COMMITTEE ON AGRICULTURE E (KIKA) DE LA GARZA, Texas, Chairman WALTER B. JONES, North Carolina, Vice Chairman GEORGE E. BROWN, JR., California CHARLIE ROSE, North Carolina GLENN ENGLISH, Oklahoma LEON E. PANETTA, California JERRY HUCKABY, Louisiana DAN GLICKMAN, Kansas CHARLES W. STENHOLM, Texas HAROLD L. VOLKMER, Missouri CHARLES HATCHER, Georgia ROBIN TALLON, South Carolina HARLEY O. STAGGERS, Jr., West Virginia JIM OLIN, Virginia TIMOTHY J. PENNY, Minnesota RICHARD H. STALLINGS, Idaho DAVID R. NAGLE, Iowa JIM JONTZ, Indiana TIM JOHNSON, South Dakota BEN NIGHTHORSE CAMPBELL, Colorado MIKE ESPY, Mississippi BILL SARPALIUS, Texas JILL L. LONG, Indiana GARY CONDIT, California COLLIN C. PETERSON, Minnesota CALVIN M. DOOLEY, California MICHAEL J. KOPETSKI, Oregon TOM COLEMAN, Missouri, Ranking Minority Member RON MARLENEE, Montana LARRY J. HOPKINS, Kentucky PAT ROBERTS, Kansas BILL EMERSON, Missouri SID MORRISON, Washington STEVE GUNDERSON, Wisconsin TOM LEWIS, Florida ROBERT F. (BOB) SMITH, Oregon LARRY COMBEST, Texas WALLY HERGER, California JAMES T. WALSH, New York DAVE CAMP, Michigan WAYNE ALLARD, Colorado BILL BARRETT, Nebraska JIM NUSSLE, Iowa JOHN A. BOEHNER, Ohio PROFESSIONAL STAFF DIANNE Powell, Staff Director VERNIE HUBERT, Chief Counsel and Legislative Director DENNIs E. LAMBERT, Minority Staff Director JAMEs A. DAvis, Press Secretary SUBCOMMITTEE on DEPARTMENT OPERATIONs, RESEARCH, AND FOREIGN AGRICULTURE CHARLIE ROSE, North Carolina, Chairman GEORGE E. BROWN, JR., California, Vice Chairman LEON E. PANETTA, California JIM JONTZ, Indiana CALVIN M. DOOLEY, California MICHAEL J. KOPETSKI, Oregon CHARLES W. STENHOLM, Texas HAROLD L. VOLKMER, Missouri CHARLES HATCHER, Georgia ROBIN TALLON, South Carolina BEN NIGHTHORSE CAMPBELL, Colorado BILL SARPALIUS, Texas JERRY HUCKABY, Louisiana DAN GLICKMAN, Kansas PAT ROBERTS, Kansas SID MORRISON, Washington STEVE GUNDERSON, Wisconsin WALLY HERGER, California JAMES T. WALSH, New York WAYNE ALLARD, Colorado BILL BARRETT, Nebraska JOHN A. BOEHNER, Ohio (II) C O N T ENTS Coleman, Hon. Tom, a Representative in Congress from the State of Missouri, opening statement........................................................................................................ Prepared statement......................................................…. Roberts, Hon. Pat, a Representative in Congress from the State of Kansas, opening statement........................................................................................................ Prepared statement................................................................................................. Rose, Hon. Charlie, a Representative in Congress from the State of North Carolina, opening statement...................................................................................... WITNESSES Crowder, Richard T., Under Secretary, International Affairs and Commodity Programs, U.S. Department of Agriculture............................................................ Prepared statement................................................................................................. Ebbitt, James R., Assistant Inspector General, Audit, Office of Inspector General, U.S. Department of Agriculture............................................................... Prepared statement................................................................................................. Mendelowitz, Allan I., Director, International Trade, Energy, and Finance Issues, National Security and International Affairs Division, U.S. General Accounting Office......................................................................................................... Prepared statement................................................................................................. Page . 39 299 12 280 REVIEW OF U.S. DEPARTMENT OF AGRICUL- TURE’S EXPORT CREDIT GUARANTEES EX- TENDED TO IRAQ THURSDAY, MARCH 14, 1991 House of REPRESENTATIVES, SUBCOMMITTEE on DEPARTMENT OPERATIONS, RESEARCH, AND FOREIGN AGRICULTURE, COMMITTEE ON AGRICULTURE, Washington, DC. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 1300, Longworth House Office Building, Hon. Charlie Rose (chair- man of the subcommittee) presiding. Present: Representatives Dooley, Kopetski, Volkmer, Hatcher, Tallon, Sarpalius, Roberts, and Coleman. Staff present: Vernie Hubert, chief counsel and legislative direc- tor; Fred J. Clark, deputy chief counsel, Joseph Muldoon and Andy Baker, assistant counsels; John E. Hogan, minority counsel; Alice Devine, minority associate counsel; Glenda L. Temple and Lena Lawrence, clerks; Keith Pitts, Joan Teague Rose, Anita R. Brown, James A. Davis, John J. Aguirre, and David Ebersole. OPENING STATEMENT OF HON. CHARLIE ROSE, A REPRESENTA- TIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA Mr. ROSE. The subcommittee will please come to order. The purpose of this hearing today is to continue our review of USDA's agricultural export credit guarantee programs, particular- ly with respect to the country of Iraq. Those of you who were on this subcommittee on November 16, 1989, may remember that it was then chaired by our colleague, George Brown of California. I joined as chairman of the Tobacco and Peanuts Subcommittee with Dan Glickman, chairman of the Wheat, Soybeans, and Feed Grains Subcommittee, to investigate abuses in the export credit guarantee programs, GSM-102 and -103, as well as the Export Enhancement Program. You may also remember that the subject of Iraq as well as Banca Nazionale del Lavoro was brought up at that point in time. Out of deference to the Office of Inspector General at USDA, I was planning to limit the discussion in this hearing to a general review of OIG's findings relating to a bank review they conducted and two USDA memorandums. One of these memorandums shed some light on USDA’s efforts to channel additional moneys to the country of Iraq, and the other memorandum discusses USDA's con- (1) 2 cern about a possible link between the Condor missile project and the Loan Guarantee Program. However, ladies and gentlemen, at 6:45 p.m., last night, my office received a faxed statement from Mr. Crowder which not only dis- cusses a draft report prepared by the OIG, which the OIG had asked me not to discuss, but which also constructs the facts in a way that I consider to amount to nothing less than a coverup. Thus, since USDA does not feel constrained, neither will I, and I encourage every member to fully explore the explanations provided by USDA with respect to the statement Mr. Crowder will give to us. To help you do that, I have provided each of you with a copy of the draft report. We are somewhat constrained here by several important facts. One, any proposal which USDA may make with respect to export credit guarantees may be vetoed by something called the National Advisory Council. This entity, my friends, has records—records which affect transactions we have authorized in law, records which we unfortunately do not have at our disposal. This entity makes political decisions or foreign policy decisions that have absolutely nothing to do with the necessity of expanding markets for Ameri- can agricultural products. This cabinet-level council cheats you and every member of the House Agriculture Committee, and every farmer in America, out of the kind of decisions we hoped were being made with respect to our export programs. We are also constrained here because much of what we need to know at this moment is tied up under the guise of grand jury secre- cy. It seems that some officials at USDA have access to records which should be secret, yet you and I may never have access to these documents. Finally, we are also constrained here because USDA wants to hold our hands and tell us that everything is just fine. There's no need to worry that the little old Italian bank down in Atlanta had any connection with Iraq's weapon procurement efforts, and no one at USDA is to blame for the widespread wrongdoing the Inspector General has so diligently uncovered in its draft report. Friends, this may be the Agriculture Committee, but like a to- bacco farmer once told me, “I guess USDA thinks that I just fell off the Greyhound bus yesterday with hay in my hair, a chicken under each arm, and holes in my shoes.” I know it sounds hard to believe, but this sleepy little agricultural program did more than feed the Iraqi people and the Iraqi military. From what I've seen, it also provided cash to various bank accounts in West Germany and other European locations. It also apparently provided trucks, spare parts, batteries, and tires. We heard testimony about the tires and batteries in earlier hearings. And I defy USDA to tell me that they have receipts which show that none of the moneys paid as bribes went for anything but agricultural purposes. Iraq is not a country whose major concern was the building of museums and music schools. It was a country bent on building the best war machine money could buy, and anybody who ignores this does a grave disservice to our brave service men and women who so valiantly entered the fray. Consequently, any provision of money by a United States exporter to an Iraqi Government monopoly or § official is suspect. They weren't paying for piano lessons or teach- ing the best crop rotation practices with the money they received. Ladies and gentlemen, we deserve a full and complete explana- tion, and it is obvious that we will need to pursue this in future hearings. Our farmers deserve a full and complete explanation. American taxpayers, now stuck with the bill for this foolishness, on account of Iraqi defaults, deserve a full and complete explanation. And most importantly, my constituents at Pope Air Force Base and Fort Bragg, among the first sent to Saudi Arabia, and their fami- lies deserve a full and complete explanation. Let's begin the proc- ess today and continue it until we have the answers we need. The Chair recognizes the gentleman from Kansas, Mr. Roberts. OPENING STATEMENT OF HON. PAT ROBERTS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS Mr. Roberts. Thank you, Mr. Chairman. Since 1988, subcommittees of the House Agriculture Committee have held several hearings regarding the operation of the U.S. De- partment of Agriculture's GSM credit programs. Under the leader- ship of the gentleman from North Carolina, Chairman Rose, this committee included amendments in the 1990 farm bill which insti- tuted additional controls and requirements on the operation of those credit programs. Now, today's testimony from Under Secretary Crowder, the Office of Inspector General, and the General Accounting Office, I think, will indicate very clearly the willingness of the Department over the last year to, one, implement improvements to the oper- ation of these credit programs; to communicate with Members of Congress and staff on these issues; to cooperate with the Office of Inspector General and the investigation of the Attorney General; and, where possible, to recover losses for the taxpayers that may have or that did occur as a result of anything that was illegal or fraudulent. Now, while we review the policy and the operations of the GSM credit guarantee programs, we should remember that these GSM- 102 and -103 programs have, from 1981 to 1990, guaranteed over 32 billion dollars' worth of loans that facilitated the export of our U.S. agricultural commodities—wheat, corn, soybeans, rice, chickens, to- bacco, lumber, and many others. This has been an enormously suc- cessful program, generating a huge amount of economic activity to the benefit of farmers, country elevators, barges and other trans- portation systems, food processors, and exporters all across the ag- ricultural spectrum. Our responsibility is great. Now, speaking on behalf of my constituents and the minority of the subcommittee, we must not allow any wrongdoing or, for that matter, any allegation of wrongdoing to destroy the credibility of one of the most effective trade tools we have available to us. That will not be permitted. In this regard, I commend the chairman for his leadership and for really providing us the vehicle for our over- sight responsibility. Mr. Chairman, if these programs designed to benefit our farmers and our export economy have somehow been manipulated to bene- fit the Iraqi war machine, we should, we must, we will investigate, 4 and we will prosecute those responsible, and we will reform the program. That is a given. I must say that despite the allegations, at least to date—and we have not had the benefit of all the allega- tions and the evidence and all of the testimony that we'll have from this hearing—I have yet to see any real evidence that our export programs did in fact impart anything of military value to the Iraqis. In discussing this with the Department and with others con- cerned and with staff, it has become obvious to me that various agencies of the Federal Government have spent thousands of hours investigating this issue, it's ongoing, it will continue. We can say to date, “I don't know of any wrongdoing on the part of any USDA employee.” If that is the case, as I've indicated, we will proceed. Second, I do not see any evidence, to date at least, that the pro- gram has been misused in any way to support Iraq's weapon pro- curement efforts. I do agree with the chairman that we must get to the bottom of this, and in terms of public disclosure and the oversight responsi- bility to this subcommittee, I think we should proceed. With that, Mr. Chairman, I will yield back. [The prepared statement of Mr. Roberts follows:] Statement of the Honorable Pat Roberts March 18, 1991 Since 1988, subcommittees of the House Agriculture Committee have held several hearings regarding the operation of the U.S. Department of Agriculture's GSM credit programs. Under the leadership of the gentleman from North Carolina, Chairman Rose, this Committee included amendments in the 1990 Farm Bill which instituted additional controls and requirements on the operation of those GSM credit programs. Today's testimony from Under Secretary Crowder, the Office of Inspector General and the General Accounting Office will indicate quite clearly the willingness of the Department over the last year to: implement improvements to the operation of the GSM credit programs; to communicate with Members of Congress and staff on these issues; to cooperate with the Office of Inspector General and the investigations of the Attorney's General; and where possible to recover losses for the taxpayer that occurred as a result of fraudulent or illegal activities. While we review the policy and operation of the GSM credit guarantee programs, we should remember that the GSM 102 and 103 programs have from 1981 to 1990 guaranteed over $32 billion worth loans facilitating the export of U.S. agricultural commodities: wheat, corn, soybeans, rice, chickens, tobacco, and lumber, and many others. This is an enormous program generating a huge amount of economic activity to the benefit of farmers, country elevators, barges and other transportation systems, food processors and exporters, Our responsibility is great. We must not allow wrongdoing or for that matter allegations of wrongdoing to destroy the credibility of one of the most effective trade tools we have available to us. Mr. Chairman, if these programs designed to benefit our farmers and our export economy have somehow been manipulated to benefit the Iraqi war machine, we should, we must and will investigate, and prosecute those responsible, and reform the program. But, despite allegations, there has been no reliable evidence that our export credit guarantee programs imparted anything of military value to the Iraqis. (Attachment follows:) ÁŠ(O)Cl]Á ſ § SUITE 801 - 1520 EYE STREET, N.W. . WASHINGTON, D.C. 20006 PHONE: (202) 463.0999 • TELEX: 440565 • FAX: (202)785-1052 March 14, 1991 Honorable Charlie Rose Chairman, Subcommittee on Department Operations, Research and Foreign Agriculture Agriculture Committee U.S. House of Representatives Dear Mr. Chairman: Your Subcommittee is holding a review of Iraq's participation in the GSM credit program under the Department of Agriculture. While we certainly regret the direction of events in regard to Iraq's policies, we would not fault the GSM program itself. There were, and we hope still are, Iraqi Officials who wanted better relations between our two countries. These people were dedicated to using trade to improve the diet of their people, especially during the eight-year war with Iran. From the early 1980's, U.S. agricultural exports to Iraq grew from a trickle to well over one billion dollars. There were many agricultural commodities on their purchase list, and the GSM program was a critical vehicle in this process as it has been with many other countries. These sales were of vital importance to U.S. wheat producers as Iraq regularly purchased almost one million tons from this country. We did not have a crystal ball to be able to foresee the unfortunate turn of later events. In our view, we seriously doubt that denying Iraq access to these credits would have altered their policital direction. While any program can benefit from creative and honest review, we would like to express our support for the GSM program as one of the most useful in promoting U.S. agricultural exports. Thank you for the opportunity to share these views with you. Winston Wilson President OVERSEAS OFFICES IN AFRICA, ASIA, EUROPE AND LATIN AMERICA T Mr. ROSE. Thank you, Mr. Roberts. Our first panel will be composed of— Mr. ColeMAN. Mr. Chairman, will others have an opportunity for an opening statement? Mr. ROSE. If you wish to make a brief Opening Statement, but We have a long list of witnesses. Go ahead, Sir. OPENING STATEMENT OF HON. TOM COLEMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSOURI Mr. ColeMAN. Thank you, Mr. Chairman. I note briefly that the GSM credit programs have benefited our Nation's farmers, ranchers, processors, shippers, and exporters. I think we recognize that. Let me say as far as the GAO is concerned about foreign policy objectives, of course, these programs do serve important foreign policy objectives of this country. I believe they always have and will continue to do so. Thus, we will continue to have problems arise whenever we have creditor nations' policies that are difficult to assess, clouded in regional conflicts, and they’re generally open to disputes among reasonable people be- cause they are constantly changing. We can't overlook the very important aspects of global trade, es- pecially when we talk of U.S. trade and the business this country does around the globe. Food and foreign policy are linked inextrica- bly, and it is one thing for the Congress' auditors to come here and pontificate about how that should not be so; it's something else for the Congress to legislate it successfully. There is not an American farmer out there who doesn't remember the loss of grain markets following the episodes of 1979 and 1980, but, of course, we're not here to talk about President Carter's grain embargo. But reasonable people recognize that no huge program of this magnitude can be administered with absolute certitude. That's why the FAS and the lenders work hard on country risk assessments, which we’ll hear more about today, that include political judg- ments. There are few hard and fast rules to follow. In hindsight, of course, our dealings with Iraq can be criticized. It's an established fact that we live in an imperfect world, and the problem that many of us have is that every day we must make dif- ficult decisions. Today, Congress gets to second-guess some of those decisions. Let us do so with good intentions and pure motives. Mr. Chairman, the real truth that I hope will be brought out as we discuss the GSM programs here today is that the executive and the legislative branches act together to assess any wrongdoing that has been found or alleged. We should root out those three evils of bureaucracy—waste, fraud, and abuse—in the