REPORT ON BANKING COMMITTEE'S INVESTIGATION OF THE ATLANTA BRANCH BNL
Henry B. Gonzalez, (TX-20)
(House of Representatives - March 02, 1992)


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The SPEAKER pro tempore (Mr. Hubbard). Under a previous order of the House, the gentleman from Texas [Mr. Gonzalez] is recognized for 60 minutes.

Mr. GONZALEZ. Mr. Speaker, today is a continuation of a series of special orders that for almost 2 years I have been giving with the indulgence of my colleagues concerning the Banking Committee's looking into various activities, among others principally the Banca Nazionale del Lavoro [BNL], the activities in Atlanta, GA, and the incredible pattern of those activities, aided and abetted by our national leaders and based upon what obviously shows today was a misdirected course.

The reason I continue these reports is that I will offer the documentation that will be the basis for the remarks that I will make chronologically, pointing out the series of actions that led to this incredible commitment by our Nation's leaders over the course of several years, to the extent of almost $4 billion of taxpayers' exposure to guaranteed letters of credit or loans that were facilitated through this Italian agency bank in Atlanta to Iraq. Also the reason for it is that we have always had a very definite legislative purpose. It has not been our practice, no matter what temporarily high-profiled publicity a certain issue might give rise to, such as 2 years ago the S&L scandals and the activities of some individuals that had been prominently paraded in our press.

We live in a world in which these images are forgotten less than 3 months after the event, or at least they are not pursued. But that is not our case. We have very specific reasons for first informing my colleagues. I promised I would do that the very first day of the last Congress, at which time I was officially elected chairman of the U.S. House of Representatives Committee on Banking, Finance and Urban Affairs, and I promised then that I would do what I had been doing through the years, even though at most I had been chairman of several subcommittees, and that is relate to my colleagues and report those activities that transcended my purely parochial responsibilities in representing a given geographic area or district of our country.

So I felt it would be more important to do so. It has not been done before, but there is nothing from the investigatory hearings we had in 1989, 1990, and 1991, not only with respect to S&L's but such things as the BCCI and the rest reported faithfully by this means in the Record to my colleagues. After all, I believe that that was inherently understood to be the intention of our committee system when our Congress was first organized, after the adoption of the Constitution in 1789. Of course, at that time the country was small, the representation was smaller in number, and we had a very different country, radically different and totally unimagined by succeeding generations, even in the early portion of this century.

Our objective is to obtain for this country its yet-to-be formulated regulatory oversight laws and structure that will give protection to the national interest from the improper activity of billions of this kind of money that is reported by so-called international banking or financial activities in our country.

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It now amounts to somewhere around or better than $800 billion yearly. It is high velocity money, just a little chunk of it has high leverage. And there is no question the kind of crime we have, such as drug money laundering, and the like, would not be possible if we did not have a meshing in between the illegal activities in the narcotics trafficking and such things as financial activities in banking.

As a matter of fact, let me say parenthetically what I have said before to my colleagues, and that I opted to stay on this committee since I was assigned to it when I first came to the Congress about 30 1/2 years ago. I opted to stay on it because it is my field of interest and also because I felt and feel that at the bottom of everything, all through history,

certainly to the present day, but all through history at the bottom of everything are such things as banking and finance.

Today there is nothing that has not affected or influenced our country, from war to peace, so-called, to commercial and diplomatic intercourse with the other nations that is not founded in some way on banking or finance.

The hostage taking, for instance, at the bottom of the celebrated taking of the hostages was financing, involving $10 billion of one of our biggest banks, which had the power at the time. And I will go into that later in subsequent reports because it has never been reported to the Congress or to the people, that involved were about 10 billion dollars' worth of those moneys in this particular bank in the United States.

Of course, the rest is history because it was inextricably linked with the fallen Shah of Iran. Of course, it is tragic, but the fact remains that it was not until the Federal Reserve official in the Federal Reserve Bank in New York pressed a button, the same day that President Reagan was taking his oath of office, that by pressing that button and releasing several billion dollars in London of that money to Iran, at that moment the hostages were released.

The same thing happens with everything, including the Persian Gulf war. It was the presence of some 280 billion dollars' worth of Kuwaiti funds in our banks here that greatly influenced our policies. And also the fact that things are done that I cannot see, even though it is not strictly within the jurisdiction of our committee, the Committee on Banking, Finance and Urban Affairs. For instance, how many of my colleagues--maybe they do, maybe they know more than I have up until lately.

How many of the people out in my district I know are not aware, even editors and newspaper reporters, that we have entered into a 10-year treaty with this country that we liberated, so-called Kuwait. It is a 10-year treaty of defense.

How many of my colleagues realize what our stake still is in personnel, servicemen, American, and armament, still remaining in that Middle East sector. In other words, what I am saying is that at the bottom of all of that is financing. Because as my colleagues will remember, we were told by the President that the war would be mostly financed by our so-called fellow allies or U.N. members.

The truth of the matter is that in the last supplemental--dire supplemental emergency bill--we appropriated an installment of over $3 billion. That is taxpayer money for the so-called Desert Storm.

So at the bottom of everything is finances. And the fact that is we have, we are the only Nation of any particular industrial size that has no screening board. We do not even have sufficient regulatory oversight. Certainly the Federal Reserve Board, which is the one that has prime responsibility for this international flow of funds, cannot and does not even now.

We did amend the International Banking Act of 1978 this last year in the Banking Act, but our point is we are still trying to establish whether, as I do not think it was, those are sufficient and adequate safeguards to guard the national interest.

I want to continue the report on the BNL and the extensive use of the U.S. Government guaranteed export promotion programs for Iraq. These are export programs that are based on taxpayers guarantees. Of course, the taxpayer, at this point, is left holding the bag with over $3 billion, including some $200 million of the Export-Import Bank guarantees to Iraq.

BNL was by far the largest participant in the Commodity Credit Corporation, a program that helped to finance the sale of over $5 billion in agricultural commodities to Iraq. And it was the second largest participant in the Export-Import Bank that guaranteed the sale of over $300

million in goods to Iraq.

The committee's investigation of BNL, and let me point out at this time, the committee first began having hearings. In fact, it will be 2 years in October. And we do not go around making big news releases because we are interested in legislating. We are not out to make waves, as far as publicity is concerned. That determination is going to be made by the news disseminating media anyway.

I cannot tell my colleagues that I know what will or will not make news. Things that I thought did not, have; things that I thought would, have not. So from that standpoint, occasionally there will be a flash of interest in this, that, and the other thing. But the point is that the overriding need at this point for the country is to have some, even minimal grasp of, say, the direct asset acquisition by foreign interests of our banking resources.

We know, for instance, that at this point about 25 percent plus is Japanese acquired, but if that gets Members excited, remember that the Japanese interests and their direct acquisitions of either direct interest or direct assets are about 50 percent of the British investment in our country. We do not hear much about that. That is something else that is in the jurisdiction of someone else.

Nevertheless, the Committee on Banking, Finance and Urban Affairs has a responsibility of focusing on the needed legislation, trying to reach a level of consciousness among the majority of our fellow 434 Members to the importance of it and try to draft such legislation as is possible under our sort of compromise procedures as will be as near adequate as it is humanly possible to construct.

The committee's investigation of BNL participation in United States credit programs has led to a broader look at the United States policy toward Iraq because of the magnitude of the BNL scandal and the fact that it touched upon nearly all the elements of the United States policy toward Iraq. The BNL scandal sheds a revealing light on United States-Iraq relations.

I also want to remind my colleagues of what I said last week, that such banks as BNL, such banks as most of those that are involved in international interests and transactions in our country are government owned. BNL is owned by the Italian Government. So we have very delicate additional questions about national policy, not only our Nation's national policy but that other country's national policy and how these institutions fit in or did not into those policies.

During last week's special order I discussed the Eximbank program for Iraq.

I showed how the Eximbank was continually pressed by the State Department and even President Bush, at the time Vice President, but as I will indicate later, even after he took his oath of office as President in 1989, he was still pushing for Iraq's aid.

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This is true, even though Eximbank is charged by law, and we have jurisdiction of the Eximbank that will be a reasonable assurance of repaying those debts. Therefore, I have asked the GAO to determine if the Eximbank violated its charter by granting credit to Iraq.

Today I will discuss the Commodity Credit Corporation's export promotion program for Iraq. I will illustrate how the Bush administration placed inordinate importance on the CCC program for Iraq and how the BNL scandal affected United States policy toward Iraq.

An October 1989 meeting between Secretary of State James Baker and Iraqi Foreign Minister Tariq Aziz illustrates that point. The main focus of that point turned out to be the BNL scandal.

During the early 1980's the United States policy toward Iraq

was motivated by the fear of Iranian dominance of the Middle East.

There is another thing that is lost sight of, and I think is very little appreciated in our country. Iran is a non-Arabic country. It is not an Arabic country. Iraq is. We must remember the distinction, because apparently those that have gotten all the notoriety, from President Reagan to Colonel North and Security Adviser McFarlane, do not seem to realize that. They played into the hands of people and nations that have been at war, and still continue in a state of war, and have been in a state of war since 1949; this is, Israel and Iraq.

Unless we know that this Middle East is complex, complicated, but like any other section of the country, Middle Europe, or as they say in Germany, Mitteleuropa, or the Far East, we seem to be totally either averse or unaware or unwilling to be aware of the tremendous corpus of history that is there, so our perception cannot be a correct one.

I have always said, even since then, that had we had the correct perception of the country we would not have lost 54,000 soldiers in Korea and 58,000 in Vietnam. But that is neither here nor there. The only connection there is that we continue with these misperceptions in the Middle East.

If we think that we are looked upon as the saviors, let me assure the Members that in the Middle East the fixed, rooted perception, whether it is true or not is immaterial, the rooted perception is that we have stepped into the shoes of the two departed colonial powers, France and England. Be that whatever it is.

The logic that I report here is best spelled out in a 1984 memorandum to then Vice President Bush related to his efforts to have the Eximbank finance the Iraqi Aqaba pipeline project. I am not going to read from it, and I have a copy of the memorandum which I will place, together with all the documents, at the end of my discourse this morning.

I quote:

The war between Iraq and Iran directly affects our vital interests in the Middle East, and particularly in the Persian Gulf.

This is Vice President Bush.

Our objective is to bring the war to a negotiated end in which neither belligerent is dominant and the sovereignty of both is preserved.

Now, he is Vice President of a regime that in the meanwhile is also dealing through the so-called client states, even though sometimes client states become masters, such as Israel, with Iran, and therefore the big scandal that later erupted, and only a portion of that has been seen, of the aid of arms to Iran.

So we were foolish enough to think that we could be helping each one of the combatants without the other realizing it. It is absurd. Of course they knew. Therefore, no respect.

I will continue, and I quote:

We believe victory by either side would have a serious destabilizing effect on the region.

