The Death Lobby: How the West ArmedIraq

Chapter 13: BNL Builds the War Machine

(pp225-246)

Saddam Hussein wasn't quite sure how he would pay for it all, butwhen he looked at the huge sums in foreign aid regularly awarded toIsrael and Egypt by the U.S. government, he probably figured thatUncle Sam's deep pockets would have something left over for him.After all, Iraq was acting in America's strategic interest, bypreventing an Iranian victory in the Iran-Iraq war that would havejeopardized the stability of U.S. allies in the Gulf. If the U.S.government couldn't sell Iraq arms openly, as France and otherWestern powers were doing, then the grain credits from the Departmentof Agriculture which freed up other Iraqi assets for arms purchaseswere the next best thing. By late 1985, Iraq was spending nearly 60%of its gross oil revenues to buy weapons and weapons-manufacturingtechnology, and had little other source of income. The war with Iran,and Saddam's ambition to build a war industry, were an immenselycostly undertaking. But he had good reason to believe that the U.S.government was willing to help pay the bills. Until now, Washingtonhad not turned down a single loan request.

Saddam Hussein was not the only one to benefit from the CCC farmcredit program. Christopher Drogoul of BNL Atlanta was making acareer out of the Iraqi loans, and he was a happy man when hetravelled to Washington in December 1985 with his assistant, Paul VonWedel. The Iraqi program was booming, and his bosses back at BNLheadquarters in Rome seemed pleased with the CCC business. WhenDrogoul had brought up the subject at the BNL Annual North AmericanManagers meeting in New York over the summer, the head of the BNLInternational Department offered encouragement given the success ofDrogoul's first $100 million loan to Iraq. "Florio agreed that Chriswould finance the entire CCC program for 1986," Von Wedel recalled."This would amount to about $600 million, with Lavoro's exposure only$12 million since the CCC guarantees 98%." The U.S. governmentguarantees made it easier to forget that Iraq was sitting atop amountain of debt that was nearly as high as the sea of oil beneath itwas deep.

Drogoul and Von Wedel had gone to Washington to discuss how todivide the pie. Their hosts were the U.S. Wheat Board, which wasthrowing a reception for a visiting team of Iraqi buyers, led byGhanin Aziz of the Agricultural Ministry. It was only the first ofmany Washington bashes hosted in the Iraqis' honor by U.S. grainexporters over the next four years. Iraq was a new and good marketfor U.S. grain. The two bankers from Atlanta seized the occasion toexpand their network of business contacts. They wanted the word toget out that BNL was now the privileged bank for the Iraqi loans.

On December 12, they got together with Iraqi Central bankofficials, Sadiq Taha and Abdul Munim Rasheed, who had come along forthe trip. Taha wanted the BNL commitment in writing, and Drogoul wasquick to accept. Before the day was out, he signed a pledge thatobligated BNL Atlanta to fund $556 million of Iraqi governmentpurchases of U.S. goods, guaranteed by the USDA's commodity creditprogram. That was ten million shopping carts full of food..

After the signing, Drogoul took the shuttle up to New York, tobreak the good news to one of his best clients, Yavuz Tezeller, whoran the U.S. office of Entrade. This Turkish food emporium was amajor supplier of U.S. grain products to Iraq, and may have helpedfunnel precious high-tech goods to Iraqi weapons plants as well. Atthis and subsequent meetings, Drogoul and Tezeller allegedlydiscussed how to divert more than $1 million in CCC credits to theirpersonal use, by double-charging Drogoul's business and travelexpenses. For the complicated series of credits and debits, BNLAtlanta set up a special "transformation account." What ittransformed was the bank's money, turning it into private money withthe touch of the magician's wand.

By early 1986, BNL Atlanta was funding exports worth hundreds ofmillions of dollars to Iraq, primarily from U.S. grain exporters.While Drogoul had discussed the booming business with his superiorsin New York and Rome, he had not yet secured their written approvalto go beyond the $100 million ceiling BNL had placed onCCC-guaranteed loans to Iraq. In March, Drogoul asked his creditmanager, Raffaelo Galiano, to telex Rome to seek formal approval forthe huge loans. The answer soon came in; it was no.

BNL's refusal to approve the Drogoul's loan requests in 1986 wasdirectly linked to a deepening dispute between the Italian and Iraqigovernments over the $2.65 billion naval contract signed in 1981. By1986, the four Lupo frigates and the six corvettes had gone down theslip at the Genoa shipyard, and the Italian government was seekingways to deliver them to Iraq. Some of them made steam for Alexandria,Egypt with Italian crews, while others headed for Tunis. But theIraqis knew they would have to fight their way through theIranian-controlled Straits of Hormuz to get the warships home, andthey didn't want to put their new high-tech navy at risk. So theystalled for time by insisting the Italians adhere to the initialterms of the contract, which called for delivery at Um Qasr, Iraq'sonly port on the Gulf. As long as the ships had not reached Um Qasr,the Iraqis argued, they could not commission them, and until theywere commissioned, the Iraqis refused to pay. In the meantime, theItalian government was forced to pick up the tab. .

"The controversy over the Lupo contract had the effect ofshrinking Italian credits for Iraq," explained the editor of SouthernBanker, Kenneth Cline. To intensify pressure on the Iraqis to paytheir debts, in 1986 the Italian government slapped a double embargoon Iraq: no new loans, and no ships, until the Lupo contract was paidup.

The Italian embargo left Drogoul out on a limb. He had loanedhundreds of millions of BNL money to Iraq, thinking he had Rome'sapproval, and now the Italian government had decided to change coursein an effort to pressure Baghdad into paying its debts. BNL lawyersdon't dispute these facts. "By this point," says Walter Driver, ofthe Atlanta law firm King & Spalding, "Iraq was considered a badrisk. Commercial banks were quoting 15-25% interest rates for loansto Iraq, so the only place Iraq could borrow money was throughgovernment-sponsored loans" such as those provided by BNL. Hisopinion of Iraq's credit-worthiness was confirmed in numerousinterviews with international bankers and commodity traders in Paris,London, New York, and Geneva.

