The Death Lobby: How the West Armed Iraq

Chapter 13: BNL Builds the War Machine

(pp225-246)

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

Saddam Hussein was not the only one to benefit from the CCC farm credit program. Christopher Drogoul of BNL Atlanta was making a career out of the Iraqi loans, and he was a happy man when he travelled to Washington in December 1985 with his assistant, Paul Von Wedel. The Iraqi program was booming, and his bosses back at BNL headquarters in Rome seemed pleased with the CCC business. When Drogoul had brought up the subject at the BNL Annual North American Managers meeting in New York over the summer, the head of the BNL International Department offered encouragement given the success of Drogoul's first $100 million loan to Iraq. "Florio agreed that Chris would 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. government guarantees made it easier to forget that Iraq was sitting atop a mountain of debt that was nearly as high as the sea of oil beneath it was deep.

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

On December 12, they got together with Iraqi Central bank officials, Sadiq Taha and Abdul Munim Rasheed, who had come along for the trip. Taha wanted the BNL commitment in writing, and Drogoul was quick to accept. Before the day was out, he signed a pledge that obligated BNL Atlanta to fund $556 million of Iraqi government purchases of U.S. goods, guaranteed by the USDA's commodity credit program. That was ten million shopping carts full of food..

After the signing, Drogoul took the shuttle up to New York, to break the good news to one of his best clients, Yavuz Tezeller, who ran the U.S. office of Entrade. This Turkish food emporium was a major supplier of U.S. grain products to Iraq, and may have helped funnel precious high-tech goods to Iraqi weapons plants as well. At this and subsequent meetings, Drogoul and Tezeller allegedly discussed how to divert more than $1 million in CCC credits to their personal use, by double-charging Drogoul's business and travel expenses. For the complicated series of credits and debits, BNL Atlanta set up a special "transformation account." What it transformed was the bank's money, turning it into private money with the touch of the magician's wand.

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

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

"The controversy over the Lupo contract had the effect of shrinking Italian credits for Iraq," explained the editor of Southern Banker, Kenneth Cline. To intensify pressure on the Iraqis to pay their debts, in 1986 the Italian government slapped a double embargo on Iraq: no new loans, and no ships, until the Lupo contract was paid up.

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

"In about two weeks time, we received notice from Rome that our loans to Iraq exceeded approvals by about $500 million," Paul Von Wedel remembers. "We tried to sell off as many as we could. Central Bank of Cooperatives [in Denver] bought some but they were restricted only to sales made with coop grains. That is when Jean [Jean Ivey, a BNL Atlanta lending officer] and Mela [Mela Maggi, BNL Atlanta's money market trader] had the idea of a gray book. So within one week's time we reduced our loan portfolio of three-year loans by $500 million, with no questions asked by our head office in Rome, the New York Regional Management or the Federal Reserve 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 of them, Drogoul and other BNL Atlanta employees kept a secret set of records they called the "gray book." These consisted of a few file boxes and computer floppy disks, which they physically removed from the office when the auditors came, transporting them in the trunks of cars and sometimes keeping them out in their garages. Whenever money was paid out to an Iraqi supplier, a chit went into the box. Whenever the 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. Normal loans were called "non-Perugina." The system worked so well that it really was a bit like taking candy from a baby.

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

Iraq's precarious financial situation was made worse by a disastrous turn of events on the battlefield with Iran. On the night of February 8-9, Iranian troops did what all military observers until then had had hoped was impossible: they swept across the southern border with Iraq and occupied the industrial town of Fao, within gunshot range of Kuwait. The Iranian attack was dramatic, swift, and effective. Iranian combat divers led the nocturnal assault, and were soon followed by thousands of well-trained Revolutionary Guardsmen in small fiberglass boats. They crossed the Shatt al-Arab waterway down at the delta, where it emptied out into the Gulf. Overpowering the handful of Iraqi defenders in the palm groves surrounding the deserted town of Fao, they erected a pontoon bridge back to the Iranian mainland and dug in.

