AGSCAM: the new world money order; the Department of Agriculture's long, dirty dance with a dictator.

Mark Feldstein is a correspondent with CNN's Special Assignment" investigative reporting team in Washington, Research assistance was provided by John Gould.

As the Bush administration toasted its military victory over a ruthless third world dictator, it was harder than ever to remember how the United States helped build Iraq up before bombing it down-including one prewar foreign policy fiasco that transpired not in the Gulf, but in the quiet hallways of the U.S. Department of Agriculture (USDA).

By now, other aspects of the story are familiar. Desperate to stop Iran's Ayatollah Khomeini, the U.S. reestablished diplomatic ties with Iraq in 1984 and began supplying Saddam Hussein with what would total more than $1.5 billion worth of helicopters, computers, electronic equipment, and other militarily vital technology. Yet, of all the American aid to Iraq, the largest-and perhaps most important-has been the least noticed: some $5 billion in U.S.-backed agricultural loans.

At its inception in the early eighties, the loan guarantee program seemed harmless, a kind of latter-day Food For Peace program that put food on third world tables while opening up a new and profitable market for the powerful American agricultural constituency. After Iraq was ushered into the program in 1983, more than 100 American companies-from Pillsbury to Pepsi-Cola, Cargill to Comet Rice-eagerly signed on. But as USDA administrators stood back, took notes, and did nothing, Food For Peace turned into Food For War.

During the final years of the Iran-Iraq war, Saddam's trade ministers began to press American businesses involved in the program to throw in free trucks, cranes, cash, and military supplies in exchange for multimillion dollar contracts for rice, grains, and other products. To some American corporations, that illegal request proved too profitable to resist-and besides, it was virtually risk-free, thanks to the USDA's faith in its agribusiness constituency. While the U.S. government guaranteed the loans and looked away, a group of renegade American companies illegally supplied Saddam's government with millions of dollars in cash and militarily useful industrial hardware.

In 1990, Iraq defaulted on its USDA loans, leaving taxpayers liable for a $2 billion bill. If that's an unwelcome surprise to the public, internal agency documents show that USDA's faith was anything but blind. As early as 1987, USDA began receiving warnings that Iraq was asking American businesses to illegally ship goods purchased with U.S. government-guaranteed loans-warnings that, in deference to State Department pressure and a desire to push American exports, USDA virtually ignored. In fact, despite four years of allegations and criticism by the General Accounting Office (GAO), Iraq was eligible for the guaranteed loans until it rolled into Kuwait.

The USDA loan fiasco did not help the Iraqis win the Gulf war. But it should nevertheless provide the United States with a powerful lesson. In the hands of dictators and dishonest businessmen, USDA's laissez-faire policy was-and is-a recipe for disaster.

Guaranteed abuse

While much of the Iraq program blackmail transpired during the Bush administration, the USDA debacle was enabled by a classic Reagan-era concept: unregulated capitalism cobbled onto a kind of welfare for the wealthy-the very philosophy that brought us the HUD and S&L crises.

In this case, the operative acronym is GSM: USDA's General Sales Manager credits. Under the program, cash-poor nations from Brazil to Bangladesh obtain loans from private banks to purchase American goods. But the program is not, USDA officials emphasize, humanitarian aid. It's self-help for the U.S. trade deficit. By negotiating the sale of billions of dollars of wheat, rice, milk, wood products, and cotton, USDA can dramatically increase its exports while funnelling money to the American farm belt. And there's no question that this aspect of the program has worked: More than $32 billion of America's overseas agricultural sales have been made with the help of USDA loan guarantees since the program began in 1980.

USDA's explicit goal has never been to regulate agricultural sales but to "facilitate" them. Here's how it works: First, after carefully analyzing the credit risk of, say, the desert nation of Narnia, USDA announces $1 billion worth of credit guarantees available for agricultural exports to the country. St. Louisbased Gringo Grain, Inc., uses that guarantee to negotiate a $20 million shipment of grain with the Narnian Import Ministry, and then brings in Paul's Bank in Des Moines, Iowa, to finance the deal. Paul's Bank pays Gringo Grain and sets up a long- or medium-term loan agreement with Narnia. USDA promises to pay Paul's Bank if Narnia fails to repay. Under normal market conditions, the program should run smoothly. But in Iraq's case, market conditions never entered the picture.