"In about two weeks time, we received notice from Rome that ourloans to Iraq exceeded approvals by about $500 million," Paul VonWedel remembers. "We tried to sell off as many as we could. CentralBank of Cooperatives [in Denver] bought some but they wererestricted only to sales made with coop grains. That is when Jean[Jean Ivey, a BNL Atlanta lending officer] and Mela [MelaMaggi, BNL Atlanta's money market trader] had the idea of a graybook. So within one week's time we reduced our loan portfolio ofthree-year loans by $500 million, with no questions asked by our headoffice in Rome, the New York Regional Management or the FederalReserve Bank. Funny, no? Funny, yes!"

With the flick of an eraser and the push of a few computer keys,the Iraqi loans were simply taken off the books. To keep track ofthem, Drogoul and other BNL Atlanta employees kept a secret set ofrecords they called the "gray book." These consisted of a few fileboxes and computer floppy disks, which they physically removed fromthe office when the auditors came, transporting them in the trunks ofcars and sometimes keeping them out in their garages. Whenever moneywas paid out to an Iraqi supplier, a chit went into the box. Wheneverthe Iraqis repaid part of the loans, another chit was made out.Drogoul and his colleagues referred to the off-book loans as"Perugina," the name of a popular brand of Italian candy. Normalloans were called "non-Perugina." The system worked so well that itreally was a bit like taking candy from a baby.

Italy was not alone in reviewing its loan policy toward Iraq, andthe credit crunch hit hard in the early months of 1986, as Iraqidebts contracted earlier in the war with Iran came due. France,Britain, and West Germany followed suit, and Iraq fell far behind inits debt payments. Few banks outside of the BNL in Atlanta werewilling to confirm letters of credit issued by the Central Bank ofIraq. The Iraqi government had already slashed civilian developmentprojects by 30% in 1984, and dramatically reduced imports of food andconsumer goods. All the resources of the Iraqi state were now goingto what Saddam needed most: arms, and arms manufacturing technology.

Iraq's precarious financial situation was made worse by adisastrous turn of events on the battlefield with Iran. On the nightof February 8-9, Iranian troops did what all military observers untilthen had had hoped was impossible: they swept across the southernborder with Iraq and occupied the industrial town of Fao, withingunshot range of Kuwait. The Iranian attack was dramatic, swift, andeffective. Iranian combat divers led the nocturnal assault, and weresoon followed by thousands of well-trained Revolutionary Guardsmen insmall fiberglass boats. They crossed the Shatt al-Arab waterway downat the delta, where it emptied out into the Gulf. Overpowering thehandful of Iraqi defenders in the palm groves surrounding thedeserted town of Fao, they erected a pontoon bridge back to theIranian mainland and dug in.

The Iraqis immediately declared a national state of emergency.Defense Minister Adnan Khairallah rushed down to Basra to marshallthe troops, along with a top Baathist General, Saadi Tuma al-Jaboori.But several days of bad weather complicated the counter-attack. TheIraqi Air Force was hindered in its attempts to bomb the Iranianpositions, despite a record 725 combat sorties in a single day, andrepeatedly failed to knock out the improvised pontoon bridges. Withina week, the Iranians had managed to move four divisions --upwards of30,000 men--into the Fao Peninsula across those bridges, which werelittle more than blocks of Styrofoam roped together and covered withroofing tin. Still, the pontoons were sturdy enough to support trucksand small artillery pieces. With them, the Iranians began to shellBasra and neighboring Kuwait, as punishment for its brazen support ofIraq.

On February 11, Iranian President Ali Khamene'i sent a personalenvoy to warn the Kuwaiti Emir that "Kuwait will bear theconsequences" of any aid to Iraq. He pointed out that the advance ofIranian troops to the Khawr Abdallah Channel, across from Kuwait'sBubiyan Island, now made Iran and Kuwait neighboring countries, andwarned against loaning Bubiyan to Iraq as a safe haven for its navy.In response to these direct threats, the Kuwaitis just shivered intheir palaces as the guns boomed and kept quiet, hoping the Iranianswould go away. The Kuwaiti Emir knew he could not throw the Iraqisout of Bubiyan or prohibit Iraqi planes from using Kuwaiti air basesas staging areas for attacks on Iranian oil installations withoutgreatly angering Saddam.

As the weeks went by, and the Iranians managed to shore up theirbridgehead on the Fao Peninsula, there was real concern in Kuwait andthe West that the Iran-Iraq war might be drawing to a close. Theprospects of an Iranian victory--however unrealistic they may havebeen--drove fear into the hearts of Iraq's creditors, who anxiouslybegan calculating what an Iraqi default would mean to their balancesheets.

In March, Iraq received its first piece of good news in months.The French Socialists lost the Parliamentary elections, and Saddam's"personal friend," Jacques Chirac, returned to power in Paris.Chirac's first act as Prime Minister was to approve a major arms salepackage for Iraq, despite the lack of realistic financing. Iraq was a"friend and ally," Chirac said, with whom relations went much deeperthan the pocketbook. With the Iranians camped out on the FaoPeninsula (and with Iraq some $5 billion in debt to France), Chiracargued that it was no time to abandon Saddam Hussein.