The Iraqis immediately declared a national state of emergency. Defense Minister Adnan Khairallah rushed down to Basra to marshall the troops, along with a top Baathist General, Saadi Tuma al-Jaboori. But several days of bad weather complicated the counter-attack. The Iraqi Air Force was hindered in its attempts to bomb the Iranian positions, despite a record 725 combat sorties in a single day, and repeatedly failed to knock out the improvised pontoon bridges. Within a week, the Iranians had managed to move four divisions --upwards of 30,000 men--into the Fao Peninsula across those bridges, which were little more than blocks of Styrofoam roped together and covered with roofing tin. Still, the pontoons were sturdy enough to support trucks and small artillery pieces. With them, the Iranians began to shell Basra and neighboring Kuwait, as punishment for its brazen support of Iraq.

On February 11, Iranian President Ali Khamene'i sent a personal envoy to warn the Kuwaiti Emir that "Kuwait will bear the consequences" of any aid to Iraq. He pointed out that the advance of Iranian troops to the Khawr Abdallah Channel, across from Kuwait's Bubiyan Island, now made Iran and Kuwait neighboring countries, and warned against loaning Bubiyan to Iraq as a safe haven for its navy. In response to these direct threats, the Kuwaitis just shivered in their palaces as the guns boomed and kept quiet, hoping the Iranians would go away. The Kuwaiti Emir knew he could not throw the Iraqis out of Bubiyan or prohibit Iraqi planes from using Kuwaiti air bases as staging areas for attacks on Iranian oil installations without greatly angering Saddam.

As the weeks went by, and the Iranians managed to shore up their bridgehead on the Fao Peninsula, there was real concern in Kuwait and the West that the Iran-Iraq war might be drawing to a close. The prospects of an Iranian victory--however unrealistic they may have been--drove fear into the hearts of Iraq's creditors, who anxiously began calculating what an Iraqi default would mean to their balance sheets.

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 sale package for Iraq, despite the lack of realistic financing. Iraq was a "friend and ally," Chirac said, with whom relations went much deeper than the pocketbook. With the Iranians camped out on the Fao Peninsula (and with Iraq some $5 billion in debt to France), Chirac argued that it was no time to abandon Saddam Hussein.

The new deals were relatively modest compared to what the French arms industry had become accustomed to signing with Iraq, and totalled a mere $430 million. They included a half dozen Aerospatiale Dauphin helicopters, equipped with a new generation anti-shipping missile (the AS-15TT), and large numbers of high-precision 120 mm mortars made by Thomson-Brandt. The contracts were given colorful code-names: "Jacinthe" and "Tulip" for the helicopters, and "Jupiter" for the mortars. Chirac also promised that France would keep open its production line for the Mirage F1, despite the fact that Dassault had no more orders on its books. Iraq needed the planes to replace war losses.

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

The threat of Iranian terrorism prompted Chirac to greater discretion. Once the news of the "Jupiter" and "Jacinthe" deals was out, he gave strict orders to keep future contracts under wraps. Except for the periodic pilgrimages of Tarek Aziz to Paris, the entire subject of French relations with Iraq became one of the closest held secrets of Chirac's second Premiership. Companies like Dassault, which sorely needed to announce a new export sale to restore investor confidence, were ordered to keep silent as they continued to supply weapons to Iraq.

But those supplies did continue, and on a daily basis. A former NATO airfield, built by the US Army Corps of Engineers at Chateauroux in central France, was the primary loading point for urgent deliveries of French-built missiles, cluster bombs, fuzes, radar equipment, and avionics. The equipment was loaded on board Antonovs of the Iraqi Air Force, which flew to France just to load arms. The deliveries became so intensive by mid-1986 that commercial flights linking Paris to Baghdad were also used to haul arms. Although they were virtually empty of passengers, the Iraqi Airlines jets were so heavily-laden they barely made it off the runway at Orly, and had to refuel in Athens or Istanbul for what was normally a non-stop flight. French intelligence sources estimated in mid-1986 that "if France cut off the arms pipeline to Iraq for a mere three weeks, Baghdad would collapse."

