One woman, a federal prosecutor, allegedly carried a magnet in her purse to erase computer records containing crucial evidence. Another woman, a Customs inspector pursuing an illegal-exports case, was subjected to a grueling in-house probe of her professional conduct. And a third, a corporate lawyer, says she became the target of threats and intimidation when she blew the whistle on her bosses.
What links these three women? The politically charged investigation of the Atlanta branch of the Banca Nazionale del Lavoro and its illegal scheme to finance exports to Iraq with billions in federally guaranteed loans--the affair that has become known as Iraqgate.
Gale McKenzie, an assistant U.S. attorney in Atlanta, is the government's chief prosecutor in the BNL case. When McKenzie's probe turned up records tying BNL to an Iraqi front company near Cleveland, Customs Agent Jill Fehr began investigating. Later, Marianne Gasior, a corporate attorney, came forward with information that appears to connect her former employer, Kennametal Inc., to BNL and an Iraqi procurement network with links across the U.S.
Gallons of ink already have been spilled telling the story of Iraqgate. But the tale of these three women, as pieced together by BUSINESS WEEK, while just a slice of the broader scandal, suggests strongly that the Bush Administration has thwarted a public airing of the U.S. role in Iraq's massive military buildup. What's more, in shielding its actions, the White House also has thrown a cloak over the helpful hand given to Iraq by U.S. businesses, ranging from such relative small fry as Kennametal to giants such as Hewlett-Packard Co.
Revelations of U.S. aid in the buildup of Iraq's nuclear capabilities already are tarnishing the Administration's greatest foreign policy triumph, Operation Desert Storm. The President himself has admitted that his prewar attempts to moderate Saddam Hussein's bellicose behavior "failed." And in this election year, scrutiny of that misguided policy is growing fiercer as congressional Democrats cry louder and louder for a special Iraqgate prosecutor. Charges Representative Charlie Rose (D-N.C.): "I believe that documents have been falsified, government officials have lied to Congress, and there's been a coverup . . . by the White House."
The White House and the U.S. Attorney's office in Atlanta flatly deny any coverup or improper behavior. And most of the companies that this story identifies as trading partners with Iraq, including Kennametal, say only that they had legal export licenses and did nothing wrong.
But the tale of McKenzie, Fehr, and Gasior raises troubling questions. BUSINESS WEEK consulted a myriad of independent sources for this story: court records, congressional testimony, and documents subpoenaed by Congress. Also, BW conducted two dozen interviews with congressional sources, Administration officials, attorneys, and corporate executives. Of the three women mentioned above, only Gasior agreed to be interviewed. McKenzie declined to comment. And Fehr, a source close to her explains, doesn't want to jeopardize her career any further.
Surely, none of the women knew what they were in for back in August, 1989, when federal agents burst into BNL's posh offices on the 20th floor of Atlanta's Gas Light Tower. Led by the U.S. Attorney's office there, a task force of a half-dozen U.S. agencies carted off stacks of bank records. McKenzie, an experienced prosecutor, coordinated the investigation.
PAPER TRAIL. Within two months, investigators learned that the Atlanta BNL branch was Iraq's principal source of credit in the U.S., lending it $5.5 billion--$2 billion of it guaranteed by the U.S. Agriculture Dept. The guaranteed loans, which were supposed to buy U.S. foodstuffs, were instead used mostly to purchase U.S. industrial machinery and technology with military applications, including nuclear weapons production, according to an Agriculture Dept. memo that followed an Oct. 13, 1989, meeting among senior Agriculture and State Dept. officials. Through an analysis of bank and other documents, BUSINESS WEEK has learned that illegal BNL letters of credit financed exports to Iraq by General Motors Corp., among other companies. GM declined to comment.
Evidence from the BNL probe stacked up so quickly that in January, 1990--eight months before Iraq invaded Kuwait--McKenzie and her boss, Robert L. Barr Jr., then Atlanta's U.S. Attorney, predicted an indictment was at hand. With the evidence obtained by McKenzie's team, federal agents elsewhere began their own probes. Customs Agent Fehr, an 11-year agency veteran, led the Cleveland investigation. She zeroed in on the export business of Matrix Churchill Corp., the Solon (Ohio) arm of Matrix Churchill Ltd., a British maker of precision machine tools.
