq is far more unpredictable and threatening. Through benign neglect or conscious effort, Washington is helping to make it possible for Saddam Hussein to pursue his own vision of the power balance in the Middle East -- a vision distinctly counter to U.S. interests.

With reporting by Karen Wolman/Rome