IRAQ-ITALY: REPERCUSSIONS OF THE BNL-ATLANTA SCANDAL

Created: 11/6/1989

OCR scan of the original document, errors are possible

DIRECTORATE OF INTELLIGENCE

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Iraq-Italy: Repercussions of the BNL-Atlanta Scandal

Summary

The revelationS branch of an Italian bank. Banco Nazionale del Lavororanted more than S3 billion in unauthorized letters of credit to Iraq has had wide-ranging repercussions for Iraa and Italy. For Iraq, public disclosure that it used some of the credits to acquire military' related technology has impeded procurement efforts, and the suspension of BNL credits has slowed civilian reconstruction and development projects. For Italy, the BNL scandal has cast atemporary shadow on Prime Minister Andreotti's new government, raised questions aboul public-sector enterprises, and reopened the issue of privatization. Q

The affair is unlikely toajor impact on Iraqi military procurement efforts, but cash-short Baghdad probably will nave to postpone plans for some civilian projects. The loss of BNL financingmore important, any reduction in US agricultural credit guarantees because of negative publicity about the scandal probably would damage US-Iraqi commercial ties. For Iraq's part, however, the strain in political relations is likely to be short-lived, particularly if Baghdad believes US credit guarantees will be forthcoming. Iraq is eager to maintain good ties to the Unaed States, an attitude intensified by improved relations between Iran and the USSR.

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BNJ -Atlanta Financing for Iraq

The Atlanta, Georgia branch of the state-owned Banca Nazionale del Lavoroargest2 billion0 unauthorized letters of credit for Iraq between8 andS and Italian authorities have been investigating the scandal since July for violations of banking regulations and tax and customs laws, n

._. Fr'gmcntary reporting indicates BNL-Atlantaillion of2 bOhon, including at0 million in letters of credit guaranteed by the USdil CorporationNL headquarters agreed lo release another

illion in carry October,

threatened to suspend payment, to Italian lirms it the bank tailed to honor its commitments.

BNL-Atlanta's unusual activities included:

Exceeding the branch's allowable debt0 per customer.

Charging Baghdad anercent commission instead of the usualercentoor credit risk.

Financine the letters of credit by borrowing from other banks forays but allowing Iraq up to five years to repay.

BNL's North American headquarters in New York and the bank's directors in Rome publicly denied knowing about the letters of credit,NL official in Chicago claims he notified New York and Rome several times about the unusualtlanta, according to press reports. Press reports alsoNL branch in Udine, Italy referred customers exporting to Iraq to the Atlanta branch. Iraqi officials have generally denied knowledge of any wrongdoing, arguing that Baghdadictim in the scandal, i

Iraq used some BNL credits-at0 million, according to Britishmilitary and dual-use technology through various front companies andin Western Europe.1

British press says that BNL-Atlanta also financed Iraqi military purchases trom Kintex. the Bulgarian armament company.

Impact on Iraq

The suspension of credits from BNL-by far Baghdad's largest source of credits-and disclosure in the British press that Iraq used the credits to acquire military-related technology has almost certainly complicated Baghdad's procurement efforts. We believe that increased Western scrutiny of these activities has at least temporarily impaired Baghdad's ability to acquire such technology. Press coverage and London's

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ontrolompany powering sensitive technology, for example led src composites to divest its advanced composites factory, according lo Dress reports. some other firms in tbe networks have gone out of business|

the loss of bnl financing has almostslowed civilian reconstruction and development in iraq. many us and west european firms supplying goods and

services to projects in iraq were being paid through

firms have probably suspended nnsmess wnn rraq unni

alternate methods of payment-cash, other loans, or barter-are arranged. financially strapped baghdad, however, is unable to meet demands by some of these firms for

Iraqi Procurement Networks

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yment in cash, especially for expensive purchases.indicatesnearly exhausted available credit lines and barter

rca,cd complex procurement networks of holding companies in western europe to acquire technology for its chemical, biological, nuclear, and

ballistic missile development programs. according to british

-one such network begins in baghdad with

Tneacing company, which controls the london-based technology and development group, ltd. (tdg) and another uk firm, tmg engineering. tdg and its brussels-based partner, space research corporation, own the ulster-cWAl%cd "rm canira technical corporation, ltd. canira in march established src composites, which acquired access to advanced composite and carbon fiber technology used in aircraft and missile production.7 tmg gained control of matrix-churchill,he united kingdom's leading producer of computer-controlled machine tools that can be used in the production of sophisticated armaments.

