Fed eyes London link in Iraq deals: Documents allege key British role in the financing of Saddam's weapons purchases

THE US Federal Reserve is planning to send investigators to London soon, as part of a reopened inquiry into the scandal involving the Atlanta branch of Banca Nazionale del Lavoro, which illegally lent dollars 5bn ( pounds 3.2bn) to Saddam Hussein of Iraq before his invasion of Kuwait.

The London connection is likely to embarrass British officials accused of shielding Iraqi businessmen implicated in the arms deals.

Fresh evidence suggests that London-based Iraqi businessmen, known to British and American intelligence, diverted millions to finance President Saddam's arms purchases, despite an international embargo.

Felice Casson, the prosecuting magistrate of a trial in Venice of BNL officials, furnished the Fed with documents alleging involvement of Italian and British agents, whom the Fed is now keen to question.

The London-based Iraqis were involved in financing Baghdad's missile programme, part of whose equipment and machine tools were supplied by the British firm Matrix Churchill. Matrix Churchill is at the centre of the Scott inquiry into the British government's role in the affair. The Scott inquiry hearings begin today.

The manager of BNL's Atlanta branch, Christopher Drogoul, who faces trial later this year, has accused the Bush administration of covering up its role in the scheme.

American sources say federal investigators want to question four Iraqis with strong London connections.

Although the Fed sources would not give many details, it is understood that a US team of prosecutors will go to Rome later this month. Several witnesses are reported to be willing to testify that on a number of occasions Mr Drogoul discussed the financing of the Iraqi arms programme with the businessmen, who have been using Iraqi and other banks in London.

One of them was Sadiq Hassan Taha, who was referred to in the investigation documents as an Iraqi banking official. Mr Taha met Mr Drogoul in New York in 1985 to handle dollars 556m guaranteed by the US Department of Agriculture as part of a dollars 1bn credit to Iraq. It was channelled to finance weapons plants.

In October 1988 Mr Taha helped arrange a dollars 300m deal with Drogoul to finance construction of the Badush dam, but the money went into the nearby Saad-16 missile and nuclear site. Machine tools for the site were provided by Matrix Churchill.

Banking sources say Mr Taha met several British bankers. He was also involved in discussions with the Department of Trade and Industry, which in December 1989 gave Iraq loan guarantees of pounds 450m to import British-made defence equipment. In 1989 Mr Taha also sought permission from the Bank of England to set up a London-based trade bank.