Russ W. Baker
IRAQGATE - The Big One That (Almost) Got Away
Fri Aug 8 01:44:23 2003

March/April 1993 | Contents

The Big One That (Almost) Got Away
Who Chased it -- and Who Didn't

by Russ W. Baker

Baker, a member of the adjunct faculty at Columbia University's Graduate School of Journalism, is a free-lance writer who regularly contributes to The Village Voice. Research assistance was provided by Julie Asher in Washington and Daniel Eisenberg in New York.

ABC News Nightline opened last June 9 with words to make the heart stop. "It is becoming increasingly clear," said a grave Ted Koppel, "that George Bush, operating largely behind the scenes throughout the 1980s, initiated and supported much of the financing, intelligence, and military help that built Saddam's Iraq into the aggressive power that the United States ultimately had to destroy."

Is this accurate? Just about every reporter following the story thinks so. Most say that the so-called Iraqgate scandal is far more significant then either Watergate or Iran-contra, both in its scope and its consequences. And all believe that, with investigations continuing, it is bound to get bigger.

Why, then, have some of our top papers provided so little coverage? Certainly, if you watched Nightline or read the London Financial Times or the Los Angeles Times, you saw this monster grow. But if you studied the news columns of The Washington Post or, especially, The New York Times, you practically missed the whole thing. Those two papers were very slow to come to the story and, when they finally did get to it, their pieces all too frequently were boring, complicated,and short of the analysis readers required to fathom just what was going on. More to the point, they often ignored revelations by competitors.

The result: readers who neither grasp nor care about the facts behind facile imagery like The Butcher of Baghdad and Operation Desert Storm. In particular, readers who do not follow the story of the Banca Nazionale del Lavoro, which apparently served as a paymaster for Saddam's arms buildup, and thus became a player in the largest bank-fraud case in U.S. history.

Complex, challenging, mind-boggling stories (from Iran-contra to the S&L crisis to BCCI) increasingly define our times: yet we don't appear to be getting any better telling them. In the interest of learning from our mistakes, this reporter examined several hundred articles and television transcripts on Iraqgate and spoke to dozens of reporters, experts, and generally well-informed news consumers.

Before evaluating the coverage, let's summarize the Iraqgate story itself:


The United States and its European allies have laws and policies designed to prevent arms and military technology from getting into the hands of developing countries, especially where there is a likelihood of their reckless deployment. If these controls were aimed at anyone, certainly they were aimed at the highly repressive, swaggering Iraqi regime, with its history of threatening both its neighbors and its citizens.

Still, when Saddam went to war against Iran, becoming the world's chief practitioner of chemical warfare, U.S. realpolitikers dubbed him the lesser of two evils, and the one less likely to disrupt the oil flow. The essence of Iraqgate is that secret efforts to support him became the order of the day, both during his long war with Iran and afterward.

Much of what Saddam received from the West was not arms per se, but so-called dual-use technology -- ultra sophisticated computers, armored ambulances, helicopters, chemicals, and the like, with potential civilian uses as well as military applications. We've learned by now that a vast network of companies, based in the U.S. and abroad, eagerly fed the Iraqi war machine right up until August 1990, when Saddam invaded Kuwait.

And we've learned that the obscure Atlanta branch of Italy's largest bank, Banca Nazionale del Lavoro, relying partially on U.S. taxpayer-guaranteed loans, funneled $ 5 billion to Iraq from 1985 to 1989. Some government-backed loans were supposed to be for agricultural purposes, but were used to facilitate the purchase of stronger stuff than wheat. Federal Reserve and Agriculture department memos warned of suspected abuses by Iraq, which apparently took advantage of the loans to free up funds for munitions. U.S. taxpayers have been left holding the bag for what looks like $ 2 billion in defaulted loans to Iraq.

All of this was not yet clear in August 1989, when FBI agents raided U.S. branches of BNL, hitting the jackpot in Atlanta. The branch manager in that city, Christopher Drogoul, was charged with making unauthorized, clandestine, and illegal loans to Iraq -- some of which, according to the indictment, were used to purchase arms and weapons technology. Yet three months after the raid, White House officials went right on backing Saddam, approving $ 1 billion more in U.S. government loan guarantees for farm exports to Iraq, even though it was becoming clear that the country was beating plowshares into swords.

At the time, inquiring minds wondered whether Drogoul could possibly have acted alone in such a mammoth operation, as the U.S. government alleged. Was there a formal, secret plan to arm Iraq? And did the U.S. government engage in a massive coverup when evidence of such a plan began to emerge?