programs and serv- ices in our Government. Let me conclude, Mr. Chairman, by saying that obviously a Monday morning quarterback can find errors in judgment in these transactions. It is also clear, especially with the current occupant of the White House, that when it comes time to act, this adminis- tration is decisive, whether it is in the Persian Gulf Desert with tanks and fighter aircraft or in the bureaucracy with investigators and lawyers. I hope we'll be able to tame this tiger today to the 8 extent that we get to these problems with the facts and complete our oversight duties in a responsible and judicious manner. Thank you, Mr. Chairman. [The prepared statement of Mr. Coleman follows: 9 STATEMENT OF TOM COLEMAN, M. C. March 14, 1991 Subcommittee on Department Operations, Research and Foreign Agriculture Mr. Chairman, the General Sales Manager's program at the Department of Agriculture's Foreign Agriculture Service has served the American farm economy well over the years. The GSM credit programs have benefited our nation's farmers, ranchers, processors, shippers and exporters. I note the GAO's concern about foreign policy objectives. Of course, to an extent these programs do serve important foreign policy objectives of this country. I believe they always have and will continue to do so. Thus, we will continue to have problems arise whenever a creditor nation's policies are difficult to assess, clouded in regional conflicts or generally open to dispute among reasonable people because they are constantly changing. We must not overlook that very important aspect of global trade, especially when we talk of U.S. trade and the business this country does around the globe. Food and foreign policy are linked inextricably, and it is one thing for the Congress' auditors to come here and pontificate about how that should not 10 -2'- be so. It is something else for Congress to legislate it successfully. There is not an American farmer out there who doesn't remember what happened to his grain markets following an episode of foreign policy in 1979 and 1980. But the subject of the hearing today is not President Carter's grain embargo. Reasonable people recognize that no huge program of this nature can be administered with absolute certitude. That is why FAS and the lenders work hard on country risk assessments that include political judgements. There are few hard and fast rules. In hindsight, of course, our dealings with Iraq can be criticized. It is an established fact that we live in an imperfect world. The problem is that many of us must make difficult decisions daily in this world. Today, Congress gets to second guess some of those decisions. Let us do so with good intentions and pure motives. Mr. Chairman, the real truth that I hope will be brought out here as we discuss the GSM programs is that we -- the executive and legislative branches -- are acting to assess wrongdoing that has been alleged or found. We should root out the three great sins of bureaucracy -- waste, fraud and abuse in the programs and services of our government. 11 -3- Obviously, a Monday morning quarterback can find errors in judgement in these transactions. It is also clear, especially when speaking of the current occupant of the White House, that when it is time to act, this Administration is decisive -- whether it is in the Gulf desert with tanks and fighter aircraft or in the bureaucracy with investigators and lawyers. I would hope this tiger could be tamed enough this morning so that we can get to the problems with the facts and complete our oversight duties in a responsible and judicious manner. 12 Mr. ROSE. Our first panel is Mr. James Ebbitt, the Assistant In- spector General for Audit, U.S. Department of Agriculture, accom- panied by Mr. Craig Beauchamp, the Assistant Inspector General for Investigation, USDA, and Mr. Richard Long, Deputy Assistant Inspector General for Audit. Mr. Ebbitt, you may proceed. STATEMENT OF JAMES R. EBBITT, ASSISTANT INSPECTOR GEN- ERAL, AUDIT, OFFICE OF INSPECTOR GENERAL, U.S. DEPART- MENT OF AGRICULTURE, ACCOMPANIED BY CRAIG BEAU- CHAMP, ASSISTANT INSPECTOR GENERAL, INVESTIGATION, AND RICHARD D. LONG, DEPUTY ASSISTANT INSPECTOR GEN- ERAL, AUDIT Mr. EBBITT. Thank you, Mr. Chairman. I have a brief statement I'd like to read, Mr. Chairman. Before I do that, I would like to comment on the draft report that you've given to the members this morning. I was presented with the De- partment's response to the draft report this morning, Mr. Chair- man. We haven't had the opportunity to analyze the response. We intend to do that as quickly as we can. Our process now will be to, once we finish analyzing that response, incorporate that response into the document that you now have, and we will proceed to go to the final document as quickly as we can— Mr. Rose. Let me ask you this question. Your usual procedure is to produce a draft report and have the Department comment on that draft report before it is released. Is that not correct? Mr. EBBITT. That's correct, Mr. Chairman. Mr. Rose. And did you not ask me—I believe you showed Mr. de la Garza a copy of the draft report or briefed him on it, and you showed me a copy of the draft report and gave me a copy, but you asked that it not be released. Is that not correct? Mr. EBBITT. That's correct, Mr. Chairman. Mr. ROSE. And you have now learned that Mr. Crowder, in his testimony, is referring to the draft report, so you're going to use that as part of his reaction to the draft report, I take it. Mr. EBBITT. Well, he's provided or the Foreign Agricultural Serv- ice has provided a very detailed response to the entire audit, which is the normal process, and we need to go through that, verify their response against what the audit is saying, and then go to the final product again, which I intend to issue as soon as we can. Mr. Rose. All right. Go to your statement, and we'll be happy to hear it. Mr. EBBITT. Thank you, Mr. Chairman and members of the sub- committee. I am James Ebbitt, the Assistant Inspector General for Audit. With me this morning are Craig Beauchamp, the Assistant Inspector General for Investigations, and Richard Long, the Deputy Assistant Inspector General for Audit. We are pleased to appear here today to discuss our continuing audit and investigative activi- ties related to the GSM-102 and -103 export credit sales programs. Since we last appeared before you in November 1989, we have completed a study of the Commodity Credit Corporation's foreign bank approval process and a joint audit and investigation of tobac- co exports under the GSM program. As a followup to our Septem- 13 ber 1989 audit on the GSM-102 and -103 programs, we performed a study of the process CCC used to analyze and approve foreign bank- ing institutions and in January 1990 issued our recommendations to CCC. We found weaknesses in CCC's process for approving foreign banks for participating in the GSM-102 and -103 programs. Specifi- cally, we found that CCC did not use financial methods commonly used by the banking industry to review foreign financial institu- tions. For example, CCC established credit line limits for foreign banks only by reviewing the bank's financial statements. This type of analysis is not a reliable method, because many foreign banks do not file full financial disclosure procedures, contingent liabilities are not fully disclosed, and the quality of stated assets may be questionable. In comparison, the Federal Reserve Bank, the Export-Import Bank, and four commercial credit rating firms, in foreign bank dealings, reviewed the foreign institution's operating environment, the role of the financial system of the foreign country, and the in- stitution's managerial and operational procedures. Another widely recognized and utilized analysis technique is the Federal Deposit Insurance Corporation's system called CAMEL, which specifies methods for analyzing capital, asset quality, management, earn- ings, and liquidity. We recommended that CCC employ these kinds of techniques in their operations. We also found that when CCC officials wanted to increase a for- eign bank credit line above what they believed secure, they often required credit guarantee assurances from foreign governments which guaranteed repayments from their banks if defaults should occur. At the time of our review, CCC had approved credit through 28 foreign banks that exceeded CCC's established credit line limits by $3.5 billion. CCC also allowed foreign banks to exceed their es- tablished credit line limits by granting waivers. A waiver was a memorandum signed by the general sales manager which document- ed the reason for exceeding the credit line. This reason usually was market development. We recommended that CCC establish proce- dures which better control the waiver process and better protects CCC's interests. Because of concerns over financing sales to Iraq, we attempted to review CCC's documentation for the $514 million credit line estab- lished for Iraq's Rafadan Bank. At the time of our review, CCC was unable to locate its file on this bank. We recommended that CCC take immediate steps to obtain current financial information for Rafadan Bank. In response, CCC did obtain an updated financial statement for 1988. Based on our study, the CCC officials took immediate steps to es- tablish an interagency task force to review CCC's capability for managing credit risk. As a result, CCC took two primary actions. First, the CCC Treasurer's office was reorganized to better focus on program accounting and bank risk assessments. Second, the Gener- al Sales Manager implemented a new decisionmaking process to enable CCC management to better evaluate the credit risk involved with allocating export guarantees. Along with these actions, CCC agreed to document their credit risk analysis of foreign banking in- stitutions to perform periodic onsite visits of foreign banks and to 14 provide better training to staff. We have scheduled a followup review of this process for this fiscal year. Mr. Chairman, if I could, I’d like to just briefly update you on the work we've done on tobacco. On four previous occasions, we have appeared before you to discuss our audit and investigation ac- tivities regarding tobacco exports under the GSM-102 and -103 programs. At those hearings, we stated that tobacco of foreign origin was being combined with U.S. tobacco and exported under the GSM programs in fiscal years 1986, 1987, and 1988. In December 1990, we completed our audit and investigation ac- tivity in this area. We found 14 firms with 17 affiliates, a total of 31 companies, exported foreign tobacco which they represented to be U.S. tobacco. The loan guarantees totaled $134.7 million for 80.9 million pounds of tobacco. The foreign content represented 46.2 million pounds, or 57 percent of the tobacco exported under GSM- 102 loan guarantees. Companies were able to export foreign tobacco under the GSM programs because exporters misrepresented the to- bacco's origin to Foreign Agricultural Service and Commodity Credit Corporation. Also, the exporters did not disclose the foreign content to the foreign buyers or to the banks that were assigned the GSM loan guarantees. Our review further disclosed that seven companies, including six that exported foreign tobacco under the GSM programs, provided over $1.5 million in after-sales service payments to the Iraqi State Enterprise for Tobacco and Cigarettes. Since the GSM loan guaran- tee coverage was improperly obtained for these payments, CCC was unfairly made financially responsible for them. On September 27, 1990, in U.S. district court, Fayetteville, North Carolina, two of the six companies that exported foreign tobacco and six of the companies that provided after-sales service payments pled guilty to making false, fraudulent, and fictitious statements to Commodity Credit Corporation. One of the six companies also pled guilty to filing false statements to U.S. Customs Service. The eight companies were fined $300,000, and the six companies that includ- ed after-sales service payments under the programs were ordered to make restitutions of up to $1.1 million to CCC. As a result of exporting foreign tobacco and including after-sales service payments in the port values, tobacco companies received over $147.2 million in ineligible GSM loan guarantees. We have recommended that CCC recover any losses, which, due to repay- ments in part, we estimate are about $37.3 million, it may incur from the companies that exported the foreign tobacco and provided the after-sales service payments under the programs. Also, we rec- ommended that these companies be suspended and debarred from participation in CCC programs. FAS is currently working with the Office of General Counsel concerning suspension and debarment. This concludes my statement, Mr. Chairman, and I would be glad to answer any questions. [The prepared statement of Mr. Ebbitt appears at the conclusion of the hearing.] Mr. ROSE. Thank you, Mr. Ebbitt. Can you stay for the entire hearing? Mr. EBBITT. We can, Mr. Chairman. Mr. ROSE. We would like for you to stay. 15 In a September 22, 1988, memorandum signed by eight employ- ees of USDA, those eight employees seemed to be saying several things. First, they discussed what appeared to the public to be new credit coverage, and second, they discussed the strong likelihood that Iraq would not repay its obligations if sanctions against Iraq were adopted. Let's discuss these two points separately. What did these employees mean—and they issued a public state- ment, which they all signed, and they're all here today. When they said that there was $36.5 million that appeared to the public to be new credit coverage, where did this money come from? Mr. EBBITT. Mr. Chairman, let me give just a little bit of back- ground. It's my understanding—and we've had the opportunity over the last couple of days to talk to FAS about this $36.5 mil- lion—generally speaking, the National Advisory Council had ap- proved a total of about $1.7 billion for GSM-for commodity pro- grams in general for the program. This particular money, the $36.5 million, we've been told was in the direct sales program whereby CCC commodities, mainly for dairy products, would have been sold to a foreign country, in this case Iraq. What the situation here is, we've been told, is they were switching the money from the direct sales program over into the GSM Credit Guarantee Program. Mr. Rose. When this $36.5 million was transferred from CCC direct sales to export sales, was the financial position of the United States more or less secure, especially in light of what has happened recently with respect to Iraq's default on export credit guarantees? Did USDA, by this action, in your opinion, increase the risk for American taxpayers? Mr. EBBITT. It's a complicated question. Mr. Rose. What did the eight employees who signed the memo- randum state? It was their opinion, was it not, that it did take an unnecessary risk? Is that not correct? Mr. EBBITT. That's the reading of that letter, that's correct, Mr. Chairman. What has happened as a result of the switch is if in fact Iraq defaults on that particular payment, the United States Treas- ury will have an immediate outlay of cash to honor the guarantee when the default occurs. Under the direct sales program, of course, the commodity would have been transferred. That is lost, but we wouldn't have the direct outlay of cash. Mr. ROSE. Have you ever seen another memorandum in the De- partment of Agriculture like this? That is, one signed by so many employees from so many different divisions protesting a decision made about credit funding to Iraq or any other country. Mr. EBBITT. I would have to say no, I haven’t, Mr. Chairman. Mr. Rose. In other words, when a recommendation is made against awarding credit guarantees to a particular country, is it normal for eight different USDA employees from different divi- sions to routinely sign such a memo” Mr. EBBITT. It doesn't appear that that was the normal way that these kinds of things were handled. We did talk directly to some of these employees, and this wasn't the normal practice. Mr. Rose. When was the first time that you, the Office of Inspec- tor General, saw this September 22, 1988, memo? Do you recall who gave this memo to you? 16 Mr. EBBITT. I don't know the exact date, Mr. Chairman, but members of your staff provided the memo to us 2 to 3 months ago. Mr. Rose. Weren't you already conducting a review of a Septem- ber 22, 1988, notice to exporters regarding blending of U.S. and for- eign commodities with respect to tobacco at the time this memo was written? Mr. EBBITT. Yes, we were. That's the time period during which we were reviewing the tobacco transactions that we reported on in December 1990. Mr. ROSE. What happens if you read this memorandum from these eight employees with the September 22, 1988, notice to ex- porters? Wouldn't you in effect be stretching the effect of the addi- tional dollars awarded to Iraq.” Mr. EBBITT. With the transfer of the $36.5 million from the direct sales program to the guarantee program, you would be extending additional credits to Iraq to use for commodity purchases. That's correct. Mr. Rose. But nobody within the Department gave you this memo; my staff gave you this memo. Mr. EBBITT. That's correct. Mr. Rose. In view of the bank review that you did in 1990, do you think you might have uncovered the fact that there was a bank file missing for the Rafadan Bank in Iraq sooner if you had received this memorandum from the USDA employees earlier? Mr. EBBITT. In all probability, we would have, Mr. Chairman. Mr. Rose. You stated in your statement that the last time you appeared before my former subcommittee was in the fall of 1989. Have there been any developments with respect to the credit guar- antees granted to the country of Iraq since that point in time, fall of 1989? Mr. EBBITT. As you mentioned earlier this morning, Mr. Chair- man, we have, of course, the draft report that hopefully we'll final- ize very quickly, so all that work on pricing activity, our pricing reviews of the agency, has been under way. We finalized the tobac- co review in December 1990. Of course, additional investigations are under way, and that's essentially what we've been doing since we last appeared. Mr. ROSE. Do you continue to review the export credit guarantees granted to the country of Iraq.” Mr. EBBITT. Yes, Mr. Chairman, we have additional reviews planned to look at more transactions with Iraq as well as other countries. Mr. ROSE. In other words, there are new developments or there are new discoveries which you will be making over the course of your continuing investigation and audits, and these could not have been communicated to us, of course, in the fall of 1989, could they? Mr. EBBITT. That's correct. Mr. Rose. Is it fair to say that it is impossible for you to commu- nicate new developments and weaknesses you may uncover with respect to credit guarantees granted to Iraq to the Department prior to your uncovering them? In other words, you may have fur- ther or additional recommendations that either USDA or Congress should consider with respect to strengthening the administration of export credit guarantee programs. 