I am going to repeat that:

We believe victory by either side would have a serious destabilizing effect on the region. At this point Iran is the intransigent party, unwilling to negotiate in part because it believes it can win in the war of attrition. We must therefore seek means to bolster Iraq's ability and resolve to withstand Iranian attacks as well as to convince Iran that continuing hostilities is useless.

Have we learned anything? No. Today we have been involved in negotiations mostly to pay back some of the money that I spoke of that had gone out of Iran and led to the release of the last hostages.

If the Members think the release of the last hostages was just accidental, let me assure them that it was connected with our payment of something that had been demanded, and coincidental with that, also there is good reason to know that right now Iran is also being enabled to get some help through other countries for arms procurement.

Why is Iran building to such a tremendous point of arms ability? What is its goal in the Middle East, now that we have conquered Iraq and consider it a continuing enemy? Why is Iran being pumped up like these messages indicate we were doing with the case of Iraq on that occasion?

With that broad policy and strategy that I have just quoted in mind, the policymakers sought out a path to achieve those goals. Since the administration had a stated policy of prohibiting the sale of United States military hardware

directly to Iraq, the options available to assist Iraq were limited. The administration chose to assist Iraq by providing financial assistance.

In determining how to assist Iraq financially, a March 16, 1983, internal State Department memo to Secretary of State George Shultz states, and I quote:

There are two possibilities for the official credit for Iraq; (a) Eximbank program: (b) CCC blended credits or guarantees for agricultural exports.

An October 31, 1983, State Department cable shows the benefits of such a strategy, and I quote:

In considering ways to build international confidence in Iraq's economic and financial future, we should give serious thought to offering Eximbank credits. New U.S. credits, in combination with our CCC credits, will demonstrate U.S. confidence in the Iraqi economy. This in turn could encourage other countries to provide similar assistance. Such concrete demonstrations of support could ease pressure on Iraq.

Increasing Iraq's access to credit allowed it to feed its people on borrowed money, thus freeing scarce foreign exchange, to purchase military hardware to fight the war against Iran.

As I said last week, the Eximbank was repeatedly pressured by the State Department to open its program to Iraq. On three separate occasions President Bush, then Vice President, intervened on behalf of Iraq and Eximbank. Luckily the Eximbank charter contained provisions that made it difficulty to lend money to a nation like Iraq, so its exposure to Iraq was limited at the time Iraq invaded Kuwait, but for no other reason.

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The same cannot be said of the CCC program. The CCC is a division of the U.S. Department of Agriculture and its Foreign Agricultural Service. The goal of the CCC program is to assist U.S. farmers to sell agricultural products abroad, that is, by granting credit to a nation that wants to purchase U.S. products.

The usual terms of CCC loans is 3, with some as long as 7 years. The CCC is required by regulation to allocate guarantees on the basis of the receiving country's needs, its market potential, and the likelihood that the loans would be repaid.

Despite these limitations, in 1988 and 1989, a whopping 20 percent of the total CCC program was dedicated to Iraq. Utilizing the CCC program as a means of bolstering Iraq's financial position was a great success. For instance, in 1983 at a time when United States officials feared that Saddam Hussein might be overthrown because of food shortages caused by the Iran-Iraq war, the United States sold $364 million in CCC-guaranteed agricultural products to Iraq. The program grew steadily, and by 1988 CCC-guaranteed sales of agricultural commodities to Iraq reached a $1 billion annual clip, Until recent times, the CCC program was poorly managed, and corruption by exporters and importing nations was not unusual.

The GAO, our Government Accounting Office, and the USDA inspector general have done almost a dozen reports on various problems with the CCC programs. Many of them concern Iraq.

The following provides a clear example of the magnitude of the problems encountered at the CCC. In September 1989, 1 month after the BNL scandal broke, the USDA Office of Inspector General admitted that the CCC had some several internal-control problems, and the Office of Inspector General wrote as follows:

The GSM program was operating without the benefit of a compliance review process or program to assess the direction and impact the program has had on U.S. and foreign agricultural marketing activities. As a result, U.S. exporters are participating in a $6 billion program without CCC conducting a review or periodic check to make sure the program is operating in accordance with applicable laws and requisitions.

In the past several years, the Congress and the USDA have made many changes to improve the operation of the CCC program. In light of the Iraqi program, the committee is concerned whether the changes in regulating go far enough.

The CCC program for Iraq was rife with corruption. Demands for kickbacks and bribes were not unusual. For example, several Iraqi Government organizations that purchased United States agricultural commodities requested United States exporters to pay kickbacks in order to win an order. Typically, these kickbacks included cash, truck parts, and machinery. While the Iraqis admitted to this practice, the CCC never punished Iraq for any violation of the CCC regulations.

However, five BNL-financed tobacco exporters did plead guilty in 1990 to violating regulations of the CCC program by paying kickbacks to various Iraq entities totaling $1,027,241, and another scheme used by the Iraqis to extract money from United States exporters was to levy a stamp tax on United States agricultural imports. On several occasions, the Iraqis were caught engaged in that scheme, but escaped without punishment.

A third scheme involved the use of foreign-sources commodities. In September two tobacco exporters pleaded guilty to violating regulations of the CCC program by selling Iraq foreign tobacco, claiming it was American tobacco. Maybe they could not tell the difference between a camel.

Documents obtained by the committee showed that the CCC program for Iraq continued to increase despite grave concerns among various Government agencies about the ability of Iraq to repay its debts. For example, documents show that beginning in 1985 the Federal Reserve Board, of all people, the Treasury Department, and the Export-Import Bank voted at different times against increases in the CCC program for Iraq. They feared that Iraq was not creditworthy and would not be able to repay the bills that it owed the United States.

In one meeting in the fall of 1988, and I have a memo and minutes here, as I said, at the end of the presentation, a Federal Reserve official warned Iraq only repaid creditors when they were offered greater lines of credit. He called the CCC program for Iraq a Ponzi-type scheme. One of the reasons that Iraq was able to obtain ever larger credit was the inadequate country-risk analysis process used by CCC to determine which nations were likely to repay their debts and how much could prudently be loaned to a nation.

A March 1990 USDA memo states:

While our formal method for establishing country program limits is not yet operational, the consensus of my staff prior to our consultation with Iraq last fall was for a maximum program level of $800 million.

One of the best illustrations of the absurdity of the situation involved the Export-Import Bank, and again, as I said last week, Iraq was often in arrears or in default in its Eximbank program; in fact, Iraq was suspended from Eximbank programs between 1986 and 1987 because of nonpayment, but during that same period, the CCC approved $1 billion in credit for Iraq. How could one Government agency grant credit to Iraq, while another located less than a mile away was being stiffed?

Obviously foreign policy drove the CCC program, not the Iraqis' ability to pay. This is illustrated by the fact that the CCC program was over 15 times that of the Eximbank program, or at least for Iraq.

Because the CCC program lacked tough standards for granting credit, the administration found it easier to use the CCC program for Iraq as a foreign policy tool at the expense of the United States taxpayers.

As stated earlier, Iraq's finances were clearly not in good shape. To illustrate Iraq's precarious financial position, look at the comments in an October 5, 1989, cable to the State Department from Ambassador April Glaspie:

Economic and commercial officers met October 3 to exchange information and views on Iraq's payment problems, the security situation, the BNL affair, and the November Baghdad International Fair. With the exception of the agricultural commodity exporting countries, that is, Australia, Canada, and the U.S.A., virtually all reported continuing payments problems. Australia, Denmark, Germany, Greece, Ireland, Italy, New Zealand, the Netherlands, Norway, and the United Kingdom reported new or continuing payments arrears on Iraqi debt.

Again, I enclose here at the end the memo from which I am quoting.

Concerns about Iraq's creditworthiness intensified when on August 4, 1989, FBI and Customs Service agents raided the Atlanta branch of BNL and uncovered $4 billion in unauthorized loans to Iraq including $900 million guaranteed by the CCC.

In order to better understand the CCC program for Iraq and its policy implications, let us take a look at the January 16, 1985, State Department cable that reported on a meeting between a representative of the Department of Agriculture and Mr. Hassan Ali, the Minister of Trade of Iraq, and the cable stated, and I enclose this also at the end of my presentation:

Minister Ali took the occasion of USDA visit to express his government's gratitude for the leading role the Department of Agriculture had played in developing United States-Iraq economic cooperation.

USDA staff, in turn, expressed pleasure with the smooth operation of the CCC program and noted United States readiness to expand cooperation in the agricultural field with Iraq.

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In response to a request for additional information on the state of Iraqi finances, Mr. Ali stated:

The U.S. did not make such credit available because of Iraq's `lovely brown eyes.

He went on the state that:

* * * U.S. laws and political constraints would not permit the availability of such credits if Iraq suffered from corruption, poor production, nonutilization of the credits made available serious bilateral political problems or doubts about its willingness to meet its full obligations.

Iraq was given the impression that it was an important partner of the United States and the CCC program was symbolic of that policy. In spite of Iraq's always dubious financial condition and continued corruption in its CCC program, the United States continue to expand cooperation in the agricultural field. By 1988 the CCC program for Iraq had grown to over $1 billion, but the events of 1989 made the color of Iraq's eyes turn red.

Because of Iraq's deteriorating financial position and the BNL scandal, 1989 turned out to be the watershed year for the CCC program for Iraq. Despite everything I have mentioned, when he was elected President Bush placed a renewed emphasis on improving relations with Iraq. He believed, as spelled out in National Security Decision-26 [NSD-26], that the best way to improve relations with Iraq was through expanded trade and the CCC program offered the single largest boost to that strategy.

Now, remember, behind all of this you have the National Security Adviser, Scowcroft, and the Deputy Secretary of State, Eagleburger, all of whom came from Henry Kissinger's stable known as Kissinger and Associates, which incidentally has had more influence with foreign potentates and ambassadors coming over than even the State Department sometimes.

Now, these two gentlemen were integral parts of Kissinger and Associates. They were integral parts in the stimulation of trade with Iraq. So now they are ensconced in these mighty powerful positions, and naturally they are going to reflect a continuation of what their boss, Henry Kissinger, who no longer has an official title, but lurks in the penumbra of power and has for many years.

So naturally, these are advisers. Presidents must depend on advisers, and when Presidents are not too sensitive or too aware or too deep in their understanding of events, I think it is safe to say and fair to say that we have had some who have not, that the role and the voices of these individuals become extremely powerful. Of course, their dealing was that added leverage in dealing with Saddam Hussein would be obtained because of these goodies we were providing him.

The thing that undid it was the B&L scandal that originated and in fact as late as just months ago, last year in fact, the administration through the Attorney General was still trying to keep us from having hearings on it.

President Bush and his advisers thought that expanded trade would give the United States added leverage in dealing with Saddam Hussein. As events showed, that was a grave miscalculation. The undoing of that strategy was the BNL scandal and Iraq's deteriorating financial condition.

I will now illustrate how the BNL scandal affected United States-Iraq relations by using the 1989 National Advisory Council [NAC] decision to grant Iraq a $1 billion in CCC credits. That decision also serves as a vivid example of how State Department and President Bush viewed the CCC program, first and foremost, as a foreign policy tool while delegating the issue of Iraq repaying billions in loans to secondary status.