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

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

By early 1986, it appeared that Saddam was getting closer to this goal. Western diplomats in Baghdad were reporting back to their governments that Iraq was now using locally-manufactured ammunition and bombs in the war. The reports were sketchy, but they confirmed what many arms salesmen had known for years: Iraq was buying fewer weapons, and more technology, to make the weapons itself. One embassy reported that Iraq had set up a special plant to re-equip its Soviet-made T-55 tanks with a more powerful 105mm main gun. The new guns, believed to have been supplied by the West German arms-maker, Rheinmetall, meant that Iraq's Soviet tanks could now fire sophisticated new armor-piercing rounds bought in the West, turning them into effective tank-killers.

In addition to the huge Taji complex to the north of Baghdad, a number of other weapons plants had gone into limited production. Some 25 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, was Iraq's principle munitions works, the al-Qaqaa State Establishment, where Iraqi technicians were hard at work fitting out assembly lines to manufacture solid rocket fuel and a wide variety of explosives. At nearby-by Iskandariyah, the Huteen State Establishment was tooling up to make the Cardoen cluster bombs under license. At Saad 16, near Mosul, work on missile projects was advancing at a rapid pace, while at Saad 13 French-trained electronics technicians were assembling battlefield radios and radar gear.

Perhaps the most ambitious of all was the brand-new chemicals complex at al-Fallujah, 60 kilometers to the west of Baghdad on the road to Ramadi. A consortium of West German companies led by WTB Walter Thosti Boswau and a consulting outfit called Infraplan, were building a gigantic complex that went by the codename of Project 9230. The core plant had been designed by an old hand from the Samarra gas works, Water Engineering Trading (WET) of Hamburg, to manufacture the type of nerve gas precursors whose export was now controlled throughout most of the European community. In contractual documents, it was called Project 33/85, to disguise its military purpose from the German licensing authority at Eschborn, but the ruse was hardly necessary. As time went on, other weapons-manufacturing lines would be added to the Fallujah complex. The Fallujah plant was managed by the al-Muthena State Establishment.

W.E.T. was actually little more than a shell company, to cover the private deals that two employees of a major West German chemical producer, Preussag AG, had made with Iraq. W.E.T. had few employees of its own so it had to purchase its expertise elsewhere. It turned to a French chemicals manufacturer, Atochem (a wholly-owned subsidiary of the French national oil company, Elf-Aquitaine), to learn how to handle the extremely dangerous substances it was supposed to deliver to Iraq. When completed, the Fallujah plant was capable of churning out 17.6 tons of nerve gas precursor chemicals each day.

Fallujah was located near the Habbaniyah air base, and was a crucial facility as far as Iraq's independence from any international embargo was concerned. By making sarin and tabun precursors themselves, the Iraqis no longer had to rely on suppliers in Europe or in the United States. Among the chemicals they asked the Germans to help them manufacture at Fallujah were Phosphorous trichloride and Phosphorous oxychloride, substances so toxic and of such little use outside of nerve gas production that even the Soviet Union controlled their export. One hundred West German technicians and workers were sent to Iraq to supervise construction and installation of the production lines.

Other chemical weapons agents were being manufactured in significant quantities in a top secret plant near the Akashat-Al Qaim phosphate works. According to U.S. intelligence sources, this plant was built in the early 1980s by Klöckner Industries Anlagen GmbH, a petrochemicals expert based in Duisburg, West Germany. "This is a duplicate facility, a clear carbon copy of al Qaim," the sources said. "We know that chemical weapons are being manufactured at both the al Qaim and the Akashat plants." A report prepared by the House Republican Research Committee entitled "Iraq's Expanding Chemical Weapons Arsenal" called the Akashat plant "the most autonomous production unit currently operational in Iraq." This report situated it to the south of Akashat, near the al-Rutbah Air Force base, which lies close to the Jordanian border.