17 Mr. EBBITT. It's very possible that as our work continues we'll have more recommendations on the program or on individual transactions, yes. Mr. Rose. You state, both in your bank review and your testimo- ny, that “CCC was unable to locate its file on the Rafadan Bank, the bank for which the CCC had established a credit line for the country of Iraq.” What happened to that file? Who had their hands on it last? And has it ever been found or located? Mr. EBBITT. Mr. Chairman, I don't know what happened to the file. I never saw the file. We asked for a file and were told by CCC that it was lost. To this date, it's never been produced. Mr. Rose. After a financial statement was obtained for the Rafa- dan Bank, did you determine whether or not the line of credit al- lowed the Rafadan Bank exceeded that which it should have been granted? Mr. EBBITT. Mr. Chairman, we haven’t really done a credit risk assessment for Rafadan Bank or for any country, for that matter, so I’m really not prepared to comment on that question. Mr. ROSE. Did you find any other bank file for any other bank in any other country that was missing or could not be located? Mr. EBBITT. No, we didn't, but at the same time, we weren't really looking at CCC files specifically for other banks or other countries, so the answer is no, but at the same time, we weren't really looking. Mr. ROSE. And you are currently conducting investigations with respect to the country of Iraq and export credit guarantees? Mr. EBBITT. That's correct. Mr. ROSE. When do you hope to have these matters completed and be able to give us a further report? Mr. EBBITT. Well, with the receipt this morning of the agency re- sponse to the audit, I would expect that by the end of this month, if not sooner, Mr. Chairman, the report will be final and we'd be pre- pared to discuss it in full detail. Mr. ROSE. In your testimony, you talk about completing your audit and investigation with respect to export credit guarantee for sales of tobacco to various foreign countries, including the country of Iraq. What's the status of this matter so far as the administra- tive proceedings are concerned? In other words, have any of these individuals been suspended or debarred from further Government participation in Government programs at this point in time? In other words, most of the companies that pled guilty in Federal court in Fayetteville, North Carolina, also store Government collat- eral tobacco under the Tobacco Program. Can you tell me the status of the administrative process? Mr. EBBITT. Suspension and debarment actions haven’t been taken on any of those companies at this point in time. The agency, FAS, is working very directly and closely with the General Coun- sel's office. We've been providing information to the General Coun- sel's office from our audit work papers as necessary to support the suspension and debarment actions. That review is now under way. I’m not sure exactly when the General Counsel's office and the agency would take that final action. Mr. Rose. But did you recommend to USDA that the individuals exporting foreign tobacco under the GSM-102 and -103 program 18 who had commingled and had improperly disclosed the contents of the shipments be suspended or debarred? Mr. EBBITT. Yes, we did, Mr. Chairman. Mr. ROSE. Are you going to recommend for all exporters who vio- lated program rules and regulations, whether with respect to the country of Iraq or any other country, that they be suspended or de- barred from further participation in Government programs? Mr. EBBITT. Yes, we are, Mr. Chairman. Mr. ROSE. Will you please report back to me as soon as possible or report to this subcommittee with respect to any and all suspen- sion and debarment actions that are taken by USDA'? Mr. EBBITT. Yes. Mr. ROSE. And will you also monitor USDA's review in this regard and make sure that consideration of suspension and debar- ment occurs as soon as it's feasible? Mr. EBBITT. Yes, Mr. Chairman. Mr. ROSE. I want to ask you to come back as soon as you can to discuss the draft report on GSM guarantees that you asked me not to release. I know you were taken by surprise by Mr. Crowder's tes- timony and that you're not prepared to discuss that report today, although since my colleagues have it, they may decide to ask you some questions about it. I'm not going to ask you any questions about the draft report, but I thank you very much for your testimo- ny and answering my questions. Mr. Roberts. Mr. Roberts. Yes, thank you, Mr. Chairman. Welcome to the subcommittee, Mr. Ebbitt. Mr. EBBITT. Thank you very much. Mr. Roberts. With the eight employees who will testify here and who signed the September 22 memo and all that that entails that the chairman has gone into, is there any particular problem associ- ated with the reallocation of the credits in regard to that memo” I mean, is there any wrongdoing here? Is there anything illegal about that? Mr. EBBITT. Congressman, I don't really know the answer to that question. We have an explanation of what the amounts were. It's a transfer from the direct sales authorization line to the guaranteed authorization line. The question of legality I believe needs to be ad- dressed to the General Counsel's office. Mr. Roberts. I know the chairman has raised the issue in regard to the uniqueness of the statements by the individuals who signed the memo, and you indicated that you did not know of any similar kind of concern in regard to other sales. I’ve got the top 10 coun- tries here in regard to the GSM-102 and -103 programs in 1990. No. 1 was Mexico, and No. 2 was Iraq. But we've got Algeria, we've got Jordan, we've got Yemen, we've got Panama—this was before Mr. Noriega said adios or we forced him to say adios—and also Co- lombia. As I go down the amnesty international yardstick of proper human behavior and also human rights, those are not stellar per- formers. Are you aware of any concern by employees who signed the memo in regard to those countries? Mr. EBBITT. Not directly, Congressman. I know the internal proc- ess within FAS–all of these divisions involved would be doing 19 these country risk assessments and making recommendations di- rectly to FAS managers regarding their assessment of country risk and if these countries are going to be able to perform and pay back ôň th& gllārāhtā65. I think when we talk about this particular memo being unusual, as I indicated, it's the only memo of this nature that we saw, and it seems to be unusual from our perspective because of the eight sig- natures on it moving forward in the process. I know internally they do reviews and they're making recommendations on any country they deal with. Mr. Roberts. Well, the rights of everybody is understandably concerned with the human rights issue, but I can recall well back in 1980 where the cause celebre at that particular time in terms of an issue, at least, was the grain embargo when the Soviets invaded Afghanistan and we canceled the Olympics and told our farmers we'd have $2.50 wheat instead of $4.50, and the Russians stayed in Afghanistan. In terms of perception and in terms of real effect, there were two different things, and in the debate on the floor of the House just a week or 10 days prior to the Iraqi invasion, obviously, many inter- est groups—primarily APEC-indicated the continuation of the vio- lation of human rights by Saddam Hussein. We can point out the same thing is happening today with the Soviet Union in the Baltic States, perhaps not to that extent. Well, without any reservation in regard to that extent. It seems to me to be a little odd here to have eight employees sign that particular memo as opposed to the other countries involved. I have a question in regard to after-sales services. Now, I think I understand that if the port value of the commodity sold is inflated in order to finance after-sales services and that if the GSM credits are extended to cover that inflated value, then the CCC would be exposed—or the taxpayer—to the liability beyond simply the amount of the loan necessary to finance the purchase. But it's also my understanding that an after-sales service could be rendered without any financial effect on the value of a GSM loan guarantee so that the CCC or the taxpayer would not incur any additional li- ability. Is that correct? Mr. EBBITT. That's my understanding, Mr. Chairman. In other words, if the after-sales service amount is not included in the amount that CCC guarantees, it's my understanding that that's not illegal if it's not in that guarantee. Mr. Roberts. In talking with our FAS folks and other people in the export business to the Middle East, I have found that an after- sales service—which is a nice word meaning perhaps something else in the cold light of day, according to our standards—that that is a common practice in regard to the private exporting field, and I’d like to know what percent of the GSM sales that you have au- dited were port values inflated in order to finance the after-sales service? Do we have any record of that? Mr. EBBITT. In the sample of transactions that we looked at, we have after-sales services of about 10 percent of the guarantees that we looked at. I don’t have that figure right here in front of me, but it was about 10 percent of the total guarantees that we looked at had an after-sales service associated with that. 20 Mr. ROBERTS. But that did not reflect on the value of the loan guarantee in regard to any responsibility on the part of the CCC or the taxpayer? Mr. EBBITT. Yes, Congressman. In other words, you've got a prob- lem with those guarantees. Those are the guarantees where the after-sales services have been identified. Mr. ROBERTS. All right. ºr. EBBITT. And if the country doesn't pay, that guarantee is at ITISK. Mr. Roberts. All right. Let's get to the bottom line here in terms—I have three basic questions, and they call for a conclusion on your part, which I'm not sure that you'll want to comment on, but one, throughout all of this, are you aware of any wrongdoing on the part of any employee of the USDA2 Mr. EBBITT. The audit has not.— Mr. Roberts. I mean to date. Mr. EBBITT. Pardon me? Mr. ROBERTS. I mean to date. Mr. EBBITT. No, Congressman, I'm not. The audit hasn't identi- fied wrongdoing on the part of FAS employees. We've made recom- mendations, obviously, to tighten the management processes of the program. Mr. Roberts. Second, with the allegation that our export pro- grams somehow aided the Iraqi war effort, do you believe that to be the case? Mr. EBBITT. We have no evidence in the audit that that's the CaSe. Mr. Roberts. With those two conclusions—I’m not going to ask you the third one. Had you answered otherwise, I would have asked you do you think we need to terminate these programs or to suspend them as of right now in regard to these allegations? If in fact those were true, wrongdoing on the part of the USDA and aiding and abetting the Iraqi war machine, which is a very serious allegation, I would think we should simply suspend the program. Have we reached that point? Mr. EBBITT. No, we have not reached that point. Had we found those two things, perhaps that would have been something that the USDA management would have wanted to consider, but again, we have no evidence of either one of those situations occurring. Mr. ROBERTS. Thank you. Mr. Chairman, I had intended on inserting the U.S. Wheat Asso- ciates letter stating their support for these programs at this par- ticular time when we're in the GATT negotiations and we need to get our market share back up, and I apologize for not having this present in my opening remarks and would simply like to make this part of the record following my opening statement, and I yield back. Mr. ROSE. That will be done. Any questions at this point? Mr. VolkMER. May I ask a question? Mr. ROSE. Yes. Mr. VolkMER. My question generally, Mr. Ebbitt, is going to be with this thing that you don't want us to talk about, but it's not for the purpose of eliciting further information but so I understand it. Mr. EBBITT. Certainly. 21 Mr. VolkMER. So when I look at it I have some idea of what I'm looking at. Do you have a copy of it there? Mr. EBBITT. Yes, I do. Mr. VolkMER. Would you refer to page 52, known as exhibit M2 Mr. EBBITT. I have to apologize. My pages, because of the process, may not be quite the same as yours. If you could identify the title of the exhibit, it would help. Mr. VolkMER. Well, this is exhibit M. If that's not the same, it's on woodpulp f.o.b. prices charged under the GSM program. There I find something that I was wondering about. At the bottom it says, “One, two, three, f.o.b., Savannah, Mobile, Victoria, British Columbia.” That applies, I guess, to the in parentheses number that follows the GSM number. Mr. EBBITT. That's correct. Mr. VolkMER. Now, when we're talking about Victoria, British Columbia, Canada, are we talking about Canadian pulp or are we talking about United States pulp? Mr. EBBITT. Well, it's supposed to be American woodpulp. One of the findings in this particular report is we do have some Canadian content in shipments, but on this particular GSM I don't know—I’d have to further study it to find out if that GSM has foreign content or not. Mr. VolkMER. Could we go into that a little bit? Because we saw what happened in tobacco, and I’m just wondering if we're seeing the same thing happening in other communities, and when I see it out of British Columbia, it leads me to believe I don’t think you're going to take a lot of pulp from the State of Washington and move it over to Victoria in order to put it on board a ship. I may be wrong, maybe they did. The other thing—the fo.b. price. Was the market price on— Mr. EBBITT. The f.o.b.—I’m sorry. Mr. VOLKMER. I mean, the f.o.b. price is the price that the con- tractor was charging to whoever was getting the guarantee, cor- rect? Mr. EBBITT. That's correct. Mr. VolkMER. Through the brokerage. Now, did that f.o.b. price include transportation? Mr. EBBITT. No, it does not include transportation. Mr. VOLKMER. It does not include transportation. Mr. EBBITT. That's correct. 3. Mr. VolkMER. The quoted average U.S. price, is this a market- quoted price average? Mr. EBBITT. This is the market price data from the trade publica- tion “Pulp and Paper International News.” Mr. VolkMER. All right. Well, now I’m going to ask you—I don’t know if— Mr. Chairman? Mr. ROSE. Yes, sir. Mr. VolkMER. If this is not along the purview of what we should be doing today and may be doing later, you let me know right away or, Mr. Ebbitt, you let me know right away. Mr. ROSE. Will the gentleman yield? Mr. VOLKMER. Yes. 22 Mr. ROSE. I certainly think that this is a proper line of question- ing, but I think I may be able to help you here. Mr. Ebbitt, basically what you're reporting in this part of your draft report is that you not only found foreign tobacco that had been mingled with U.S. tobacco and shipped overseas guaranteed as all United States, but you did find instances in which U.S. wood- pulp was mingled with foreign woodpulp and sold as all U.S. wood- pulp. Mr. EBBITT. That's correct, Mr. Chairman, but I need to stand corrected here. The item that we're talking about, in this report that you now have, is not foreign content. - Mr. Rose. Why is it in this report? Mr. EBBITT. We have a problem with price— Mr. VolkMER. I was going to get to that next. Mr. EBBITT. We have a problem with price on woodpulp. In the previous report that we issued in September 1989, we talk about foreign content in woodpulp. In this particular report, we have some foreign content with Canadian furs and cattle and that sort of thing, but not woodpulp. Mr. VolkMER. So you mean in this report we will find also that perhaps under fur skins going to Korea and other places, there may be some foreign content in there? Mr. EBBITT. That's correct. Mr. VolkMER. And you also found foreign content in what else? Mr. EBBITT. In cattle between Mexico and the United States. Mr. VolkMER. Canadian beef or Mexican? Mr. EBBITT. Mexican. Mr. VolkMER. Mexican beef being shipped with American? Mr. EBBITT. Mexican beef was imported into the United States, fattened out here, and reexported. Mr. VolkMER. All right. Mr. Rose. It was reexported as U.S. beef with GSM full guaran- tee. Mr. EBBITT. That's correct. Mr. VolkMER. Now, the other thing—I, too, Mr. Chairman—just to get into the pricing, I see the pricing in the woodpulp, and when I turn to the next page I also find it in rice, where it just boggles my mind. Have you all gone deep enough to determine why a coun- try that's being the beneficiary receiving this product would pay this extraordinarily high price? Mr. EBBITT. Congressman, that's part of the investigation effort that's continuing, to try and understand exactly what that differ- ence is. Right now, we just really don’t know. And let me just sum- marize— Mr. VolkMER. We were guaranteeing the higher price. Mr. EBBITT. That's correct. If I could just— Mr. VolkMER. But a person could purchase for that same price, in some instances, at least 1.5 times as many units. Mr. EBBITT. On the surface, that's what appears to be the case, but again, this particular finding is trying to describe what were the market indicators, the best indicators that we could find avail- able to compare what was happening on the private commercial sector at the same time these GSM sales were being made. So what we have are price indicators of private Sector operations versus 23 GSM operations, but exactly what those differences are are yet to be discovered, if we can discover that. Mr. VolkMER. And we don't know, of course, when that was guaranteed, and it went to the actual broker or whoever was han- dling the sale—through the guarantee, through the bank of the country that's importing, and they get their payment, right? l Mr. EBBITT. The American exporter gets his payment immediate- y, yes. Mr. VOLKMER. And if he buys on a market at the market price you've shown and sells 50 percent to 75 percent more, he's got a pretty good profit, hasn't he? Mr. EBBITT. That would appear to be the case if in fact that's ac- tually what happened. Mr. VOLKMER. If that's actually what happened. There is, of course, no provision—or if there is, maybe you can tell me where it is—where USDA officials and the FAS would have any authority to question actual pricing. Mr. EBBITT. Well, yes, and this is the whole gist of what we're reporting here, that FAS needed to have an internal review process when these transactions are passing back into their agency to ask these kinds of questions: What is the reason for these large differ- ences? And that's the in-house process that FAS instituted begin- ning in 1990 to review and to ask these questions. Mr. VolkMER. Before that, they had none? Mr. EBBITT. Before that, the review was really minimal as far as prices were concerned. Mr. VOLKMER. When do you anticipate—I may have missed it. When do you anticipate that you'll be concluded with this and be prepared to tell us all about it? Mr. EBBITT. Again, Congressman, we've just received the agency response to that draft this morning, and we need to analyze their comments and insert them as appropriate into the report. I would hope that that would be done within the next 2 weeks. Mr. VolkMER. Thank you very much. Mr. Chairman, can I just make a little short statement? Mr. ROSE. Yes. Mr. VolkMER. After reviewing the statement here and looking at GAO’s statement, I do think that we need to continue to look at this program as to what's happened in the past, and hopefully it doesn't continue to happen in the future. Mr. Rose. I would thank you for that and say that your subcom- mittee is certainly welcome to have at this information, and I’m sure, Mr. Ebbitt, even though we requested much of it, you certain- ly have my permission to have Mr. Volkmer have anything that he'd like to see. He certainly has that right in his own stature. Mr. Coleman. Mr. Cole:MAN. Thank you, Mr. Chairman. Mr. Ebbitt, did you or members and representatives of your office ever meet with Mr. Crowder prior to the decision and as this decision was evolving for fiscal year 1990 on this program? Mr. EBBITT. We met with the agency and directly with Mr. Crowder a number of times on GSM activities. Mr. ColeMAN. Prior to the decision being made that we're talk- ing about here today? 