Before embarking on that journey I will provide some background on the interagency process that determines how credit is allocated to foreign governments like Iraq.

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NAC: ORGANIZATION AND FUNCTIONS

The National Advisory Council on International Monetary and Financial Policies [NAC] is responsible for the policies and practices of agencies that make, or participate in making foreign loans such as the International Monetary Fund, the World Bank, Export-Import Bank and the USDA's Commodity Credit Corporation [CCC]. In the case of CCC and Eximbank, the NAC seeks to assure that the credit extended by those entities is consistent with U.S. policies and objectives.

NAC: MEMBERSHIP

The members of the NAC include the Secretary of the Treasury--chairman; Secretary of State; U.S. Trade Representative; Secretary of Commerce; Chairman of the Board of Governors of the Federal Reserve System; Chairman of the Board of the U.S. Export-Import Bank; and the Director of the International Development Cooperation Agency. These high-level decisionmakers rarely participate directly in NAC decisions. Instead, a committee of alternates at the Assistant Secretary level has been empowered to act for their principals.

Under the alternates level lies the day-to-day apparatus that performs the work of the NAC called the staff committee. The staff committee is composed of economists and other professionals from NAC member agencies. They are often joined by representatives of other agencies of the U.S. Government such as the Departments of Defense [DOD], the Department of Agriculture [USDA], and the Office of Management and Budget [OMB]. The staff committee meets regularly or talks by phone to discuss CCC or Eximbank extensions of credit to foreign nations such as Iraq.

The NAC itself cannot override the decisions of the Eximbank and the CCC, but obviously in practical terms these agencies must heed advice of more powerful organizations such as the White House and the State Department.

On rare occasions a decision is so important that a NAC deputies committee meeting is called. The deputies committee is generally composed of the No. 2 person in each NAC agency. The question of whether to grant the $1 billion in loans to Iraq eventually was kicked up to the deputies committee.

THE FISCAL YEAR 1990 DECISION

Even though Iraq's financial condition had deteriorated steadily during 1989, the USDA, at the State Department's prodding, proposed a $1 billion CCC Iraq program for fiscal year 1990. Because of concerns about the BNL affair and Iraq's financial problems, a NAC staff committee voted in August 1989 to defer consideration of the Iraqi program until a later date.

The CCC understood that it would be difficult to get the entire $1 billion approved by the NAC, so in September 1989, it approached the NAC with a modified offer. CCC proposed an interim $400 million in CCC credits for Iraq. An additional $400 million was contemplated once Iraq was exonerated from responsibility for the BNL scandal. On October 4, 1989, the NAC unanimously approved that approach. That is when the trouble began--the NAC forgot that Iraq always wanted more not less.

Iraq considered the $400 million offer for CCC credit an insult. A November State Department memo spells out the Iraqi position on the $400 million offer. It states:

The Iraqis rejected a USDA offer of a $400 million `interim' in early October because they believed so drastic a cut from the $1.1 billion fiscal year 1989 program would be viewed as a United States no vote of confidence in Iraqi debt policy.

The Iraqis were also worried that the United States would publicly announce its decision to limit Iraq to a $400 million interim program because such a decision could severely affect the perception of their creditworthiness.

The Iraqis immediately began to pressure the State Department, United States Embassy in Baghdad, and the United States farm community for a larger CCC allocation. They also sought a meeting between Secretary Baker and Foreign Minister Aziz to discuss the CCC program.

October 6, 1989, Secretary of State Baker met with Iraqi Foreign Minister Tariq Aziz. The main topic of the meeting was United States-Iraq relations and how the United States handling of the BNL scandal was jeopardizing that relationship. Notes from the meeting report Foreign Minister Aziz as saying:

Finally, and most seriously, Aziz stated that lately there had been reports that `some American agencies' are trying to destabilize Iraq. The CCC program was being linked to the BNL Atlanta branch scandal of which Iraq had no part. The Minister made it clear that this was not a sign that the U.S. wanted improvement in relations. It is in fact a setback and the Government of Iraq (GOI) is very unhappy.

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Mr. Aziz found a strong ally in Secretary Baker. A week after their meeting a cable from the U.S. Embassy in Baghdad reported:

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As a result of his conversation in Washington last week with Secretary Baker concerning the CCC credits, Foreign Minister Aziz has high hopes that the Secretary will seek to break the current impasse in the US/GOI negotiations.

Secretary Baker not only intervened personally on behalf of Iraq, he put the whole weight of the State Department behind Iraq. Mr. Baker and other State Department officials repeatedly referred to NSD-26 which stated that `the President wished to improve relations with Iraq' as the justification for pressuring other agencies of the NAC into approving the $1 billion CCC program for Iraq.

The State Department was intent on ignoring Iraq's poor financial condition. The agency was also intent on ignoring the BNL scandal despite the fact that the highest levels of the Iraqi Government were involved including the second most powerful man in Iraq--Saddam Hussein's son-in-law Hussain Kamil.

INTERVENTION LETTERS

In order to set the scene for the NAC consideration of the CCC program for Iraq, Secretary Baker wrote a letter to the Secretary of Agriculture, Clayton Yeutter, and then called him personally to express his conviction that Iraq should be given the benefit of the doubt and granted the full $1 billion CCC program for fiscal year 1990. The talking points for Mr. Baker's call to Mr. Yeutter state:

On foreign policy grounds, we support a program of up to $1 billion, released in tranches, with periodic compliance reviews. With safeguards, I hope we can get this important program back on track quickly.

Convincing the Department of Agriculture to support the allocation of the full $1 billion to Iraq was the easy part. The next step was to convince the OMB and Treasury to drop their opposition to the $1 billion program for Iraq. This job was left to Deputy Secretary of State, Lawrence Eagleburger.

To their credit, the Treasury Department and OMB were opposed to the $1 billion program for Iraq based on Iraq's precarious financial condition and the smell of the BNL scandal. The Treasury Department had actually voted against the fiscal year 1989 program for Iraq because of creditworthiness concerns.

Iraq's shaky financial condition was not paramount on Mr. Eagleburger's mind. The talking points for Mr. Eagleburger's calls downplayed any such considerations. They state:

The Secretary has determined that policy considerations warrant support for a full $1 billion program of CCC credit guarantees to Iraq. * * * The CCC program is crucially important to our bilateral relationship with Iraq.

Mr. Eagleburger topped off his efforts on behalf of Iraq by sending letters to OMB and Treasury. His efforts were crucial to eventually neutralizing OMB and Treasury opposition to the CCC program.

Finally, after much lobbying and back scratching, a November 3, 1989, meeting of the NAC alternates was held to consider the USDA's request for a new $1 billion CCC program for Iraq. Apparently still concerned over what was about to occur, the Treasury Department and Federal Reserve members formally moved to block a decision at that level. At the Treasury Department's request, it was decided to kick the decision up to the next level--the NAC deputies committee.

An internal State Department memo accused the OMB of instigating the Treasury and Federal Reserve and implied that OMB was taking its role as `the administration's watchdog against scandal' a bit too seriously.

Moving the decision on the Iraq program to the deputies committee level played right into the State Department's hands. Secretary Baker had already lobbied the Agriculture Department and Mr. Eagleburger had lobbied the Deputies at OMB and Treasury.

THE DEPUTIES MEETING

The NAC deputies meeting took place on November 8, 1989, Some of the more or less notable participants in the meeting were Robert Kimmitt, State Department; John Robson, the No. 2 man at the Treasury Department; Steve Danzansky, the White House; Jack Parnell the No. 2 man at USDA, Federal Reserve Board Governor Edward Kelly; and William Diefenderfer, the No. 2 man at OMB.

Mr. Robson opened the meeting by stating that there were two issues that should be addressed with respect to the CCC program for Iraq: First, the questions of Iraq's creditworthiness, and second, the implications of the BNL scandal.

The State Department's Mr. Kimmitt opened by stating that his `comments reflected the views of Secretary Baker who believed that the CCC program in Iraq was crucial to the U.S. bilateral relationship with Iraq. He noted that in NSD-26 the President called for improvement of United States-Iraq relations and bilateral trade offered the best means to achieve that goal.'

Other NAC participants indicated that they had reservations about the program, but they offered no fatal objections. The NAC voted to approve the $1 billion for Iraq to be released in two $500 million tranches. Several safeguards were added to ensure that the CCC program's integrity would remain intact.

My next floor report will continue with the events that occurred after the NAC decision of November 6, 1989. That statement will show that President Bush and the State Department continued to champion the cause of Iraq despite numerous warning signs that Saddam Hussein was out of control and the revelation that BNL provided over $2 billion for a secret Iraqi technology procurement network which had responsibility for obtaining the technology necessary to build ballistic missiles and nuclear, chemical, and biological weapons. I will also discuss the issue of the pending $350 million CCC payment to BNL.

CONCLUSION

At the NAC deputies meeting on November 8, 1989, the State Department's Robert Kimmitt invoked the heavy hand of President Bush by stating:

To abruptly terminate the CCC program in Iraq would clearly run counter to the President's intention and would furthermore, cause a deterioration in our relationship with the Iraqis.

Now I think that the American public and we in particular would find it hard to understand how deterioration of relations with such a country as Iraq would irreparably harm the United States national interest. The fact is that the miscalculations and the rather shifting, almost schizophrenic adoption of policies, if such can be called policies, led to a tragic denouement.

It ended up in the loss of tremendous loss of human life, over 200,000. Those are human beings, regardless. We reached the point where, incredibly, even our much publicized commanding general, on the eve of the skirmishes, pictured the Iraqis as subhuman beings. The result is still to be calculated.

Throughout the Muslin world, not just the Middle East but from one end to the other, we have engendered a tremendously deep hatred toward us. We are involved in something that we have not been disengaged as yet and will not be for the foreseeable future. But have we learned? No.

Once we stray from fundamentals, and this is what I always say and have always said on the committee, we cannot stray from basics except at our own risk.

Some time ago, I believe it was perhaps the second-to-last or the third-to-last speakership, Speaker O'Neill's regime, that the House suspended--and I did not realize it until it did not happen--the annual reading of the Farewell Message of President George Washington. It used to be the habit when I came, and I used to kind of marvel at the idea that that would be the case.

On the occasion, or on the Monday of the week that we used to celebrate George Washington's birthday, we would have the reading, even if there was no other business, we would have the reading of Washington's Farewell Address. That has been suspended. I am suggested to our present Speaker that he reinstall that.

I think it was very well founded, more than just having a ritualistic reading, because it gave us basics that are still true today as they were in his time. It is a vastly radical, hardly perceived world in that day and time, from what we live in today, but he did say in the speech what I think is now involving us, involved in this very tragic mistake, as it turned out to be.

Have we learned? No. As I said earlier, we are about to do the same with even Iran, which is still considered and certainly was during the time that this trade was fomented with Iraq, our real enemy, mostly because of the hostage taking and the like. But today it is more than ever because it has tremendous potential.