It didn't take her long to establish that Matrix actually was, as a Customs report asserts, an "Iraqi front company." Its mission, according to current and former Customs officials: to procure U.S. technology and equipment for the Iraqi military buildup, particularly its nuclear weapons program. A month after the Iraqi invasion of Kuwait, the U.S. Treasury used its emergency powers to close Matrix Churchill.
By that time, however, the Atlanta U.S. Attorney's office had changed its tune. Months dragged by without an indictmentof BNL. Congressional investigators say that other agencies started complaining about interference from Justice Dept. headquarters in Washington.
The reason, those investigators suspect, is that Justice officials took direct control of the BNL probe. Congressional sources assert that Justice then attempted to derail the House Banking Committee's inquiry into the Administration's role in Iraq's military buildup. The banking panel's chairman, Representative Henry B. Gonzalez (D-Tex.), charges that former U.S. Attorney General Richard L. Thornburgh "delayed the BNL indictments and repeatedly tried to have the investigation of the committee obstructed and curtailed under the false pretense that it would endanger national security." Replies Thornburgh: "The allegations are absolutely false."
NARROW FOCUS. The grand jury in Atlanta didn't issue its indictment until Feb. 28, 1991, near the end of the gulf war. The 347-count indictment limited its scope to three former bank officials, an Iraqi bank and four Iraqis, and a Turk and his trading company. All were charged with conspiring to arrange fraudulent credits for Iraq.
Key Democrats in Congress criticized the indictment's narrow focus. One of many questions: Why was Matrix Churchill named only as an unindicted co-conspirator? After all, the indictment characterizes the company's dealings with BNL as illegal. But House investigators point out that a full airing of Matrix' activities would highlight the role of U.S. business in the Iraqi procurement network.
Matrix isn't the only player that has escaped indictment. Marianne Gasior and congressional investigators believe that Kennametal, a $600 million maker of machine tools based in Latrobe, Pa., illegally traded with Iraq and was a key link in the supply network. In January, 1990, Gasior says, she was forced out after nine months as a Kennametal attorney for disagreeing with top management over export procedures. After she left the company, she says, she started receiving threatening phone calls from Kennametal employees. Worse, she says, she was chased by a car one day when she was driving near her home. "It scared the living daylightsout mf me," she says. She dropped her threat to sue Kennametal for harassment in exchange for a financial settlement.
At the same time, Gasior was trying to tell the FBI and U.S. Attorney in Pittsburgh about Kennametal's potentially illegal Iraqi dealings. But "the door slammed in my face," she says. The Pittsburgh FBI office and the city's U.S. Attorney did not return calls seeking comment.
By chance, Gasior learned of Fehr's investigation and phoned her in early 1991--a month before the BNL indictment came down. Fehr independently had documented Kennametal's questionable involvement with Matrix. But Gasior helped the agent establish that Kennametal benefited from BNL letters of credit.
While Kennametal is just one of hundreds of U.S. industrial exporters to Iraq, its case shows how the Iraqis obscured purchases of industrial equipment and technology. In sworn congressional testimony on Aug. 1, 1991, Gasior explained how Kennametal arranged to ship tungsten carbide cutting tools, which have munitions-making applications, to Iraq via a German defense company (box).
A second deal is detailed in internal Kennametal documents. In the transaction, Kennametal worked with Matrix Churchill and Chilean arms merchant Carlos Cardoen to supply Iraq's NASSR munitions complex. In late 1988, Iraq, through Matrix, contracted with Cardoen for $16.2 million worth of machine tools for arms projects, to be financed with a BNL letter of credit later identified in the BNL indictment as one with a fraudulently obtained U.S. guarantee. Kennametal signed on as a subcontractor and procurement agent for a price of more than $500,000.
That August, while work under the contract was proceeding, federal agents raided BNL's Atlanta office. Three months later, British authorities raided Matrix Churchill's London office. The raids made payment for the parts problematic. In December, 1989, attorney Joe D. Whitley filed suit on Matrix's behalf to recover payment from BNL Atlanta for the NASSR contract. The next year, on Aug. 3, the day after Iraq invaded Kuwait, President Bush named Whitley to succeed Barr as Atlanta's U.S. Attorney. Whitley thus became McKenzie's boss, but he immediately recused himself from the BNL investigation.