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

It was already unusual for such a powerful, but shadowy figure in the Iraqi defense establishment as Amer Rashid to speak on the record to a Western journalist, but then he referred specifically to the Saad 13 electronics factory set up by Thomson-CSF. "We are certainly trying to develop our own electronics industry, not to become self-sufficient, but to produce those parts or assemblies that will best contribute to our independence and free action now and in the future." Stripped of the rhetoric, what he meant was that Iraq intended to make what it could not hope to buy on the world market. "Technology has become a very important weapon for us in and of itself," he went on. "And military technology has become one of our government's top priorities. So we will try to master whatever technology that can contribute to the development of our industry."

For the most part, these Iraqi claims were considered empty boasts. The conventional wisdom among Iraq's arms suppliers was that they were scarcely capable of correctly using the sophisticated weaponry they had purchased in the West, let alone designing and building their own. Even the foreign engineers maintaining some of Iraq's most sophisticated weaponry were not certain about the real status of Iraqi weapons programs, because of tight government security and compartmentization. "They call us in when they have a problem," one French engineer said, "then they refuse to tell us what went wrong. 'Security, security,' they shout. Well, because of all that security the infrared seekers of our missiles are collecting dust, because they are storing them in secret warehouses out in the open desert they won't let us visit."

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

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

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

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

The Condor II project was being run directly by the Egyptian Minister of Defense, Field Marshall Abdelhalim Abu Ghazaleh. He appointed a member of his staff, Colonel Ahmed Hussam Khairat, as his personal liaison officer with the clandestine procurement network operating in Europe. Colonel Khairat rented an office in Salzburg, Austria, to cover his operations. He shared the office with IFAT and Consen, the procurement people based in Monaco and in Zug, Switzerland. Khairat and IFAT's Keith Smith worked together on a daily basis. But since Smith was already working on Honeywell to get the plans to manufacture FAE explosives, Khairat decided to turn elsewhere for help. He called on an old friend who worked as a scientist 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 Secret security clearance, because of his work at the Jet Propulsion Laboratory.

Helmy agreed to help Egypt obtain copies of the American patents for the FAE bomb, and investigate whether Egypt could manufacture its own. Soon however he realized that the Egyptians needed a different sort of help. He introduced Khairat to another former Teledyne employee who had launched his own consulting firm, Madison Technical Services, Inc. Sam Hazelrig knew how the Munitions Control Office worked, and drew up a plan for the Egyptians on how best to approach the FAE deal. Court records show that Hazelrig submitted his strategy to the Egyptians in a final report on March 7, 1986. Hazelrig was nothing if not thorough. He provided a detailed chronology of the year-long effort to obtain the FAE bombs, and presented a detailed interpretation of the State Department's Munitions Control List. But he argued his conclusions in an extraordinary manner.

"The CBU-72/B FAE bomb is on the Munitions Control List inasmuch as it is classified a bomb... It is easy to relate the FAE "ball of fire image" to the release of nuclear energy; therefore, most personnel with little practical experience with FAE would have negative connotations [sic] on the subject. It is obvious," he concluded, without transition or further development, "that the sale of FAE bombs to Egypt would not compromise national security."

His second point was argued just as dubiously. "The President of the United States through his representative, the Secretary of State, makes U.S. foreign policy. Munitions that could obviously upset the balance of power in the world, such as nuclear weapons, are made a matter of foreign policy. Therefore, the CBU-72/B FAE bomb is not thought to be a consideration of foreign policy." Hazelrig suggested that the Egyptian government renew its demand but on a more official basis, instead of going through the exporter, Day & Zimmerman. "The initiation of this procurement action should be taken by the Egyptian Ambassador to the United States through existing channels of communication adhering to established protocol... that would allow the U.S. Department of State to evaluate the military-politico requirements, including the end-use and user."

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

IFAT was having trouble procuring other technologies that were critical to the development of the Condor II. They especially needed specialized software, available only in the United States, to help in the development phase of the missile. Again, Colonel Khairat called his compatriot in California, Abdelkader Helmy, and again, he managed to arrange an introduction. Through another former Teledyne colleague named Jim Huffman, Helmy arranged for Khairat to explain his needs to a small software house located in Huntsville, Alabama, the home of the U.S. Army's Strategic Defense Command, which was deeply engaged in transforming the Patriot missile into a ballistic missile killer.

