Iraqgate: What Went Wrong

Ross Perot got it wrong: Iraqgate, the smudge-pot scandal that no one in Washington seems able to get to the bottom of, is not about what April Glaspie said to Saddam Hussein. It isn't about what George Bush told Jim Baker to tell April Glaspie to say to Saddam Hussein, either. And at this moment, at least, it isn't particularly about the Bush administration's tilt toward Iraq, its sharing of U.S. intelligence with Iraq or the long list of U.S.-made high-tech products that the Bush administration approved for sale to Iraq in the two years preceding the Persian Gulf War. All that, in its still unfolding detail, is evidence of an abysmally dumb policy that even the president admits was a failure. There's plenty of blame to go around, and historians can parcel it out.

But history must wait. Iraqgate has now become an extremely complicated-and almost hopelessly screwed up-criminal case with very large political overtones. It is, at bottom, a fraud investigation that involves the Atlanta branch office of a big Italian bank, the Banca Nazionale del Lavoro, or BNL. In recent weeks, the BNL scandal has led to more or less open warfare between the U.S. Department of Justice and the CIA, and it has touched off internecine combat within the CIA itself. It has begun to cast new doubt on the competence of former U.S. attorney general Richard Thornburgh, current Attorney General William P. Barr and CIA Director Robert Gates. It has turned the U.S. Attorney's Office in Atlanta inside out, and it appears to involve improper conduct at the White House. It prompted U.S. district Judge Marvin Shoob, in a highly unusual decision, to allow the principal defendant, BNL branch manager Christopher Drogoul, to withdraw his guilty plea.

The BNL scandal has now led to six separate congressional investigations, and many Democrats are calling for the appointment of a special prosecutor. To head off that demand, Attorney General Barr recently brought in a retired federal judge, Frederick B. Lacey, to review the government's handling of the case. But the questions go well beyond the technical issues of prosecutorial conduct. Recent disclosures and NEWSWEEK'S own reporting reveal a pattern of blunders, interdepartmental feuds and political meddling that began in 1989 and continued until September 1992. This pattern suggests that both the Bush administration and the Italian government were interested in limiting fallout from the case. A summary view:

The scandal began in August 1989 with a raid on BNL's Atlanta offices, where the FBI and federal bank examiners, acting on a tip, discovered that Drogoul had been keeping two sets of books. Drogoul's private books recorded very large unreported loans to the government of Iraq, which even then was hard at work building up the military might that would conquer Kuwait. This was highly disturbing to the Italian government, which owns BNL. It was also embarrassing to the Bush administration, since BNL was a primary middleman in a foreign-aid program that enabled Iraq to buy American grain with loans underwritten by the U.S. Department of Agriculture. All told, investigators found that BNL/Atlanta had handled some $5 billion worth of illegal loans to Iraq; Drogoul, they now allege, got $2.5 million for himself.

Within weeks of the raid on BNL, George Bush signed National Security Directive 26, which effectively committed his administration to continue the tilt toward Iraq. About the same time, federal prosecutors in Atlanta were soon called by an associate counsel to the president, Jay Bybee, who reportedly expressed concern for the BNL case's "embarrassment level." The Department of Justice and the U.S. Attorney's Office in Atlanta then spent 18 months wrangling over just whom to prosecute. In the end, the Feds made a minimalist case: their indictment, handed down in February 1991, alleged that Drogoul and two aides had acted without the knowledge or involvement of BNL/Rome, and that four officials of the Iraqi government also were involved in the deception. There was almost no possibility, of course, that the four Iraqis would ever stand trial.

Fast-forward to the summer of 1992. Drogoul, who had previously submitted a 122-page confession in return for a negotiated guilty plea and the promise of a lesser sentence, got a new lawyer named Bobby Lee Cook. Cook essentially claimed that Drogoul was only a pawn in a wider conspiracy, and that higher-ups had been involved. Judge Shoob, who had his own doubts that the U.S. government was telling all it knew, pressed the prosecutors for an assurance that no American official had evidence that Drogoul had received help from above. The prosecutors called Washington, and the Justice Department once again asked the CIA what it knew. On Sept. 4, the CIA sent a classified letter reporting that it had no such evidence.