24 Mr. EBBITT. I’m sorry. Which decision? Mr. ColeMAN. The one to provide $500 million in 1990, I think it is, that's under question. Mr. EBBITT. Yes, we have. Mr. COLEMAN. And during those meetings, did you or any repre- sentatives of your office ever tell the Under Secretary that he should not go forward with these? That there was some question about them or that there may be anything wrong— Mr. EBBITT. Should not go forward with credits to Iraq.” Mr. COLEMAN. Yes. Mr. EBBITT. We did not say that, no. Mr. COLEMAN. So you were in the meetings where this was dis- cussed, and you never advised them that there was anything wrong with extending these credits, and—I want to emphasize your re- sponse to Mr. Roberts' questions—that there was no evidence of any funds being diverted from this program to be used for pur- chases of the weapons in Iraq. Furthermore, your audit did not reveal any wrongdoing by any employee of the USDA2 Is that cor- rect? Mr. EBBITT. We didn't reveal any wrongdoing by FAS employees other than the need to tighten up the management processes to— Mr. COLEMAN. No illegalities; these were management questions that you uncovered. Mr. EBBITT. That's correct. Mr. COLEMAN. I think that those management questions now should be addressed, too, and you have, I’m sure, proposed some suggested changes and reforms that have been implemented. It's my understanding that they have in fact been implemented. Is that correct, Mr. Ebbitt? Mr. EBBITT. We've been told by Mr. Crowder and by FAS that they have a pricing review program in place. That was put into place in early 1990, resulting from work that we were doing at that time, and we believe that the program is probably a pretty strong program. It appears that if they implemented the program as they've explained it to us, it should get at a lot of these basic ques- tions that we've raised in the audit. Mr. ColeMAN. Well, it's my understanding that some of those re- forms include a requirement that exporters certify to the FAS that the commodities are of U.S. origin. Is that one of the reforms? Mr. EBBITT. Yes, Congressman. Mr. ColeMAN. And furthermore, reforms contained in the farm bill last year exclude the so-called after-sales services, which may be a euphemism for a bribe or a kickback. Is that correct? Mr. EBBITT. It's possible. Mr. ColeMAN. And that this is now totally outlawed under the 1990 farm bill. Is that correct? Mr. EBBITT. Well, after-sales services have always been ille- al g Mr. ColeMAN. But we've made them unambiguously illegal. Mr. EBBITT. The farm bill, as I understand it, requires the foreign country to certify that there aren't after-sales services involved. Mr. ColeMAN. And that a new country risk analysis system is in place. Are you familiar with that? 25 Mr. EBBITT. I’m not directly familiar with that, no. Mr. COLEMAN. And that exporters who have violated any compo- nents of this program will be standing at risk themselves, not the taxpayers, to make up the difference on any guarantees. Are you familiar with that reform? Mr. EBBITT. Yes, I am. Mr. Cole MAN. And that's one that you recommended or that you support? Mr. EBBITT. We certainly support that. Again, that's been part of the program over the years. If the exporter violates the provisions of the guarantee, CCC always had the right to go back against the exporter. Mr. ColeMAN. Earlier, there was mention of this Rafadan Bank and a so-called missing file, and somehow this was tied to a memo by eight employees that has been discussed. I’m sorry, I don't un- derstand the connection between the memo of the eight employees and a missing file in a bank somewhere overseas. Could you pull those two together or are they irrelevant to each other? Mr. EBBITT. I don’t believe that I made the direct connection. Mr. COLEMAN. No, others here in questioning did. Mr. EBBITT. We looked at what the agency did have on file to extend a credit limit regarding that bank as they participated with Iraq in the program. We didn't find a file. We didn't find much evi- dence that financial reviews had been made to make that determi- nation. I think the connection that's been drawn here is that deci- sions were being made, as that memo would indicate, to extend more credit to Iraq. We have Rafadan Bank involved directly in the payback on that additional credit amount, and without the bank file, without a good financial analysis to determine if that bank is in good shape or not, it's questionable as to whether or not you should extend more credit. Mr. ColeMAN. As I understand it, then, the only constant be- tween the two of them was that they were using the same bank. Mr. EBBITT. All of Iraq's transactions were through the Rafadan Bank. Mr. ColeMAN. And now there has been mention about the move- ment of some amounts from the so-called direct loans to the guar- anteed loans. Was there anything that you uncovered or discovered that would indicate that any of those funds that were transferred did not go toward the purchase of agricultural commodities? Mr. EBBITT. That memo has just recently been brought to our at- tention. The only thing we've been able to do at this point, Con- gressman, is to discuss with the agency what that transfer was all about. I understand the transfer was made. I don't know today if additional guarantees were extended as a result of that transfer or not. Mr. ColeMAN. The guarantee program, of course, has the same requirements as the direct loan program, and that is to purchase agricultural commodities. Isn't that true? Mr. EBBITT. That's the objective, yes. Mr. ColeMAN. So to conclude that there was a transfer from one account to another, that somehow these moneys were siphoned off or used for other purposes, would be a great leap in logic and con- 26 clusions that don't really bear any evidentiary facts here. Is that correct? Mr. EBBITT. I’m not sure, Congressman. As I indicated, I under- stand what happened with the money. Whether or not that's legal is a question that the General Counsel needs to address directly. Mr. COLEMAN. I thank you very much for your answers. Mr. Rose. Let me ask you one followup question. Were you asked to find out whether or not after-sales services had been used to pur- chase anything of military value to Iraq.” Mr. EBBITT. Were we asked to find that out? Mr. ROSE. Yes. That wasn't part of your mandate in this— Mr. EBBITT. Not specifically. We went into this review attempt- ing to identify reasons for price differences between guarantees and the world price indicators. As part of that, we tried to identify what makes up that gap, that difference. One of the reasons in some of the cases we worked on was some amounts of after-sales services that came to light while we were making our review. Mr. Rose. Now, some of those after-sales services were in the form of cash, for example, to a bank in Germany. Do you have re- ceipts for what that money was used for? Mr. EBBITT. No, we don’t. We know— Mr. RoSE. So you can't say what use was made of those funds, can you? Mr. EBBITT. In regard to the cash, I don't know what happened to that money or what they did with it. Mr. Rose. And you're aware that certain of the GSM customers were asked to furnish, at no cost to the taxpayers, tractor-trailer trucks, are you not? Mr. EBBITT. There were trucks provided, that's correct. Mr. ROSE. And you don't know what they were used for? Mr. EBBITT. No, I don't. Mr. Rose. Thank you. Any other followup questions? [No response.] Mr. Rose. Gentlemen, thank you all very much, and we'd appre- ciate it if you would stick around. We might want to ask you some more questions later. Mr. EBBITT. Thank you, Mr. Chairman. Mr. Rose. Thank you for an excellent job. I’d like to call next Dr. Allan Mendelowitz, the Director of Inter- national Trade, Energy, and Finance Issues, National Security and International Affairs Division of the GAO, accompanied by Mr. Phil Thomas, Assistant Director, and Ms. Julie Gerkens, Project Manager. STATEMENT OF ALLAN I. MENDELOWITZ, DIRECTOR, INTERNA- TIONAL TRADE, ENERGY, AND FINANCE ISSUES, NATIONAL SE- CURITY AND INTERNATIONAL AFFAIRS DIVISION, U.S. GENER- AL ACCOUNTING OFFICE, ACCOMPANIED BY PHIL THOMAS, AS- SISTANT DIRECTOR, AND JULIE GERKENS, PROJECT MANAGER Mr. MENDELowITz. Mr. Chairman, I'd like to introduce Mr. Phil Thomas, who is our Assistant Director for agricultural trade issues, 28 monly referred to as the NAC-considered this funding level in August 1988, there were substantially differing views among the members as to what was the appropriate level, and some NAC members believed the appropriate level justified by Iraq's riskiness was about $600 million; others believed that from our national in- terest perspective, over $1 billion would be appropriate. FAS risk assessment documents noted that Iraq was effectively tying repayment of past debt to continued participation in the GSM export credit guarantee programs. Despite these problems, FAS believed it had little choice but to continue the programs, be- cause they feared that by stopping or severely reducing the pro- grams the important Iraqi market would be lost, and Iraq would refuse to pay its past CCC-guaranteed loans. In September 1989, FAS proposed an additional $30 million in GSM-102 credit guarantees for Iraq for that fiscal year 1989 and $1 billion in GSM-102 guarantees for fiscal year 1990. Because of the preliminary findings from the BNL investigation and the discovery of possible improprieties in the Iraqi GSM programs, two members of the NAC requested that discussion of the GSM programs for Iraq be delayed pending the outcome of the investigation. Another member of the NAC at the time supported the $1-billion level. As an alternative, FAS proposed a two-pronged approach with an initial $400 million allocation and the remainder to be offered if no improprieties involving Iraq surfaced in the BNL investigation. Al- though other members of the NAC approved the $400-million level, two members voted against it. In November 1989, Agriculture officials traveled to Iraq and of. fered $500 million, with additional guarantees contingent on not finding evidence of Iraqi complicity in the BNL scandal. Iraq agreed to the $500 million but would not accept conditions on fur- ther guarantees, and in effect, the fiscal year 1990 allocation was limited to $500 million, half of the preceding year's allocation. And I might interject at this point, given the repayment terms associated with these loan guarantees, this proved particularly for- tuitous, because it meant that at the time of the Iraq invasion of Kuwait our exposure was in fact substantially less than it would have been had a higher level of export credit guarantees been ex- tended for 1990. Mr. ROSE. How much less? Mr. MENDELowITz. I don't have the specific numbers at my fin- gertips, but basically what we had was $1 billion outstanding, roughly, from 1988 that was to be paid off over 3 years and then $1 billion outstanding from 1990 that was to be paid off over 3 years, and then in—I’m sorry. Let me back up. We had $1 billion outstanding in 1988 that was to be paid off over 3 years, $1 billion outstanding in 1989 that was supposed to be paid off over 3 years, and then the final $500 million made avail- able in 1990 that was to be paid off over 3 years. So that on the 1990 debt, they started paying on $500 million, and for the 1988 and 1989 years they had already made substantial repayments on that $2 billion that was already outstanding. That was just my point, that had we given them $1 billion again in 1990, our expo- sure would have been substantially greater. 29 In closing, the GSM programs to Iraq were driven by foreign policy and agricultural trade objectives which did expose the U.S. Government to substantial financial loss. During the period in which the exposure to Iraq was growing, there were significant pro- gram irregularities, including the provision of after-sales services, the export of non-United States origin commodities, and unauthor- ized banking practices. On a number of occasions over the past 3 years, we have pointed out the need for stronger internal controls and better management of the GSM programs. Had the Agriculture Department responded to our concerns more quickly, information on program irregular- ities might have surfaced sooner and resulted in a smaller U.S. Government exposure to financial loss. Two types of changes should make the future of the programs less problematic. Agriculture is attempting to address problems GAO identified through management and regulatory reform, and the 1990 farm bill mandates a variety of management reforms and prohibits the use of GSM export credit guarantees for foreign policy or foreign aid purposes. Implementation of this provision, in effect, restricts program determinations to the consideration of export market opportunities and financial risk to the CCC. With decisionmaking so constrained, further financial risks should not be borne by the CCC as a result of foreign policy or other objectives that are now prohibited by law. Because Mr. Coleman essentially asked a question in his opening statement, if I can I would like to address a comment to you as I close, and that is with respect to the policy considerations that were driving decisionmaking under the program. We were not making a judgment as to the appropriateness or nonappropriate- ness of those policy objectives. Clearly, any time you have a pro- gram that involves international relations, even if it's an Export Credit Guarantee Program, it would be natural to assume that for- eign policy considerations would play a role. What we tried to do was to lay out in the record that, in fact, these were considerations. It was the Congress in the 1990 farm bill that made the determina- tion that foreign policy and foreign aid should not be justifications for the GSM-102 program initiatives, and that was the only point that we were trying to make. This concludes my statement, and we'll be happy to try to answer any questions you might have. [The prepared statement of Mr. Mendelowitz appears at the con- clusion of the hearing.] Mr. ROSE. Thank you very much. You said in the opening part of your statement that what we have observed with Iraq's participation in GSM-102 and -103 was something new, and that was that FAS was financing the freight costs. Can you expand that a little bit? Mr. MENDELowITz. Our understanding is that Iraq represented the first country to receive export credit guarantees not only for the commodities that it was purchasing but also to cover the cost of shipping the agricultural commodities to the destination. This was in response to a specific request on the part of Iraq, who basically was short of hard currency because of the costs associated with the 47–86O O – 92 – 2 30 war with Iran. Having financing available for the shipping cost helped to free up their limited hard currency for other purposes. Mr. Rose. So if you’re short of hard currency, you don’t have much ability to buy things that you might need for your country whether you're at war or not, so a cash payment would be very helpful as an after-sales service if you're short of cash, would it not'. Mr. MENDELowITz. I think so. I think that's a fair judgment. Mr. Rose. You've answered my first question. My second ques- tion is what percentage of the guaranteed port value was repre- sented by shipping costs? In other words, I know there was a spread there. What was the highest percent of the guarantee that you discovered was shipping costs? Mr. MENDELowITz. The shipping costs to Iraq were somewhat higher than normal, because the Iran/Iraq war had closed direct access to the sea for Iraq, and Iraq's shipments were coming to the Port of Aqaba in Jordan and then carried overland to Iraq. The Iraqis claimed that they were paying as much as 25 or 30 percent of the value for shipping, that is, 25 percent of the value of the commodity was represented by shipping costs. We looked at the programs overall to determine how much of the outstanding guarantees covered shipping costs. We identified, I be- lieve, something on the order of $1.4 billion in guarantees included shipping costs, and we identified about $170 million out of that total which represented the actual specified cost of shipment. This is for everyone who benefited from the program, and that was in 1988. Mr. ROSE. You very properly pointed out that in the 1990 farm bill proposals which I proposed were adopted that would tighten up on the administration of this program. Mr. Thomas and Mr. Rhinehorn, you attended the farm bill con- ference last year. Would either or both of you state whether or not the United States was supportive or was it against these proposals regarding transshipment and paperwork access? Mr. THOMAs. I specifically recall that the U.S. Department of Ag- riculture officials who were present there were opposed to them. They felt that they would be an unnecessary burden to the trade and create a disincentive to using the program. Mr. Rose. Thank you, Mr. Thomas. How much GSM credit have we extended in the past 3 years to Iraq.” Mr. MENDELowITz. For the 3 fiscal years 1988, 1989, and 1990, Agriculture approved levels for 1988 at about $1.1 billion, for 1989 at about $1.1 billion, and for 1990 at about $500 million, and that comes out to roughly $2.6 billion. Mr. Rose. How much has not been paid back? Or let me put it another way. What is our exposure or likely exposure from these transactions? Mr. MENDELowITz. When payment on the guaranteed credits was suspended in August with the invasion of Kuwait by Iraq, the out- standing guarantees were somewhere in the neighborhood of about $2 billion. Mr. ROSE. Over the past several years, legislation has required that CCC make available not less than $5 billion under its short- 31 term Export Credit Guarantee Program and not more than $1 bil- lion for the intermediate-term Export Credit Guarantee Program, and the total amounts of guarantees allocated during the past 3 years under both GSM-102 and –103, if you have them there, what were they for 1988, 1989, and 1990 for all countries? You've given us the Iraqi breakdown. Mr. MENDELowITz. The total guarantees approved in 1988 were approximately $4.5 billion, in 1989 it was roughly $5.2 billion, and in 1990 it was about $4.3 billion. Mr. Rose. Why haven't allocated amounts under GSM-102 met or exceeded the minimum required by law, and why haven’t the fºnts under GSM-103 approached the maximum permitted by aW! Mr. MENDELOWITZ. I think that you have to look at the potential market and you have to look at the financial risks that different countries represent when you administer this program. I believe that potential markets for U.S. agricultural exports can be broken into roughly three broad categories. At one extreme, you have the highly credit-worthy countries which have no need of export credit guarantees to purchase agri- cultural commodities from the United States. At the other ex- treme, you have countries whose financial conditions are so poor that they don't represent any kind of acceptable commercial risk now and don't represent an acceptable commercial risk over the foreseeable future, and those are the countries who basically are recipients of food aid, because they just don't have the financial strength to borrow money to buy food exports. In that middle category between the two extremes, you have countries that are not sufficiently, financially, and economically well off to represent good credit risks for the private sector, but they do represent reasonable risks over the longer term in the sense that their economies appear to be developing, they appear to be growing stronger. And it's these countries that the GSM-102 program is targeted at. So what you need to do is you need to identify countries that rep- resent somewhat greater risk than the private market would con- sider acceptable but at the same time somewhat less risk than we think is appropriate for a country that's a food aid recipient. And my guess is the reason why they haven't hit the total specified in the law is they basically have had difficulty identifying countries that represent the appropriate risk and the appropriate market op- portunities. Mr. Rose. Thank you. A September 22, 1988, memo sent to the FAS General Sales Manager and signed by eight senior staff at FAS stated their objections to the reprogramming of additional GSM amounts from other countries to Iraq. Their