Iraq was escorted into the agricultural loan program in 1983 as part of the State Department s campaign to reestablish diplomatic ties with Saddam's regime. While war-torn Iraq was not an ideal credit risk, State thought that good relations with Saddam were essential to counter the threat Khomeini's fundamentalism posed to regional stability. Loan guarantees served as a diplomatic foot in Baghdad's door. The guarantees were a "political instrument," recalls Richard Murphy, then assistant secretary of state, part of our effort in foreign policy to see if we could develop a set of relations with Iraq which would help moderate that country." USDA incentives worked like a charm: A year later, the United States established normal diplomatic ties with Iraq. Says one USDA official, "The State Department gave [the program] a great deal of credit for helping improve relations between Iraq and the United States."

There was, of course, the unpleasant matter of Iraq's brutal human rights record-torturing political opponents, sponsoring acts of terrorism, and eventually unleashing chemical weapons on women and children. But such concerns did not prevail. Over the next six years, the guarantees remained an integral part of American foreign policy towards Iraq. As the U.S. tilted toward Saddam in his war with Iran, culminating with the tanker reflagging effort of 1987, U.S.-backed loans grew accordingly, reaching over $2 billion in guarantees in 1988 and 1989-making Iraq one of the largest recipients of USDA guarantees. It was not until August 1990 that Iraq was excluded from the program-that is, until it marched into Kuwait, "facilitated" by hardware it had obtained through USDA's largess.

Spuds n Scuds

It's disturbing enough that the $5 billion in loan guarantees allowed Iraq to stockpile food and other essential agricultural commodities, helping it shift capital to artillery and tanks and eventually resist the United Nations embargo. But some of the shipments weren't agricultural at all. A recent GAO audit reports that Iraq demanded tires, air-conditioning equipment, spare parts, and cash from companies applying for a contract under the credit program. In one cable from the Iraqi government to several U.S. wood export companies, the Iraqis demanded trucks and trailers "free of charges-repeat-free of charges," adding that "our future business with your company will depend mainly on the range of your cooperation." Just in case the American companies missed the point, the cable stated that "any negative reply" would cause the U.S. firm to be "blacklisted."

Several American agricultural exporters-who were promised anonymity-privately admitted to CNN that they had routinely supplied Iraq with cash and hardware in order to make a deal. "It's standard practice in the industry," said one knowledgeable participant. "It's the price of doing business in Iraq." According to an unpublished USDA inspector general's report, cooperating companies often received privileged information about their competitors' bids, giving them an illegal edge in the marketplace.

U.S. businessmen even came up with a name--after-sales "services"-for money they quietly sent to Baghdad to get a contract. Congressional investigators call it a kickback. According to program participants, the amount of those after-sales services was often spelled out in advance-up to 10 percent of each contract. Says one businessman, "Either you do it, or you don't get the deal."

For some American companies, the answer, obviously, was do it. Federal prosecutors recently found that, under the USDA program, Iraq secretly received more than $1.5 million in non-agricultural products and cash payments from five North Carolina tobacco companies. (It was only after these allegations came to light that tobacco was removed from USDA's list of acceptable commodities.) Yet those companies, snagged in a separate tobacco investigation, may be only the beginning. The unpublished inspector general's report charges that three of eight companies examined in a random inspection illegally provided more than $380,000 in goods and payments to Iraq. (There are 140 other companies that did business with Iraq.)

While the government report did not identify the three exporters, congressional sources did. The Louis Dreyfus Corp., a giant grain-trading company, allegedly supplied Iraq with more than $33,000 in laboratory equipment and fumigants. The American subsidiary of Japan's Mitsui & Co. delivered $250,000 in unspecified chemicals, spare parts, and copy and fax machines, and the Los Angeles-based Comet Rice, Inc., supplied more than $97,000 in illegal after-sales services. According to the government report, Iraq requested spare parts that the company feared "were for military use."

The Customs Service is currently investigating possible arms sales under the program; it won't reveal which American companies complied with the war-bound Iraqis' wish list. But some a agricultural loans may have wound up helping Iraq fire its erratic Scud missiles at U.S. troops and civilians in Israel and Saudi Arabia. According to federal investigators and other sources, Iraq managed to use the U.S. loan program to obtain trucks and cranes. "You don't have a mobile Scud without a truck and a crane," says James Blackwell, a military analyst at the Center for Strategic and International Studies. "The only way to transport Scud missiles around Iraq is by truck. And a crane is necessary to lift the missile up and to reload it." While it's unclear how many of these trucks and cranes iraq received under the U.S. loan program, some information can be gleaned from one truck order that Iraq placed with a U.S. agricultural company. According to analyst Blackwell, who examined it, Iraq ordered only trucks large enough and powerful enough to carry a Scud.

Although Iraq could have purchased this machinery on the open market in Europe or elsewhere, it would then have had to pay for it. Under the U.S. loan guarantee program, it won't. For on August 2, 1990, Iraq stopped payment on $2 billion of USDA-guaranteed loans, leaving taxpayers liable for the bill.