It is a non-Arabic country, but Muslim, and we must never forget that just 90 miles away from the Iraqi border is Russia. Along that Russian border is over 3 million Muslims. That is where Iran is directing its attention.

It now has probably the most substantial buildup of any in that area.

Remember, it is non-Arabic as a nation, but what about the other part of the world? Same thing with

respect to China. It seems that in the case of China our policymakers for some time have gone on the theory that maybe they can have a gentler, kinder kind of communism there. Of course, it is an equally profound error.

Ever since the factors that led to the 1972 Nixon visit, and even then by the time the Chinese permitted President Nixon and his entourage to go to China--I was the one that reported it, and I do not remember anybody else mentioning it--but we had to guarantee them a downpayment of $10 million in gold, ostensibly to cover the cost of all that was involved in this tremendous entourage that President Nixon took.

But the reasons for the things that were done in 1972 no longer hold in China. Why? Because we have had at least three Secretaries of Defense, we have had two Presidents visit China, made commitments and receive deceptive assurances.

For instance, when 37 of our sailors died while patrolling the Persian Gulf and died as a result of a missile fired by, not Iran, but by Iraq, that missile was procured through China because we gave China, one of our Presidents, or Secretary of Defense, with great secrecy, provided China with the license to produce the so-called Silkworm missile. Then China, very much looking after its own national interests--and this is where I have been criticized and asked if I am an isolationist; I have said, of course, no, of course not. I never have been an isolationist. But I am a protectionist.

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[TIME: 1400]

Dog-gone right. I am a protectionist of the national interest. Everybody in our Nation looks out for No. 1 first and foremost, and they are expected to. We do not expect the country to go against its own national interest. Why should we? So, why should we then expect any of the other nations to ask us to yield on matters that now have to do with the basic independence and freedom, financial and economic, and our standard of life, which is what is at stake in the world today? But here was China selling to both sides also.

Mr. Speaker, I ask, `Why shouldn't they?' Even though our Presidents went over and came back--even Secretary Baker, as late as November 1991, came back and said, `Well, you know, the Chinese have given us assurance. They're not going to be selling any more of these armaments over to the Middle East,' but the Chinese said, `Well, we will stop doing' what they denied just a year before.

But today where are we? Syria, whose President met with President Bush in Switzerland in 1990, when we were building up our expeditionary force, suddenly the Syrian leader becomes what? Less tyrannical? Less murderous than Saddam Hussein? No. But all of a sudden the enemy of our enemy is our friend, and it is this policy that is leading us constantly down a path that is detrimental to our national interest, and I think basically it is the disregard that our first President in his advice to us has given us, and I am going to quote:

That nation which indulges towards another an habitual hatred or an habitual fondness is in some degree a slave to its affection, either of which is sufficient to lead it astray from its duty and its interests.

I will leave it with that, however I include for the Record various and sundry items relating to the subject of my special order today.

Creditworthiness Assessment of Iraq

Iraq will not be able to commit sufficient resources for foreign debt service over the next five years or longer:

The military absorbs a substantial share of Iraqi resources:

Long-term program for enhanced regional political power.

1/4 of all adult males are on active duty in the armed forces.

Large military hardware purchases: fighters, etc.

Costly high-tech military production projects.

Military will absorb output of new civilian industries.

The `civilian' government also absorbs considerable resources:

Large, costly intelligence services and informer networks.

Costly government bureaucracies control most industry.

`Privatization' efforts are minimal.

Costly consumer price subsidies--including farm products.

Costly prestige projects--Basra and others.

The government fails to mobilize the private sector:

Military and government have first claim on resources.

Private business limited--by government--to small scale.

Government price controls constrain profits.

Traders forced to operate outside government FX system.

State banking system discourages private savings, investment.

The government's additional resources will be insufficient:

Oil revenues remain constrained by OPEC negotiations.

New industries: civilian FX contribution likely small.

Non-oil projects: will not be permitted to `stand alone'.

Massive agricultural development is far off.

Iraq will make timely debt payments only to `favored creditors':

Iraq's debt strategy is not likely to change:

Iraq only repays those who offer larger amounts of new money.

Iraq attempts to force new money from creditors by defaulting, or threatening to default, on existing debt.

Iraq reschedules--on a bilateral basis--debts owed creditors who are unwilling to commit new money.

Iraq will not go to the Paris Club or otherwise adopt `normal' debtor-creditor relations.

Export credit agencies seek to reverse Iraq's strategy:

Only ECGD--backed by HM Treasury--provides MT project cover.

Other ECAs link ST cover to specific amounts of repayments.

ECA terms: pre-84 debt repaid first, post-83 debt rescheduled.

Political element to rescheduling negotiations: Italy & Japan.

Iraq's strategy toward Eximbank:

Iraq seeks small MT program as a `foot-in-the door.'

Iraq will seek much larger Exim programs thereafter.

Iraq using U.S. exporters to lobby for new credit.

Iraq will maintain ST payments while MT is on Exim agenda.

Exim can expect Iraqi `Favored Creditor' status as long as:

Exim commits to consecutively larger lending programs.

Source: 1989 Eximbank.

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1. Secret--entire text.

2. Summary: On October 6 Secretary Baker met with Iraqi Foreign Minister Tariq Aziz. Aziz emphasized his government's strong desire for the very best possible relationship with the United States, but said his government had received `signals' that this might not be the U.S. Government's attitude. He mentioned, (1) the negative remarks about Iraq intentions in the gulf made to other governments by U.S. officials, (2) USG-placed obstacles to Iraqi efforts to rebuild its economy technology transfer, and (3) congressional actions against Iraq. He also said `some American agencies' are trying to destablize Iraq. Finally, he complained about a USG decision to cut CCC credits for FYSG from over dols 1 billion to dols 488 million. The Secretary assured the Foreign Minister of our desire for good relations with Iraq. At the same time, the Secretary confirmed U.S. concerns globally about the transfer of sensitive technology related to proliferation. He also deserved that while the administration had opposed congressional moves to place sanctions on Iraq, the Congress had been influenced strongly by GDI's use of VW which did have a very negative impact. He asked for more details about alleged U.S. efforts to destabilize Iraq so that he could investigate it fully. Regarding CCC credits the Secretary said he understood the dols 400 million in credits now offered by USG was an interim commitment. The Fed and Treasury are worried about Iraqi involvement in the Atlanta BHL bank scandal and wish to defer commitment on the full level of CCC credits until their investigation is completed. Aziz said this was a banking problem and not one that involved the GDI. Aziz made clear a solution needed to be found quickly. Iraq is particularly worried about the impact of this decision on its ability to meet food import requirements in 1990. The Secretary said he would look into the matter immediately. The two sides also discussed briefly the Middle East peace process and Lebanon. End summary.

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3. The Secretary warmly welcomed Iraqi Foreign Minister Tariq Aziz to the Department on October 6. We noted their inability to find a mutually acceptable time to meet in New York and said we appreciated Aziz willingness to come to Washington. The Secretary said the U.S. values its relationship with Iraq and wants to see it strengthen and broaden. Our dialogue on human rights will help. We also noted with pleasure Iraq's participation in CW conferences. Regarding the Stark claims, the Secretary welcomed Iraq's payment of wrongful death compensation and observed that this set the stage for early conclusion of the remaining claims. We ended his introductory remarks to again stress the U.S. desire for good relations saying there was all the potential to move the relationship in a positive direction.

4. Aziz responded with warmth that we had good relations with Secretary Shultz and many other senior American officials. He said we had always conducted his conversations in a friendly and open manner and hoped we could continue to do so with the Secretary. It leads to much better understanding. The Secretary encouraged him to do so. Aziz said we wanted to state clearly and unequivocally that Iraq wants good relations with the U.S. on the basis of mutual respect and understanding. He said he wanted it understood that while this had been stated in time of war when diplomatic relations were restored, he was saying it now after a ceasefire had brought the active fighting in the war to an end. We strongly believe he said, that good relations between us is in the best interests of the U.S. and of the region.

5. Aziz continued that he greatly appreciated the Secretary's assessment of bilateral relations; but frankly speaking in the spirit of friendship, Iraq has not seen `enough improvement' in the relationship since the ceasefire. In fact Iraq had received a number of signals which were rather disturbing. We listed four: (1) After the ceasefire the GOI got a number of reports from several capitals that senior U.S. diplomats were approaching officials in the gulf raising suspicion and fear regarding Iraqi intentions in the region. Aziz said this disturbed the GOI greatly because during the war we had discussed the gulf region in a frank manner. Iraq has said clearly that it wants to maintain the whole region intact--including the individual countries--and that it has no bad intentions against any of them. He stressed that Iraq's objective was and is good relations with them all, particularly Saudi Arabia and Kuwait. Hence, he said the GOI is perplexed and concerned about U.S. motivations.

6. Secondly, Aziz said the U.S seemed to have a negative approach to Iraqi post-war efforts to develop its industry and technological base. Aziz emphasized that the GOI had clearly stated that its current goals and objectives were to reconstruct and restore the economy. Our desire, he said, is to develop the country for our people--to raise their standard of living. Implying this massive effort was being misrepresented, Aziz declared that all this was being done for Iraq and her people. No objective directed against any other country in the region lay behind Iraqi development activities. Aziz then complained of a propaganda campaign against Iraq in the U.S: particularly by the Congress. He noted congressional moves to legislate economic and political sanctions.

7. Finally, and most seriously, Aziz stated that lately there had been reports that `some American agencies' are trying to destabilized Iraq. He said he had no details and had heard only the reports just as he was leaving Baghdad. He said he felt it was important to mention this to the Secretary. The Secretary indicated his surprise at such reports and said he would like more details as quickly as possible so he could look into it immediately. Aziz undertook to try to get more details.

8. Aziz closed with a final point on U.S.-Iraqi commercial relations. He noted that up to now this had been a very positive aspect of our bilateral relationship. The USG, he said, had allocated CCC credits of over dols 1 billion in FY89, making the U.S. Iraq's major supplier of agricultural products. He told the Secretary that he had just learned from the Iraqi agricultural team, now in Washington to reach agreement on a program of similar size for FY90, that the U.S. was prepared to agree to only dols 400 million in credits at this time. The CCC program was being linked to the BNL Atlanta branch scandal of which Iraq had no part. The minister made it clear this was not a sign that the U.S. wanted improvement in relations. It is in fact a setback and GOI is very unhappy.

9. The Secretary said he wished to respond to the minister's points. He said he heard the desire for better relations and that was the U.S. objective as well. He asked Aziz to note that the U.S. had been in the forefront in focussing on the POW repatriation issue at the UNSC during the meeting on renewing UNIIMOG's mandate. As to efforts to destabilize Iraq, the Secretary repeated that our desire is to improve relations with Iraq and he urged Aziz to give him further details as soon as possible. Regarding technology, the Secretary admitted the U.S. does have concerns about proliferation, but they are world wide concerns. He suggested that we work together on specific requests so the U.S. can understand Iraqi needs and objectives and Iraq can hear what concerns us. Regarding Aziz point on congressional criticism. The Secretary noted that the administration never supported sanctions on Iraq and that he personally had so testified. The Secretary added that congressional actions were limited to Iraqi use of CW during the war. Our position continues to be that we need to look forward, not backward.