The plot now thickens-in fact, fairly curdles. U.S. Rep. Henry Gonzalez of Texas, chairman of the House Banking Committee, had been harassing the Bush administration over the BNL case for nearly two years. On Sept 14, Gonzalez took to the House floor to announce that the CIA had told him exactly the opposite-that there was good evidence to suggest that BNL officials in Rome had known what Drogoul was doing. According to several knowledgeable officials, Gonzalez's revelations caused panic and fury at the Department of Justice. The CIA, through its general counsel, had assured Justice its theory was sound--Drogoul had acted alone. Now another department of the same agency-the CIA's directorate of intelligence-was telling Gonzalez that BNL officials in Rome had actually signed off on some of the loans to Iraq. The case against Drogoul was being torpedoed-and so, it seemed, was the Justice Department. Senior Justice officials called the CIA to accuse it of a double cross and to demand that the directorate of intelligence retract the report to Gonzalez. The CIA refused, although its general counsel's office tried to maintain that the evidence of Rome's complicity was inconclusive.

The two agencies then reached a short-lived compromise. On Sept. 17, the CIA general counsel declassified the agency's earlier letter; it answered 10 questions on the BNL affair. The answer to question No. 8 was a masterpiece: it said that the CIA had "publicly available information ... that BNL-Rome was aware of the illegal activities" in Atlanta. In plain language, this meant the CIA had only press reports speculating that the parent bank knew about Drogoul's loans to Iraq and, by implication, that the U.S. government had acted in good faith in singling Drogoul out for prosecution.

This, too, set off a firestorm. Gonzalez sent a letter to CIA Director Gates demanding to know why the CIA's report to him had been so flatly contradicted by the CIA's report to Judge Shoob. Senate Intelligence Committee chairman David Boren, who had been pursuing his own investigation of the BNL case, also took issue with Gates. Boren had copies of intelligence bulletins provided by the CIA's directorate of operations, and to him, these reports suggested BNL headquarters was aware of Drogoul's activities.

Under fire for withholding information, Justice and the CIA agreed to send these intelligence bulletins to Atlanta, which now had contradictory reports by three different departments of the CIA-the general counsel's office, the director of intelligence and the directorate of operations. But the case against Drogoul was already collapsing. On Sept. 21, Drogoul's lawyers filed a motion to withdraw his guilty plea. On Oct. 1, Judge Shoob, furious at the way the CIA and Justice had handled the case, allowed Drogoul to change his plea, and added an angry blast at prosecutors and the Bush administration. "It is apparent that decisions were made at the top levels of the Justice Department, State Department, Agriculture Department and within the intelligence community to shape this case," Shoob concluded. Drogoul's trial is tentatively scheduled for early 1993, but under a different judge: Shoob has recused himself.

It got worse. Belatedly searching its files, the CIA directorate of operations found six field reports containing even more detail about the fraud and more evidence that BNL's Rome headquarters knew about it. The CIA then acknowledged error but claimed there was "no attempt to mislead anyone or cover up anything." Boren, unconvinced, called the CIA's lawyers and Justice Department officials to a secret hearing to discuss the mess. According to committee sources, the CIA lawyers accused Justice of pressuring them to withhold evidence. Justice denied it-but when the story leaked to the press, the CIA's public-affairs office put out a news release denying that the CIA's lawyers had ever said they were pressured by the Justice Department. Boren went ballistic, accusing the CIA of putting out another misleading statement and demanding that it correct the record. The Senate Intelligence Committee is now pursuing its investigation of the agency, and sources said that Gates, who got the CIA's top job with support from Boren, has been written off. He is likely to be replaced if Bill Clinton wins the November election.

