Iraq's civil and military procurement efforts in the 1980s benefited enormously from low-interest, unauthorized loans from Banca Nazionale de Lavoro (BNL), an Italian government owned bank with branches throughout the world. Because of its war with Iran during the 1980s, Iraq was heavily indebted to other countries. Some experts estimated that Iraq owed $60 billion by 1988. When it started its procurement efforts in 1987 for advanced industrial items, Iraq had little access to credit for its purchases. Many bank officials expected that a credit squeeze would soon stifle Iraq's purchases.1
Iraq nonetheless managed to establish a special relationship with the Atlanta branch of BNL that enabled Iraq to obtain credit and borrow about $2.16 billion for its procurement of Western industrial commodities. These funds went to build both its civilian and military infrastructure.2
BNL was Iraq's largest source of private credit and provided credit on conditions exceptionally favorable to Iraq and risky for itself. The only collateral for many of the loans was Iraq's state bank. In some cases, BNL loaned the Central Bank of Iraq money to provide the collateral for letters of credit (LC), or a line of credit, confirmed by other banks. Atlanta's activities were unauthorized by BNL headquarters, which had limited BNL Atlanta's lending to Iraq to $100 million in agricultural loans and $50 million to the Central Bank of Iraq on the condition that it was fully secured. In addition, BNL's activities violated U.S. banking laws.
In reaction to inside information from BNL employees, U.S. officials raided the BNL office in Atlanta in August 1989. Twelve people were subsequently indicted or charged with conspiracy, wire fraud, and related offenses. Christopher Drogoul, the manager of the Atlanta office, and five of his subordinates were charged. The others indicted were foreign nationals or companies that received funds and credits to be provided to exporters. Included in this group was Safa al Habobi, Iraq's procurement master, and Sadik Hassan Taha, the Director General of the Central Bank of Iraq. Neither of these two were apprehended.
The special relationship between BNL and Iraq started in 1985 with loans to buy U.S. agricultural goods. Between 1985 and 1989, BNL loaned over $2 billion to Iraq's state-owned Rafidain and Rasheed banks for agricultural products. About $900 million of these loans were guaranteed by U.S. Department of Agriculture's Commodity Credit Corporation.
In 1988, near the end of the war between Iraq and Iran, Iraq asked BNL in Atlanta to help with the reconstruction of its industries, which Iraq presented as being only civilian in nature. BNL signed four medium-term loan agreements with the Central Bank of Iraq between February 1988 and April 1989 for a total of $2.16 billion. These loans had relatively low interest rates and generous repayment terms. BNL could borrow such large amounts of money, because it was owned by the Italian government and had a stellar credit ranking.
Officials from the Central Bank of Iraq and the Ministry of Industry and Military Industrialization (MIMI) signed these loans on behalf of Iraq. MIMI had been recently formed under the leadership of Hussein Kamel, Saddam Hussein's powerful son-in-law. This new ministry brought together a wide variety of state-owned civilian and military industries, including weapons of mass destruction and ballistic missile programs.
Two Atlanta BNL officials signed the first three agreements. In violation of BNL policy, only one official signed the last agreement for $1.155 billion. When the FBI and the Federal Reserve in Atlanta raided BNL in August 1989, all but $600 million of these loans had been dispersed to pay for Iraqi purchases on non-agricultural goods.
BNL dispersed the funds in several ways. The most straightforward involved direct
payments to exporters totaling $800 million in the form of letters
of credit. In total, BNL established about 2,500 letters of credit.
The letter of credit would typically contain conditions that had to
be fulfilled before BNL could pay an exporter. These conditions varied
but could include the provision of shipping documents or letter confirming
the origin of the goods and their delivery. Click here
for examples of correspondence associated with letters of credit.
In addition, another $800 million was loaned to Iraq in a way that concealed that BNL was the source of the funds. These "off-book" transactions required Atlanta officials to falsify a large number of records and hide its activities from BNL headquarters, the Federal Reserve Bank, and state banking officials. Senior officials in Atlanta also received substantial "kickbacks" and other unauthorized compensation using funds from these off-book transactions.
Atlanta officials placed these funds directly into Iraqi accounts in the United States, from which Iraq could transfer the funds elsewhere as needed. The exporters did not always know the source of the funding. In these loans, BNL received only minimal or no paperwork about the actual exports. An example of this type of transaction could involve just a fax from an official at the Iraqi-owned Technology and Development Group (TDG) in London to Drogoul in Atlanta with a list of companies and the amount they are owed. Click here to see an example of this type of correspondence.
BNL loans financed thousands of Iraqi purchases in Europe and the United States. Many of these purchases were for civilian goods. However, other purchases were for Iraq's armaments, ballistic missile, and nuclear weapons programs.
Officials at Iraqi-controlled companies were aware of the importance of the special credit arrangement offered by BNL. In a May 1989 internal memo, a senior official at Matrix Churchill Corporation (MCC) in the United States said that if the letter of credit is not issued by BNL, MCC would have great difficulty in securing financing for a proposed multi-million dollar project. He had contacted two major U.S. banks that balked at offering conditions similar to those provided by BNL.