concern at the time was that Congress was considering sanctions against Iraq due to Iraq's human rights violations and that if sanctions were passed there would be a high risk that Iraq would not repay debt it al- ready incurred under the program. Was this memo an unusual action on the part of the eight sign- ees, and what action was taken in response to the memo” Mr. MENDELOWITZ. I think that to the extent that I have not seen that done before, I have to assume that it represents a fairly un- | say that any program that would be of benefit to that country was in support of that program. I don't mean to quibble, but this cer- tainly was not the intent of this committee or the Congress. Would you care to comment as to the purpose of the GSM program? I think we're getting a little far afield here if we say it was to Sup- port Iraq. Mr. MENDELowITz. No, I think that you have correctly character- ized the purposes of the program, but I might point out that when Iraq became eligible for the program back in 1983, it was our un- derstanding it was a part of the effort on the part of the United States to tilt toward Iraq in the Iran/Iraq conflict. When we tried as a government or as a country to give some meaning to the tilt toward Iraq, it was very difficult for the U.S. Government to pro- vide much substantive basis to the tilt, because Iraq was still on the list of countries that supported terrorism and, therefore, was ineligible for a whole series of potential benefits from the U.S. Gov- ernment. About the only thing that we could make available to Iraq at the time were export credit guarantees under the GSM-102 and -103 programs. Mr. Roberts. Well, you've raised the issue of the foreign policy situation again in regard to our export programs and almost to a person, members of this committee have tried to define our efforts as using agriculture as a tool for peace as opposed to a foreign policy weapon. That sounds pretty good, but it depends on the time and the event and the place. I can remember meeting with Secretary Weinberger back in the days of the Reagan administration when we allegedly ended the grain embargo, but for 2 years we didn't have any contract sancti- ty. In meeting with the Secretary in regard to many of these pro- grams to honor our commitments, i.e. to compete in the market- place, we were told in not so gentle language with adjectives and adverbs that I won’t repeat here that it will be a cold day in North Carolina before we send wheat to the Soviet Union, judging in regard to their behavior on human rights and what Secretary Weinberger indicated he thought was a very real threat. We raised unmitigated hell on this committee, saying that we should go ahead with contract sanctity, et cetera, et cetera. I know in your testimony before Mr. Schumer on the task force on urgent fiscal issues, which must be a very busy task force, you indicated that there were some foreign policy problems in this, and we all know that Mr. Schumer, Mr. Glickman, Mr. Berman, and others had a very serious concern, as we all shared, in regard to the human rights violations by Iraq and by their policy more espe- cially with Israel, i.e. why on Earth are we doing this, and on one hand we try to sit like the lady at the Justice Department with a blindfold, saying, “Let’s have contract sanctity, and don't mix poli- tics with our trade policy or we get into ill-conceived embargoes to hurt the farmer and nobody else,” while on the other hand if you have a country like Iraq behaving like they did, without question we can’t do this. How do we work through this, Allan? You've been doing this now for some time in terms of shall we suspend this program for 180 days and take a look at it and march backward with our 34 Export Enhancement Program and our TEA Programs and what- ever? With the new world order here, should we not do this? Mr. MENDELowITz. We would not recommend suspension of this program or the EEP or other efforts to promote U.S. agricultural exports. In fact, we've gone on record any number of times, for ex- ample, with respect to EEP, calling for increased funding, as needed, to ensure that this important trade policy tool doesn’t wither in its effectiveness in helping to bring the EC to the negoti- ating table. But that does not mean that everything is well, and as we've pointed out, I think what we need to do is to make sure that we have in place the appropriate management and the appropriate internal controls to ensure that the program is operated effectively, to make sure the program is operated in a way that minimizes the opportunities for irregularities and abuse, and as I’ve said, we be- lieve both the 1990 farm bill as well as current management changes— Mr. Roberts. Well, the chairman was extremely instrumental in putting forth these proposals that are now in the farm bill, and I hope we can certainly live up to that. I'll ask you the same two questions I asked the Inspector General. One, are you aware of any specific wrongdoing by any employee within the USDA, and two, is it in your opinion that this export program somehow was manipu- lated to assist the Iraqi war machine? Mr. MENDELowITz. In response to the first question, the problems that we’ve identified with respect to USDA's operation of the pro- gram in the past have been management problems. We're not talk- ing about problems of wrongdoing. Those problems were quite severe. One of the things that we’ve tried to point out in our eval- uation and review of the program is that while GSM-102 is a pro- gram to facilitate lending by private borrowers and exports by U.S. farmers, the Federal Government assumes virtually all the risk be- cause of the loan guarantee, and when you have the Federal Gov- ernment assuming such a tremendous amount of risk, it no longer can be viewed as a purely commercial undertaking in which Agri- culture should not get deeply involved in the transaction. Mr. Roberts. Having just voted for $30 billion for the S&L bail- out, I’m very much aware of the management problems that lead to deep, deep holes in pockets. But no specific wrongdoing on the part of any USDA employee. What about the war issue? Mr. MENDELowITZ. Let me just say, in respect to your first ques- tion, I think that is correctly the case, and I think your comparison to the S&L bailout is exactly right on the mark. That's what we're talking about. Just as in the S&L's, we have the Federal Govern- ment assuming the risk, and the private sector went out there and engaged in practices that were less than responsible because they weren't bearing the risk. With respect to the second point, I think that the issue of wheth- er we supported the Iraqi war effort is not so much an issue of whether a few dollars here or there may have been diverted specifi- cally to the war effort. The issue is really the fungibility of hard currency. Iraq had limited hard currency available during the war, it needed a lot of money to support its war effort, it needed a lot of money to feed its people. It had to do both those things: Feed its people and pursue the war effort. To the extent that we made 35 available hard currency credits to Iraq that it could not have gotten otherwise, we increased the availability of hard currency, which meant that Iraq didn't have to come up from its own inter- nal sources with the necessary funds to buy food— Mr. Roberts. Well, you're making the same argument that Sec- retary Weinberger made to me in 1982 in regard to the Soviet Union, that in fact we are making it easier for the Soviet Union to spend more money on armaments and terrorism and exporting communism all around the world, and it was our point that they're going to force their people through whatever deprivation they need to do that anyway, and all you're doing is really trying to punish the individual Russian citizen, i.e. we're into some emergency aid now to help the people who are in the bread lines, and that other people are simply selling them this product, and you turn it over to the hardliners, which in fact if you use agriculture for a tool for peace, if it had not been for, say, Saddam and his craziness, that we could have used the food in that particular effort. Now, that's a debate that will probably go around this town for the next God knows how many decades. I think we've got enough of it, and— Mr. MENDELowITZ. In response to that observation, I think given the type of regime you have in Iraq, one would expect that the people would share some of the deprivation. But my guess is it's probably reasonable to say that 100 percent of what we might have denied them wouldn't have come out of their diet. Some proportion would come out of their diet, some would come out of funding— Mr. ROBERTS. Have you any observations, say, about the freedom- loving people of Yemen, Syria, Panama, Ecuador, Colombia, or the rest of the top 10 that receive this assistance? Mr. MENDELowITz. I think I would be— Mr. Roberts. You look a little like Henry Kissinger, I thought maybe you ought to be able to respond to that. [Laughter.] Mr. MENDELowITz. I think I would be speaking beyond the bounds of what I have come here to speak about if I delved into that. Mr. Roberts. We'll have you answer that at the next hearing. Thank you, Mr. Chairman. Mr. ROSE. Mr. Volkmer. Mr. VolkMER. Mr. Mendelowitz, I'm just wondering, as you did your GAO study, it appears it's more into the policy decision of the USDA in making these sales rather than into the sales were actu- ally, let's say, “Ohio,” as we use in the card games. Is that correct? Mr. MENDELowITz. I’m sorry? Mr. VolkMER. Did you look into such things as the high f.o.b. prices they were doing and whether it was after-sale services— Mr. MENDELowITZ. Yes. The specific price analysis and the other issues you raised are part of the IG investigation, and— Mr. VolkMER. I understand that. Mr. MENDELowITz. We didn’t want to— Mr. VolkMER. You didn't get into that, because they— Mr. MENDELowITZ. Yes, we didn't want to do the same thing they were doing. We were trying to coordinate what we did so we wouldn't find ourselves going to the same trough, so to speak. 36 Mr. VolkMER. Thank you, Mr. Chairman. That's all I wanted to clarify. Mr. ROSE. Mr. Coleman. Mr. COLEMAN. You mentioned that an important part of your review was that what's come out of this are managerial changes. Is that correct? Mr. MENDELowITz. That's correct, sir. Mr. CoLEMAN. I don't see anything in your report here today that really talks about those changes. I went through and relayed some of them to the Inspector General earlier about these reforms. Getting back to those, do you have any problems with any of the reforms that have been instituted or suggested such as requiring certifications of U.S. origin; such as again making illegal the so- called after-sales services, euphemistically bribes and kickbacks; of coming up with an improved country risk analysis system, for ex- ample? Are there any problems with any of these suggested changes and reforms? Mr. MENDELowITz. Those are exactly the kind of management changes that we had been recommending. Mr. ColeMAN. This is really what GAO is all about, isn't it, to make these types of recommendations and to review management procedures and to try to make suggestions to make them better? And I don't know where these came from, perhaps from OIG, but I'm glad that you're also supporting those as well. Mr. MENDELOWITZ. Those were our recommendations. Mr. ColeMAN. Were they? Well, good. I didn’t see them in your testimony, that's why I didn't think— Mr. MENDELowITz. No, Mr. Coleman, we've been reporting on these programs for the past 3 years. I think the first time was 1988, and we have a number of reports, and if you'd like we'd be happy to meet with you Mr. ColeMAN. By reference they're incorporated in here. Thank you. You're suggesting today that the United States may be look- ing at a $2 billion debt from Iraq because of the war and the fact that we extended these credits. Is that basically what you're sug- gesting? Mr. MENDELowitz. Well, when Iraq invaded Kuwait, there was outstanding approximately $2 billion in export guarantees on loans that Iraq stopped servicing. The loans went into default, and the holders of the credit instruments turned to the CCC to make good on the guarantees, and that's— Mr. ColeMAN. We speculate the Iraq–we don’t deal with Iraq economically, so we're speculating that perhaps they won't be paid back. But let me make this statement, if Iraq owes us $2 billion as a result of these credit extensions on these agricultural commod- ities, then it seems to me that the U.S. Government ought to re- quire as a condition of surrender of this war that Iraq make repa- rations specifically to pay back these accounts. Would you think that would be something that should be done? Mr. MENDELowITz. I think that any peace settlement will involve consideration of a whole range of claims. Mr. Col.FMAN. Why wouldn't these be included? Mr. MENDELowITz. And this is, I think, appropriately a claim that has to be put on the table along with the other claims. 37 Mr. COLEMAN. Your testimony also includes a discussion about the Banca Nazionale del Lavoro investigation. Is there any connec- tion to the FAS that there was any wrongdoing by those employees regarding this bank investigation, subsequent indictments any con- victions that may have flowed from that? Mr. MENDELowITz. Our understanding of the BNL case is that we do not at this point believe or have any reason to believe that there was some inappropriate relationship between FAS and BNL. What the BNL case represented, though, was some of the problems that we’ve identified with respect to bank participation. Mr. COLEMAN. Basically, the employees of that bank in Atlanta were ripping off their own bank in Italy. Is that basically the bottom line? And misrepresenting a lot of things to the U.S. Gov- ernment in the process. Mr. MENDELOWITZ. I would not venture a judgment on who was doing what in BNL. What we do know is that there were some bil- lions of dollars of loans extended to Iraq off the books. We do know that there were a number of U.S. banking laws and regulations that appear to have been violated, and that's on the basis of the fact that there is an indictment, but who was involved and at what levels in the bank I would not venture to judge. Mr. COLEMAN. This is a banking issue. It's not an FAS issue except that the bank happened to be doing business as a credit— Mr. MENDELowITz. No, I would disagree with that. Mr. Col.FMAN. Well, then, tell me what the— Mr. MENDELOWITZ. It's a FAS issue because— Mr. Col.FMAN. Tell me about why it should be. Mr. MENDELOWITZ. It's an FAS issue because this program works through banking institutions, and we have identified problems with bank participation generally in the program, and this was just one example of the types of problems. And along with the list of recom- mended changes that we came up with over the years of our work, we also made recommendations with respect to bank participation. So if they're in the program, their participation has to be managed. Mr. COLEMAN. As other banks are managed that have no prob- lems. Mr. MENDELOWITZ. Correct. Mr. COLEMAN. Let me ask you regarding the amount of money in after-sale accounts. Do you disagree with Mr. Crowder's testimony that he's going to make that less than 1/20th of 1 percent, or about $342,000, may have been in this type of a transaction? Is there any- thing to indicate that that's not an accurate figure? Mr. MENDELowitz. I have no basis for making a judgment on the accuracy of that number. I have no basis for saying he's wrong, but I have no basis for agreeing with it. Mr. Col.FMAN. OK. Mr. ROBERTS. Would you yield? Mr. Cole:MAN. Yes, I would yield to Mr. Roberts. Mr. ROBERTS. Allan, I think there has been an impression here that with this program Iraq had a very unique line of credit and cash in regard to the United States, and I notice on page 10 of your testimony you indicated at the bottom of page 10 that the $500 mil- lion in credit guarantees were exhausted. Iraq no longer considered offers from the United States; instead, it began purchasing com- 38 modities from Argentina, Australia, a member of the alliance, and Canada, a member of the alliance, the European Community, all members of the alliance, Saudi Arabia, members of the alliance, Thailand, and Vietnam. Australia, Canada, and Thailand did pro- vide some new credit, and the remainder of the purchases were for cash. To clear the way for further negotiations within the USDA, they asked for consultations with the officials to discuss the pro- gram irregularities that had been highly publicized and document- ed in past hearings and here today. As a matter of fact, when they came in to ask Dr. Crowder for an additional $500 million—well, these are my words—go simply chase a SCUD or something, but at any rate, he said, “No, I'm sorry, we're not going to do that.” o the point I’m trying to make is that we were not the only source here and that if we use 20/20 hindsight, we could have rep- resentatives from all members of the alliance saying, “Whoops, what a tremendous mistake.” And as a matter of fact, as I recall my conversation with the Department, did not Iraq pay for the first $500 million and an additional $300 million, expecting to get the extra $500 million, so we were about $300 million in the black? Is that not correct? Mr. MENDELowITz. That was exactly the point I was trying to make, although I didn't have the specific numbers at my fingertips. The decision on the part of the Department to extend the $500 mil- lion and then not extend additional credit guarantees left the United States in a better position than we would have been prob- ably if we had extended no guarantees to Iraq at the beginning of 1990. Mr. Roberts. Do you mean the USDA actually made a decision resulting in an additional $300 million from the Iraqi Government to the good of the United States taxpayer? Heavens! [Laughter.] Mr. MENDELowITz. Right here in front of all these witnesses, I would say yes. Mr. Roberts. That's incredible, Mr. Chairman. [Laughter.] Mr. MENDELowITz. Now, I think that the- Mr. ROBERTs. Well, I didn't ask for anymore, Allan. [Laughter.] Mr. MENDELowITz. I’m not going to detract from the fact that you liked the answer. All I was going to say was that Iraq at this time had a very troubled repayment history, and basically it had stopped paying on its international debt. It was in arrears to its international creditors who were not extending new loans, and the fact that we extended $500 million gave them the incentive to pay off on the preceding $2 billion that was still outstanding, so they were repaying at a faster rate than we were disbursing new loans. Mr. Rose. Thank you very much. We appreciate your testimony and your presence here today, and we hope you'll stick around. We may need you some more. I want to call at this time Richard Crowder, the Under Secretary for International Affairs and Commodity Programs, USDA. Mr. Coleman and Mr. Roberts, I have a number of questions that I'd like to ask Mr. Crowder, and I would like to suggest a little bit different procedure. In the interest of time, I’d like to ask questions as we go through his testimony, and you have full opportunity to respond or to ask him an additional lead-on question at any point or you stop him at any point for an amplification. In that way, I 39 think we can get through this much quicker than if he reads his testimony and then we go back and start all over again. Mr. CIOWſler, We hāVé à (OD) Of yOllſ Sfâtément that Wę Itſfiyêd last night. Is it the same statement that you have brought to the hearing today? Mr. CRowder. I have brought a summary statement that I would like to read that's not as lengthy as the other statement. Mr. Rose. We want you to read the whole thing. Mr. CROWDER. OK. Let me get the long version, then. STATEMENT OF RICHARD T. CROWDER, UNDER SECRETARY, INTERNATIONAL AFFAIRS AND COMMODITY PROGRAMS, U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY KEVIN BORSCH, OFFICE OF GENERAL COUNSEL, F. PAUL DICKERSON, GENERAL SALES MANAGER AND ASSOCIATE ADMINISTRATOR, FOREIGN AGRICULTURAL SERVICE Mr. CRowder. Mr. Chairman, I thank you for this opportunity to appear before you with my colleagues, Mr. Kevin Borsch, from our Office of General Counsel, and Mr. Paul Dickerson, the General Sales Manager. Since this is an important issue and very technical and complicated, I appreciate the opportunity to read the full state- ment and take a little bit longer than we normally would. From our personal conversations, Mr. Chairman, I know that you have always been interested in programs such as these that we ad- minister at the Department. You know that I share your concerns that these programs be administered properly, because any impro- priety or deviation from regulations and so forth should be consid- ered unacceptable. And that is why since my arrival at the Depart- ment, I have undertaken reviews and implemented changes in all the programs we manage, including the GSM, in order to assure the American public the highest degree of integrity in the oper- ation of our programs. I commend you and the committee, Mr. Chairman, for holding numerous hearings over the past 2 years where we have been able to explore ideas for program improvement together, and I hope we will continue to do so. And that's why we're here today, to examine how we can use the results of an audit we requested to better ad- minister these programs which are so important to our farmers. Mr. Rose. Can I stop you right there? Mr. CRowdER. Surely. Mr. Rose. My understanding is that you did not request the audit which the Inspector Jeneral did on commodity pricing in Iraq. The Office of Inspector General had an audit under way for after-sales services and foreign content as a result of work that they did for me on tobacco. You asked the Office of IG to expand their audit, as did I, and the whole issue of after-sales services or bribes came up because of the work the Inspector General did on tobacco. Is that not correct? Mr. CRowder. Mr. Chairman, this audit—and I can provide, I think, for the record a copy of the memo that I sent to the Inspec- tor General asking him for this audit— Mr. Rose. That would be helpful. [The information follows:] 40 DEPARTMENT OF AGRICULTURE 23 antwer. ". * * ă à. . of-FICE OF THE secPETARY ** s was Hincºron, D.C. 2025O ‘ºy ~~~~ May 8, 1990 MEMORANDUM FOR LEON SNEAD Acting Inspector General FROM: £” Richard T. Crowder f. Under Secretary SUBJECT: Iraq GSM-102 Program As you are aware, a team with representatives of FAS, CCC, OGC and the State Department met with Iraqi officials in Baghdad during the week of April 16, 1990 in furtherance of our administrative review of the GSM-102 program for Iraq. I understand that on Friday, May 4, the team briefed you and your staff on those meetings. 