In fact, we now know that in February 1990, then Attorney General Dick Thornburgh blocked U.S. investigators from traveling to Rome and Istanbul to pursue the case. And that the lead investigator lacked the basic financial know-how to handle such an investigation, and made an extraordinarily feeble effort to get to the bottom of things. More damningly, we know know that mid-level staffers at the commerce department altered Iraqi export licenses to obscure the exported materials' military function -- before sending the documents on to Congress, which was investigating the affair.

Eventually, it would turn out that elements of the U.S. government almost certainly knew that Drogoul was funneling U.S.-backed loans -- intended for the purchase of agricultural products, machinery, trucks, and other U.S. goods -- into dual-use technology and outright military technology. And that the British government was fully aware of the operations of Matrix Churchill, a British firm with an Ohio branch, which was not only at the center of the Iraqi procurement network but was also funded by BNL Atlanta. (Precision equipment supplied by Matrix Churchill was reportedly a target this January when the Western allies renewed their attack on Iraq).

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It would later be alleged by bank executives that the Italian government, long a close U.S. ally as well as BNL's ultimate owner, had knowledge of BNL's loan diversions. It looked to some like an international coalition. As New York Times columnist William Safire argued last December 7, "Iraqgate is uniquely horrendous: a scandal about the systematic abuse of power by misguided leaders of three democratic nations to secretly finance the arms buildup of a dictator."

Safire had been on the case since 1989, turning out slashing op-ed pieces. But readers of the Times's news pages must have wondered where Safire's body-blows were coming from, since the news columns contained almost nothing about Iraqgate for the longest time.


Not everyone was slow to spot trouble. The coverage might be said to have begun in 1987, when Alan Friedman, a correspondent in Italy for the London Financial Times who was writing a book -- Agnelli: Fiat, and the Network of Italian Power -- learned of a European-based arms-procurement network that had gathered equipment for Iraq. In the book, published in 1988, he explored a five-year-old joint Argentine-Egyptian-Iraqi effort to build a ballistic missile capable of carrying a nuclear warhead, code-named CONDOR 2. Friedman's claims that Iraq was developing a nuclear weapon were shrugged off by colleagues in the press.

In August 1989, while working in Milan, Friedman noticed a four-line press release from Banca Nazionale del Lavoro. "Irregularities," it seemed, had been uncovered at BNL's Atlanta branch. (Later, Friedman would learn that this was the bank's way of acknowledging something troubling that had just transpired, unnoticed by the press: the FBI raids on BNL's U.S. branches.) Shortly thereafter, a London tipster told Friedman to look at a seemingly unrelated story -- the possible role of a British company, Matrix Churchill, in secretly arming Iraq. When Friedman phoned a source in Rome and mentioned both firms, he was told to get on a plane and come down for a little chat. It lasted all night.

Beginning in September 1989, a Financial Times team, reporting from Milan, Baghdad, and London, laid out the first charges that BNL, relying heavily on U.S. government-guaranteed loans, was funding Iraqi chemical and nuclear weapons work. Led by Friedman, who relocated to New York City in early 1990, the reporters went on to produce about 300 articles over three years, painting a compelling portrait of a massive -- and seemingly coordinated -- international effort to aid Iraq. For the next two and a half years, the Financial Times provided the only continuous newspaper reportage on the subject.

The London paper tied CONDOR 2 to BNL Atlanta -- which had just been publicly identified as the source of $ 3 billion in unauthorized loans to Iraq. And in one 1989 article it warned that the BNL story was more than just another dull tale of banking malfeasance: "The CONDOR story raises questions about the effectiveness of the commitment of Western governments to preventing military technology transfer." It pointed out that, while U.S. intelligence had long bragged about aggressively monitoring the transfer of military technology, Washington had fallen down on the job. The paper noted that if government sleuths had been serious about stopping the arms flow, they could have followed either the money trail or the technology trail. "In each case, they appear to have slipped up," it concluded.

The Financial Times extensively quoted top former officials at the International Monetary Fund, the Pentagon, and elsewhere, who expressed alarm over Export-Import Bank loan guarantees to Iraq. Some asserted that Washington had, as one of them put it, "allowed and abetted the development and stockpiling of a major chemical warfare capability" in Iraq. Among the companies shipping militarily useful technology under the eye of the government, according to the Financial Times, were Hewlett-Packard, Tektronix, and Matrix Churchill, through its Ohio branch.

