Lone Wolf Or a Pack of Lies?

By STANLEY W. CLOUD 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 counterstrike, 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 Bybee, 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 Barclays 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 Urgenson. "This case is radioactive," says he. "Anything you do is going to be criticized."

With reporting by Jay Peterzell, Elaine Shannon and Bruce van Voorst/Washington