ATLANTA -- In 1987, two bankers from Atlanta met with Iraqi businessmen. It was a convivial meeting, the occasion being the signing of a multimillion-dollar loan agreement to help Iraq buy U.S. agricultural products.
They raised glasses of Scotch to toast the agreement. They exchanged gifts.
The Americans gave out gold pens and television sets; the Iraqis gave goatskin rugs and watches.
"A GI Joe watch!" Paul Von Wedel, one of the bankers, would later recall blurting out as he opened his package. "My kids will love it."
But he was badly mistaken: The face of the watch depicted Iraqi President Saddam Hussein in his field uniform.
It was an innocent misunderstanding -- but one unlikely to be repeated today.
The face of Mr. Hussein is now a familiar icon, and the dealings between the Iraqis and their Atlanta bankers are the subject of a scandal that is entangled in the politics of three countries -- the United States, Italy and Iraq.
Four years ago, Iraq was an ally, cheered on by the United States in its long war against Iran.
The bankers from Atlanta -- officers of the Italian Banca Nazionale del Lavoro -- took that spirit of cooperation a long way.
Between 1984 and 1989, the bank's Atlanta branch lent almost $3 billion to Iraq.
It was a staggering amount, more than all other loans to Iraq by U.S. banks combined during the period. If only indirectly, the funds are thought to have helped to build the war machine being deployed in the Persian Gulf region.
For 18 months, a federal grand jury here has been investigating allegations of bank fraud and tax evasion involving the bank's employees.
Indictments are expected as early as this week, according to lawyers close to the case.
Among those expected to be charged are high-ranking Iraqi officials, including Hussein Kamel, Mr. Hussein's son-in-law and one of the Iraqi leader's closest advisers, the attorneys said.
One of the most astonishing aspects of the case is that the Atlanta bankers managed to keep the loans secret from Italian, U.S. and Georgian banking regulators -- and apparently even from the bank's headquarters in Rome.
The billions that flowed into Iraq eluded auditors and regulators until July 1989, when two bank employees tipped off the Federal Bureau of Investigation.
Although it was not in itself illegal to lend money to Iraq during those years, most banks avoided it -- not out of disdain for Mr. Hussein but because Iraq was considered to be a poor credit risk.
Banca Nazionale del Lavoro reported a $415 million loss in 1989, in part because it deemed the Iraqi loans unlikely to be repaid. The Italian government had to inject $2 billion worth of capital to keep its bank solvent.
U.S. taxpayers also are likely to pick up part of the tab, even though federal depositors' insurance does not cover branches of foreign banks.
Some of the loans were guaranteed by the Agriculture Department under a program designed to help credit-poor nations buy U.S. farm exports. As of August, when Iraqi assets were frozen, the USDA was on the hook for $347 million.
Beyond financial concerns, there are other worries for the United States. U.S. Attorney General Richard L. Thornburgh has called it a "sensitive case with national security concerns."
"It is intimately linked with Iraq and the current gulf war," said Representative Henry B. Gonzalez, D-Texas, chairman of the House Banking Committee, which is investigating the BNL affair.
The committee has "developed evidence clearly linking BNL loans to a network of companies that helped to build the Iraqi war machine," Mr. Gonzalez said last week. At the very least, the loans "permitted Iraq to . . . free up scarce foreign currency . . . to build up its military arsenal."
The source of Iraq's billions is based in Peachtree Center, a shopping mall and office complex in downtown Atlanta.
Banca Nazionale del Lavoro opened its foothold in Atlanta in the early 1980s to explore commercial lending opportunities in the Southern United States.
The branch manager -- now the principal target of the probe -- was Christopher Drogoul. Born in New Jersey, the son of a wealthy French banker, Mr. Drogoul was a 1974 graduate of Temple University.
Jerome Froelich, an Atlanta lawyer involved in the case, describes Mr. Drogoul, 41, as a tall and charismatic man with European manners.
"He had an ego that was fed by being able to get involved with international figures," he said. "He liked being wined and dined.
Mr. Drogoul's second-in-command was the bank's vice-president, Von Wedel, now in his mid-50s, a veteran of Chemical Bank's trade finance department.
In 1984, Mr. Drogoul and Mr. Von Wedel contacted Iraqi bankers at a conference in Washington on the Agriculture Department's commodity-credit program. The program enabled banks to lend money to foreign governments to buy U.S. farm products. It was relatively risk-free because the USDA guaranteed repayment of the loans.