10. Turning to CCC credits, the Secretary said he was aware that a problem existed. It was his understanding that the DOLS 400 million which the USG was now ready to approve is an interim allotment. The balance of the program was being held pending further investigations into the BNL banking scandal. He noted Iraq had received about DOLS 3 billion out of DOLS 4 billion of the unauthorized loans. The Fed and Treasury, he explained, want some restraint in further credits to Iraq until this banking problem is more thoroughly investigated. Aziz defended the GOI, arguing that they were not involved in any illegal actions. If the bank had willing to make loans under such good terms, any customer would have said it was the bank not the customer who had the problem. Aziz said he had met with the Italian Minister of Finance who said Iraq was not involved. If the Government of Italy is not taking action against Iraq, it is strange that the U.S. is. Iraq, he said, was always punctual with its payments to the U.S. He continued that Iraq was relying on U.S. cooperation in a number of areas and such actions to restrict programs called into question whether the U.S. would be a reliable trading partner. Food was a particularly explosive area because the Government must feed its people. We said the Iraqi delegation was very concerned that failure to agree to the full program now would force Iraq to search immediately for alternative suppliers and such suppliers may not be available. U.S. actions will sour relations, he concluded.

11. The Secretary asked if GOI is cooperating with the Fed investigation, indicating this was important to do. Acting Assistant Secretary Covey noted there were some concerns that there may have been some wrongdoing traceable to Iraqi officials. Aziz said that Iraqi Central Bank Governor and Minister of Finance had been in Washington, met with U.S. officials, and were told the GOI was not involved. If Iraqi officials were implicated, the GOI wanted to know immediately. He stressed Iraqi pride in rooting out corruption and said GOI would surely act on any information available to it. When the Secretary asked if GOI would make available any official implicated in the affair, he said he did not know. It would depend on the information. Aziz again repeated the urgency of solving this matter quickly. The Secretary said he wanted to find a way to solve it and the USG may need assurances from GOI that it will aid in the investigation. He assured Aziz that we would immediately look into what could be done and let him know what other U.S. agencies might need from GOI.

12. The Secretary said he had several subjects that he wished to raise. On the search for peace in the Middle East, we asked Iraq to consider supporting the Egyptian ten points. The Secretary said the U.S. is working hard to keep the peace process going. Both Egypt and Jordan are partners with Iraq, had been very helpful. Iraq's endorsement of the Egyptian ten points would be a big help. Aziz said Egypt had discussed the ten points with Iraq and Arafat, too, had recently been in Baghdad. The GOI, he said, was pleased and supported the joint efforts by Egypt and the PLO. Aziz noted that Iraqi support was well known in the region. It was, however, Iraqi policy to refrain from public statements on the peace process. A policy Iraq would maintain. Talk, particularly from parties not directly involved, may complicate the issue.

13. The Secretary raised Lebanon saying we strongly supported the Arab League tripartite committee effort and understood Iraq did too. He said he wanted to see all foreign forces leave Lebanon. We have supported a role for General Aoun in the process and hope he will stay committed to the AL effort. The Secretary said we had hopes that Iraq would too. We are encouraged, he concluded, by the initial reports coming out of Taif. Aziz affirmed that Iraq does indeed support the AL effort noting that when they had asked Iraq to stop sending arms to Lebanon Iraq had agreed. Iraq had advised Aoun to support the meeting in Taif. Aziz stressed the historic nature of the meeting--the first time Lebanese members of parliament had been able to discuss their problems under an Arab League umbrella and not under Syrian domination. Syria, after all, was a party in the Lebanese dispute. Aziz also said Iraq had encouraged the Christmas to accept reform (the 50/50 formula). Times had changed and the old systems are no longer valid, we said. The question of the Syrian presence, however, had to be faced and resolved. A new government and new president could not function under Syrian domination. They would be hostages--just as Salim Al-Nuss and some other Lebanese officials are now in West Beirut. At a minimum, Aziz argued, there had to be a free environment in the capital. The Syrians, he said, do not have to withdraw immediately and President Hussein had told Asad this in Casablanca. Aziz concluded that Saddam Hussein had, at King Fahd's request, sent a message to Aoun October 5 urging him to cooperate with the AL committee and Saudi Arabia to achieve a successful outcome of the Taif meeting. Aziz said Iraq had great confidence in King Fahd and would give him all support possible.

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14. Participants: Iraqi Foreign Minister Tariq Aziz, Iraqi appointed Ambassador in Washington, Mohamed Sadiq Al-Maskat, MFA International Organizations Director Riyadh Al-Gaysi, and Aziz Chef Du Cabinet Kamal Issa. The Secretary, under Secretary Bartholomew, Assistant Secretary Tutwiler, Policy Planning Director Ross. Acting HEA Assistant Secretary Covey, and HEA Deputy Assistant Secretary Edward W. Ghenm, Jr. (notemaker) comprised the U.S. side. Baker.

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U.S. Department of State
Washington, DC, October 11, 1989.

Memorandum for the Secretary

I have looked into the problems concerning USDA's Commodity Credit Corporation (CCC) program for Iraq. There are three distinct but related problem areas:

1. Creditworthiness.

2. Allegations of corruption in the operation of the Iraqi CCC program itself.

3. The Italian Banca Nazionale de Lavoro (BNL) agency office scandal in Atlanta.

CREDITWORTHINESS

The Fed, Treasury and EXIM have all been concerned about Iraq's credit record for several years. During the war years the Iraqis become notoriously bad creditors defaulting or unilaterally rescheduling billions of dollars of official and commercial credit and refusing to even discuss the matter in the Paris and London Clubs. Because of the extenuating circumstances and the country's substantial economic potential, not to mention the opportunity to profit from the war recovery program, this has never been a big stumbling bloc for Iraq's other major trading partners like Japan, France and West Germany.

Iraq's repayment record on the CCC program has been good. There is, however, some concern about the large amount of credit outstanding (about $1.7 billion) and heavy debt service (some $800 million a year), especially since Iraq already accounts for about 20 percent of the total CCC program. Despite these concerns by Treasury and the Fed, USDA has been disposed to continue the program at the $1 billion a year level, in part, not to unnecessarily anger the Iraqis and trigger a default that could jeopardize the whole CCC program.

Creditworthiness, therefore, while a legitimate concern, is not a major driving factor for reducing the Iraq CCC program. All other things being equal, USDA would continue on at the $1 billion plus level indefinitely and the Fed and Treasury would probably acquiesce.

Exim has refused to provide medium-term credit to Iraq until they agree to multi-debt rescheduling of official debt. The Bank's $200 million insurance program has also been `suspended' until the $6.2 million in arrears is repaid.

CORRUPTION

Several investigations (IRS, DOD, USDA, FBI) reportedly are looking to allegations of widespread and blatant `irregularities' in the CCC program for Iraq. Hard information is difficult to obtain, but apparently there has been substantial overpricing of some commodities (double and triple wholesale prices), diversion and trans-shipment of commodities outside Iraq and financing of non-U.S. origin goods. There is even one report that the Iraqis used the proceeds for arms purchases.

None of this, of course, has yet to be proven. Nor is it clear how long these investigations will take and whether or not indictments will eventually be handed down. And even if they are, if may never be clear how much, if any, Iraqi official complicity there was.

BANCA NAZIONALE DE LAVORO (BNA)

The unfolding BNA scandal is directly involved with the Iraqi CCC program and cannot be separated from it. Of the $4 billion of unauthorized loans involved, about $1 billion were CCC guaranteed. (*is

trying to obtain the details from the U.S. attorney in Atlanta.) Treasury and the Fed, however, find it hard to believe that Iraqi Central Bank officials and others were not aware of what was going on given the apparent scale of loans, kickbacks, deeply discounted interest rates and other gross irregularities. Indictments of U.S. citizens are expected by the end of this year, although no legal moves against Iraqi officials are contemplated at this point.

*State

It is also worth noting the president of Iraq's central bank and the finance minister reportedly have been arrested for unknown reasons in the past several days.

RESPONSE TO IRAQIS

Given the above apparent problems with the Iraq CCC program, it would seem wise to proceed with caution and prudence. We should not jump to conclusions before all the facts are known; nor should we continue with business-as-usual.

USDA, acting against the advice of the Fed and Treasury, but with the support of the other NAC members (including State), recently approved a `first tranche' of $400 million in FY 1990 CCC credits for Iraq--about one-third of the planned annual program or enough to keep the pipeline open until January at about the same volume as last year. They have told the Iraqis that approval of additional credits will depend on the outcome of the ongoing investigations into the BNA scandal and charges of corruption in the operation of the CCC program.

The Iraqis are taking an `all or nothing' approach, insisting that they have done nothing wrong and will be hurt badly if the annual CCC program is substantially cut. Iraq, in fact, is a consistent net importer of food and other commodities and undoubtedly benefits considerably by the CCC program. Certain painful adjustments would undoubtedly have to be made at a time when the government is hard-pressed for foreign exchange.

On balance, I think the USDA approach is prudent and proper under the circumstances. No options are foreclosed and, at least until the pipeline dries up, the Iraqis are not being prejudged until the facts are known and acted upon by U.S. authorities.

In the meantime, this situation should be kept under close policy review because the stakes are big. We need export markets, and Iraq is a large potential market and as the war-induced imports are replaced by commercial purchases, this market will undoubtedly increase in the next decade.

Once the facts are all known, it may be possible to correct the problem by building in safeguards against future possible abuses and then resuming the Iraq CCC program at previous levels. We will want, in any event, to avoid taking punitive action against the whole Iraqi government and population for the sins of some corrupt officials if they are brought to justice.

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State,
Washington, October 27, 1989.

Mr. Secretary: When this issue first emerged, ------ office was screaming caution on our involvement in this CCC exercise with Iraq. Ten different U.S. Government agencies were investigating various aspects of potential fraud in Iraq's past CCC program, and no one really knew just how far and deep the corruption went.

I was then reluctant to advise you to proceed with this matter until we had an opportunity to dig deeper into the potential corruption, and until the Department of Agriculture had an opportunity to follow through on my suggestion to devise a new CCC program with Iraq that would insulate us against corrupt elements.

I gather that a sanitized CCC program with Iraq is devised. In the meantime the top GOI ministerial team associated with the CCC program has been removed. You also now have a formal recommendation from ------ that we proceed on this matter.

Assuming that USDA finalizes a sanitized CCC program, I recommend that you assert to Yeutter the political and economic rationale for going forward with this whole program, by tranche, to the $1 billion level. If we are comfortable with a $400 million exposure, based on our new anticorruption safeguards, we ought to be comfortable with a billion dollar program.

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Confidential

[CONFIDENTIAL]

U.S. Department of State,
Washington, DC, November 7, 1989.