1. In the course of those discussions, representatives of the Government of Iraq disclosed that Iraq had, during the period 1987-1989, requested and, in some cases, received so-called "after-sales services" from U.S. exporters participating in the GSM-102 program. Based on information we have received from the trade in the past, these requests have been for a number of different benefits: cash rebates or discounts, agreements to use certain Iraqi shipping lines, additional agricultural products, and, in some cases, non-agricultural items (e.g., truck or air conditioning equipment). According to the Iraqi officials, this practice occurred primarily in conjunction with sales of wood products, but we understand that requests for after-sales service have been a common strategy of many Iraqi state enterprises. The provision of after-sales services in conjunction with GSM-guaranteed sales could constitute a violation of program regulations if the exporters did not subtract the value of the additional benefits from the contract price at the time that it reported the "port value" of the sale to CCC when registering for the CCC guarantee. As you know, the regulations require that port value be reported net of any "discounts or allowances." 42 Mr. CRowDER. And then we have the note back from the Inspec- tor General that expanded the objectives of which I had asked him and his staff to do. And as I will explain as we go through the testi- mony, this resulted from an administrative review that we were doing in the Department, and we, like you and the OIG working with you had found in the past, when we did the administrative review we found issues of after-sales service. We found issues of in- cluding freight in guarantees when freight was not included in the guarantees, and once we found those and published those in our ad- ministrative review, I believe it was in May 1991, we asked the In- spector General to expand the scope of this because his resources are greater than ours. Like our administrative review, the audit has uncovered program violations, and we don't like those, and they're unacceptable. But the worst fears of some have not materialized. Various agencies of the Federal Government have spent thousands of hours investigat- ing this issue, and we can say that to date there is absolutely no indication which: One, would indicate any wrongdoing on the part of any USDA employee, or two, that would suggest that the pro- gram has been misused in any way to support Iraq's weapons pro- curement efforts. Finally, Mr. Chairman, the time period covered by the audit pre- dates the many administrative changes that we have made in the program over the past 18 months, and we will, of course, continue our efforts to improve the operation of the program. And as OIG and the GAO witnesses have said this morning, we have been drawing upon their audits, their investigations, and so forth, and their recommendations to improve the operation of the program. I'd like to use the rest of my time to accomplish basically four things, Mr. Chairman. One, to outline for the subcommittee the events leading up to our request for this audit, because they are associated, Mr. Chairman, with the discussion of the $500 million that the GAO talked about this morning, and two, to comment briefly on the results of that administrative review, and, Mr. Chair- man, with your permission, I'd like to have included in the record of these hearings a copy of our administrative review, because it has a lot of history and so forth of what we had. Mr. Rose. Thank you for that. We'd be glad to have it. Mr. CROwdER. Thank you, Mr. Chairman. [The information follows:] 43 222 --T -32: Ç. 4, 2 B > xv. * U E D A N E W ſº P C 1 Unlted States Prº® - NEWS : :* : Agriculture Washington, D.C. 20260 Office of the Secretary Kelly Shipp (202) 447-4623 ADMINISTRATIVE REVIEW OF IRAQ GSM-102 PROGRAM WASHINGTON, May 21--Under Secretary of Agriculture for International Affairs and Commodity Programs Richard T. Crowder released today the results to date of the U, S. Department of Agriculture's administrative review of the Export Credit Guarantee Program (GSM-102) for Iraq. The administrative review has involved the examination and analysis, over the past seven months, of certain records pertaining to GSM-guaranteed sales to Iraq, including information submitted by exporters to the Commodity Credit Corporation (CCC), bank records and exporter records. As part of the review, a USDA team travelled to Baghdad for discussions with Iraqi officials, and review of Iraqi documents, on April 17-22, 1990. The Office of the General Counsel, the Foreign Agricultural Service, CCC and the Department of State were represented on the review team. The administrative review focused on four particular potential problem areas identified by USDA: unusually high commodity prices in G&M sales to Iraq during the period 1985-1967, Iraqi requests to exporters for "after sales services"; attempts by Iraq to impose certain taxes on GSM transactions; and questions regarding the arrival of commodities in Iraq. The U.S. government has not incurred any losses as a result of GSM-guaranteed sales to Iraq. Iraq has participated in the GSM program since 1963 and has purchased more than $4.5 billion in U.S. agricultural products. 0561 44 EXECUTIVE SUMMARY REPORT: USDA ADMINISTRATIVE REVIEW OF IRAQ GSM-102 PROGRAM In October, 1989, the U.S. Department of Agriculture and the Commodity Credit Corporation (hereinafter "USDA") initiated an administrative review of certain aspects of the Export Credit Guarantee (GSM-102) program for Iraq. This administrative review was undertaken in response to allegations that surfaced as a result of the investigations of the Atlanta, Georgia agency of Banca Nazionale del Lavoro (BNL), about possible irregularities in the GSM-102 program for Iraq. This review focused on certain transactions and issues that were identified as a result the BNL investigation in Atlanta. Iraq began participating in the GSM-102 program in 1983 during which approximately $214.7 million in sales of agricultural commodities were guaranteed by CCC. Program levels increased each year thereafter, reaching a high of $1.051 billion in FY 1989. For FY 1990, program levels were set at $500 million, and to date, nearly all of that line has been registered for guarantees with CCC. Review of the Iraq GSM-102 program began last fall after USDA learned of allegations that approximately $720 million of CCC- guaranteed loans were part of a loan portfolio being investigated by the Office of the United States Attorney for the Northern District of Georgia. Allegedly, the CCC-guaranteed loans were part of a clandestine loan operation in which officials of the Atlanta branch of Banca Nazionale del Lavoro (BNL) had booked more than $2 billion in unauthorized and unreported loans to Iraq. As a result of its initial inquiries into these loans, USDA initiated an administrative review focusing on the following issues: o unusually high FOB prices obtained by exporters in connection with GSM-guaranteed sales to Iraq financed through BNL; o the arrival in Iraq of agricultural commodities shipped under the GSM program. o provision of additional goods or monetary rebates, as so-called "after sales service", in connection with GSM-guaranteed export sales to Iraq. o payment of certain Iraqi domestic taxes in conjunction with GSM-guaranteed sales. 45 The USDA administrative review has involved review of BNL records of GSM-102 transactions; review of CCC records; review of a certain exporter records; telephone interviews with several companies involved in the agricultural export trade; and discussion with officials of the Government of Iraq and its various state purchasing enterprises, and review of Iraqi records, during a visit to Baghdad on April 18-22, 1990. As a result of its administrative review, and its analysis of bank, exporter and Iraqi records, USDA has reached some initial conclusions about past conduct of the Iraq GSM-102 program. They are as follows: (1) . USDA analysis indicates that during the period 1985- 1987, sale prices to Iraq for corn, rice and sugar under the GSM- 102 program were much higher than price levels in other markets. Price levels paid by Iraq appear to be at least $10/MT higher than benchmark world prices for rice and corn, and $15-40/MT higher for sugar. It appears that these price levels may have resulted in part from supplier perceptions that Iraq was a very high risk market due to wartime conditions; because of the limited number of U.S. suppliers who were willing to participate in this high risk market; and, Iraq’s policy of seeking freight financing which only a limited number of suppliers able or willing to provide. (2) In some of the higher priced transactions reviewed, it appeared that a portion of the high FOB prices reported to CCC -- approximately $8-10/MT -- represented an allocation by the exporter of what should have been considered either freight costs or freight financing charges. It appears, therefore, that some this "allocation" technique may have been used to shift some of the freight financing of a C&F sale to the loan guaranteed by CCC during a time period in which CCC did not permit financing of freight under its guarantees, and that Iraq agreed to these allocations. This practice may have constituted violations by certain exporters of program regulations. While these allocations did not result in any losses to CCC or the U.S. Government, they did result in a diminution of guarantee amounts available under the program. (3) The USDA administrative review uncovered no evidence to suggest that there has been diversion of commodities sold to Iraq. The lack of "proof of arrival" in either bank or exporter records appears to be linked to the complexity of overland shipment system that Iraq had to develop after its Basra port was closed during the height of the Iran-Iraq war. It appears, based on a review of sample records, that Iraq maintains records to establish proof of arrival for its GSM purchases. 46 3 (4) On several occasions during the period 1987-1989, state enterprises of the Government of Iraq appear to have requested "after-sales services" from U.S. exporters, either in the form of requests for additional agricultural products, for non- agricultural products (e.g., truck parts or tires), for cash rebates or discounts, or for use of designated Iraqi shipping companies. Iraq has identified several exporters who apparently provided after sales service in response. That information has been turned over to USDA’s Office of Inspector General for further investigation. Iraq’s Deputy Minister of Trade has provided CCC with a letter confirming that the Government of Iraq has instructed all of its state enterprises not to request or accept after sales services in connection with any future GSM contracts. (5) Iraq has also requested some exporters to assume responsibility for paying a domestic Iraqi "stamp tax" in connection with GSM transactions. Iraq's Deputy Minister of Trade has confirmed in a letter to CCC that Iraq has changed its policy and will, in the future, specifically exempt GSM transactions from application of this tax. 47 MAY 21 S30 TO: Richard T. Crowder Under Secretary for International Affairs & Commodity Programs Alan Charles Raul General Counsel FROM : Kevin J. Brosch International Affairs & Commodity Programs Division, Office of the General Counsel F. Paul Dickerson, General Sales Manager and Associate Administrator, Foreign Agricultural Service Lawrence T. McElvain Director, CCC Operations Division, Foreign Agricultural Service RE: USDA Administrative Review of Iraq GSM-102 Program. This report summarizes the findings and conclusions to date of an administrative review, conducted by the U.S. Department of Agriculture and the Commodity Credit Corporation (hereinafter "USDA"), of certain aspects of the Export Credit Guarantee (GSM- 102) program for Iraq. This administrative review was undertaken in response to allegations that surfaced as a result of the investigations of the Atlanta, Georgia agency of Banca Nazionale del Lavoro (BNL) regarding possible irregularities in the GSM-102 program for Iraq. The USDA administrative review has involved review of BNL recordis oa. GSM-1 12 trans. ons; review of CCC records; review of a specific and limited number of exporter records; telephone interviews with several companies involved in the agricultural export trade; and discussion with officials of the Government of Iraq and its various state purchasing enterprises, and review of Iraqi records, during a visit to Baghdad on April 18-22, 1990. This review was not intended to be a comprehensive study of all past GSM-102 transactions with Iraq; rather, it focused on a limited set of transactions and issues that were identified as a result of the BNL investigation in Atlanta. This report includes description of: background information about the GSM-102 program generally, and the Iraq GSM-102 program in particular; USDA’s preliminary review of specific bank and exporter records; information obtained as a result of USDA's April 18-22 visit to Baghdad; and findings with respect to 48 certain issues about the conduct of the Iraq GSM-102 program raised by the BNL affair. BACKGROUND The GSM-102 Program for Iraq The Export Credit Guarantee Program (GSM-102) was developed administratively by the Commodity Credit Corporation in 1980, pursuant to the authority granted under section 5(f) of the CCC Charter Act. That provision directs CCC to "Export or cause to be exported, or aid in the development of foreign markets for, agricultural commodities. . . ." 15 U.S.C. 714c (f). Program regulations were promulgated and are codified at 7 CFR Part 1493. Currently, section 1125 of the Food Security Act of 1985 wandates that CCC make available not less than $5 billion annually in export credit guarantees under this program. Since the program began in 1980, approximately 40 foreign countries have participated. Under GSM-102, the CCC helps to make available private credit, on deferred payment terms of three years or less, by guaranteeing repayment of loans made for export purchases of U.S. agricultural commodities. At the beginning of each fiscal year, the CCC develops a list of participant countries based on information obtained through the trade, from the Foreign Agricultural Service, and from interested trading partners. In general, countries eligible to participate are those which are unable to purchase U.S. agricultural commodities in the cash markets, but are interested and able to purchase those commodities if short term credit is made available. CCC then allocates the target guarantee amount among those countries, and establishes specific "lines" of credit guarantees by commodity. These country and commodity plans are presented for review to an interagency group, the National Advisory Council on International Fiscal and Monetary Policies ("NAC"). After country allocations and commodity lines have been set, they are announced publicly to the trade. An exporter who seeks a CCC guarantee must conclude a firm sale for a commodity with the a purchaser in a participant country. The purchaser must agree to purchase the commodity on credit terms of three years or less, with payment to be made under a foreign bank letter of credit issued by a CCC-approved banking institution in that foreign country. If, at the time the exporter seeks to register its sale, there is a sufficient guarantee amount available and the sale meets regulatory requirements, the CCC issues a payment guarantee. The exporter may then assign its proceeds of sale and the right to payment under the CCC guarantee, to a U.S. financial institution. 