How could such double-dealing happen with publicly guaranteed funds? GAO and inspector general reports suggest that the answer lies not just with duplicitous Iraqis and agribusiness CEOs, but with the USDA itself, which trusts businesses to regulate themselves as they enter the moral and economic maze of international export.

No investigator ever peers into the crates of most of the 80 or so commodities that qualify for loan guarantees; instead, USDA relies wholly on the exporters' own records. The obvious flaw in that thinking led GAO to complain in 1988 that there was no "accurate accounting" of billions of dollars in USDA's outstanding loans.

Ironically, the first complaints about abuse in the USDA guarantee program came, not from government auditors, but from high-ranking Iraqi officials, who in early 1986 claimed to have received a blend of American and cheaper Brazilian tobacco when they had paid for-rather, borrowed the money for-all-American tobacco. The Iraqi claim was never verified, but congressional investigators on the case discovered that USDA rarely questioned an exporter's statements about a shipment's contents. As one congressional investigator put it, "For all the Agriculture Department knew, the shipments could have been military equipment."

Of course, as with all loans, the banks that fronted them were also supposed to keep a vigilant eye on how they were spent. In fact, that's what USDA was counting on. Unfortunately, the Department of Justice has just indicted officials from the major money center in the Iraqi guarantee program-the Atlanta branch of Italy's largest bank, Banca Nazionale Del Lavoro (BNL)-charging that the bank was in on Iraq's scam. According to a complaint filed by BNL headquarters in Rome, the Atlanta branch's directors hid about $750 million in U.S. guaranteed loans to Iraq in secret "greybook" accounts.

What were those bankers allegedly hiding? Justice won't speculate. Nor will it forward numerous crucial documents to congressional investigators. But the subject heading of one memo from the Federal Reserve Bank of New York offers a chilling clue: "BNL involvement in Nuclear Triggers of Iraqis."

While the case has yet to go to trial in Atlanta, an internal memo written in February 1990 by General Sales Manager F. Paul Dickerson indicates that USDA long ago started discussing damage control. "In the worst case scenario, investigators would find a direct link to financing Iraqi military expenditures, particularly the Condor missile," he wrote. "Should a direct link be developed between Iraqi government officials or the government itself, [USDA] would face severe criticism for continuing the program."

Condors or no Condors, severe criticism may be in order. Since 1987, GAO has been urging USDA to tighten up its administration of the agricultural loan program by instigating random, on-site verification of goods both domestically and abroad. The USDA's inspector general has chimed in, too, requesting more and better documentation of what, exactly, is in those thousands of U.S. government-facilitated shipments overseas. And in the wake of the tobacco-company convictions and the BNL scandal, some reforms have been made. Yet while the new, improved USDA has asked exporters to provide additional documentary evidence, no physical verification of the shipments' contents has been ordered-even on a spot-check basis. The end result of this reform? "If [the exporters] are willing to falsify the paperwork," says GAO investigator N. Scott Einhorn, "they probably won't get caught."

And even if they do, they'll probably get a slap on the wrist and continue profiting from USDA credits. As of mid-February, confirms Kevin Brosch of the USDA's Office of General Counsel, no participant in the loan program has ever been barred for breaking the rules; only one has been suspended. As one USDA administrator shrugs, "If someone wants to commit fraud, [he's] going to do it." And, as the Iraqi case suggests, given the right political climate, he's going to get away with it for years-even when USDA knows what's going on.

Loan wolves

The first alarm over the Iraqi loan program was sounded back in 1987, when American companies complained to USDA about Iraq's illegal requests. But instead of launching an investigation, the department sent a memo to its trusted American exporters telling them not to break the law. It then renewed--and increased-the loan guarantees to Iraq.

Not surprisingly, the shakedowns continued, and by 1988, several exporters were so exasperated by the Iraqi blackmail that they put their complaints in writing to USDA. Officials from one U.S. company even met with the agency's attorneys, turning over written evidence of Iraqi threats.

Meanwhile, concern was mounting in other government agencies. The Export-Import Bank warned in August 1988 that, despite Iraq's oil-rich potential, the country's accumulated war debts-estimated at $90 billion-made it a risky recipient of U.S. largess. In fact, Iraq was already "in arrearage" to the bank itself. Yet the next month, USDA provided Iraq with a supplemental $36.5 million in credit guarantees. And as 1989 began, it extended another billion dollars' worth of credit to Iraq.