Briefing Memorandum

I. KEY POINTS

In early October, Iraq rejected USDA's offer of an `interim' FY90 program of $400 million in Commodity Credit Corporation (CCC) credit guarantees. At the urging of Secretary Baker, USDA has proposed a full, billion-dollar CCC program for Iraq with built-in safeguards to ensure Iraqi compliance with CCC obligations and cooperation with the U.S. Attorney's investigation of the Atlanta branch of the Italian-owned Banca Nazionale del Lavoro (BNL). On November 3 the National Advisory Council (NAC) declined to make a recommendation on the new USDA proposal, preferring instead to refer the decision to the policy level.

Our goal for the NAC Deputies meeting is to obtain NAC approval for USDA's full billion-dollar CCC program, with safeguards, for Iraq. Rapid action is crucial, because Iraq has already begun to explore alternate sources of supply.

II. INTERAGENCY POSITIONS

The Federal Reserve and Treasury, reflecting the views of OMB (which is not in the NAC), oppose a CCC program for Iraq. They note that Iraq has failed to make payments on some of its $30-40 billion debt to non-Arab creditors. They also support OMB's contention that allegations of Iraqi wrong doing in the BNL case, though not backed by evidence at this time, could eventually embarrass the Administration. USDA responded to OMB's specific concerns on BNL, but OMB (and Fed and Treasury) claimed to have continued, unarticulated `uneasiness' regarding the BNL case. OMB's concern stems from its post-HUD watchdog role. It is not clear whether a meeting between OMB and the USDA on 11/7 allayed OMB concerns.

State strongly backed USDA in the November 3 NAC. The other NAC members--AID, USTR, Commerce and EXIM--did not speak at the meeting. USTR reportedly is leaning against USDA's proposal. However, AID can generally be depended upon to follow State's lead and EXIM has privately indicated support, since it has its own short-term program of credit guarantees. The Commerce representative will support the State position if the argument is made on foreign policy grounds.

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III. PROPOSED STRATEGY

The Deputy Secretary has laid the groundwork by calling Deputy Secretary Robson at Treasury to urge acceptance of the full program, and he plans a similar call to OMB. USDA briefed OMB November 6, emphasizing that the U.S. Attorney does not intend to indict Iraqi officials in the BNL case on the basis of the evidence to date. You should strongly urge, on policy and commercial grounds, that the NAC Deputies approve the full package, with safeguards, submitted by USDA.

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Confidential

[CONFIDENTIAL]

Talking Points for NAC Deputies Meeting, November 8, 1989

The CCC program is crucially important to our bilateral relationship with Iraq. State strongly supports immediate action by the NAC Deputies to approve the new program proposed by USDA.

In NSD-26, the President mandated that we seek to improve and expand our relationship with Iraq. At present, trade is central to that relationship and credits guaranteed by CCC finance a large part of that trade.

(In response to the point that Iraq cannot service existing debt and that we are digging ourselves into a hole by providing new credits:)

Iraq's record of repayment to us is good, and the Iraqis have told us we have priority over other creditors. Iraq has oil reserves second only to Saudi Arabia. In addition, we should not take action that would harm U.S. exporters.

(In response to the point that we should not go forward with a new program in light of the BNL scandal;)

On the basis of the evidence we have there is no reason to derail future programs. We have a pledge of Iraqi cooperation with an investigation into the NBL issue, in response to the Secretary's request to the Iraqi Foreign Minister. No investigating agency has put any specific questions to Iraq.

Past problems are a reason to make sure there are adequate safeguards in a new program--not a reason to stop the program in its tracks to the detriment of our foreign policy interests.

We support a program of up to one billion, released in tranches, with periodic compliance reviews. These safeguards should protect us if problems are uncovered in the future and help assure Iraqi cooperation in the investigation.

I urge immediate approval of the full program of CCC credit guarantees, with safeguards, proposed by USDA for Iraq.

U.S. Department of State,
Washington, DC, November 6, 1989.
To: The Acting Secretary--Eagleburger.
Subject: CCC Program for Iraq.

ISSUE FOR DECISION

How to expedite approval of a full CCC program for Iraq.

ESSENTIAL FACTORS

The Secretary has determined that policy considerations warrant support for a full, $1 billion program of Commodity Credit Corporation (CCC) credit guarantees for Iraq, provided the program is protected by safeguards, such as disbursement in tranches, that would ensure Iraqi compliance with CCC obligations and cooperation with the investigation of the Atlanta branch of the Italian-owned Banca Nazionale del Lavoro (BNL). The Iraqis rejected a USDA offer of a $400 million `interim' in early October because they believed so drastic a cut from the $1.1 billion FY89 program would be widely viewed as a U.S. vote of no confidence in Iraqi debt policy. The Secretary telephoned Secretary Yeutter October 31 to urge that USDA propose a full program with adequate safeguards (Tab A).

USDA presented its new proposal for a full, billion-dollar program to the National Advisory Council (NAC) on November 3 (Tab B for membership and function of the NAC). The NAC declined to make a recommendation on the USDA proposal, electing instead, at Treasury's request, to bump the decision up to the political level; an Alternates' (Assistant Secretary level) meeting is to take place this week. Treasury and the Fed formally moved to block a decision in the NAC, acting at the behest of OMB. OMB, though not a member of the NAC, led the opposition to USDA's proposal at the November 3 meeting. Noting that OMB is administration watchdog against scandal, OMB complained of continued uncertainty regarding the Iraqi role in the BNL affair and that the Iraq CCC program was too big, given Iraq's recent failure to make timely payments on debt to some creditors. (OMB's real problem may be less with Iraq per se than with some serious accountability questions regarding the entire CCC program.) USDA responded to OMB, noting that the legal situation with regard to BNL remained unchanged, that there were no current plans to indict Iraqi officials, and that Iraq's record on repayment of CCC-guaranteed credits was spotless (Tab A). The NAC members, however, were content to kick the problem to a higher level. Only State spoke out in support of the USDA proposal.

Time is a factor. USDA has yet to register a single purchase by Iraq from U.S. commodity suppliers in FY90, and the Iraqis have begun to explore alternate sources of supply. A significant potential market for U.S. exporters is therefore at risk. USDA wants an Alternates' meeting as soon as possible, and it may take place as early as the afternoon of November 7.

RECOMMENDATION

That you telephone Treasury and OMB and urge that an Alternates meeting take place as soon as possible to approve USDA's proposed full program of CCC credit guarantees, with safeguards, for Iraq.

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U.S. Department of State,
Washington, DC, November 8, 1989.
To: The Acting Secretary.
Subject: Letter to Treasury Deputy Secretary Robson on a CCC Program for Iraq.

In your conversation earlier today, Department of the Treasury Deputy Secretary John Robson asked that you send him a letter outlining the policy reasons for which State strongly backed USDA's proposal for a full, billion-dollar program of Commodity Credit Corporation (CCC) credit guarantees, with safeguards, for Iraq. Attached is a letter for your signature that outlines those policy considerations. It essentially follows the talking points provided for your telephone conversation with Mr. Robson.

RECOMMENDATION

That you sign the attached letter to Deputy Secretary Robson.

Attachment--Proposed letter to Deputy Secretary Robson.

Department of State,
Washington, DC, November 8, 1989.

Hon. John E. Robson,
Deputy Secretary of the Treasury,
Washington, DC.

Dear John: Further to our discussion, on foreign policy grounds we support the Department of Agriculture's proposal for a full, billion-dollar program of Commodity Credit Corporation GSM-102 export credit guarantees in FY 90, with adequate safeguards, for Iraq.

In addition to the near-term benefits for agricultural sales, the CCC program is important to our efforts to improve and expand our relationship with Iraq, as ordered by the President in NSD-26. Iraq is a major power in a part of the world which is of vital importance to the United States. Our ability to influence Iraqi behavior in areas from Lebanon to the Middle East peace process to missile proliferation is enhanced by expanded trade. Also, to realize Iraq's enormous potential as a market for U.S. goods and services, we must not permit our displacement as a major trading partner.

With regard to the real concerns which arise from the investigation into the operations of the Atlanta branch of the Banco Nationale de Lavoro, we have received from the Government of Iraq a pledge of cooperation. Our intention is to hold Iraq to this commitment and to work with the Department of Agriculture to ensure that the problems with the program in the past are fully resolved in a new program. The safeguards proposed by USDA, including disbursement of the CCC guarantees in tranches, buttress the program and merit our backing.

I appreciate your support in this connection.

Sincerely,

Lawrence S. Eagleburger,
Acting Secretary.

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U.S. Department of State,
Washington, DC, October 26, 1989.
To: The Secretary.
Subject: The Iraqi CCC Program.

ISSUE FOR DECISION

Whether to push for a full CCC program for Iraq.

ESSENTIAL FACTORS

Over the last five years USDA's Commodity Credit Corporation (CCC) has guaranteed some $4 billion in loans for U.S. agricultural exports to Iraq under its GSM program, which Iraq so far has repaid on schedule. This year, concern over possible Iraqi involvement in the scandal in the Atlanta branch of Italy's Banco Nazionale del Lavoro (BNL) caused USDA to withdraw its first, billion-dollar offer for FY 90 and put forward instead an `interim' program for $400 million. The Iraqis, believing so large a reduction would be widely viewed as a U.S. vote of no-confidence in their economy, rejected the 400 million. They hope we will come back offering the full program but also have begun to hedge their bet by looking into other sources of supply. Tariq Aziz raised the issue with you on October 6, and you promised to look into it personally.

Earlier this month, the President signed NSD-26, mandating pursuit of improved economic and political ties with Iraq. Since last year's cease-fire in the Gulf War, trade has become the central factor in this relationship. Iraq is now our ninth largest customer for agricultural commodities, and the U.S. is Iraq's largest supplier of non-military goods. Iraq has signalled the importance it places on the relationship by giving first priority to repaying CCC-guaranteed loans at a time when it faces severe financial difficulties. (Treasury and the Fed cite these difficulties--Iraq has failed to make some payments on its $30-40 billion debt to non-Arab creditors--in opposing any FY 90 CCC program for Iraq.) Our ability to influence Iraqi policies in areas important to us, from Lebanon to the Middle East peace process, will be heavily influenced by the outcome of the CCC negotiations.

USDA has looked into the BNL investigation and * * * has spoken with USDA and independently with the U.S. attorney's office in Atlanta. * * * believes the investigation is largely focussed on widespread, systematic banking fraud by persons working for BNL or under consulting relationships with BNL. It may also involve several high Iraqi officials, though this is unclear. USDA, which has come under pressure from U.S. exporters, is prepared to reopen talks with Iraq, but leans toward a partial offer. We doubt the Iraqis would accept this, unless it includes a U.S. commitment to complete the program early next year. In view of the evidence available, * * * believes that, to wall off a FY 90 CCC program from the BNL investigation, it is sufficient to exact Iraq's promise to cooperate in the investigation into past practices and to cooperate with USDA in establishing monitoring procedures and safeguards for future deliveries. The CCC contract could be discussed as a full program but include built-in, periodic reviews and related disbursement in tranches to ensure Iraqi compliance with CCC obligations and cooperation with the BNL investigation. In this regard, Tariq Aziz responded positively to your message of October 23 and--in an unprecedented step for Iraq--promised Ambassador Glaspie full cooperation in the BNL investigation. To date, no investigating agency has asked Iraq for help.