49 3 In the case of a payment default under the foreign bank letter of credit, CCC will pay the exporter or its assignee 98 percent of the principal amount due, and up to 4 and 1/2 percent interest. When it makes payment under a guarantee, CCC takes rights of subrogation, thus permitting it to pursue the claim against the defaulting bank or against the foreign country. Iraq began participating in the GSM-102 program in 1983, shortly before formal diplomatic relations with Iraq, which had been severed in 1967, were reestablished. In the first year in which Iraq received guarantee allocations under GSM-102 program, approximately $214.7 million in sales of agricultural commodities to Iraq were guaranteed by CCC. Program levels increased each year thereafter, reaching a high of $1.051 billion in FY 1989. For FY 1990, program levels were set at $500 million and, to date, nearly all of that line has been registered for guarantees with CCC. For the first four years of the program, CCC registered the value of sales of Iraq under the GSM program on the basis of the commodity value, FOB U.S. port. In late 1987, in response to requests by exporters serving that market to accommodate the need for freight financing of agricultural sales, USDA changed its policy to permit exporters to register their sales to Iraq on the basis of the C&F values. The GSM regulations were amended to reflect this change in policy. The BNL Investigation In August, 1989, the Office of the United States Attorney for the Northern District of Georgia was told that officials at the Atlanta branch of Banca Nazionale del Lavoro (BNL) allegedly had been conducting a clandestine "greybook" loan operation, and had booked more than $2 billion in unauthorized and unreported loans to Iraq. This information led to the issuance of search warrants, FBI inspection of BNL bank records and initiation of a grand jury investigation under the auspices of the Office of the United States Attorney. USDA became involved in the investigation when federal investigators and banking officials determined that approximately $750 million of the greybook loans resulted from assignments of letter of credit proceeds for agricultural sales in conjunction with export credit guarantees issued by the Commodity Credit corporation (CCC) under its GSM-102/103 programs. Investigators with USDA’s Office of the Inspector General (USDA-OIG) began assisting the U.S. Attorney’s investigation in early September, and have continued to work on the case since that time. The BNL investigation has proceeded in the grand jury since that time. Indictments have yet to be returned. The specific 50 theories being pursued by the United States Attorney, the identity of targets of that investigation, and the evidence developed are protected by the rules pertaining to grand jury secrecy and that information has not been available to USDA. In late September, 1989, questions were raised about possible irregularities in connection with the GSM-102 program for Iraq. These questions were apparently motivated by the large amount of CCC business that was conducted by BNL-Atlanta, as well as allegations that Atlanta-branch BNL officials may have received payments from exporters who export sales included some agricultural financed with the assistance of CCC export loan guarantees. Upon learning of these rumors, USDA officials sought additional information, and consulted with USDA-OIG officials in Atlanta. USDA ADMINISTRATIVE_REVIEW Initial Information Received: Review of BNI, Bank Records On Thursday, October 5, 1989, USDA officials in Washington were briefed on the current status of the BNL investigation by a USDA- OIG investigator from Atlanta who was assigned to that case. USDA officials learned that the investigation centered on possible bank fraud in the arrangement of large amounts of undisclosed loans, and bank reporting violations. The investigation was also looking into possible kickback payments, questionable "consultant payments", and other irregularities. While the investigator was not aware of any specific irregularities affecting the GSM program, he cautioned that the investigation was at a very early stage and noted the large amount of GSM loans in the BNL portfolio. USDA personnel from the Foreign Agricultural Service (FAS) and the Office of the General Counsel (OGC) were dispatched to Atlanta to gather additional information. On the afternoon of October 11, 1989, and a week later on October 18-19, USDA personnel also visited the BNL offices in Atlanta and reviewed records of GSM guaranteed transactions in the BNL files. This review was conducted pursuant to USDA's regulatory authority to review exporter and assignee records, in accordance with the provisions of 7 CFR Part 1493. They were able to review approximately 50 GSM files and associated letter-of-credit files, and spoke with both USDA-org investigators and with bank examiners from the Federal Reserve. In this initial review, USDA officials focused on several potential problem areas: 5 l o possibilities that GSM exporters that made sales to Iraq may have made personal payments in cash to officials of the BNL Atlanta branch. o apparent lack of documentation in the BNL files demonstrating that agricultural commodities shipped to Iraq under the GSM program arrived in Iraq. o suspicions that exporters doing business with Iraq through BNL might have received high prices and made unusually high profits; o possibilities that GSM exporters were being required to provide additional goods or to rebate money, as so- called "after sales service", in connection with their export sales to Iraq. During the same time period, USDA attorneys also interviewed officials of one exporter who had complained, independent of the BNL matter, about requests from Iraq for so-called "after sales service" in connection with GSM sales. As a result of those discussions, interviews and document reviews, USDA attorneys made the following evaluations about the evidence then available regarding possible irregularities in connection with the GSM credit guarantee programs: (1) "Exporter Payments to Bank Officials." There was no evidence of any payments to bank officials in the GSM files examined. (2) "Arrival of Commodities at Destination." There was no specific evidence of any GSM shipment having been diverted prior to reaching Iraq. The concerns about arrival at destination appeared to have stemmed from the " "ck of shipping documents, bills of lading, or landing certif. -ates in the 3NL files that would have demonstrated conclusively that the commodities entered Iraq. Indeed, it appeared at first that many files were missing any bill of lading documents whatsoever. While the USDA attorneys were in Atlanta, however, they were able to determine, along with the OIG investigators, that the lack of ocean bills of lading in the files being reviewed had resulted from a misunderstanding on the part of a paralegal who was xeroxing requested files. After discovering this problem, USDA attorneys were able to obtain copies of the original document files for a number of GSM-guaranteed trades and found that those files uniformly contained ocean bills of lading for shipment either to Aqaba, Jordan or to ports in southern Turkey. Because the Iraqi gulf port of Basra has been closed by war damage, all of the GSM shipments were being delivered to either Jordanian or Turkish ports, and then to be trucked overland by the Iraqi Ministry of Transportation to Iraq. From review of the files, it 52 appeared to have been the practice of the parties to negotiate documents based on the ocean bills of lading alone or, in some cases, based on the ocean bills of lading along with a beneficiary's "certificate" that the goods were being delivered overland to Baghdad. In a number of cases, the exporters provided such certification within a few days after the ocean carrier on board bill of lading date, and BNL accepted these certifications when negotiating documents. Few files contained documents evidencing overland shipment. However, there was no affirmative evidence that arrival in Iraq had not occurred. (3) "High Prices." Suspicions with respect to high prices appeared to have been based on comparisons of prices among several trades, or, in one case, by comparison of sale prices to invoice prices for supply. To that point, no rigorous study had been made evaluating the price levels observed in the file records against prevailing market prices at the time of the transactions. USDA attorneys reviewed the files and gathered examples of reported transaction prices, and determined that proper evaluation could not be made without additional research into market price levels for the period under review. USDA attorneys, working with the USDA commodity divisions, subsequently developed price series for eight major commodities to permit a better evaluation of this issue. (4) "Required Consultant Fees." No documentary evidence was found in any of the files reviewed to indicate that GSM exporters were asked, or required, to pay special consultant fees in connection with Iraqi sales. USDA attorneys concluded that evidence of such payments may have been developed with respect to sales of non-agricultural goods, leading investigators to search for similar arrangements in connection with GSM sales. However, there was no apparent evidence of this practice with respect to agricultural sales at that time. (5) "After-Sales Service." The question of after-sales service requirements had not apparently arisen out of the BNL investigations. Rather it been brought to USDA’s attention in complaint letters from several exporters during the same time that the BNL investigation was starting. USDA attorneys attempted to follow up on this issue as well. One of the complaining exporters met with USDA attorneys to discuss the matter. Essentially, the exporter reported that it had first been approached early in 1988 by Iraq and asked to ship, free of charge, additional non-agricultural goods (primarily truck parts and tires, and air conditioning equipment), as "after-sales service" in connection with GSM sales. It did not comply with the request for non-agricultural extras. The exporter stated that it was approached again by Iraq early in 1989 about the use of certain carrier for any shipments made under GSM. Because the exporter had bid the contract on a C&F basis, it had already 53 SSRträgtgd for its frtijht Càffišf flá 38 flºtifi!? If??: Apparently, it also told Iraq that it did not feel the Iraqi recommended carrier could be price competitive. For several months Iraq pressed the matter through a series of telex messages and, in fact, submitted a price quotation. Finally, after the exporter informed Iraq that the freight bids ºro-fered were not at all competitive, and that, moreover, it could not ship the products in manner suggested, the issue was dropped. The exporter was again approached in August of 1989 by Iraq through a "broadcast" telex (presumably sent to all Iraq GSM exporters) for after-sales service through provision of trucks and related transportation equipment. The exporter stated that it ignored this request, and sent a copy of the telex to USDA asking for intervention to end this Iraqi practice. Based on this information, USDA raised this issue shortly thereafter with Iraqi representatives in meetings both in Washington and Baghdad during October and November 1989, and received assurances from Inraq’s Deputy Minister of Trade, Mr. Al-Obaidi, that the practice of requesting after-sales service in connection with GSM transactions would cease. At the time, USDA had no information that would establish which exporters, if any, had provided after-sales service to Iraq in response to these requests. Decision on FY 1990 Funding In October, 1989, USDA was also considering the request of Iraq for FY 1990 funding of the Iraq GSM-102 program. Iraq had requested allocations of approximately $1 billion, a level consistent with program activity in FY 1888 and 1989. Initial discussions occurred in Washington, D.C. in October but, due to the allegations arising from the BNL investigation, a decision to make an allocation was initially postponed. Because USDA did not have access to the information being developed in the Atlanta investigation, it specifically asked the Office of the United States Attorney and USDA-OIG to indicate whether there was sufficient reason, at that time, to deny GSM funding participation in the FY 1990 program. Both the U.S. Attorney’s Office and USDA-OIG informed USDA that they did not have information or evidence to indicate that Iraq should be precluded from obtaining additional FY 1990 GSM allocations. USDA decided, after consultation with other federal agencies in the NAC process, to extend a line of credit guarantees for Iraq in FY 1990, establishing a tiered approach. A first tranche of guarantees was set at $500 million, with additional credit guarantees for the year to depend upon the results of further investigations. USDA advised the NAC members that it would §§ 9 credit, drafts drawn on letters of credit, commercial invoices to Iraq for goods and freight, and commercial invoices from commodity suppliers or freight companies. The files also included numerous other documents including telex traffic and other communications surrounding the sale. CCC records indicated that it had issued guarantees to Entrade for fourteen (14) sugar sales to Iraq. USDA was able to find files which appeared to document all aspects of those fourteen sales. Based on the information in the exporter’s files, USDA was able to make an approximate calculation of the profit margin which the exporter had obtained on each sale * by comparing the revenue obtained (based on the invoiced value of the transaction, either FOB or C&F basis) with the exporter’s basic costs for commodity and freight (based on invoices from suppliers). USDA was able to link these invoices, in most cases, to supplier contracts or confirmations which coincided, within a day or two, of the date of sale to the Iraqi customer reported by the exporter in its application for credit guarantee. In almost all cases, sales were matched with purchases on the same day or with a few days. USDA reviewed fourteen sugar sales to Iraq which occurred during the period July, 1985 through October, 1987, and represented about one-half (14 of 29) of all GSM-guaranteed sugar transactions during the period. For each of those sales, the exporter enjoyed margins ranging between $2.77 and $37.50 per metric ton, based on a comparison of the sale price with the exporter's replacement cost. Between April 1986 and February 1987, the sales resulted in very high margins of approximately transportation to Iraq, or that the shipment had been consigned to an agent of the Iraqi Land T sport Ministry for overland shipment. However, in most cases, the tiles did not contain overland bills of lading to any Iraqi destination. * The term "approximate margin of profit" means the difference between the transaction price and replacement cost. These were verified for each sale through contract/sales confirmation documents and commercial invoices. In all the transactions reviewed, both the sale of the commodity to Iraq and the purchase of the same commodity from the supplier occurred at the same time, or within a few days (commonly referred to as "back-to-back" or matched trades). Where the transaction included freight, the price charged Iraq for the freight component and the shipping company's invoiced price for the freight service were similarly verified. The profit calculation was "approximate" because it did not, for example, include any adjustments for various demurrage claims, inspection costs, or overhead, etc. Thus, it is a reasonably close, although not exact, assessment of profit or loss for each sale. 56 10 k £50 per metric ton. During this time period, sale prices ranged between $162 and $281 per metric ton, on a C&F delivered basis. These approximate profit levels appeared to be much higher than those generally experienced by the export businesses in commodity trading. USDA analyzed both these sale prices, and sale prices reported by other exporters in the same market during the July 1985 to October 1987 period with some common world benchmark price -- the London daily spot price for white refined sugar and the "French Whites" price quoted in the Paris market.” In the latter case, USDA used the French Whites closing futures contract prices for the month of shipment, as quoted on the date of sale. Based on those prices, USDA concluded that almost all GSM refined sugar sale prices to Iraq during the period were at similar levels, substantially above benchmark world prices. USDA also reviewed in detail eleven rice sales made by Entrade to Iraq under the GSM-102 program during the period, and found the pattern similar to that observed for sugar sale..., although the approximate profit margins were not quite so dramatic. Between December 1985 and November 1986 exporters enjoyed approximate margins of profit of $7 to $20 per metric ton, although between January and April 1987, its approximate margins of profit dropped to $1 to $3 per metric ton. With the aid of specialists in FAS’ Grain and Feed Division, a series of approximate weekly market prices for No. 2 rice, FOB Gulf, was developed for the period June 1986 through June 1987 and used in the analysis. It appeared that both the prices for the specific transactions reviewed, as well as the sale prices for other rice sales to Iraq during this period, were approximately $10-20 per MT above this benchmark world price. USDA attorneys also reviewed two sales of corn to Iraq under the GSM program during the period, both of which involved very significant volumes. Its first sale in September 1986 was for * There is, unfortunately, no quoted futures market for U.S. refined sugar, FOB Gulf. Specialists in USDA’s Sugar Group advised that the only consistently quoted world prices for refined sugar are in the London and Paris markets. In the London market, the price for refined sugar -- the London No. 5 contract price -- were reported only on a spot basis. The "French Whites" series, quoted from the Paris market, provided both daily spot and future contract closing prices for refined white sugar. Both series were published in the weekly International Sugar Report by F.O. Licht, a West German commodity information service. Use of either price series -- London or Paris -- is necessarily imperfect due to differences from FOB Gulf prices because of relative freight advantages to many destinations. § 11 more than 100,000 metric tons; a second sale, three months later, was for 35,660 tons. Bºth silº WGF8 GR iſ FCB Gillf Bääif fºr 3: 2 yellow corn in bulk. Based on confirmations/contracts and commercial invoices for both purchase and sale contained in the export : records under review, USDA was able to estimate approximate margin of $16 to $20 per MT these sales. These sale prices were also compared with benchmark world prices -- based on Chicago Board of Trade closing prices for No. 2 corn, FOB U.S. Gulf, during the period -- and that comparison indicated the sale prices to be $15-20 per MT above world bench mark prices. USDA also compared these prices with other FOB sale prices registered under GSM during the period, and determined the transactions under review to be as much as $10-12/MT higher than prices obtained by other exporters. However, the analysis indicated that all exporters were obtaining prices at least $8-10 per MT above indicative world price levels. The review of Entrade’s records also included thirteen wheat sales made to Iraq under the GSM program. Of those thirteen sales, eleven sales also involved the award of bonus certificates under the Export Enhancement Program (EEP). The files appeared to contain complete documentation of each sale including the confirmations and/or contracts and commercial invoices for both the sale and purchase of the commodity. In the eleven cases where EEP bonuses had been awarded, the files also contained records of the income obtained by the exporter through sale of the bonus certificates. - - USDA analysis of these sales revealed that profit margins for wheat sales averaged about $2 per metric ton -- in line with expected margins for the bulk commodity business -- and well below the margins apparent in the sugar, rice and corn transactions. The records indicated the same approximate margins for both EEP and non-EEP sales. Meetings in Baghdad and Review of Iraqi Records In January, 1990, USDA reported to the NAC that its administrative review of the Iraq GSM-102 program had, thus far, revealed a pattern of unexpectedly high pricing for certain commodities -- corn, sugar and rice -- sold to Iraq during the period 1985-1987. USDA had focused initially on one particular exporter -- Entrade, Inc. -- because there had been allegations made in the Internal Revenue Service litigation linking that exporter with unreported payments to BNL officials. Although the USDA review had determined that Entrade had received very high prices, and enjoyed high approximate profit margins for its sales to Iraq, review of sales by other exporters revealed prices that were also high by comparison with benchmark world prices. USDA 58 12 wanted to determine an explanation for this pattern of high