Given the tobacco scandal, the allegations of blackmail, and the emerging proof of Iraq's inability to repay, why was USDA still so resistant to terminating aid to Iraq? One reason was a concerted campaign by wheat, wood, and rice distributors from Alabama to the Pacific Northwest, who papered USDA with pleas to keep their Iraqi deals alive. After all, as former General Sales Manager Melvin Sims remarks, [The Department of] Agriculture considered it very much a market development program." Still, as documentation of iraq's abuses piled up, another advocate of continuing the program may have been equally influential: the State Department. State officials routinely meet with USDA administrators and representatives of Treasury, Commerce, and other federal agencies to discuss the credit guarantee program in the National Advisory Council, a body that makes non-binding recommendations on which nations will be given credit guarantees. While the minutes of the council's deliberations on the Iraqi loans have not been released-even to GAO auditors--GAO concluded, and Sims confirms, that State was an unwavering supporter of continuing the loan guarantees to Saddam. I think our government wanted to be good to Saddam Hussein and to help him as quietly as they could," speculates North Carolina Rep. Charlie Rose, who is leading a subcommittee investigation of the Iraqi loans. "They didn't want to directly ship military systems to Iraq. They didn't want to excite Israel. They didn't want to directly offer foreign aid or military sales credit. So they told USDA to be as generous as [it could] with agricultural credits."

It was not until the BNL-Atlanta allegations surfaced in the fall of 1989 that USDA ordered an "administrative review" of the Iraqi program. Yet two months later, USDA's new general sales manager, Paul Dickerson, proposed that Iraq's credits remain at $1 billion for 1990, BNL allegations notwithstanding. When other government officials rebelled, Dickerson reconsidered-but didn't stop the credits altogether. After negotiations in Baghdad, he reduced the guarantees to $500 million, holding the other $500 million in abeyance until the BNL investigation was resolved. A memo Dickerson wrote at the time noted that the decision to continue the loans would receive "strong interagency opposition . . . particularly [from] the Treasury Department." Still, he pointed out, "Iraq is a major market for U.S. agricultural products and our largest market for rice."

Although Dickerson's memo warned of possible adverse congressional reaction and press coverage"-particularly "domestic political concerns ".. that no HUD or savings and loan type scandal be permitted"-it concluded that stopping those loans would be "considered by the Iraqi Government as unwarranted and an affront to their dignity."

By this time, of course, even some State Department officials were willing to affront Iraq's dignity, calling its human rights record "abysmal." But as Agriculture pushed American products and State pushed against Iran, both seemed oblivious to humanitarian concerns. For instance, while congressional hearings in 1988 had determined that Iraq's government had ordered the use of chemical weapons on the Kurds, USDA apparently had more reliable sources. After a "personal investigation" led by Sims, USDA decided that there was "no concrete evidence" that the poison gas was actually authorized by the government. "I never had anyone tell me that the evidence was conclusive at that time," he recalls.

It was not until 1990 that Iraq's reputation became sufficiently tarnished to raise the issue of canceling the guarantees altogether. By spring, Iraq had used the $500 million allotted to it and come back to USDA for more; Dickerson, citing the ongoing BNL investigation, refused to release the funds. Shortly thereafter, Rep. Charles Schumer introduced an amendment to the 1990 farm bill that would deny the Iraqis any further guarantees. On July 27, it passed-but the very same day, the House effectively gutted its sanctions by giving USDA the power to return Iraq to the program if the ban hurt American farmers.

Six days later, Iraq invaded Kuwait, finally Putting an end to the sorry saga of Iraqi agricultural credits-too late to undo the damage. The results: an Iraqi government supplied with military hardware and cash under a U.S. government program, and a $2 billion bill about to come due.

Check imbalances

As years of unnoticed GAO and inspector general reports amply indicate, the press considers USDA an unlikely outpost for international intrigue; cotton, rice, and milk contracts are not the usual stuff of searing foreign policy exposes. Yet in 10 years of existence, USDA's loan guarantees have been quietly transformed from a dull export-enhancement strategy into a critical foreign policy tool-one that has as much to do with backroom diplomacy as with careful estimation of credit risks.

In this perverted market," in which businesses, banks, and dictators make deals with U.S. government credits, there should be increased public and press demand for government oversight. There isn't. Iraq or no Iraq, tens of thousands of shipments still leave American ports unexamined, guaranteed by public money. It's checkbook diplomacy that we'll inevitably find ourselves paying for again-in our tax bills, certainly, and perhaps even in our next little war.

Just a few weeks after Iraq invaded Kuwait, sources say, some State Department officials suggested extending agricultural credits to Syria, a country notorious for its support of terrorism and its bloody record on human rights. The idea was to encourage Syrian President Hafez al-Assad  to join the allied coalition against Iraq. Eventually, cooler heads prevailed. But the irony of it all went almost undetected.