[Page: H868]

DISCUSSION OF OPTIONS

There is no point in going back to the Iraqis with a partial program they have already rejected, especially when it seems clear they would accept reviews and other reasonable safeguards. Offering a program of up to $1 billion would strengthen relations with Iraq, in line with NSD-26, and help U.S. exporters. * * * favor. * * * first instinct is to give USDA leeway in negotiations, but * * * supports on commercial grounds a program with safeguards, made available in tranches, that could go up to the full amount.

RECOMMENDATION

That you telephone Clayton Yeutter to urge that we go forward rapidly with a CCC program, with safeguards and to be made available in tranches, that could go up to the full $1 billion, provided the review process turns up no evidence of Iraqi wrong doing. Talking points attached.

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Talking Points

The CCC program is crucially important to our bilateral relationship with Iraq. We strongly support your effort to reinstitute it.

Obviously we should not go forward with the program if we have substantial evidence of a pattern of serious violations of U.S. law by high-ranking Iraqi officials. Our information about the investigation indicates that the prosecutor does not now intend to indict Iraqi officials.

On foreign policy grounds, we support a program of up to one billion, released in tranches, with periodic compliance reviews.

Given the allegations, we believe safeguards should be build in to ensure the alleged problems do not recur.

The Iraqi Foreign Minister, with whom I talked, has now pledged Iraq's cooperation with the investigation.

My legal adviser, Abe Sofaer, is prepared to work with USDA's lawyers to secure Iraqi cooperation in developing adequate safeguards for the Iraq CCC program.

With safeguards, I hope we can get this important program back on track quickly.

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Function and Composition of the National Advisory Council

The National Advisory Council (NAC) was established by statutory authority to advise the President on general policy directives for the International Monetary Fund, the multilateral development banks, the Export-Import Bank and other agencies that participate in making foreign loans or engage in foreign financial, exchange or monetary transactions. it is composed of the Secretary of the Treasury, who is chairman of the Council; the Assistant to the President for Economic Affairs, who is Deputy Chairman; the Secretary of State; the U.S. Trade Representative; the Secretary of Commerce; the Chairman of the Board of Governors of the Federal Reserve System; the Chairman of the International Development Cooperative Agency; and the President of the Export-Import Bank. By Executive Order, the President has delegated to the Secretary of the Treasury most of the functions and responsibilities conferred on him in the setting up of the NAC.

In practice, the NAC meets weekly at the working level and generally makes its recommendations on the basis of a majority vote of the seven members routinely in attendance (Treasury, State, the Fed, AID USTR, Commerce and EXIM). In cases in which the NAC cannot or prefers not to make a decision, or on the strong request of one of its members, consideration may be moved up to the polity level through the convening of an NAC alternates' Meeting.

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Talking Points for Calls to Treasury and OMB.

The CCC program is crucially important to our bilateral relationship with Iraq. State strongly supports action by the Alternates' meeting to approve the new program proposed by USDA.

We realize that Iraq has had problems paying its debts recently. However, the Iraqi economy survived the war in surpringly good shape, and Iraq sits atop immense oil reserves. Its record on repayment of CCC-guaranteed loans is spotless.

Obviously, we should not go forward with the program if we have substantial evidence of a pattern of serious violations of U.S. law by high-ranking Iraqi officials. However, the most recent available information about the BNL investigation indicates that the prosecutor does not now intend to indict Iraqi officials.

On foreign policy grounds, we support a program of up to one billion, released in tranches, with periodic compliance reviews. These safeguards should protect us if problems are uncovered in the future and help assure Iraqi cooperation in the investigation.

Given the allegations, we believe safeguards should be built in to ensure the alleged problems do not recur.

The Iraqi Foreign Minister has promised the Secretary Iraqi cooperation with the BNL investigation.

With safeguards in place, we can get this important program back on track.

I urge that the NAC Alternates Meeting be convened as soon as possible to approve the full program of CCC credit guarantees, with safeguards, proposed by USDA for Iraq.

National Advisory Council Deputies Meeting, November 8, 1989

Treasury representative opened the meeting by stating that there were two issues that should be addressed with respect to the proposed extension of new CCC guarantees to Iraq in FY 1990: (1) the question of Iraqi creditworthiness and (2) the implications of the Banca Nazionale del Lavoro (BNL) investigation and the uncertainties it created for the proposed program for Iraq. He stated that the proposed FY 1990 program should be evaluated, first, on the basis of the agencies' judgment that the 1990 program was a responsible action from a programmatic standpoint, and, second, from the standpoint of having to defend the program to a hostile Congressional committee or the media if a worst case scenario--involving criminal conduct in connection with the program on the part of banks, exporters, or the Iraqis--came about. He indicated that this possible worst case scenario should be weighed against the agricultural, trade, and foreign policy considerations involved in a decision on whether to proceed with the program. He then referred the meeting participants to two background papers prepared by Agriculture which outlined 1) the status of the BNL investigation and 2) a country risk analysis of Iraq, and asked Agriculture for his comments.

Agriculture representative noted that the BNL investigation had, thus far, resulted only in allegations of violations and that the Department of Agriculture representative had advised the Department in writing that there was not an evidentiary basis for withholding approval of a new CCC transaction with Iraq. Furthermore, he said, many of these alleged violations were internal BNL bank matters not associated with the management of the GSM program for Iraq. He added that while eventually it might be proven that certain BNL bank officers had been engaged in violations of the banking laws, such possible violations would not necessarily implicate Iraqi officials or others directly connected with the CCC program. These possibilities had to be weighed against the value of one billion dollars in export sales--to a country, he noted, that accounted for 20 percent of all U.S. rice exports and was the tenth largest U.S. agricultural export market. He said that in his view the benefits of approving the program far exceeded the risks.

The Department of Agriculture continued by noting that Iraq normally entered the market at that time of the year. He added that the United States was already five weeks late in its export credit negotiations with Iraq, and, accordingly, there was a risk of our losing the market for our exports.

As to a worst case scenario, Agriculture representative said that his position would be that, based on all available evidence, the decision to go ahead with the GSM program was appropriate and correct. He stated that in this country innocence is assumed until proven otherwise and it was therefore improper to penalize the Iraqis for unproven allegations. Noting that the one billion dollar program was to be offered in two tranches, he suggested that if wrongdoing on the Iraqis' part were proven, the unused portion of the first tranche could be withdrawn and the second tranche not released. He summarized by noting that had to make immediate buying decisions, and that third parties were willing to fill these agricultural needs at the expense of U.S. exporters. He concluded that there was a strong need to move ahead expeditiously with a FY 1990 GSM program for Iraq.

Department of State representative stated that his comments reflected the views of State, who believed that the GSM program in Iraq was crucial to the U.S. bilateral relationship with Iraq. He noted that in `National Security Decision 26' the President had called for improvement of the U.S. relationship with Iraq, and bilateral trade expansion offered a good means to achieve that end. He noted that Iraq was key to the achievement of our objectives in the Middle East, the Gulf, and Lebanon. To abruptly terminate the GSM program in Iraq would, he said, clearly run counter to the President's intention and would, furthermore, cause a deterioration in our relationship with the Iraqis. Any such deterioration, he contended, would create difficulties in ongoing discussions on other issues, e.g., the Middle East peace process, human rights, and proliferation of missile and chemical weaponry. He noted that Treasury had called to express its support for an ongoing GSM program in Iraq. He also noted that the Iraqi Foreign Minister had given assurances that Iraq would cooperate fully with the investigation. Finally, he stated that, despite possible future revelations, overwhelming foreign policy considerations led him to urge support of the proposal, based on information available at that time.

OMB representative said that, while he was aware that OMB was not a voting member of the NAC, his agency's mandate to oversee the management of Government programs had led him to request an interagency review of the GSM-Iraq program. He applauded Agri for bringing a potential problem to the attention of OMB, stated that he was satisfied that the allegations had been taken seriously, and indicated that he did not want to express an opinion on the issue. Noting that the decision on approval of the program would involve a balancing of risks, he expressed confidence that the eventual outcome would be prudent and correct.

Department of Commerce representative, noting Iraq's large external debt and questions surrounding its creditworthiness, voiced an uneasiness with the proposed program. However, noting the foreign policy concerns of State and the large export market that Iraq represented, he said that Commerce did not want to obstruct the proposal. In response to a question from Treasury, he said that his agency was not opposed to the program but felt that tranching and other safeguards were necessary.

Eximbank representative said that he viewed the NAC as a forum for consideration of political, not country creditworthiness, issues. He noted Eximbank had supported the CCC on its Iraq proposal in the past and would do so at this meeting. He also noted that Eximbank was currently open in Iraq with a short-term $200 million revolving line of credit. The Iraqis, he said, were currently delinquent by $12 million as of September 30, 1989, and Eximbank, therefore, would be reluctant to expand its exposure from the short-term facility.

AID/IDCA representative stated that since AID/IDCA was not active in Iraq, his agency had no position on the current proposal.

Federal Research Representative stated that, despite assurances on several points gained from the Agriculture Department papers, there was still more about the BNL affairs that had yet to be brought to light. He said that he was reassured, however, that the investigation had not yet revealed culpability on the part of the Iraqis. Nevertheless, he cautioned, it would be unrealistic to think that the entire BNL affair would be settled before the second tranche was released sometime in 1992.

Furthermore, Federal Reserve said, the BNL affairs notwithstanding, there was still the question of credit risk with respect to Iraq. While he stated that he understood the need to make a sale to a customer, it was just as important that the customer pay. He cautioned that extending 20 percent of the CCC's guarantee authority for a fiscal year to one country was not desirable in terms of risk management--especially when that country was engaged in unilateral debt reschedulings. Finally, noting the foreign policy considerations brought forward by State, Federal Reserve said that he, too, did not want to be obstructionist, but had reservations about a one billion dollar program.

U.S. Trade Representative stated that, while this transaction was risky from both the creditworthiness and domestic and international political angles, he thought it was reasonable to proceed, given the safeguards discussed.

Treasury representative, in summarizing the sense of the meeting, indicated that absent compelling agricultural export and foreign policy interests this proposed programs probably would not go forward. He stated further that the Committee's deliberations had been valuable insofar as they facilitated: 1) acknowledgement of the risks of proceeding with the proposed program for Iraq in the face of uncertainties as to the potential for future revelations of wrongdoing; 2) clarification of the point that resolution of the issue required a balancing of foreign policy and agricultural export interests; and 3) establishment of a record that showed that the risks involved in the transaction had been recognized and that the strong advice of the State and Agriculture had been that we should proceed. Thus, in the worst scenario, it could be shown that the NAC agencies had taken prudent steps to protect the integrity of the program. He then offered a number of suggestions as to actions that might be taken.