In April 1986, Khairat travelled to Huntsville to meet with members of Coleman Research Corporation. His travel companion was Keith Smith, the systems engineer. Just to keep things clean, Smith decided not to use his IFAT calling cards, and instead presented himself 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 provide them with sophisticated software tailored for ballistic missile design, and for analyzing and controlling in-flight trajectories. They also asked Coleman to quote a price for building an entire manufacturing facility for strapdown inertial guidance systems to be used on the missile, and to design a program for optimizing warhead trajectories. It was a heady shopping list. But Coleman wrote back almost immediately. The whole package, minus the inertial guidance equipment, came to $6.5 million, he replied on May 22. The most expensive portion by far was the "thrust termination" software, which included $1.5 million for wind tunnel tests of a missile mock-up.

But there was a hitch. The Condor II shopping list would require four separate export licenses. "Four separate Letters of Intent are suggested," Coleman wrote, if they wanted to facilitate the licensing procedure. Khairat and Smith let the matter drop. They had already revealed too much of their true plans. Instead, they took the Coleman proposal, just as they took the Honeywell FAE study, and put it to practical use themselves as a procurement guide. This was another common Iraqi practise: buy the blueprints from one source, and the equipment from several others. That way there were fewer leaks, since no one understood the big picture.

Since 1981, Saddam had been skimming an estimated 5% off the top of Iraq's $15 billion yearly oil revenues, and placing the money in special Swiss accounts. He had also been taking a 2.5% kickback on contracts with Japanese companies, and had worked out a scam on foreign 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 was controlled by Saddam's half-brother, Barzan Ibrahim al-Tikriti. Some of the money was invested in legitimate business concerns through front companies operating out of Switzerland. An estimated $1 billion went into bank accounts controlled by Saddam himself, for his personal and family use.

Two Iraqi fronts, Midco, and Montana Management, Inc, organized the stock purchases. Montana had been set up as a mail box company in Panama shortly after Saddam took over as President in 1979, while Midco was created by Barzan in Switzerland in 1982. The Geneva commercial registry shows that the seed money--2.1 million Swiss francs--was paid in cash onto a numbered Swiss account by an Iraqi named Aladin Hussein Alwan. Alwan also appears on the Panamanian commercial registry as the Secretary General of Montana Management. In fact, both companies were controlled from Baghdad by two frontmen working for Barzan, named as Khalaf al-Doulimi, and Mohammed Turki Habib. Alwan, whose real name was Aladin Hussein Ali Maki Khamas, was in 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 gradually acquired hundreds of millions of dollars worth of industrial stock. Jules Kroll believes they salted away as much as $10 billion disguised as legitimate business investments--5% of the $200 billion Iraq earned during the 1980s. His investigators managed to locate $2.4 billion in Iraqi-controlled deposits stashed away in fifty banks around the world. One of the companies that attracted Saddam's private investment purse was the West German industrial giant, Daimler-Benz, which owned missile and helicopter manufacturer MBB. Another was the French publishing conglomerate, Hachette, which controlled several French publishing houses and had stakes in newspapers, radio stations, and television networks. Hachette's owner and Chief Executive Officer, Jean-Luc Lagadère, also controlled one of the top French defense companies, Matra. [TKTK with Dassault if Montana bought in] By buying into Hachette, the Iraqis couldn't guarantee access to the latest Matra missiles, but their 8.4% stake, worth around $67 million, was large enough to wield as a weapon of financial terror. If the Iraqis sold short, Hachette stock would go tumbling down. Lagadère and his board say the Iraqis never wielded this weapon. But throughout the 1980s, Matra never refused an Iraqi order, no matter how sophisticated the equipment that was demanded.