The new deals were relatively modest compared to what the Frencharms industry had become accustomed to signing with Iraq, andtotalled a mere $430 million. They included a half dozen AerospatialeDauphin helicopters, equipped with a new generation anti-shippingmissile (the AS-15TT), and large numbers of high-precision 120 mmmortars made by Thomson-Brandt. The contracts were given colorfulcode-names: "Jacinthe" and "Tulip" for the helicopters, and "Jupiter"for the mortars. Chirac also promised that France would keep open itsproduction line for the Mirage F1, despite the fact that Dassault hadno more orders on its books. Iraq needed the planes to replace warlosses.

Tarek Aziz could hardly restrain his enthusiasm at finding his oldfriend Jacques Chirac back at the Matignon palace. When he came toParis soon afterwards to sign the Jupiter project, he bubbled withpraise for the returning Prime Minister. "There are no clouds on thehorizon of Franco-Iraqi relations," he told a press conference onJune 10. "My visit has been crowned with success. My objectives haveall been attained." In case the message was not clear enough, headded: "You could call that concrete results... Arms orders arefollowing their normal course. All the financial problems have beenresolved."

The threat of Iranian terrorism prompted Chirac to greaterdiscretion. Once the news of the "Jupiter" and "Jacinthe" deals wasout, he gave strict orders to keep future contracts under wraps.Except for the periodic pilgrimages of Tarek Aziz to Paris, theentire subject of French relations with Iraq became one of theclosest held secrets of Chirac's second Premiership. Companies likeDassault, which sorely needed to announce a new export sale torestore investor confidence, were ordered to keep silent as theycontinued to supply weapons to Iraq.

But those supplies did continue, and on a daily basis. A formerNATO airfield, built by the US Army Corps of Engineers at Chateaurouxin central France, was the primary loading point for urgentdeliveries of French-built missiles, cluster bombs, fuzes, radarequipment, and avionics. The equipment was loaded on board Antonovsof the Iraqi Air Force, which flew to France just to load arms. Thedeliveries became so intensive by mid-1986 that commercial flightslinking Paris to Baghdad were also used to haul arms. Although theywere virtually empty of passengers, the Iraqi Airlines jets were soheavily-laden they barely made it off the runway at Orly, and had torefuel in Athens or Istanbul for what was normally a non-stop flight.French intelligence sources estimated in mid-1986 that "if France cutoff the arms pipeline to Iraq for a mere three weeks, Baghdad wouldcollapse."

Unable to expel the Iranians from Fao, Iraq struck back hardagainst Iranian oil exports in the Gulf, using its French-builtwarplanes and their Exocet missiles. The French delivered nearly 270Exocets to Iraq in 1986, or roughly 75% of Aerospatiale's totalproduction. Within the close confines of the defense community itbecame common knowledge that Iraq was now the biggest customer forthe accurate, but expensive, Thomson-Brandt mortars. The Iraqi orderwas so large that many companies were hoping to pick up the crumbs.They showed Iraqi delegations all manner of special devices they hadconcocted to go with it, dune-buggies to pull the mortar across thedesert, harnesses and special parachutes to drop it from helicopters,even reinforced Zodiacs so the Iraqis could use it in the Howeizamarshes.

But the Iraqis were becoming less happy about buying arms. Eventhough Saddam had successfully diversified his supplies of weapons,he resented even the limited political influence a weapons suppliercould wield. Worse, news of weapons deals tended to leak and large,highly visible transfers of equipment and money could allow Saddam'senemies (the world was full of them) to discover his true intentions.The tightening of international financial markets reinforced hisdetermination to build an indigenous armaments industry in Iraq. IfIraq couldn't purchase the weapons it wanted on the open market, thenit would manufacture them itself.

By early 1986, it appeared that Saddam was getting closer to thisgoal. Western diplomats in Baghdad were reporting back to theirgovernments that Iraq was now using locally-manufactured ammunitionand bombs in the war. The reports were sketchy, but they confirmedwhat many arms salesmen had known for years: Iraq was buying fewerweapons, and more technology, to make the weapons itself. One embassyreported that Iraq had set up a special plant to re-equip itsSoviet-made T-55 tanks with a more powerful 105mm main gun. The newguns, believed to have been supplied by the West German arms-maker,Rheinmetall, meant that Iraq's Soviet tanks could now firesophisticated new armor-piercing rounds bought in the West, turningthem into effective tank-killers.

In addition to the huge Taji complex to the north of Baghdad, anumber of other weapons plants had gone into limited production. Some25 kilometers south of Baghdad at al-Yusufiah was the Badr factory,which made "dumb" bombs and was gearing up to make artillery pieces.A bit farther south, near the industrial town of al-Hillah, wasIraq's principle munitions works, the al-Qaqaa State Establishment,where Iraqi technicians were hard at work fitting out assembly linesto manufacture solid rocket fuel and a wide variety of explosives. Atnearby-by Iskandariyah, the Huteen State Establishment was tooling upto make the Cardoen cluster bombs under license. At Saad 16, nearMosul, work on missile projects was advancing at a rapid pace, whileat Saad 13 French-trained electronics technicians were assemblingbattlefield radios and radar gear.

Perhaps the most ambitious of all was the brand-new chemicalscomplex at al-Fallujah, 60 kilometers to the west of Baghdad on theroad to Ramadi. A consortium of West German companies led by WTBWalter Thosti Boswau and a consulting outfit called Infraplan, werebuilding a gigantic complex that went by the codename of Project9230. The core plant had been designed by an old hand from theSamarra gas works, Water Engineering Trading (WET) of Hamburg, tomanufacture the type of nerve gas precursors whose export was nowcontrolled throughout most of the European community. In contractualdocuments, it was called Project 33/85, to disguise its militarypurpose from the German licensing authority at Eschborn, but the rusewas hardly necessary. As time went on, other weapons-manufacturinglines would be added to the Fallujah complex. The Fallujah plant wasmanaged by the al-Muthena State Establishment.

