Abuses in U.S. Aid to Iraqis Ignored : Mideast: The Bush Administration pushed through $1 billion more in assistance despite reports of kickbacks and evidence that food may have been traded for arms.

WASHINGTON —  The Bush Administration ignored evidence that a $5-billion American aid program for Iraq was riddled with bribery and that food intended for hungry Iraqis may have been traded for weapons, according to classified government documents and interviews.

Beginning in 1989, Administration officials learned that Saddam Hussein’s regime had demanded millions of dollars in bribes from American exporters of commodities, the documents indicate. The commodities had been sent to Iraq as part of a food aid program underwritten by the U.S. government.

Senior Administration officials, including Secretary of State James A. Baker III, were warned of such abuses in the fall of 1989, but still pushed through $1 billion in new government loan guarantees to allow Iraq to buy more agricultural products, classified documents show.

Two Administration officials said the warnings culminated in a highly classified intelligence report in July, 1990--a month before Hussein’s troops overran Kuwait. The report said a Jordanian entrepreneur heavily involved in the U.S. aid program also was assisting Iraq’s covert arms-procurement network, according to the officials who read the report.

At the same time, Iraq threatened to stop making payments on $2 billion it owed on previous loans guaranteed by the United States unless new aid was approved, according to classified records.

While the intelligence report did not directly link arms deals to food aid, an Administration official said the Jordanian businessman’s dual role as arms trafficker and food middleman should have been “sufficient evidence” that aid was being traded for weapons.

Despite the intelligence findings and the Iraqi threat, documents show that the State Department and the White House National Security Council continued to seek the release of a final $500 million in aid for Baghdad.

The disclosures represent the first suggestion that American food aid may have been bartered by Iraq to buy weapons, and they provide new details on the extent of the warnings about widespread irregularities in the aid program. They also illustrate the determination within the Administration to continue assistance to Iraq in the face of evidence of abuses.

That determination continued even after an Agriculture Department investigation completed in April, 1990, was unable to conclude that millions of dollars of commodities shipped through the Jordanian port of Aqaba were ever delivered to Iraq. The department’s Commodity Credit Corp. had financed the food purchases for Baghdad.

The Administration maintains publicly and privately that it has no evidence that U.S. food aid was diverted for arms by Iraq.

In an interview, however, another Jordanian businessman, who was involved in the CCC program, said he has firsthand knowledge that aid had been diverted by Iraq as early as 1988.

The businessman, who asked that his name be withheld, said Iraqi officials had bartered U.S. food aid to the Soviet Union in exchange for a shipment of Soviet tanks in 1988. The food was shipped first to Aqaba and then to the Soviet Union instead of being taken overland to Iraq, he said.

Until Iraq invaded Kuwait on Aug. 2, 1990, the CCC program remained an integral part of President Bush’s policy of assisting Saddam Hussein in hopes of softening the Iraqi dictator’s threats to his neighbors.

The first allegations that Iraq was demanding bribes surfaced in November, 1988, according to a report detailing an Agriculture Department investigation of the charges in 1990.

“USDA had been informed that at least one Iraqi state trading enterprise had been routinely requesting that exporters provide either cash rebates or goods, either in the form of additional commodities or non-agricultural items, as so-called ‘after-sales’ service in the form of trucks and truck parts,” said the report.

Despite an Iraqi pledge to end such practices in 1988, Iraq continued to demand kickbacks. U.S. exporters complained repeatedly to the Agriculture Department that they were forced to give Iraq spare parts with military uses, such as armored trucks, and other bribes in order to sell goods to the Gulf state under the CCC program.

For instance, in a Sept. 7, 1989, letter to the department, a lumber exporter complained of increasing pressure by Iraq to provide free trucks, trailers and tires as the price of continued business.

“The recent telex requests (from Baghdad) have exhibited extraordinarily threatening language, where the future business relations are being judged by our response to requests for free goods,” said the letter.

Later court records show that Iraq also was demanding cash from U.S. exporters. Six U.S. tobacco companies pleaded guilty in 1990 to paying more than $1.5 million in kickbacks to Iraq. The funds were transferred to foreign bank accounts, some of which were in countries that had supplied Iraq with arms, such as Bulgaria, France, Germany and Italy.

About the same time that concerns were rising over the kickbacks in 1989, federal agents raided the Atlanta branch of Italy’s Banca Nazionale del Lavoro. They seized evidence that the branch had made $4 billion in fraudulent loans to Iraq and firms doing business with Iraq. About $900 million of the loans was guaranteed by the U.S. government through the CCC program.

Allegations of wrongdoing in the program became so disturbing that the Agriculture Department and three other federal agencies recommended sharply curtailing or even halting the loan guarantees to Iraq.

Secretary of State Baker was personally warned in a classified memo that officials at the Treasury Department and the Federal Reserve “find it hard to believe” that Iraqi government officials “were not aware of kickbacks and other gross irregularities” in the CCC program.

But the Administration, led by Baker, fought off any cuts and pushed through another $1 billion in aid.

