IRAQ: GOVERNMENT DEAL WITH A 'MERCHANT OF DEATH'?

In an effort to crack down on one of the world's most notorious international criminals, President George W. Bush last summer signed an order barring U.S. citizens from doing business with Russian arms trafficker Victor Bout. But not long afterward, U.S. officials discovered Bout's tentacles were wider than anticipated: for much of this year, NEWSWEEK has learned, a Texas charter firm allegedly controlled by Bout was making repeated flights to Iraq--courtesy of a Pentagon contract allowing it to refuel at U.S. military bases. One reason for the flights, sources say, was that the firm was flying on behalf of Kellogg Brown & Root, the division of Halliburton hired to rebuild Iraq's oilfields.

U.S. officials say Bout--once dubbed a "merchant of death" by a British foreign minister--built an empire in the 1990s flying weapons to the Taliban and African dictators and rebel groups, in violation of international sanctions. Bush's order banning business with Bout, a former Soviet military officer, was for supplying guns to the rogue regime of ex-Liberian president Charles Taylor. "Our ultimate goal is to shut down his network," says Juan Zarate, assistant Treasury secretary.

But U.S. officials feared they were being undermined recently when they got evidence that Bout's aircraft were spotted in Iraq. A Pentagon official confirmed that, until last summer, a Texas carrier named Air Bas had a "fuel purchase agreement" authorizing its planes to refuel at U.S. bases there. Air Bas planes landed 142 times at U.S. bases this year, says Jack Hooper of the Defense Logistics Agency. The flights began months after a U.N. report identified Air Bas as a suspected Bout "front company." Sources say Treasury officials recently recommended naming Air Bas to a list of Bout-connected firms to be covered by Bush's order. (Air Bas president Richard Chichakli acknowledges he was in contact with Bout, but says Bout is not an owner of the firm.)

Hooper says his agency had been unaware of the Bout connection and cut off the agreement in August after the firm "repeatedly" rebuffed requests to identify what business it was conducting for the U.S. government. Chichakli says Air Bas had subcontracted with another firm, Falcon Express in Dubai, that was hired to haul cargo for two big Iraq contractors--Fed-Ex and Kellogg Brown & Root. "I'm like Hertz or Avis," he says. "You rent my planes, you go from point A and point B." A FedEx spokeswoman says the firm recently told Falcon to drop Air Bas when it learned of the alleged Bout link. Halliburton spokeswoman Wendy Hall says the firm had "no knowledge" of Air Bas's role, but that the firm stopped using Falcon Express "six months ago." Still, Lee Wolosky, a former National Security Council official who tracked Bout, says it's "seemingly inexplicable" that the U.S. government could have been "doing business with an international criminal organization."