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.