The Libyans set up the takeover of Arab Hellenic Bank (AHB) to take advantage of the European Community's second banking directive, which allows a bank in one Community country complete freedom to set up branches in any other EC state.
After a report of the plan in the Independent in February, the families of the victims of Pan Am flight 102 over Lockerbie bombarded the White House and the US State Department with petitions, asking for intervention to stop the takeover.
The US stepped in just days before the deal was due to be legally completed. Michael Varnopoulos, who is one of Prime Minister Constantine Mitsotakis's close economic advisers, put a stop to a takeover agreed in January with the Tripoli-based Arab-Foreign Investment Bank.
This is a consortium set up in 1977 to promote Arab investment and trade in Greece. It had agreed to raise its holding in AHB from 20 per cent to 72 per cent.
Mr Varnopoulos, the governor of National Bank, Greece's largest state- owned bank and the majority shareholder, had completed all the documents and the paper work. He was about to sign the final document and hand over control to the Libyans, who had already paid 3bn drachmas ( pounds 9m) in January.
Greek sources say Mr Varnopoulos was ordered to stop the deal by the Prime Minister, who had given the US a written assurance that his government would block it.
The Arab-Foreign Bank and Kuwaiti Investment Organisation (KIO) held 40 per cent between them while other Arab investors held 9 per cent. National Bank held 51 per cent and provided most of the bank staff.
When AHB wanted to raise the capital to comply with the EC banking second directive, the KIO refused to raise any more money since the Kuwaiti parliament is engaged in a fierce battle with the al-Sabah ruling family over corruption and loss of money invested in joint banks in Europe.
The Libyans came up with the cash, raising their stakes to 72 per cent, after financial and legal experts advised Colonel Gaddafi that new European legislation would allow him to open any branches for his bank in any EC capital.
Although the fierce campaign by the relatives of the families of Lockerbie victims pressurised the White House to demand the written assurance from the Greek Prime Minister, pressure from other quarters also helped to frustrate Colonel Gaddafi's scheme.
The British expressed concern over the deal, seeing it as one of Libya's attempts to by-pass economic sanctions placed on it by the UN for refusing to hand over two Libyans suspected of involvement in the Lockerbie crash.
Britain was also far from happy about the idea of the Libyans having a foothold inside the EC banking system. The Bank of England would have been powerless to stop a Libyan- controlled bank having a branch in London except under an untested let- out clause in the second banking directive covering the 'public good'.
Several Western intelligence sources warned last year that UN economic sanctions were likely to be less effective because of a network of Libyan investment in Europe, especially in the downstream petroleum product sector and in banking and financial services.
'Mr Mitsotakis's written commitment would block Colonel Gaddafi's takeover just for the time being,' one Greek source said last night.
Mr Mitsotakis is facing a general election next year and there is a chance that the opposition Panhellenic Socialist Movement might return to power. The source said: 'If the Socialists take over, the Libyans will try to revive the deal.'
During his term in office, the opposition Socialist leader Andreas Papandreou kept close ties with Colonel Gaddafi and turned a deaf ear to criticism from his EC partners.
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