What we have here, as one investigator puts it, is "a massive bureaucratic screw-up," and maybe more than that. Knowledgeable officials say the BNL case is only the latest and most dramatic instance of turf wars within the CIA-chiefly, the long-running rivalry between the directorate of intelligence and the directorate of operations. The DI shapes and analyzes the CIA's "product." The DO, which runs the agency's field stations and agent networks, collects the raw material but is notoriously stingy about sharing it even within the CIA. Intelligence is highly compartmentalized on a "need to know" basis, and disagreements about its meaning and significance are not uncommon. In this case, apparently, the agency could not even determine what was in the files. Beyond all that, the CIA has historically been opposed to cooperating with agencies outside the intelligence community, and it was very reluctant to respond to the Justice Department's repeated requests for help with the BNL investigation.

Still, no one has yet said the CIA had any direct interest in the BNL caper or that it was necessarily trying to keep the lid on: perhaps the agency was only arrogant and inept. The same cannot be said of the Department of Justice or the Atlanta U.S. Attorney's Office, both of which seem to have waffled between pursuing obvious leads to a wider conspiracy and what is now known as the "lone wolf" theory. Judge Shoob, among others, strongly criticized the prosecutors for not resolving the question of whether BNL/Rome was involved in the fraud. The U.S. Attorney's Office in Atlanta initially tried to do so, and it was supported by senior Department of Justice officials in Washington. These attempts went nowhere. When investigators sought routine approval for travel to Italy to interview witnesses, attorney general Thornburgh turned them down. "You can't prosecute the case if you don't gather the facts," one Capitol Hill source says. "That would be wrong." (Thornburgh says he has "no recollection" of the travel request.)

The whole affair had, meanwhile, become highly politicized. Thornburgh and his aides tried hard, if unsuccessfully, to fend off the House Banking Committee's investigation. They also pushed their Atlanta office to limit the scope of the case, and Atlanta apparently tried to discourage witnesses from appearing before Congress. BNL president Giampiero Cantoni contacted the U.S. ambassador to Italy, Peter Secchia, allegedly to try to contain the investigation. "You can imagine that it was very dangerous for me to speak to the American ambassador," Cantoni told NEWSWEEK. "But I had to do it; it was too important a matter not to." BNL officials also hired former secretary of state William P. Rogers to lobby for their concerns in Washington. Secchia and BNL now say they were only trying to warn Congress and the Bush administration that the case could have large repercussions in Italy.

Sifting it all out-trying to determine who messed up and why-will surely take months if not years. The U.S. Attorney's Office in Atlanta still insists that Drogoul acted alone. "We never came up with evidence that higher-ups were involved," said Acting U.S. Attorney Gerrilynn Brill. The Bush administration further maintains that the lobbying campaign mounted by Italian officials had no impact. "There is no evidence to support the view that any contact made with political officials ... had any bearing on the prosecutor's decisions in this case," says Paul McNulty, a Justice Department spokesman. On the other hand, there can be no question that various players in the Bush administration took a persistent interest in the BNL investigation and that both the Justice Department and the Atlanta prosecutors were aware of it. That fact, and the deep conflicts within the Justice Department over the case, will be powerful ammunition for Drogoul's lawyers if and when Drogoul goes on trial.

The scandal's larger implications are even more disturbing. BNL was a primary conduit for U.S. aid to Iraq at a time when some U.S. officials were warning that Saddam Hussein was clearly trying to acquire U.S. technology for chemical, biological and nuclear weapons. This suggests the Bush administration had compelling reasons of its own to limit the investigation, and it may raise even deeper issues. Was the Bush administration aware of what BNL was doing.? Did it try to contain the investigation to prevent disclosure of its tilt toward Saddam Hussein? If so, Christopher Drogoul is sitting on the tip of a very large iceberg-and Bush looks more and more like the captain of the Titanic.

NEWSWEEK POLL Are you satisfied with Bush's explanation of his handling of U.S. aid to Iraq before it invaded Kuwait? 37% Yes 55% No Does Clinton have the honesty and integrity to serve as president? 52% Yes 42% No NEWSWEEK Poll, Oct. 22-23, 1992