The most striking thing about the paper's revelations is that they were published before Saddam Hussein invaded Kuwait in 1990. Douglas Frantz of the Los Angeles Times, who deserves a lot of credit for his own reporting on Iraqgate, nevertheless says the Financial Times was without question the early leader on the story. "Events subsequent have shown inmost cases they were on the money," he says.

By early 1990 the Financial Times was no longer alone. Representative Henry Gonzalez, chairman of the House Banking Committee (who also had noticed the four-line BNL press release back in 1989), began a long, lonely crusade to expose the affair. Soon he would be entering related documents into the Congressional Record in late-night speeches before an empty chamber. Attorney General Thornburgh even wrote to him, demanding that he stop looking into BNL in the interests of "national security." He didn't. Meanwhile, many reporters, accepting the administration's line that it was shocked -- shocked! -- to discover the BNL subterfuge, treated Gonzalez as a crank.

On August 2, 1990, Saddam Hussein invaded Kuwait and the debate began in the U.S. over an appropriate response. But only a handful of reporters bothered to ask where he had acquired the military muscle for the invasion. One who did, Thomas L. Flannery of the Intelligencer Journal, a 45,000-circulation paper in Lancaster, Pennsylvania, warned in November: "If U.S. and Iraqi troops engage in combat in the Persian Gulf, weapons technology developed in Lancaster and indirectly sold to Iraq will probably be used against U.S. forces. . . . And aiding in this . . . technology transfer was the Iraqi-owned, British-based precision tooling firm Matrix Churchill, whose U.S. operations in Ohio were recently linked to a sophisticated Iraqi weapons procurement network." Flannery, who wrote in impressive string of stories identifying Pennsylvania companies that supplied Iraq, had been hired by the Financial Times as an occasional stringer the year before.

Meanwhile, The Village Voice published a major investigation by free-lancer Murray Waas in its December 18, 1990, issue. Under the headline GULFGATE: HOW THE U.S. SECRETLY ARMED IRAQ, Waas pulled together a massive amount of information, ranging from senior White House officials' accounts that George Bush was a behind-the-scenes advocate of a pro-Iraq tilt, to an accounting of U.S. trade with Iraq that had a potential military application. "That American troops could be killed or maimed because of a covert decision to arm Iraq," Waas wrote, "is the most serious consequence of a U.S. foreign policy formulated and executed in secret, without the advice and consent of the American public."

The gulf war began shortly after, on January 16, 1991, and the media went wild. But when it ended six weeks later, most Americans knew little more about the war's root causes then they did before.

There would, however, be more to the story. Within hours after hostilities ceased on February 27 -- and nine-teen months after the FBI had raided BNL -- the government indicted Drogoul, painting him as a lone-wolf financier of the Iraqi war machine. He was charged with defrauding his Rome employers of billions of dollars.

Nightline, which had been looking at Iraqgate for some time, hooked up with the Financial Times in an unusual and productive arrangement. On May 2, 1991, the team reported the secret minutes of the President's National Advisory Council, at which, despite earlier reports of abuses, an undersecretary of state declared that terminating Iraqi loans would be "contrary to the president's intentions."

Nightline/Financial Times also cited intelligence reports that Iraq was using U.S. government farm credits to procure military technology. On July 3, 1991, the Financial Times reported that a Florida company run by an Iraqi national had produced cyanide -- some of which went to Iraq for use in chemical weapons -- and had shipped it via a CIA contractor.

In another unusual and productive partnership, Douglas Frantz of the Los Angeles Times teamed up with The Village Voice's Murray Waas. The Times published the first of their three-part series on February 23, 1992. "Classified documents obtained by the Times show . . . a long-secret pattern of personal efforts by Bush -- both as President and as Vice-President -- to support and placate the Iraqi dictator," the paper reported. It cited a top-secret National Security decision directive signed by President Bush in 1989, ordering closer ties with Baghdad and paving the way for $ 1 billion in new aid. Although the directive had been briefly described in other publications, the Times put it in context. Assistance from Washington was critical for Iraq, Frantz and Waas pointed out, since international bankers had cut off virtually all loans to Baghdad because Iraq was falling behind on repayments -- precisely because it was busily pouring millions into arms purchases.

And it emphasized the striking fact -- buried deep in a 1991 Washington Press piece -- that Secretary of State James Baker, after meeting with Iraqi Foreign Minister Tariq Aziz in October 1989, intervened personally to suppor

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