W.E.T. was actually little more than a shell company, to cover theprivate deals that two employees of a major West German chemicalproducer, Preussag AG, had made with Iraq. W.E.T. had few employeesof its own so it had to purchase its expertise elsewhere. It turnedto a French chemicals manufacturer, Atochem (a wholly-ownedsubsidiary of the French national oil company, Elf-Aquitaine), tolearn how to handle the extremely dangerous substances it wassupposed to deliver to Iraq. When completed, the Fallujah plant wascapable of churning out 17.6 tons of nerve gas precursor chemicalseach day.

Fallujah was located near the Habbaniyah air base, and was acrucial facility as far as Iraq's independence from any internationalembargo was concerned. By making sarin and tabun precursorsthemselves, the Iraqis no longer had to rely on suppliers in Europeor in the United States. Among the chemicals they asked the Germansto help them manufacture at Fallujah were Phosphorous trichloride andPhosphorous oxychloride, substances so toxic and of such little useoutside of nerve gas production that even the Soviet Union controlledtheir export. One hundred West German technicians and workers weresent to Iraq to supervise construction and installation of theproduction lines.

Other chemical weapons agents were being manufactured insignificant quantities in a top secret plant near the Akashat-Al Qaimphosphate works. According to U.S. intelligence sources, this plantwas built in the early 1980s by Klöckner Industries AnlagenGmbH, a petrochemicals expert based in Duisburg, West Germany. "Thisis a duplicate facility, a clear carbon copy of al Qaim," the sourcessaid. "We know that chemical weapons are being manufactured at boththe al Qaim and the Akashat plants." A report prepared by the HouseRepublican Research Committee entitled "Iraq's Expanding ChemicalWeapons Arsenal" called the Akashat plant "the most autonomousproduction unit currently operational in Iraq." This report situatedit to the south of Akashat, near the al-Rutbah Air Force base, whichlies close to the Jordanian border.

In an interview in Baghdad in February 1986, the head of theScientific Research Council, General Amer Rashid, gave a rare glimpseof this flurry of activity. Iraq was already fitting French missilesonto Soviet aircraft, and vice-versa. It was upgrading Soviet tanks,at repair depots built and equipped by West European companies, andwas developing its own electronics industry. Not a single piece ofequipment Iraq purchased abroad fully met their expectations orrequirements. "We systematically modify everything we buy.Everything," General Amer said. "We do this operationally, by usingit in a different way, or technically, by actually modifying certainfeatures. In nearly six years of war, we have yet to find anyequipment that exceeded our expectations."

It was already unusual for such a powerful, but shadowy figure inthe Iraqi defense establishment as Amer Rashid to speak on the recordto a Western journalist, but then he referred specifically to theSaad 13 electronics factory set up by Thomson-CSF. "We are certainlytrying to develop our own electronics industry, not to becomeself-sufficient, but to produce those parts or assemblies that willbest contribute to our independence and free action now and in thefuture." Stripped of the rhetoric, what he meant was that Iraqintended to make what it could not hope to buy on the world market."Technology has become a very important weapon for us in and ofitself," he went on. "And military technology has become one of ourgovernment's top priorities. So we will try to master whatevertechnology that can contribute to the development of ourindustry."

For the most part, these Iraqi claims were considered emptyboasts. The conventional wisdom among Iraq's arms suppliers was thatthey were scarcely capable of correctly using the sophisticatedweaponry they had purchased in the West, let alone designing andbuilding their own. Even the foreign engineers maintaining some ofIraq's most sophisticated weaponry were not certain about the realstatus of Iraqi weapons programs, because of tight governmentsecurity and compartmentization. "They call us in when they have aproblem," one French engineer said, "then they refuse to tell us whatwent wrong. 'Security, security,' they shout. Well, because of allthat security the infrared seekers of our missiles are collectingdust, because they are storing them in secret warehouses out in theopen desert they won't let us visit."

Much of the weapons-manufacturing technology was purchased on theopen market, and billed as "development" projects. It was a tried andtrue tactic that had served the Iraqis by making them them eligiblefor government-sponsored export credits from West Germany, the UK,and the United States. But if the Iraqis hoped to obtain particularlysensitive technology, more clandestine needs were required.Especially when the aim was the build a nuclear weapon, and a missilepowerful enough to launch it against capitols throughout the entireregion--Tehran, Ankara, Riyadh, and Tel Aviv.

Only months after Keith Smith went to Honeywell to acquire theplans for a fuel-air explosive warhead for the Condor II ballisticmissile, the Iraqis and their Egyptian partners decided to make ahead-on play to acquire FAE bombs directly from the Pentagon.

The Egyptians learned that some 9,000 CBU-72/B FAE bombs werebeing stored at the Hawthorne military Depot in Nevada. Designed byHoneywell for the US Air Force during the Vietnam war, these bombshad been manufactured by a Philadelphia munitions-packer called Day& Zimmerman The Egyptian Ministry of Defense told the Pentagonthat they urgently needed the FAE bombs for clearing mines in theEgyptian desert.

Egypt was a large-scale recipient of U.S. military aid, and wasthe State Department's favorite because it had signed the Camp Davidpeace treaty with Israel. The Egyptians felt they had such a goodchance of obtaining official U.S. approval for the sale that theyeven provided maps showing the areas they wanted to de-mine. Althoughthe United States had no current use for the FAE bombs, the Egyptianrequest was turned down. On August 12, 1985, the State Department'sOffice of Munitions Control issued a "negative advisory opinion" tothe Pennsylvania exporter, Day & Zimmerman. This was not abinding, final rejection of an official request; but it clearlyshowed the Egyptians and their American suppliers that the proposed$14 million deal involved the national security of the UnitedStates.