e believe iraqi intelligence is directly involved in the activities ofcompanies funnelling technology to *

Effect on US-Iraqi Relations

for iraq, any reduction in bilateral commercial ties because of the bnlon political significance, which baghdad-ever paranoid-tends to exaggeratefrom the scandal has strained us-iraqi relations. baghdad isthat the affair is adversely affecting its economic ties to the unitedbackbone of the bilateral relationship. iraq is particularly upset that thesigmficantly less credit guarantees forhan baghdad requestednegative publicity about the scandal. iraq fears that any large reduction inguarantees would make it more costly and difficult to import agriculturaldamage its international credit

several us firms have already been affected by the scandal.

press reporting indicate bnl was financing at leastillion in sales io iraq py US firms, including agricultural goods, an automobile plant, an ethylene plant, industrial

machinery, construction materials, and irrigation equipment. Some US suppliers arc worried that they will not receive payment on letters of credit that they have not yet submitted to BNL-Atlanta. Many US firms are trying to arrange other means of payment to avoid losing lucrative contracts.

The scandal has contributed to Iraq's perception that the United States is trying to hamstring Baghdad's efforts to promote better politicalenior Iraqi official told his US counterpart in early October that Baghdad was unhappy that Washington's decision on CCC credits is linked to the scandal, with which he inaintained Iraq had no part. The official indicated this wasign that tbe Uniled States wants to improve

Baghdad is eager to resolve tbe BNL crisis because harmonious bilateral relations are important to its strategic planning. Iraq believes that the Iranians have not abandoned plans to oust the regime in Baghdad and wants to assure that the superpowers would back Iraa or at least remain neutral during any future hostilities. The Iraqis seek to prevent Washington from favoring Iran so much that Baghdad's interests are threatened. In Iraq's view, the superpowers regard Iran to be of greater importance in the region, and Baghdad is therefore trying to enhance Iraq's political and economic importance to the United States. r

Impact on Italy

The BNL affair--in combination with otherashadow on Prime Minister Andreotti's three-month-old government. Partly to divert attention from the BNL affair, the Socialists and some Christian Democrats are playing up other scandals, including renewed allegations that the Italian military covered up evidence concerning0 crash of an Italian airliner north of Sicily. None of the governing political parties or their factions, however apnear* now tn believe it can strengthen its relative positions by exploiting the issue.

The scandal has also spotlighted the cost of Italy's longstanding and entrenched spoils system in the state-owned enterprises. Traditionally, appointments to key positions in public-sector companies have been allocatedeasure of party and even factional influence. Under this system, the president and several directors of BNL are members of the Italian Socialist Party, while the executive director usually comes from the Christian Democratic Party. Several backbenchers in parliament quickly denounced the spoils system for not allowing tbe most competent people to fill public-sector jobs. The attacks, however, have been discounled as political sour grapes, and the system shows no signs of collapse.

In light of the BNL affair, Treasury Minister Carli-has renewed hisadmittedly long odds-to enlist support for privatizing state-owned bankspublic-sector corporations. Carli believes the breakdown in supervision at BNLtoo typical of the quality of Italian public-sector banking. In hiswould force Italian banks to narrow theercentagc-pointinterest paid to depositors and that charged torerequisitebanks are to do well after the EC dismantles capital controls next year, i

'scPvfryof BNLs exposure in Iraq forced the bank to seek funds to boost its capital, which the Bank of Italy already considered too low. If Iraq defaulted BNL technically would have been bankrupt because the amount of its loans to Iraq exceeded

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the bank's capital. In that event, the Bank of Italy and lhe Treasury Ministrybeen compelled to bail out the bank. Rome was stymied in finding ainstitution to recapitalize the bank by itself, and the government incobbled7 billion package from the Treasury, acompany, and the Social Security Fund, thusocialistthe BNL board of 7

We believe the revelations of BNL's dealings with Iraq-along with otherin counterpoint to growing Italian self-confidence on thein recent vears. After more than three decades of international diffidence,Italian leaders have beeniplomatic profile moretheir country's international economic role. Italians have felt particular

Italian troops in tbe Beirut peacekeeping forces had fulfilled their mission as defined by Rome.