After the bank was raided in the summer of 1989, BNL stopped honoring a large number of the letters of credit it had already issued to Iraqi suppliers. BNL officials said they had found discrepancies in the letters of credit that rendered them invalid.
The Iraqi government immediately asserted that its agreements with BNL were "correct and legal" and "purely for civil use," and threatened to stop making interest payments if BNL stopped dispersing the $600 million credit remaining.3 After several months of secret negotiations, BNL and Iraq signed an agreement in January 1990 that allowed Iraq to use its remaining credit.4 BNL was worried about the impact of the scandal on its own profitability, and the Italian government feared that the scandal could undermine its other commercial arrangements with Iraq.
In parallel, companies in the Matrix Churchill group filed lawsuits against BNL seeking payment under the existing letters of credit. MCC, which was managing the construction of a glass fiber production plant for the Iraqi entity TECHCORP, was liable for BNL's nonpayment to vendors and subcontractors. This glass fiber project was declared as a civilian project, although TECHCORP was linked to Iraq's ballistic missile program.
The letter of credit in dispute was from November 1988, when BNL had advised MCC of the issuance of a $14.3 million irrevocable LC by the Central Bank of Iraq to pay for the Glass Fiber project.5 Under this LC, BNL was bound to pay all drafts presented by MCC in conformity with the terms of the LC that included submitting commercial invoices and shipping documents. In 1989, BNL paid MCC $3.575 million under this LC.
Starting in early September 1989, BNL stopped paying MCC under this letter of credit. As a result, Glass Inc., the most important subcontractor of the glass fiber project, stopped shipping equipment to the construction site in Iraq, threatening the entire project. In January 1990, MCC filed a lawsuit against BNL seeking payment for items already provided to Iraq and future payments under the letter of credit.
In February, following the settlement between BNL and Iraq, MCC was able to settle its dispute with BNL. The exact conditions of the settlement are not available. However, a secret letter from TECHCORP to its superiors at the Military Industrialization Corps of MIMI outlined several of these conditions and recommended that its superiors approve the proposed settlement, which they quickly did. This letter also shows that TECHCORP was secretly part of a military program, and MCC was aware of this connection.
Under the settlement, the Central Bank of Iraq, TECHCORP, and MCC agreed to cancel the letter of credit with BNL. TECHCORP agreed to pay MCC directly the money it was owed. Funds to pay MCC were allocated from the Military Industrialization Corps. These funds would also be used by MCC to repay a $600,000 loan to BNL but without having to pay interest. The settlement also established a new letter of credit by the Central Bank of Iraq for the remainder of the funds necessary to finish the glass fiber project.
Shipments from suppliers, particularly Glass Inc., accelerated after the settlement was finalized. They were continuing right up to Iraq's invasion of Kuwait.
Internal MCC documents support the view that TECHCORP endorsed the settlement to ensure that the project would be finished in December 1990. This rush to finish the plant at a time when Iraq was suffering financially adds additional support to the conclusion that the glass project had a military purpose.
After Iraq invaded Kuwait in August 1990, however, the U.S. embargo prevented important equipment from entering Iraq. Once again, MCC and Glass Inc. were unable to collect their payments.
All the charged BNL Atlanta officials eventually plead guilty to a portion of the charges and were sentenced according to the level of cooperation they provided the prosecutor and their own personal situations.
The court concluded that these arrangements with Iraq went undetected because BNL officials in Atlanta were willing to take extraordinary steps to hide their activities. Some officials derived financial benefits from their illegal activity, which likely encouraged further illegal activity.
But the court also found extenuating circumstances that justified reducing the severity of the sentences. The judge said that these illegalities also resulted from widespread mismanagement at BNL in Rome. BNL was suffering serious organizational problems throughout its organization that resulted in poor accounting and audits of its overseas branches. The court concluded that BNL headquarters knew, should have known, or could have known about the illegal activities at its Atlanta branch by exercising minimal diligence.
The court also said that U.S. and Italian policies toward Iraq were partly to blame for the actions of the accused. Both countries encouraged trade with Iraq, viewing it as an important counterweight to Iran in the region and an important business opportunity. Although U.S. policy forbid exports of military equipment to Iraq, it allowed the export of most dual-use items.
1Andrew Collier, "U.S. Tool Firms May Have Lost Sales to Iraq," Metalworking News, September 5, 1988. [back to the text]
2This section is based on a document from the House Banking Committee, U.S. Congress, titled "Background on BNL Loans to Iraq," 1991 and documents seized by the U.S. government in the fall of 1990 at the Matrix Churchill Corporation in Ohio. See also John Hogan, "BNL Task Force-Final Report," Report to the Attorney General, October 21, 1994 and Alan Friedman, Spider's Web: The Secret History of How the While House Illegally Armed Iraq (New York: Bantam Books, 1993). [back to the text]
3Laura Colby, "Iraq Voices 'Surprise' in BNL Scandal, Says Export Credit Pacts Date to 1982," Wall Street Journal, September 12, 1989. Iraq was paying only interest, because principal payments were not due for another year or two. [back to the text]
4John Wyles, "BNL to Expand Iraqi Business After Accord on Atlanta Credits," Financial Times, January 26, 1990. [back to the text]
5BNL Advice No. 11753 and Central Bank of Iraq Advice No. 88/3/3544. [back to the text]