Agriculture representative responded that he agreed that building a record was appropriate and supported the suggestions that Treasury had made. Agriculture indicated that it should be recognized that there are significant controls in place and that the problems with BNL had been uncovered and disclosed to OMB because of them. NSC strongly seconded Agriculture point.

Treasury observed that the Middle East peace process was at a vital point and proceeding quickly with the proposed program would be helpful in that context. He added that he approved of the approach Treasury had suggested.

Based on the foregoing discussion, including the points suggested by Treasury that were subsequently accepted and reduced to writing (see attached), the NAC Deputies agreed that Agriculture should go forward with a FY 1990 GSM program for Iraq in up to two tranches of export credit guarantees, with each tranche not to exceed $500 million.

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[Page: H869]

Summary of Agreed Points in NAC Deputies Meeting on Proposed CCC Program for Iraq, November 8, 1989

1. The Agriculture Department will designate senior officials to monitor the Iraq program through appropriate channels.

2. The Agriculture Department will suspend its program under specified conditions and will ensure the full cooperation of the government of Iraq in uncovering and dealing with any wrongdoing in connection with the program.

3. The Agriculture Department has reviewed the existing GSM procedures and is installing additional safeguards or controls needed to tighten the monitoring and enforcement of its guarantee programs and to raise the probability that irregularities will be detected at an early stage.

4. The State Department and Agriculture will send, for the record, letters to the Secretary of the Treasury, in his capacity as chairman of the NAC, outlining the agricultural, trade, and foreign policy reasons which make it important to proceed with the CCC program for Iraq.

5. Prior to commitment of a second tranche under the Iraq program, the Agriculture Department will submit a written report to the NAC detailing:

(a) the nature and operation of the safeguards and controls established in connection with the Iraq program in particular;

(b) the steps taken to tighten the monitoring and enforcement of its export credit guarantee programs; and

(c) developments in the investigations of the BNL scandal.

Any significant developments with respect to the BNL investigations that may have ramifications for the Iraq program will be reported to the NAC as soon as they become known.

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Department of State,
Washington, DC, June 12, 1984.
NEA Subject: Eximbank Financing for Iraqi Export Pipelines.

Attached is a background paper, prepared at the request of the Vice-President's staff, on the status of the proposed Iraqi oil export pipelines and suggested talking points for possible use by the Vice President in calling Eximbank Board Chairman William Draper concerning Exim financing.

Charles Hill,
Executive Secretary.

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Background Paper: Status of Iraqi Export Pipelines

Iraq has agreement in principle with both Jordan and Saudi Arabia to build separate oil export pipelines and has asked US firms to take the lead in both projects. Both are moving forward slowly, however, because of delays in arranging financing as well as some apparent indecision on the part of the Iraqi and Saudi Governments.

Bechtel has detailed financial and technical discussions with an Iraq-Jordanian Joint Commission on the $1 billion 1 million barrel per day line to Aqaba. Recently, the Commission asked Bechtel to revise its proposal and maximize US official and private participation and present the new version by June 25. In keeping with this request, Bechtel has now applied to Eximbank for a preliminary commitment of financing for up to $570 million in US goods and services and has urged Exim to act on this request at its June 19 Board meeting (Eximbank would cover 85 percent of the amount, or up to about $500 million.) Bechtel is seeking financing for most of the remainder from Eximbank's French and British counterparts.

The Iraqi-Jordanian effort to maximize US participation is in part due to concerns over possible Israeli interference with the planning, construction and operation of the line, which would terminate within a few miles of the Israeli port of Eilat. We have advised the Israelis of our interest in seeing this line operate and they have raised no military or political objections, but have noted the need for adequate environmental safeguards.

Iraq has also publicly and privately described this project as a major test of US intentions toward it. Jordan enthusiastically supports this project which would provide additional employment and continuing revenues.

In the case of the proposed link to the Saudi East-West pipeline, Brown & Root has a contract with Iraq to design and manage this $800 million 500,000 b/d project. The company has prepared an application for Exim financing of its $35 million service contract but has delayed submitting it while it attempts to meet an Exim request for external, i.e., Saudi, guarantees. Construction of this line presents a number of potential problems to the Saudis and their commitment to it appears lukewarm at best; while they have not obstructed preliminary work, they have also not facilitated it, and there has been no sign of Saudi government willingness to provide financing.

Eximbank support is likely to be a crucial component, particularly for the Aqaba line. Exim's policy to date has been to disapprove medium and long term financing for US goods and services for Iraq in the absence of external security arrangements because of doubts regarding repayment prospects. Following recent discussions with Exim Chairman Draper and his staff, however, Bechtel believes they are favorably disposed towards the project and Bechtel's application, which would include only about $50 million in Iraqi risk with the remainder backed by a Jordanian government guarantee. (All of Brown & Root's request would be for Iraqi risk.) The Aqaba project would be one of the largest single commitments ever made by the Bank and would far exceed its current exposure in Jordan.

While expressions of interest and support made to Eximbank at this time would necessarily focus on Bechtel's application regarding the line to Aqaba, we do not regard the two projects as mutually exclusive. Both would be beneficial.

Given the importance of these projects to our overall policies in the region, Deputy Secretary Dam is calling Mr. Draper to reiterate our foreign policy interests. (The Secretary has not been involved because of his previous association with Bechtel.) We understand that National Security Advisor McFarlane may also call Draper. A call by the Vice President would be particularly useful in confirming the Administration's support for these projects. (Suggested talking points for such a call are attached.)

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Talking Points: Exim Financing for Iraqi Pipelines

The war between Iraq and Iran directly affects our vital interests in the Middle East and particularly in the Persian Gulf.

Our objective is to bring the war to a negotiated end in which neither belligerent is dominant and the sovereignty of both is preserved. We believe that victory by either side would have a serious destabilizing effect on the region.

At the present time, Iran is the intransigent party, unwilling to negotiate in part because it believes it can win in a war of attrition. We must therefore seek means to bolster Iraq's ability and resolve to withstand Iranian attacks as well as to convince Iran that continuing hostilities are useless.

One such means would be the early initiation of construction and rapid completion and operation of additional export pipelines for Iraq's large oil reserves.

Eximbank could play a crucial role in our efforts in the region. Early and favorable action on applications for Exim financing for these pipeline projects would be clear and very welcome evidence of US commitment to these objectives.

US suppliers of services and equipment would benefit and with the completion of these pipelines, we would be less dependent on oil shipped through the Persian Gulf.

Finally, operation of a pipeline to Aqaba could contribute to stability in the region by promoting at least tacit cooperation in the region.

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Department of State,
Washington, DC, March 16, 1983.
To: The Secretary.
From: EB--Richard McCormack.
Subject: U.S. Credit Possibilities for Iraq.

ISSUE FOR DECISION

Whether to approve the attached cable (Tab A) outlining the limited possibilities for U.S. financial support for exports to Iraq.

ESSENTIAL FACTORS

In your February 14 meeting with Iraqi Minister of State Hammadi you undertook to provide Iraq information on official U.S. financing possibilities in support of U.S. exports to Iraq.

Iraq's financial position has gradually worsened since the beginning of the war in 1980 and is likely to grow more serious over the next six months. With reduced, although still substantial, aid from the Gulf, Iraq faces a current account short-fall of as much as $10 billion this year. This situation undoubtedly motivated Hammadi to mention to you that the US should consider providing credits, loans and technical cooperation to support U.S. exports to Iraq, which have approached one billion dollars in each of the past two years.

ANALYSIS OF OPTIONS

There are two possibilities for US official credit for Iraq: (a) Eximbank programs; (b) CCC blended credits or guarantees for agricultural exports. Secondarily, the US attitude in the IMP could affect Iraq's ability to obtain access to IMP resources. Finally, although commercial bank financing is beyond USG control, we could take some minor steps in support of Iraq's prospects in private credit markets.

A. Eximbank Programs

Eximbank is discouraging the few inquiries from US exporters regarding Iraq because of the war's effect on Iraq's economy. This decision was based upon the Export-Import Bank Act requirement that there be `a reasonable assurance of repayment'. Other official credit agencies have informed Exim of payment and contract problems.

Equally problematic is section 520 of the Foreign Assistance Appropriations Act of 1979 which prohibits Eximbank funding to any government which harbors terrorists. L has concluded that if an Iraqi government entity were involved in an Eximbank transaction, then the question of whether Iraq was harboring terrorists would have to be decided. However, an area of ambiguity exists with respect to the issuance of FCIA insurance for the benefit of a U.S. exporter or U.S. bank where the importer is a private foreign national.

Section 520 language originated in a 1977 amendment proposed by Senator Heinz. With the Eximbank Act up for renewal this year, a section 520 case, on the heels of a Chaffee Amendment determination for Argentina, could galvanize Congressional support to circumscribe the Administration's flexibility to ensure that Exim loans are consistent with our foreign policy. Because Heinz will be a key Senator on the Eximbank renewal we would hope to avoid a section 520 case. Given legislative requirements and Congressional sensitivity, we have asked Eximbank to refer any applications involving Iraq to State before taking action.

B. CCC Blended Credit Program

Based in part on the opinion of the AID General Counsel's office, L has concluded that there are no FAA or other pertinent statutes which specifically bar a CCC program for Iraq. In December, USDA approved $210 million in CCC credit guarantees for Iraqi imports of U.S. agricultural exports. State successfully opposed a proposal to raise the quantity of wheat in the package (and increase the total package to $250 million), citing the need to avoid further angering Canada, a non-subsidizing exporter of wheat. Canada has complained that our blended credit package with Iraq has affected their non-subsidized cash wheat market there. Although Agriculture has received Iraqi assurances that they will purchase the minimum amounts of Canadian wheat required under the long term agreement with the GOC, the Canadians have told us that the Iraqis have not signed any new contracts for wheat deliveries for this year and that old contracts also have not been picked up. We can expect further protest from Ottawa.

C. U.S. Vote in the IMF

IMF assistance may be appropriate for Iraq's current balance of payment problems. We could give no blanket commitment to support Iraqi applications, since our decisions are made on the viability of individual loans. Furthermore, legislation requiring that we `work in opposition' to any extension of IMF financial or technical assistance to any country that harbors terrorists would be an additional constraint. For these reasons and because we would not want Iraq to tell the IMF the U.S. in any way suggested it approach the Fund, we have not included this subject in the cable.

D. Commercial Financing

The Iraqis probably doubt disclaimers that the USG cannot swing loans for Iraq through friends in the private sector. We might remind the Iraqis that the private sector takes into account the state of political relations in making its credit determinations. We could offer to arrange consultations between Iraqi government financial officials and U.S. government and private international financial experts.

RECOMMENDATION

That you approve the attached cable which instructs US Interest Section Chief Eagleton to inform the Iraqis what we have done on CCC credits, explains the constraints on Eximbank credits to Iraq and reiterates that the U.S. private sector is influenced by the overall state of our relations.

END