Tbe Italian decision to accept US cruise missilesecisive role in swinging West Germany behind deployment

Their country's GDP bad surpassed that of the United Kingdom and possibly France.

In the opinion of almost all Italian press commentators, tbe BNL affairegative

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ct on Italy's credibility throughout the West. We believe, however, that the setback line's international standing has been substantially less than that portrayed in the Italian press, and we expect the scandal will gradually fade from public view within Italy and will have little lasting impact on the country's perception of its international role

Outlook

Wc believe Iraq will work hard to establish new military procurement networks to replace those disclosed by the press and by the US and Italian investigations as part of the fallout from the BNL affair. Baghdad highly values these networks to obtain technology that might otherwise be denied to it if the end user or purpose were revealed. Because of renewed Iraqi efforts and the likely existence of other networks that remain undetected, we do not believe that Iraq's covert procurement efforu will be set back seriously.

The drying up of this major financial source-at least for the next several years-will probably force Iraq to scale back ambitious civilian reconstruction and development plans, Baghdad probably formulated some economic plans under the assumption that BNL-Atlanta would continue to issue letters of credit on its behalf. Iraq will be unable, however, to replace BNL financing any time soon. Most commercial banks and foreign governments are likely to remain unwilling to grant or guarantee significant new credits to Baghdad until it repays more ofillion non-Arab foreignow priority to Iraq. Furthermore, Iraq has overextended its barter commitments and will probably be reluctant to engage in many more such deals. *

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The BNL affair will probably haveinimal impact on Italian-Iraqi relations. The scandal is unlikely to cause more than short-term political friction unless BNL fails to disburse the remaining letters of credit. Even then, Baghdad would probably employpolitical-means to punish Rome. Continued Iraqi threats to suspend payment to Italian firms if Rome fails to release the promised BNL credits will almost certainly be effective against the Italians, who have already agreed to release some of tbe undisbursed credits and have backed down la the past in the face of threats from other countries. [

Jte over the delivery of Italian warships to Iraq, which is unlikely to be resolved any time soon because of Iraqi demands for additioruU financing for the ships and Iranian threats of retaliation against Italy if the ships are delivered V

Implications for the United States

The BNL scandal is likely to leadeduction in US-Iraqi commercial relations, particularly if CCC credit guarantees are decreased. Any loss of CCC credits probably would reduce Iraq's food imports from the United States because Baghdad prefers to buy on credit. Iraq probably would turn to Australia and EC countries-which lost sales when the United States became Iraq's top Western agricultural supplieras well as traditional suppliers Turkey and Brazil. Many of these suppliers are already trying to profit from the BNL scandal by boosting agricultural sales to Iraq at US croc rise. Furthermore, the bank's continued refusal to disburse rernaining credit probably would prevent some US firms from implementing contracts with Iraq.

We have detected no sign of flagging Italian interest in Iraq, although we expect that Italian banks will scrutinize expon financing and other credits for Baghdad more carefully. The Italians are rnajntaining existing levels of oil Imports from Iraq while still trying to boost exports. Italian-Iraqi relations will continue to be strained, however bv

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The strain in US-Iraqi political relations caused by the BNL scandal will probably be short-lived, particularly if Baghdad believes additional US credits will be forthcoming after tbe dust of the investigation settles. Iraq is eager to maintainofio United States, an attitude intensified by improved relations between Iran and the USSR thai make Baghdad uneasy. Iraq probably also believes that strained political relations would complicate its efforts to acquire US technology and credits in the future. We anticipate that Iraq will work hard to overcome the current frictions by offering commercial opportunities to the United States and lobbying US business and government officials.

Although the BNL affair embarrassed the Italian Government and banking sector, we do not believe it will notajor impact on Italian relations with uie United States. Rome appears satisfied to date with the cooperation of the US investigatinc agencies and appreciates the low-key manner in which Washington has reacted. BNL will probably close its Atlanta office and mayoss of business in financing exports for US companies.

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