BNL Scandal

The BNL scandal (Banca Nazionale del Lavoro scandal) grew from the discovery that the Atlanta, Georgia branch of Banca Nazionale del Lavoro - Italy's largest state-owned bank - had illegally extended approximately $5 billion in unauthorized loans to Iraq between 1985 and 1989. The loans were used by Saddam Hussein's government to finance purchases of weapons, weapons components, and dual-use industrial equipment. The FBI discovered the scheme on August 4, 1989, when agents raided the Atlanta branch and seized documents showing undisclosed credit facilities to Iraqi state enterprises.¹

The Atlanta Loans

Branch manager Christopher Drogoul claimed to have acted alone, without authorization from BNL's Rome headquarters or his own supervisors in Atlanta. He subsequently recanted this claim, asserting that his superiors and U.S. government officials were aware of the transactions and that the loans were part of an authorized policy of providing financial cover for arms sales to Iraq. Drogoul was convicted in 1993 and sentenced to 37 months in federal prison.¹

The Iraqi entities that received the loans included the Nassr State Enterprise for Mechanical Industries and other procurement agencies that were simultaneously purchasing weapons components from Western suppliers. The loans were guaranteed in part by the U.S. Commodity Credit Corporation (CCC), a Department of Agriculture entity whose agricultural export guarantees to Iraq had been used to free up Iraqi hard currency for arms purchases - a mechanism separately documented in congressional investigations of the Iraq relationship.²

CIA Knowledge and Obstruction

The key contested question in the BNL scandal was whether the Central Intelligence Agency knew about the BNL loans and used them as a conduit for authorized assistance to Iraq under the Reagan and George H.W. Bush administrations' policy of supporting Baghdad during the Iran-Iraq War. Evidence assembled by journalists, congressional staff, and House Banking Committee investigators suggested that CIA reports specifically identifying Iraq's use of BNL-Atlanta funding for weapons procurement had been available as early as 1988 and had been circulated within the intelligence community.

Federal Judge Marvin Shoob in Atlanta became the focal point of the scandal when he publicly criticized the Department of Justice's handling of the case. Shoob accused the DOJ of directing prosecution away from the central question of whether the loans had been authorized at high levels of the U.S. government. He recused himself from the case on October 1, 1992.²

Congressional Investigation

The House Banking Committee under Chairman Henry Gonzalez conducted the most sustained congressional investigation of the BNL scandal. Gonzalez publicly released thousands of pages of classified documents relating to the U.S.-Iraq relationship, including CIA reports on Iraq's use of BNL funds. The investigation documented the Reagan administration and early George H.W. Bush administration's consistent support for Iraq's weapons procurement networks, including knowledge of chemical weapons use, and revealed the internal government debate over whether to continue agricultural credit programs.¹

Connection to Broader Networks

The BNL scandal intersected with other subjects documented in this vault. Carlos Cardoen, the Chilean arms manufacturer who supplied cluster munitions to Iraq through CIA-connected channels, received financing through mechanisms connected to the BNL funding stream. Matrix Churchill, the British machine-tool company at the center of the Arms-to-Iraq affair, exported equipment to the same Iraqi procurement entities that received BNL funding. The PROMIS software distribution to Iraqi intelligence is separately alleged by Ari Ben-Menashe and others.²

Indictment and Pleas

The indictment, No. 1:91-CR-078 in the Northern District of Georgia, was returned on February 28, 1991, the day after the Gulf War ceasefire, and charged Christopher Drogoul on 347 counts with two branch officers, Entrade International and its manager Yavuz Tezeller, Rafidain Bank, and four Iraqi officials including Safa al-Habobi. Two branch employees, Leigh Ann New and Paul Von Wedel, pleaded guilty to separate informations. Drogoul pleaded guilty to 60 counts in June 1992 and withdrew the plea on October 1, when Judge Marvin Shoob recused himself with the stated conclusion "that officials at BNL-Rome were aware of and approved Mr. Drogoul's activities." The Eleventh Circuit ordered the depositions of thirteen Italian bank officers on September 2, 1993. Drogoul pleaded guilty to three counts and was sentenced in December 1993 to 37 months.³⁴

Lacey and the Senate Staff Report

Attorney General William Barr appointed the retired judge Frederick Lacey as special counsel on October 16, 1992. Lacey reported on December 8 that there were no grounds for an independent counsel and that he had "seen nothing" to suggest that Brent Scowcroft and Lawrence Eagleburger knew of the loans. Part of the report was classified. Representative Henry Gonzalez called it a whitewash. Acting United States Attorney Joseph D. Whitley had recused himself on June 1, 1990, because his former firm represented Matrix Churchill. The staff of the Senate Select Committee on Intelligence found in February 1993 that the CIA's grounds for withholding reports from prosecutors had "no legal support" and did not find deliberate concealment. In December 1992 prosecutors in Venice indicted 59 people, including executives of the bank, for financing arms sales to Iran.⁵⁶⁷