The Condor II project was being run directly by the EgyptianMinister of Defense, Field Marshall Abdelhalim Abu Ghazaleh. Heappointed a member of his staff, Colonel Ahmed Hussam Khairat, as hispersonal liaison officer with the clandestine procurement networkoperating in Europe. Colonel Khairat rented an office in Salzburg,Austria, to cover his operations. He shared the office with IFAT andConsen, the procurement people based in Monaco and in Zug,Switzerland. Khairat and IFAT's Keith Smith worked together on adaily basis. But since Smith was already working on Honeywell to getthe plans to manufacture FAE explosives, Khairat decided to turnelsewhere for help. He called on an old friend who worked as ascientist with the Teledyne Corporation of Hollister, California, Dr.Abdelkader Helmy. Helmy was an American citizen of Egyptian origin,and spoke fluent Arabic. He also had a U.S. government Top Secretsecurity clearance, because of his work at the Jet PropulsionLaboratory.

Helmy agreed to help Egypt obtain copies of the American patentsfor the FAE bomb, and investigate whether Egypt could manufacture itsown. Soon however he realized that the Egyptians needed a differentsort of help. He introduced Khairat to another former Teledyneemployee who had launched his own consulting firm, Madison TechnicalServices, Inc. Sam Hazelrig knew how the Munitions Control Officeworked, and drew up a plan for the Egyptians on how best to approachthe FAE deal. Court records show that Hazelrig submitted his strategyto the Egyptians in a final report on March 7, 1986. Hazelrig wasnothing if not thorough. He provided a detailed chronology of theyear-long effort to obtain the FAE bombs, and presented a detailedinterpretation of the State Department's Munitions Control List. Buthe argued his conclusions in an extraordinary manner.

"The CBU-72/B FAE bomb is on the Munitions Control List inasmuchas it is classified a bomb... It is easy to relate the FAE "ball offire image" to the release of nuclear energy; therefore, mostpersonnel with little practical experience with FAE would havenegative connotations [sic] on the subject. It is obvious,"he concluded, without transition or further development, "that thesale of FAE bombs to Egypt would not compromise nationalsecurity."

His second point was argued just as dubiously. "The President ofthe United States through his representative, the Secretary of State,makes U.S. foreign policy. Munitions that could obviously upset thebalance of power in the world, such as nuclear weapons, are made amatter of foreign policy. Therefore, the CBU-72/B FAE bomb is notthought to be a consideration of foreign policy." Hazelrig suggestedthat the Egyptian government renew its demand but on a more officialbasis, instead of going through the exporter, Day & Zimmerman."The initiation of this procurement action should be taken by theEgyptian Ambassador to the United States through existing channels ofcommunication adhering to established protocol... that would allowthe U.S. Department of State to evaluate the military-politicorequirements, including the end-use and user."

Hazelrig personally delivered his report to Khairat at the IFAToffices in Monaco, the record shows, then travelled on to Cairo tomeet with other Egyptian officers working on the Condor II project,including General Abdel El Ghohari, the overall project manager. Fromthese discussions, Hazelrig told U.S. governments investigators, heunderstood that the FAE's were really intended for a ballisticmissile project and not for mine-clearing. What he apparently failedto realize was that both the FAE and the missile project were reallyintended for Iraq.

IFAT was having trouble procuring other technologies that werecritical to the development of the Condor II. They especially neededspecialized software, available only in the United States, to help inthe development phase of the missile. Again, Colonel Khairat calledhis compatriot in California, Abdelkader Helmy, and again, he managedto arrange an introduction. Through another former Teledyne colleaguenamed Jim Huffman, Helmy arranged for Khairat to explain his needs toa small software house located in Huntsville, Alabama, the home ofthe U.S. Army's Strategic Defense Command, which was deeply engagedin transforming the Patriot missile into a ballistic missilekiller.

In April 1986, Khairat travelled to Huntsville to meet withmembers of Coleman Research Corporation. His travel companion wasKeith Smith, the systems engineer. Just to keep things clean, Smithdecided not to use his IFAT calling cards, and instead presentedhimself as a representative of Transtechno U.K., of Stony Stratford,Milton Keynes, a London suburb not far from Heathrow Airport.Transtechno was just another Consen front.

Smith and Khairat went for gold. They asked Coleman to providethem with sophisticated software tailored for ballistic missiledesign, and for analyzing and controlling in-flight trajectories.They also asked Coleman to quote a price for building an entiremanufacturing facility for strapdown inertial guidance systems to beused on the missile, and to design a program for optimizing warheadtrajectories. It was a heady shopping list. But Coleman wrote backalmost immediately. The whole package, minus the inertial guidanceequipment, came to $6.5 million, he replied on May 22. The mostexpensive portion by far was the "thrust termination" software, whichincluded $1.5 million for wind tunnel tests of a missile mock-up.

But there was a hitch. The Condor II shopping list would requirefour separate export licenses. "Four separate Letters of Intent aresuggested," Coleman wrote, if they wanted to facilitate the licensingprocedure. Khairat and Smith let the matter drop. They had alreadyrevealed too much of their true plans. Instead, they took the Colemanproposal, just as they took the Honeywell FAE study, and put it topractical use themselves as a procurement guide. This was anothercommon Iraqi practise: buy the blueprints from one source, and theequipment from several others. That way there were fewer leaks, sinceno one understood the big picture.

Since 1981, Saddam had been skimming an estimated 5% off the topof Iraq's $15 billion yearly oil revenues, and placing the money inspecial Swiss accounts. He had also been taking a 2.5% kickback oncontracts with Japanese companies, and had worked out a scam onforeign letters of credit, used to finance Iraqi development schemes.In a CBS 60 Minutes interview, Wall Street financial investigator,Jules Kroll, revealed that the multi-billion dollar slush fund wascontrolled by Saddam's half-brother, Barzan Ibrahim al-Tikriti. Someof the money was invested in legitimate business concerns throughfront companies operating out of Switzerland. An estimated $1 billionwent into bank accounts controlled by Saddam himself, for hispersonal and family use.