The only caveat was that the new aid would be divided into two $500-million payments. The second payment would be released as long as no substantial Iraqi government involvement was uncovered in the Banca Nazionale investigation in Atlanta, according to documents.

At that point, the National Security Council was monitoring the progress of the Banca Nazionale investigation, according to documents and interviews. Other records show that plans by the U.S. attorney’s office in Atlanta to indict top Iraqi officials and officers of two government-owned banks in the fraud scheme were delayed for more than a year.

The NSC also was keeping an eye on the internal Agriculture investigation into possible diversion of CCC food by Iraq.

When a draft of the Agriculture Department’s report was completed in the spring of 1990, documents show that it was sent to Timothy Deal, a senior director at the NSC, as well as to Undersecretary of State Richard T. McCormack. A cover letter said the draft was provided to the other agencies “for your review and clearance.”

A copy of the draft obtained by The Times shows that Agriculture Department investigators concluded that Iraq continued to demand kickbacks. But the most explosive allegation addressed by the investigators was that agricultural commodities were diverted and sold before they ever reached Iraq.

The report noted that “geographically, Iraq is almost entirely landlocked,” and that during the Iran-Iraq War, its only large port city was closed to international shipping because of the fighting. As a result, Iraq had the commodities shipped to Aqaba as well as to Turkish ports, from which they were transported overland to Iraq.

The investigators had inspected shipping records for CCC goods at the foreign ports, but they found the trail ended there.

“In almost every case, the records document shipments as far as the ocean port but contained little or no record of the overland portion of the shipments to Iraq,” said the report.

The department asked Iraqi officials to provide documents on a handful of the thousands of CCC transactions so they could be translated and reviewed. Even those few records were not scrutinized, said the report, because they were in Arabic and Turkish and were not translated.

The final report sent to Congress, after having been reviewed by the NSC, concluded that there was no evidence that foodstuffs and commodities sent to Iraq under the CCC program were diverted or did not end up in Iraq.

One Administration official said in an interview that he disagreed with the findings. “The facts that our own investigators uncovered did not square with the conclusion,” he said. The official added that his superiors did not want to acknowledge that they “had sent $5 billion of commodities to Iraq, and they had no system in place to confirm their rightful delivery.”

The official said that if the report had concluded there had been a massive diversion of food aid, it almost certainly would have caused the cancellation of the CCC program.

On May 21, 1990, the Agriculture Department drafted a press release and prepared to brief members of Congress that it planned to suspend the last $500 million in food aid for Iraq. But NSC intervened. A classified memo said that on May 28, NSC staff members called a meeting “because they want to prevent the (loan program) from being canceled, as it would exacerbate the already strained foreign policy relations with Iraq.”

Evidence that a prominent middleman in the CCC food program was involved in Iraqi arms trafficking soon surfaced in a widely circulated, highly classified intelligence report.

The July, 1990, report said that Jordanian businessman Wafai Dajani and a company he heads, Amman Resources, had covertly purchased arms for Hussein’s regime, according to two officials who read the report. It also said Dajani had served as a middleman in arranging arms purchases for Iraq from private brokers in Portugal and Cyprus, the officials said.

Dajani’s company received shipments of CCC-guaranteed commodities in Aqaba, stored them and was responsible for sending them on to Iraq. Federal investigators say Dajani was one of the most prominent middlemen involved in the CCC program.

Because of the high classification of the intelligence report, the two Administration officials declined to discuss its details. But they said it did not directly link Dajani’s arms deals to exchanges of CCC aid.

Even so, one of the officials said that Dajani’s prominent involvement with the CCC program and his alleged role as an arms trafficker should have set off alarm bells within the Administration, where the intelligence report was circulated widely.

Dajani has not been charged with any wrongdoing. Attempts to reach him in Jordan were unsuccessful.

A classified State Department report identifies Dajani as a confidant of Jordan’s King Hussein and the brother of a former Jordanian interior minister. Other records show that he served as a middleman on many of the loans made to Iraq by the Banca Nazionale branch in Atlanta.

As indictments were being finalized in the Banca Nazionale case, the Justice Department queried the State Department about the foreign policy implications of possibly charging Dajani.

The State Department, while warning that an indictment of Dajani would be “seen as a further U.S. attempt to punish Jordan” for siding with Iraq in the Gulf War, also noted in its memo that an indictment “would serve legitimate law enforcement interests.”

But when the U.S. attorney general finally announced the Banca Nazionale indictment on Feb. 28, 1991, Dajani was not among those charged. He has since been identified in federal court records as an unindicted co-conspirator in the Banca Nazionale case.

Dajani remains a target of the inquiry, according to law enforcement officials.

The Treasury Department said Dajani has been involved in continuing efforts by Iraq to ship goods to Baghdad through Jordan and evade the United Nations embargo imposed in August, 1990.

Administration officials acknowledged that some illicit goods are still passing through Jordan for Iraq despite the U.N. sanctions.

“There has been an active discussion involving the overall sanctions regime and Jordan, from the President down to (CIA Director) Bob Gates,” said an Administration official. “But a very small portion of the discussion focused on arms. Since August, 1990, no significant arms shipments have gone to Iraq.”