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

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

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

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

Schneider's visit was significant for another reason as well. He was not an Arabist, nor was he a diplomat in the ordinary sense of the term. His business was technology, which was what the Iraqis wanted most from the U.S. In an interview shortly before his trip to Baghdad, Schneider was clearly uncomfortable with the delivery of American-built helicopters to Iraq. "The Hughes 500 sneaked in under our noses because helicopters weighing less than 10,000 lbs don't technically need our approval. They can be shipped with an ordinary Commerce Department license." Schneider went on to explain that he had received unequivocal information that these small, battlefield observation helicopters had "definitely been diverted to military purposes," although he wouldn't say whether or not the Iraqis had managed to equip them with TOW anti-tank missiles, as the manufacturer's literature suggests. As for the Bell 214, Schneider said the State Department only cleared this sale "with substantial Iraqi 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. The Iraqis complained to Schneider that they were not getting all the equipment they sought from the U.S. because of all the bureaucratic red tape. Computers they needed for their oil industry, and machine-tools they needed for their steel factories were getting blocked, and the Iraqis wanted to know why. The U.S. claimed it was not supporting Iran, and yet U.S.-built weapons were still getting through to the Ayatollahs. How could Iraq believe that the U.S. was supporting Baghdad, Tarek Aziz wanted to know, when purely civilian sales of American computers to Iraq could not get approved? Aziz never missed an opportunity to hammer his message home. He had put the same point in almost identical words only a few months earlier to Richard Murphy, during an unpublicized visit to Washington in October 1985.

When he returned to Washington, Schneider threw his considerable weight behind the "trade off" with Iraq, as he saw it: the U.S. would ship the Iraqis no weapons, but it would allow extensive technology sales. Richard Murphy and the NEA experts up on the 5th floor of the State Department were overjoyed. Schneider stood a bureaucratic head higher than the Pentagon's Steve Bryen, whom they saw as their arch-enemy when it came to high-tech sales to Iraq. In a long interview in the fall of 1985 exclusively devoted to developments inside Iran, one of Murphy's principal deputies found time to single out Bryen and Richard Perle for their obstructive behavior. "They are not interested in the Gulf," this Arabist lamented, "except when it comes to technology transfer. They are dead set against the sale of perfectly ordinary computers to Iraq."

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

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

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

At the Iraqis' request, the U.S. exchanged defense attachés soon after the renewal of diplomatic ties. Colonel Mark Pough, the first U.S. military attaché in Baghdad in nearly twenty years, took to his new job with a passion. He had gone on a crash Arabic-language course before arriving in Baghdad, and was scouring the local papers for hints of what was going on at the front during the attack on Fao. Meanwhile, the Iraqis were happily introducing Pough and other U.S. officers to mid-level commanders and some senior staff officers at Staff Headquarters in Baghdad.

Some of the Iraqis, such as Major General Aladine Maki Khamas, had been educated in the West. General "Ala," as he was called familiarly by his subordinates, had gone to Sandhurst in Britain, and later attended a 6-month armor training course at Fort Knox in the U.S. An older generation officer ostensibly in charge of the Army's Historical Directorate, General Ala was a tank driver who had commanded the only Iraqi armored division that reached Damascus before a UN ceasefire ended the 1973 Arab-Israeli war. (A dedicated Baathist, he spent four days in the international spotlight later on when Saddam Hussein appointed him as the "interim leader of Kuwait.") Unbeknownst to those who became acquainted with him, he was also one of the principal operators of Saddam's clandestine financial network in Europe.