Kennametal disputes the accounts of both deals and says law enforcement authorities have cleared it of any wrongdoing. "Like thousands of Western companies, Kennametal had some lawful business with Iraq prior to its outlaw invasion of Kuwait," says a spokesman.
Although federal prosecutors had largely ignored Gasior, her congressional testimony got McKenzie's attention. Last August, she demanded that Gasior testify before an Atlanta grand jury. When Gasior delayed her appearance because of illness, McKenzie threatened to have her arrested. Only after House Speaker Thomas S. Foley (D-Wash.) intervened on Gasior's behalf did the prosecutor back off. A few weeks later, Gasior did testify in Atlanta. However, she and two others whom McKenzie subpoenaed say the prosecutor dwelt only on irrelevant issues.
Why such bizarre behavior by a federal prosecutor? Rose charges that McKenzie was acting at the direction of superiors in Washington out to sabotage other agencies' BNL investigations. He claims an Internal Revenue Service agent is willing to testify under oath that in the spring of 1991, McKenzie carried a magnet in her purse to a meeting during which BNL records were being loaded into a computer. She destroyed the information, he says, by putting the magnet on top of the computer. "That's total nonsense," responds McKenzie's supervisor, Gerrilyn G. Brill.
Fehr first got the McKenzie treatment in April, 1991, when McKenzie requested that the Cleveland Customs office send her all "illegally seized pieces of evidence" involving Matrix. What made the request odd, say congressional and Customs sources, is that McKenzie had reviewed the warrant that the Customs office used to obtain its evidence. Then, in October, 1991, McKenzie instigated an investigation of Fehr for allegedly leaking grand jury information to Gasior, according to several independent sources. Early this year, Fehr was cleared of any wrongdoing. Neither Customs nor Brill would comment on the matter.
To critics in Congress, it all adds up, as Gonzalez puts it, to "a coverup mechanism." Other moves suggest a concerted Administration effort. The Commerce Dept. has reported that in late 1990, in consultation with the State and Defense Departments, it altered data requested by Congress on 68 licenses for exports to Iraq, including a billion-dollar sale of military trucks. Some changes, such as the one covering the trucks, made it appear the goods were for civilian rather than military uses and were "unjustified," says the Commerce Dept. inspector general.
LEGAL TRADE. More intriguing, in the five years before Desert Storm, Commerce licensed more than $1.5 billion worth of strategically sensitive U.S. exports to Iraq. By law, Gonzalez cannot reveal the names of the licensees, but what their licenses demonstrate, he says, is that "our government knew about the military uses of thistechnology and did nothing to stop it."
Could U.S. companies have been blind to Iraq's military use of their exports? "Almost certainly not," says Kenneth R. Timmerman, author of The Death Lobby, a book on Iraq's military buildup. Companies including Hewlett-Packard, Rockwell, and Tektronix sold high-performance electronics to Iraq's major missile research center and to the Iraqi Atomic Energy Commission, says Gary L. Milhollin, director of the University of Wisconsin's Project on Nuclear Arms Control. The three companies insist that they legally sold equipmentthat they believed to be for civilian usesin Iraq.
Indeed, most recent trade with Iraq was legal. Under the Reagan and Bush Administrations, the U.S. tilted toward Iraq when Iran appeared to have the upper hand in their eight-year war. It was then that Iraq became eligible for U.S. agricultural credit guarantees and other sympathetic trade treatment. In 1985, with a green light to pump up business in Iraq, dozens of U.S. blue-chip companies formed the U.S.-Iraq Business Forum.
Today, the tide may be turning in the effort to force the Administration to air the details of its failed Iraq policy. Just last month, Christopher P. Drogoul, a former Atlanta BNL manager, struck an 11-hour plea bargain with the Justice Dept. in which he agreed to plead guilty to 60 counts. That set off alarm bells for U.S. District Judge Marvin H. Shoob, who has joined the call for a special prosecutor to look into BNL and Iraq's arms-procurement operation.
Even if Congress manages to force the Administration to name a special prosecutor by November, any investigation will certainly last beyond the election. While it's a messy, inevitably politicized business sorting through the wreckage of a major miscalculation in foreign policy, it's business that must be done.