Two Iraqi fronts, Midco, and Montana Management, Inc, organizedthe stock purchases. Montana had been set up as a mail box company inPanama shortly after Saddam took over as President in 1979, whileMidco was created by Barzan in Switzerland in 1982. The Genevacommercial registry shows that the seed money--2.1 million Swissfrancs--was paid in cash onto a numbered Swiss account by an Iraqinamed Aladin Hussein Alwan. Alwan also appears on the Panamaniancommercial registry as the Secretary General of Montana Management.In fact, both companies were controlled from Baghdad by two frontmenworking for Barzan, named as Khalaf al-Doulimi, and Mohammed TurkiHabib. Alwan, whose real name was Aladin Hussein Ali Maki Khamas, wasin fact a retired Major General in the Iraqi Army. Fluent in English,and conversant in French, he served as Barzan's bagman.

Over the years, these Iraqi investment companies graduallyacquired hundreds of millions of dollars worth of industrial stock.Jules Kroll believes they salted away as much as $10 billiondisguised as legitimate business investments--5% of the $200 billionIraq earned during the 1980s. His investigators managed to locate$2.4 billion in Iraqi-controlled deposits stashed away in fifty banksaround the world. One of the companies that attracted Saddam'sprivate investment purse was the West German industrial giant,Daimler-Benz, which owned missile and helicopter manufacturer MBB.Another was the French publishing conglomerate, Hachette, whichcontrolled several French publishing houses and had stakes innewspapers, radio stations, and television networks. Hachette's ownerand Chief Executive Officer, Jean-Luc Lagadère, alsocontrolled one of the top French defense companies, Matra. [TKTKwith Dassault if Montana bought in] By buying into Hachette, theIraqis couldn't guarantee access to the latest Matra missiles, buttheir 8.4% stake, worth around $67 million, was large enough to wieldas a weapon of financial terror. If the Iraqis sold short, Hachettestock would go tumbling down. Lagadère and his board say theIraqis never wielded this weapon. But throughout the 1980s, Matranever refused an Iraqi order, no matter how sophisticated theequipment that was demanded.

Saddam's slush fund went to other, more secret projects aswell.

As Undersecretary of State for Science, Technology, and SecurityAssistance, William Schneider was the Department's point man when itcame to foreign military sales. If Egypt wanted a new squadron ofF-16s, or if Israel wanted more helicopters, they had to go throughSchneider's shop on the ground floor of the State Department.

Schneider had also taken over Operation Staunch, the Allied effortto block military supplies from reaching Iran, once Richard Fairbanksretired to private law practice and lobbying. U.S. diplomats inBaghdad said this is what brought Schneider to the Iraqi capitolduring the first week of February 1986, only days before the Iranianattack on Fao. "He came to discuss expanding U.S. trade with Iraq,and to remind the Iraqis that we are still pursuing OperationStaunch." The diplomats also suggested with a few winks and nods thatSchneider might have entertained Iraqi requests to acquire U.S.weapons at some later date. "Don't forget that Bell helicopter nowhas a full time rep right here in Baghdad," they pointed out. "Thisis giving the Iraqis a taste of what U.S. technology is all about."

Schneider met with Tarek Aziz, who seemed to have a finger inevery Iraqi arms purchase, and with Trade Minister Hassan Ali. Thetiming of Schneider's trip was deliberate, U.S. diplomats said."Saddam had just returned from an official visit to Moscow inJanuary--one of the rare trips abroad he has taken since thebeginning of the war. We wanted to make sure we were present in avery visible way when he returned. Just to remind him that there isan alternative to the USSR."

Schneider's visit was significant for another reason as well. Hewas not an Arabist, nor was he a diplomat in the ordinary sense ofthe term. His business was technology, which was what the Iraqiswanted most from the U.S. In an interview shortly before his trip toBaghdad, Schneider was clearly uncomfortable with the delivery ofAmerican-built helicopters to Iraq. "The Hughes 500 sneaked in underour noses because helicopters weighing less than 10,000 lbs don'ttechnically need our approval. They can be shipped with an ordinaryCommerce Department license." Schneider went on to explain that hehad received unequivocal information that these small, battlefieldobservation helicopters had "definitely been diverted to militarypurposes," although he wouldn't say whether or not the Iraqis hadmanaged to equip them with TOW anti-tank missiles, as themanufacturer's literature suggests. As for the Bell 214, Schneidersaid the State Department only cleared this sale "with substantialIraqi promises that they would not be used for military ends. So far,this seems to be respected."

But American high-tech goods were another matter entirely. TheIraqis complained to Schneider that they were not getting all theequipment they sought from the U.S. because of all the bureaucraticred tape. Computers they needed for their oil industry, andmachine-tools they needed for their steel factories were gettingblocked, and the Iraqis wanted to know why. The U.S. claimed it wasnot supporting Iran, and yet U.S.-built weapons were still gettingthrough to the Ayatollahs. How could Iraq believe that the U.S. wassupporting Baghdad, Tarek Aziz wanted to know, when purely civiliansales of American computers to Iraq could not get approved? Aziznever missed an opportunity to hammer his message home. He had putthe same point in almost identical words only a few months earlier toRichard Murphy, during an unpublicized visit to Washington in October1985.