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

The satellite link came on top of a long-standing agreement to provide the Iraqis with information on Iranian Air Force movements, gathered by U.S.-manned AWACS planes flying out of Riyadh, Saudi Arabia and patrolling the Gulf. U.S. tactical intelligence of this sort allowed Iraq to counter potentially devastating Iranian human wave attacks in 1983 and 1984, and was so sensitive that "King Hussein of Jordan personally oversaw the transfer to Baghdad" of U.S. intelligence data. In August 1986, information from U.S. satellite photographs probably helped the Iraqis plan their first air strike against Sirri Island at the head of the Gulf, where Iran had shifted the bulk of its oil loading operations in an effort to get them off of Kharg Island and beyond the range of the Iraqi Air Force. To make the extra range, half the Iraqi Mirage fighter-bombers served as fuel tanks 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 Department in many ways. Like Commerce, it was responsible for promoting trade; and like Commerce, it was the lead agency in licensing the export of sensitive technology. Promoting trade and controlling trade created just as many conflicts of interest in Britain as they did in the United 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, he was an outspoken advocate of free trade, a philosophy prominently on display in the conservative pantheon. But trade promotion often conflicted with national security, which Alan Clark was going to discover the hard way.

The lurid lights and blaring headlines of a major scandal were the last thing on Clark's mind as he strode down the red carpet at Baghdad's Saddam International Airport in November 1986. He was greeted by his Iraqi counterpart, Trade Minister Hassan Ali, and ushered into the VIP lounge for a brief champagne reception. In Clark's briefcase was a substantial "gift" for Iraqi leader, Saddam Hussein: a new credit guarantee to finance British exports to Iraq, offered by the DTI's Export Credit Guarantee Department (ECGD). If Iraq accepted the terms, it would bring British credits to Iraq since 1983 to more than $1.2 billion (£750 million).

It was less than what the United States was offering, Clark fully understood, but he hastened to explain that the British money would have fewer strings attached. It was not tied to food or agricultural purchases, as the American CCC credits were, but could and should be used to buy British manufactured and industrial goods. Clark may not have realized it at the time, but Britain was about to get involved in building the Iraqi war machine.

The credit package came despite an official trade embargo barring British firms from supplying Baghdad with arms, ammunition or anything else that might "exacerbate or prolong" the 6-year old Iran-Iraq war. That policy, quietly determined at the start of the war, was reiterated with force by Foreign Minister Sir Geoffrey Howe before the House of Commons on October 29, 1985. But the official position contained a loophole, which specified that Her Majesty's Government "should maintain our consistent refusal to supply lethal equipment 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 of export licenses awarded to British manufacturers selling to Iraq, and like Commerce, this refusal was motivated by the very high number of licenses relating to equipment that directly fed the Iraqi war machine. Over the next four years, Britain would supply more than $1.5 billion worth of high technology goods to Iraq, according to the official trade figures it supplied the OECD.

Alan Clark had come to Baghdad in November 1986 with a mission. He wanted to convince the Iraqis to support the British machine-tool industry, instead of just buying from the Germans and the Swiss as was their habit. Clark's success went beyond his most imprudent dreams. The Iraqis bit, and they bit hard.

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

By conservative estimates, the arsenal of American weapons sold to Iran in 1986 as part of the "Initiative" topped $650 million, and included:

• 10,000 to 12,000 TOW anti-tank missiles, sold for an average 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, worth upwards of $150 million;

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

When this vast resupply operation was completed in late 1986, it tipped the military balance momentarily in Iran's favor. The Iraqis noticed the difference on the battlefield and in the air. Thanks to the HAWKs (and to Swedish-supplied RBS-70 laser-guided missiles), Iraq lost some 45-48 Soviet MiGs and Sukhois during the Kerbala offensives, Iraqi military sources said. The Phoenix was responsible for the destruction of many of the new French Mirages, and due to Iranian TOWs, Iraq's armored divisions were checked in counterattacks to the east of Basra. The military situation had radically, if momentarily, changed.

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

Sounding the alarm on the renewed vigor of the Iranian Armed Forces was Richard Murphy's former deputy, James Placke, who now worked with Fairbanks as a professional lobbyist on behalf of the Iraqi Embassy in Washington, DC.

The pro-Iraq lobby in Washington took the Irangate caper as the perfect justification of what they had been arguing all along. The United States needed to swing fully behind Iraq, with all the might of trade and aide and technology sales, to prevent the Iranian brand of radical Islam from sweeping across the Mediterranean. With Irangate, the last restraints slowing the flow of U.S technology to Iraqi weapons projects disappeared. From then on, anything could go.