In extraordinary developments culminating this weekend, two of the most powerful agencies in the US government have accused each other of withholding information from federal prosecutors investigating the alleged fraud, carried out from the Atlanta branch of Banca Nazionale del Lavoro (BNL).
The loans, which were never properly recorded in the bank's books, reportedly totalled between dollars 3bn and dollars 5bn (pounds 1.77bn-pounds 2.9bn). They are widely believed to have helped President Saddam to build up his military machine before the Gulf war.
The renewed headlines made by the affair have arrived at the worst possible moment for President Bush, threatening to tarnish further his proudest foreign policy achievement - and on the very eve of last night's first presidential debate, which offers probably his last chance to reverse his dismal standings in the polls before the 3 November election.
The issue has already been seized upon by his Democratic opponents. Al Gore, the candidate for Vice President, who last week gave a scathing speech on the administration's pre-1990 dealings with Iraq, yesterday declared that more than bad judgement was involved. 'It is a seemingly blatant disregard of the law by those responsible for enforcing it.'
The tangled tale of the BNL Iraq loans, which stretches from Atlanta to Washington to the corridors of political power in Italy, is a central strand in what has become known as 'Iraqgate', the mistaken attempts of the Bush adminstration to win President Saddam round by financial and political inducements until almost the eve of the invasion of Kuwait in August 1990. The irregular loans from BNL were first discovered a year earlier.
Acting on a tip-off, FBI agents raided the bank's offices, seizing thousands of documents and closing down the operation. Until lately, it was maintained that the entire scheme had been carried out singlehandedly by Christopher Drogoul, the head of the branch, unbeknown to his superiors in Rome. In June he struck a plea-bargain deal with prosecutors, admitting guilt in 60 of 347 counts of conspiracy and fraud. In the past three weeks, however, even as the Attorney General, William Barr, refused a request from Congress for an independent special council to examine 'Iraqgate', that version has all but unravelled.
First came word of a classified letter from the CIA indicating that the agency knew that BNL officials in Rome were aware of the loans, but withheld the information from the federal judge trying the Drogoul case. Then CIA officials, in leaked testimony to the Senate Intelligence Committee, admitted that they had deliberately concealed evidence from the judge but claimed they had been urged to do so by the Justice Department. The department in turn has denied those allegations.
It has also emerged that the Italian government last year lobbied the administration strenuously for a planned extension of the investigation into Italy to be called off. Ten days ago, the plea- bargain agreement with Mr Drogoul was scrapped, and a full-scale trial will be held next year. The original Atlanta judge withdrew from the case, saying that prosecutors 'may have been blocked by agencies with political agendas from developing a full picture of the affair'.
Now the CIA has said it is conducting a full internal investigation, while the FBI is probing the Justice Department's role.
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