When he returned to Washington, Schneider threw his considerableweight behind the "trade off" with Iraq, as he saw it: the U.S. wouldship the Iraqis no weapons, but it would allow extensive technologysales. Richard Murphy and the NEA experts up on the 5th floor of theState Department were overjoyed. Schneider stood a bureaucratic headhigher than the Pentagon's Steve Bryen, whom they saw as theirarch-enemy when it came to high-tech sales to Iraq. In a longinterview in the fall of 1985 exclusively devoted to developmentsinside Iran, one of Murphy's principal deputies found time to singleout Bryen and Richard Perle for their obstructive behavior. "They arenot interested in the Gulf," this Arabist lamented, "except when itcomes to technology transfer. They are dead set against the sale ofperfectly ordinary computers to Iraq."

The "perfectly ordinary computers" were in fact headed for theSaad 16 missile complex in Mosul, documents released by the CommerceDepartment now show. "Murphy fought dogs and cats to get thesecomputers and imaging systems approved," Bryen asserts. "The StateDepartment knew from explicit DoD warnings where that equipment wasgoing, and it certainly wasn't intended for university research."Bryen has since tried to get the warnings he sent over to Commerceand the State Department released through the Freedom of InformationAct, but to no avail. "My own letters are now classified as statesecrets," he commented wryly.

In July 1986, the Pentagon lost the turf battle on Iraq. As manyWashington battles, the fight was joined in the corridors and lost atthe conference table. In this case, at a meeting of PresidentReagan's National Security Council, in which the Pentagon received asevere dressing down for its "obstruction" of Iraqi high-tech licenserequests. At the request of the State Department, which backed theCommerce Department to the hilt, Admiral Poindexter issued a NationalSecurity Decision Directive enjoining all government agencies "to bemore forthcoming" on Iraqi license requests. The Pentagon, andBryen's DTSA, were not mentioned by name. But a number of Saad 16licenses they had rejected were listed as examples of the type ofhigh-tech that ought to be allowed to reach Iraq.

The message was clear. it was okay for U.S. companies to help Iraqdesign and build a ballistic missile. After all, it might teach theIranians a lesson.

At the Iraqis' request, the U.S. exchanged defense attachéssoon after the renewal of diplomatic ties. Colonel Mark Pough, thefirst U.S. military attaché in Baghdad in nearly twenty years,took to his new job with a passion. He had gone on a crashArabic-language course before arriving in Baghdad, and was scouringthe local papers for hints of what was going on at the front duringthe attack on Fao. Meanwhile, the Iraqis were happily introducingPough and other U.S. officers to mid-level commanders and some seniorstaff officers at Staff Headquarters in Baghdad.

Some of the Iraqis, such as Major General Aladine Maki Khamas, hadbeen educated in the West. General "Ala," as he was called familiarlyby his subordinates, had gone to Sandhurst in Britain, and laterattended a 6-month armor training course at Fort Knox in the U.S. Anolder generation officer ostensibly in charge of the Army'sHistorical Directorate, General Ala was a tank driver who hadcommanded the only Iraqi armored division that reached Damascusbefore a UN ceasefire ended the 1973 Arab-Israeli war. (A dedicatedBaathist, he spent four days in the international spotlight later onwhen Saddam Hussein appointed him as the "interim leader of Kuwait.")Unbeknownst to those who became acquainted with him, he was also oneof the principal operators of Saddam's clandestine financial networkin Europe.

But the U.S. military men in Baghdad were not the ones running theshow. The real masters of the U.S.-Iraqi alliance were the CIA. BobWoodward of the Washington Post reported in August 1986 that the U.S.had established a secret intelligence link between Baghdad andWashington, and was giving the Iraqis intelligence on Iranian troopformations and economic targets, derived from U.S. satellitephotographs. CIA Director William Casey negotiated the intelligencesharing deal personally with Saddam's half-brother Barzan, during atrip to Amman, Jordan in 1982, French intelligence officials say.(Casey stopped off in Paris on the way to meet Barzan, to confer withthe former head of French intelligence, Count Alexandre deMarenches). The Director made subsequent trips to Baghdad as timewent by, to see how the intelligence link was operating. "Before theU.S. had a full-time ambassador in Baghdad," sources knowledgeable ofthe arrangement said, "it had a full time Chief of the Station," thetop CIA officer in US Embassies abroad. The COS, as he was called,enjoyed a privileged status among Saddam's cronies, and was generallyconsulted before Iraq launched a major offensive on the battlefieldor on the diplomatic front. "The United States did in Baghdad what itdid in other Arab capitals over the past three decades: it made theCIA station chief more important in local eyes than the U.S.ambassador."

The satellite link came on top of a long-standing agreement toprovide the Iraqis with information on Iranian Air Force movements,gathered by U.S.-manned AWACS planes flying out of Riyadh, SaudiArabia and patrolling the Gulf. U.S. tactical intelligence of thissort allowed Iraq to counter potentially devastating Iranian humanwave attacks in 1983 and 1984, and was so sensitive that "KingHussein of Jordan personally oversaw the transfer to Baghdad" of U.S.intelligence data. In August 1986, information from U.S. satellitephotographs probably helped the Iraqis plan their first air strikeagainst Sirri Island at the head of the Gulf, where Iran had shiftedthe bulk of its oil loading operations in an effort to get them offof Kharg Island and beyond the range of the Iraqi Air Force. To makethe extra range, half the Iraqi Mirage fighter-bombers served as fueltanks for the planes launching the attack, using a special"buddy-buddy" refueling kit supplied by Dassault.

Alan Clark headed Britain's Department of Trade and Industry. DTI,as his ministry was called, paralleled the U.S. Commerce Departmentin many ways. Like Commerce, it was responsible for promoting trade;and like Commerce, it was the lead agency in licensing the export ofsensitive technology. Promoting trade and controlling trade createdjust as many conflicts of interest in Britain as they did in theUnited States. The two jobs were frankly contradictory.

