WASHINGTON -- A key middleman in the Iraqi bank loan scandal told a Department of Agriculture official in the spring of 1990 that executives of Italy's largest bank had known that a branch in Atlanta provided secret loans to Iraq, according to documents and interviews.
The information was relayed to prosecutors, the records indicate.
But investigators turned down a chance to question the middleman and decided that bank officials in Rome had been unaware of the loans, greatly restricting the scope of the corruption case.
The disclosure adds to mounting questions about the investigation into $5 billion in loans that helped finance Iraq's military arsenal before the gulf war.
It also could lend credence to charges that the investigation was deliberately truncated by the administration for political reasons.
"The failure to interview a key witness in one of the biggest bank fraud episodes in our nation's history raises serious questions about an administration cover-up," said Sen. Patrick J. Leahy, D-Vt., chairman of the Senate Agriculture Committee.
The loans were provided to Iraq between 1985 and 1989 by the Atlanta branch of the Banca Nazionale del Lavoro, which is owned by the Italian government.
Federal agents discovered the loans in August 1989, but prosecutors soon concluded the scheme was carried out by the branch manager without knowledge of officers in Rome.
The conclusion was important to the resulting criminal case against the manager.
If Rome officials had been aware of the loans, the bank could not have been victims of the scheme. The prosecutor said in an early 1990 memo that the case would amount to minor technicalities if the bank was not the victim.
In recent weeks, the government's investigation has been marred by numerous disclosures. Federal agents never questioned BNL officials in Rome or examined records there, instead relying on material brought to Atlanta by the bankers.
A White House lawyer also telephoned the prosecutor early in the investigation to express concerns, and the Italian ambassador pressed the Department of Justice to restrict the investigation.
Recently, it was disclosed that CIA files indicating that Rome officials knew of the loans were withheld from the federal judge handling the case. The CIA and Justice Department have blamed each other for the omission.
Newly obtained records show that prosecutors were worried as early as 1990 that the CIA might have known about BNL's dealings with Iraq.
"As you well know, experience has demonstrated that CIA knowledge and participation can seriously impact a decision to prosecute," a senior prosecutor in Atlanta wrote to Deputy Attorney General Mark Richard on July 3, 1990.
The government says the CIA was not aware of the scheme while it was under way, but a special investigator has been appointed by the attorney general to investigate the role of the CIA in the case and the overall handling of the investigation by the Department of Justice.
U.S. District Judge Marvin H. Shoob, who presided over the BNL case for 18 months, has said that U.S. officials may have hampered the inquiry either to protect the Italian government from damaging disclosures or to avoid criticism of the administration's policy toward Iraq.
The encounter between the middleman and the Agriculture official is described in Department of Justice documents.