Alan Clark was no "wet," as his Prime Minister, Margaret Thatcher,called cabinet ministers suspected of latent liberalism. Indeed, hewas an outspoken advocate of free trade, a philosophy prominently ondisplay in the conservative pantheon. But trade promotion oftenconflicted with national security, which Alan Clark was going todiscover the hard way.

The lurid lights and blaring headlines of a major scandal were thelast thing on Clark's mind as he strode down the red carpet atBaghdad's Saddam International Airport in November 1986. He wasgreeted by his Iraqi counterpart, Trade Minister Hassan Ali, andushered into the VIP lounge for a brief champagne reception. InClark's briefcase was a substantial "gift" for Iraqi leader, SaddamHussein: a new credit guarantee to finance British exports to Iraq,offered by the DTI's Export Credit Guarantee Department (ECGD). IfIraq accepted the terms, it would bring British credits to Iraq since1983 to more than $1.2 billion (£750 million).

It was less than what the United States was offering, Clark fullyunderstood, but he hastened to explain that the British money wouldhave fewer strings attached. It was not tied to food or agriculturalpurchases, as the American CCC credits were, but could and should beused to buy British manufactured and industrial goods. Clark may nothave realized it at the time, but Britain was about to get involvedin building the Iraqi war machine.

The credit package came despite an official trade embargo barringBritish firms from supplying Baghdad with arms, ammunition oranything else that might "exacerbate or prolong" the 6-year oldIran-Iraq war. That policy, quietly determined at the start of thewar, was reiterated with force by Foreign Minister Sir Geoffrey Howebefore the House of Commons on October 29, 1985. But the officialposition contained a loophole, which specified that Her Majesty'sGovernment "should maintain our consistent refusal to supply lethalequipment to either side." It did not determine what "lethal" meant,and failed to rule out the supply of weapons manufacturing machinery.Like the Department of Commerce, DTI refused to publish a list ofexport licenses awarded to British manufacturers selling to Iraq, andlike Commerce, this refusal was motivated by the very high number oflicenses relating to equipment that directly fed the Iraqi warmachine. Over the next four years, Britain would supply more than$1.5 billion worth of high technology goods to Iraq, according to theofficial trade figures it supplied the OECD.

Alan Clark had come to Baghdad in November 1986 with a mission. Hewanted to convince the Iraqis to support the British machine-toolindustry, instead of just buying from the Germans and the Swiss aswas their habit. Clark's success went beyond his most imprudentdreams. The Iraqis bit, and they bit hard.

Shortly after Clark's visit to Baghdad, the Iranians launched aseries of offensives against Basra, Fish Lake, and areas to thenorth, whose intensity and planning took the Iraqis by surprise. TheKerbala 3-4-5 and 6 offensives of December 1986 and January 1987revealed a strikingly more powerful Iranian military machine thatmost Western analysts believed still could exist. The secret to theIranian comeback was a little publicized military resupply effortorchestrated initially by President Reagan's National SecurityCouncil staff. The "Iran Initiative" was revealed on November 4,1986, following the release by pro-Iranian terrorists in Beirut ofAmerican hostage David Jacobson. As the story unravelled, it becameapparent that the U.S. government had violated its own embargo onarms sales to Iran in an effort to win the release of the hostages.This "private policy" which totally contradicted the U.S. publicpolicy of an arms embargo on Iran, had already begun to undercut theefforts of Ambassador Richard Fairbanks, who had resigned as the headof Operation Staunch in September 1985 just as the NSC-sponsored armsdeals began. It soon became apparent that it also opened the floodgates to arms dealers all over the globe, hoping to make a buck offof Iran.

By conservative estimates, the arsenal of American weapons sold toIran in 1986 as part of the "Initiative" topped $650 million, andincluded:

• 10,000 to 12,000 TOW anti-tank missiles, sold for anaverage black market price of $10,000 each;

• 200 Phoenix anti-radar missiles, at $1.8 million each;

• Spare parts, engines, and avionics for F-4 and F-14s, worthupwards of $150 million;

• 246 HAWK missiles and radar sets worth $20 million, some ofwhich were delivered by former National Security Advisor Robert C.McFarlane in May 1986 .

When this vast resupply operation was completed in late 1986, ittipped the military balance momentarily in Iran's favor. The Iraqisnoticed the difference on the battlefield and in the air. Thanks tothe HAWKs (and to Swedish-supplied RBS-70 laser-guided missiles),Iraq lost some 45-48 Soviet MiGs and Sukhois during the Kerbalaoffensives, Iraqi military sources said. The Phoenix was responsiblefor the destruction of many of the new French Mirages, and due toIranian TOWs, Iraq's armored divisions were checked in counterattacksto the east of Basra. The military situation had radically, ifmomentarily, changed.

Similarly, the U.S. deliveries revived the Iranian Air Force to alevel it had not reached since 1982, increasing its capability by 80%to 110 combat aircraft. U.S. satellite photos began detecting wholesquadrons of Iranian F-14s in the air as of January 1987 - up totwelve F-14s at once - whereas two years earlier Iran could barelykeep two or three F-14s in the air at any given time. "The Iranianshave a far greater military capability than they did a year ago," aformer high-ranking State Department official said ruefully inJanuary 1987. "That is because of direct US action, and because ofthe general discrediting of the public policy."

Sounding the alarm on the renewed vigor of the Iranian ArmedForces was Richard Murphy's former deputy, James Placke, who nowworked with Fairbanks as a professional lobbyist on behalf of theIraqi Embassy in Washington, DC.

The pro-Iraq lobby in Washington took the Irangate caper as theperfect justification of what they had been arguing all along. TheUnited States needed to swing fully behind Iraq, with all the mightof trade and aide and technology sales, to prevent the Iranian brandof radical Islam from sweeping across the Mediterranean. WithIrangate, the last restraints slowing the flow of U.S technology toIraqi weapons projects disappeared. From then on, anything couldgo.