prices. USDA told the NAC that it had been waiting for information to be released, or indictments issued, from the grand jury investigation in Atlanta, but that the Justice Department had not indicated that such disclosure was likely to occur in the near future. USDA also noted that the $500 million of GSM guarantees allocated to Iraq for FY 1990 was being rapidly registered, and that it anticipated a request from Iraq for a second $500 million tranche. In February, the Government of Iraq ("GOI") made such a request, which USDA reported to the NAC. At an ensuing interagency meeting, USDA informed the interagency group that, after review of available information, it felt that it needed to pursue its administrative review further in order to be able to make a recommendation to the NAC as to any further allocation of FY 1990 GSM guarantees for Iraq. USDA proposed to have a delegation hold discussions directly with the GOI Ministry of Trade, as well as with the various Iraqi State Enterprises who acted as purchasing agents for Iraq. USDA requested these discussions through the U.S. Department of State and the U.S. Embassy in Iraq, and it was agreed that USDA would provide the State and Justice Departments with an agenda of items for discussion and questions it would ask. After further discussions between the Departments, a request for consultations was sent through the State Department to the GOI, and it was arranged that the USDA team would travel to Baghdad during the week of April 16, 1990 to meet with appropriate Iraqi officials. The USDA team arrived in Baghdad on early Wednesday morning, April 18 and discussions began later that afternoon. Further discussions were held on April 19, 21 and 22. The USDA delegation consisted of: F. Paul Dickerson, Associate Administrator of FAS and USDA’s General Sales Manager; Lawrence T. McElvain, Director, FAS-CCC Operations Division; and Kevin J. Brosch, attorney with USDA’s Office of the General Counsel, International Affairs and Commodity Programs Division. Also accompanying the team and participating in discussions was Geoffrey Watson, a lawyer with the U.S. Department of State, office of the Legal Adviser, Near East Section. In Baghdad, the team was joined by Lawrence Panusak, the Agricultural Trade Officer assigned to the U.S. Embassy. The GOI delegation was chaired by Mr. Farouk Al-Obaidi, Deputy Minister of Trade for Foreign Economic Relations. Members of the Iraqi team included: Mr. Fakhri Rashan, Advanced Country Director, Ministry of Trade; Ms. Amal Aziz, Commercial Counsellor, State Enterprise for Foodstuff Trading; Mr. Redha Selman, Director of the Import Section, Grain Board of Iraq; Mr. 59 13 Hanan Amin, Director for Wood Product Imports, State Enterprise for Construction Material Trading; and Ms. Samira Hadi Jaber, U. S. Desk Coordinator, Ministry of Trade. Also participating in the discussions was Mr. Hamza, the U.S. Desk Officer for the Ministry of Foreign Affairs. In the course cº the discussions, a number of other officials, including commodity traders and individuals responsible for various State Enterprise procurement Programs, were brought in to assist Iraq in its presentation. At the time arrangements were being made for the USDA team visit, the GOI requested more specific information about the topics which USDA wished to discuss. In response, USDA prepared and transmitted, through the Department of State, a memorandum detailing its concerns about four aspects of the Iraq GSM program: (1) Iraqi procurement and tendering practices, and the connection between those practices and high price levels observed in a number of specific (and identified) GSM transactions during the period 1985-87; (2) Iraqi shipment practices between the intermediate ocean ports (either in Aqaba, Jordan or in Iskenderun and Mersin, Turkey) and final destinations in Iraq; (3) Iraqi requests and/or demands that U.S. exporters provide goods or other benefits as "after sales service" in connection with GSM purchases; and (4) Iraqi attempts to impose special "stamp tax" payment obligations on U.S. exporters selling under the GSM program. This list of four items also served as the basic agenda for the meetings. These issues were identified for the GOI so that it could be expected to locate and provide appropriate documents for inspection by the USDA team while in Baghdad, and to ensure that the Iraqi delegation would include knowledgeable individuals who could respond fully the USDA's questions. In the course of the four days of discussions, the USDA team requested the GOI for numerous docu- ~ *s to substantiate both general Iraqi practices with respec - J tenderii.g, shipment and other practices, as well as documents underlying a number of specific GSM-guaranteed trades for rice, sugar, and corn. In many cases, the documents requested were for transactions which occurred as early as 1985, and which had already been sent to document storage. The GOI provided nearly all documents requested for review, and provided either file originals or copies for USDA to bring back to the United States. In those instances where the GOI reported that it had been unable to find specific documents requested, it produced other documents from its files which either provided the same information or tended to substantiate the information provided. 60 14 USDA findings with respect to the four areas of inquiry mentioned above are as follows: (1) Tendering Practice and High Commodity Prices GOI officials told us that all Iraqi State Trading Enterprises are required by law to issue public tenders when purchasing commodities from abroad. We requested citation to the precise law or regulation which established this legal obligation, and were told that the requirement was set forth in unpublished presidential regulations which were issued to the ministries by the Office of the President of Iraq. USDA was told that these presidential regulations were considered to be confidential and internal within the Iraqi government, and so were not provided with a copy of the regulation; USDA was told that the regulation had not been published in the official gazette. GOI officials stated that the existence of this legal requirement could be inferred, however, by the practice of the state enterprises in conducting public tenders in virtually all cases. GOI officials said that public tenders had taken place with respect to all GSM-guaranteed transactions, and produced files containing the public tender and related documents for all of the transactions that USDA indicated it wished to review in more detail. GOI officials explained that although there was a general legal requirement to conduct public tenders, each state trading enterprise was afforded some discretion in establishing its own policies for implementing this requirement. Further discussion of the topic revealed some of the differences in the policies adopted by the various state enterprises in conducting tenders for the agricultural commodities which USDA was specifically concerned, i.e., sugar, rice and corn. In the course of earlier work in the administrative review, the USDA team had identified a number of Iraq GSM purchases involving corn, sugar and rice with respect to which the exporter reported sale prices well in excess ($10–$35/MT) of either the replacement cost for the commodity, or of a benchmark world price. A principal goal of the team was to determine why Iraq would pay such a high price in light of the apparent availability of these commodities in the marketplace at lower values. In the list submitted to the GOI, USDA identified a number of these high priced sales and asked the GOI to make available underlying records. At the meetings in Baghdad, USDA was told that all of these transactions involved public tenders and that, in the view of the GOI, the prices paid for the commodities represented sales at the lowest prices bid, or on the most advantageous terms, or both. GOI invited USDA to identify §l 15 specific transactions which it wished to review and offered to produce all materials in its files on those transactions. In response, USDA identified ten transactions that it wished to review: two corn sales, four rice sales and fºr sugar sales. * All of these were GSM-guaranteed sales by Ent. ade, for which USDA had already obtained substantial background information through its review of bank and exporter records. USDA obtained the following information relative to those ten transactions: a. Corn Sales GSM-102-542.84 The Iraqi State Enterprise for Feed (SEF) issued its public tender Notice No. (25) 1986 on or about November 1, 1986, tendering for supply of 150,000 metric tons of yellow corn. This notice was published in the English language Baghdad Observer as well as in Arabic language newspapers in Iraq. The notice and an associated list of terms and conditions were also available at the offices of SEF. Under terms of the notice, the tender was to close on November 12, 1986, and all bidders were required to provide a bid bond of 3%. Bidders were permitted to submit their proposals on either an FOB or C&F basis; C&F bids could specify delivery at Baghdad, at Aqaba in Jordan, or at Mersin or Iskenderun in Turkey. In total, SEF received seven bids, four of which were immediately disqualified for failure to adhere to the condition of the tender requiring that a bid bond be provided. The three qualifying bids were as follows: Company FOB US Gulf C&E Aqaba/Isken. C&F Bagh’d Arab $89.50 $175.00 -Finagrain Intradev.co $ 86.95 Entrade $1.94.50 * GSM-102-54284 and GSM-102-55190 (corn); GSM-102-53030, GSM-102-53031, GSM-102-54.464 and GSM-102-54977 (rice); and GSM- 102-10735, GSM-102-10736, GSM-102-55.245 and GSM-102-55585 (sugar). 47-86O O – 92 – 3 62 16 The four bids rejected for failure to submit bid bonds were: Company FOB US Gulf C&F Aqaba/Isken. C&F Bagh’d Deerfield $122.00 $169.00 Trinity, Ltd. $153.00 ITI (Haddad Bros.) $178.00 Project Export $110. 79 (Isken.) A schedule of the responses was prepared by the SEF staff and submitted to a committee of the Board of Directors for decision. The committee decided not to accept any of the three qualifying offers, but instead to invite representatives of the three to submit revised offers and to visit SEF for negotiations. SEF also submitted a counteroffer to all three of $82.00/MT, FOB U.S. Gulf, or $152.00/MT, C&F Baghdad. All three companies responded to the counteroffer. Arab Finagrain offered to reduce its original offers $5 for each destination. Payment was to be made under two separate letters of credit; the FOB portion of the sale would be financed under a GSM guarantee, with the freight portion payable on a cash basis. Intradevoo (Dreyfus) offered $84.00/MT FOB, U.S. Gulf, payment under a letter of credit financed for three years under GSM. Entrade offered $153.00/MT, C&F Baghdad. Financing was to be under two separate letters of credit. The FOB portion of the sale was to be financed for three years under GSM; the freight was to be financed for two years pursuant to the Iraqi-Turkish protocol for transportation with shipment through Iskenderun, Turkey. After the bid was accepted, Entrade and SEF formalized a contract for the sale in which SEF agreed to pay $153.00/MT, C&F, and in which the FOB portion of the sale was designated as $92.00/MT. SEF apparently agreed to this allocation between the FOB and freight portions of the sale, and directed Bank Rafaidin to open letters of credit accordingly. Note that, although the final C&F price agreed to was almost identical to the SEF counteroffer, the $92/MT FOB price agreed to was $10/MT above the SEF counteroffer, and $8/MT higher than the FOB price at which corn was purchased from Intradev.co (Dreyfus) in the same tender. The counteroffers were submitted to the committee of the Board of Directors which decided to reject the offer of Arab Finagrain, and to accept the offers of both Intradevoo and Entrade. SEF officials asserted that the decision to reject Arab Finagrain was based on the fact that its C&F price was approximately $1.7/MT 63 17 higher than the Entrade bid, and because it offered no financing for freight. The Intradevoo bid was accepted on an FOB basis, and shipment was arranged through Aqaba, Jordan using shipment services which had been contracted with a Geerbulk-led joint venture on a fixed-price annual basis. Subsequently, both the Entrade sale and the Intradev.co (Dreyfus) sales were registered for GSM guarantees. GSM-102-551.90 SEF announced a tender for 300,000 MT of yellow corn in its Notice No. (13) 1986, published on or about August 1, 1986. The Notice was published in the Baghdad Observer and in other Arabic- language newspapers, and specific terms and conditions of the tender were made available through SEF's offices. The tender required bidders to submit a 3% bid bond, and announced a closing date of August 13, 1986. The tender was for No. 2 U.S. yellow corn for Oct/Nov./Dec, 1986 shipment. The tender permitted bids on FOB or C&F bases, and anticipated deferred payment for the FOB portion under the GSM credit guarantee program, as well as 720 day deferred payment for the freight and shipping costs. In response to this tender, SEF received seven bids. Again, four bids were rejected for failure of the bidder to submit the 3% bid bond required in the tender specifications. The three qualifying bids were: Compan FOB US Gulf C&f Aqaba/Isken. C&F Baqh" d Arab Finagrain $178.00 Entrade $1.90.00 Intradev.co $80.5u $ 2.0.00 $158.50 (Dreyfus) The bids were submitted to a committee of SEF's Board of Directors, which confirmed the rejection of the four bids without bond, and which directed SEF staff to invite the remaining three bidders to submit alternative bids and to direct their local representatives in Baghdad to visit SEF's offices for further negotiations. When USDA requested any documents relating to these negotiations, GOI officials asserted that negotiations had been conducted orally and that their files contained no additional documents. According to GOI officials, after negotiations a contract was awarded to Entrade which had reduced its offer first to $175.00/MT, cºf Baghdad, and finally to $171.50/MT, C&F Baghdad. Entrade agreed to deferred payment terms for the entire C&F 64 18 price, with the FOB portion to be financed by a letter of credit guaranteed under the GSM program, and the freight portion to be financed by the Turkish Central Bank under the Iraqi-Turkish transportation protocol. A final contract was agreed to for the $171.50, with allocation of $90.00/MT for the FOB portion, and $81.50 for freight. The available documents do not indicate that Entrade offered an FOB U.S. Gulf price quotation at any point during the course of its bidding. The $90/MT FOB price reported to CCC when the sale was registered for GSM guarantee apparently represented an allocation made by the exporter, and agreed to by SEF when it opened its letter of credit. Note that this price was $9.50/MT higher than the FOB price that had been initially offered by Intradev.co (Dreyfus). b. Rice Sales At the current time, the Grain Board of Iraq is responsible for import purchases of rice. The Grain Board is the administrative successor of the State Organization for Grain and Foodstuffs ("GFS"), which was the responsible governmental entity in the relevant period, 1985-88. GFS’s method of conducting its public tenders differed somewhat from the procedures followed by SEF, described above. Essentially, GFS maintained a list of 25-30 trading companies which it considered to be reliable suppliers of rice. Seven or eight times each year, GFS would announce its tenders for rice, usually for 30,000 MT in two shipments of 15,000 MT each. The tender was announced by sending telex messages to each of the companies on the target list. Because the tender was made by direct contact with potential suppliers rather than by newspaper publication, the response time was much shorter. Typically, the tender closed within 7-10 days after announcement. Unlike SEF, GFS did not require responding companies to provide a bid bond, nor did it request bidders to travel to Baghdad for negotiations. Instead, the GFS staff would prepare a competitive study of the bids received, and submit that analysis to a committee of its Board of Directors with a recommendation as to possible counteroffers. The committee consider the recommendations, and authorize a counteroffer at a specific price level to be made to some or all of the bidders. Those counteroffers would be transmitted by telex to the appropriate companies, and revised bids would be received. Depending on the price levels and terms of these revised offers, GFs would then purchase rice from one or more of the bidders. Although GFs announced its tender for volumes, its final purchasing decision was often for lesser or greater amounts depending upon Iraq’s particular needs, the offered prices and market conditions. fij 19 GSM-102-54977 On November 12, 1986, GFS announced a tender for 30,000 MT of *No. 2-4 U. S. rice in two cargoes for Jan. /* b. 1987. GFS records indicate that the te.lder was transmitted by telex message to 34 potential suppliers. Companies were asked to submit bids for up to 30,000 MT. GFS requested C&F bids (Iskenderun or Aqaba) on deferred payment terms, with FOB financing guaranteed under the GSM program, and deferred payment of one year for freight. By close of the tender, GFS had received eight responses, seven with specific bids and one from a company (American Rice) indicating that it would not participate. GFS received no response from the other 26 companies. The bids of the seven participating companies were as follows: Company FOB US Gulf C&F Isken. C&F aba Balfour-McL. (Jan) $226.00 $257.00 $259.00 (Feb) $228 . 00 $257.00 $259.00 Benjar Trank (Jan) $224. 53 $254. 53 $263.53 (Feb) $224. 53 $254. 53 $263.53 Continental (Jan) $226. 00 (Feb) $225.00 Comet Rice (Jan) $229.00 (Feb) $230.00 Entrade (Jan) $254.00 Euro Maghrib (Jan) $238.96 $257. 09 $261.96 (Feb) $238.96 $257. 09 $261.96 Riceland (Jan) $221.28 $245. 28 $250. 28 (Feb) $221.28 $245. 28 $250. 28 GFs provided a competitive analysis of these bids to its committee, and was directed to counteroffer to all seven companies for 15,000 MT at price terms of either $243.50 CEF, Iskenderun, or $248.50, C&F Aqaba. This counteroffer contemplated an FOB, U. S. Gulf price of $220.50, and freight costs of $23 to Iskenderun and $28 to Aqaba. GFS received replies from five companies accepting its counteroffer. Due to the price levels, which GFS deemed favorable, it executed purchases from those five companies of 105,000 MT for delivery in the January–March, 1987 period, despite the fact that its original tender had been for only 30, Ooo MT. Contracts were awarded to Comet Rice (30,000 MT), 20 Continental (15,000 MT), Euro Maghrib (15,000 MT) , Entrade (15,000 MT), Riceland (30,000 MT). All sales were made at the price levels in the counteroffer, with the FOB value financed pursuant to the GSM program, and with freight on a cash basis. All sales were eventually registered with the GSM program on an FOB basis of $220.00/MT. USDA analysis indicates the FOB prices offered by all participants in the tender were well above apparent replacement costs for rice in the U.S. market. For example, the FOB portion ($220/MT) of the final contract price was approximately $9 higher than the supplier invoice price paid by Entrade for the rice shipped, and approximately $8-10/MT above the USDA estimated FOB price for the period. It should be noted, however, that the FOB price reported for this sale was not an actual transaction price, but rather an allocation of the FOB portion of a C&F contract price. GSM-102-54.464 on September 7, 1986, GFS issued a notice of tender for 45,000 MT of U.S. No. 2-4 rice, to be shipped in three cargoes for Oct/Nov./Dec 1986 delivery. The request asked for bids on a C&F Iskenderun, Turkey or Yenbu, Saudi Arabia basis. Payment was to be on 3-year deferred terms under GSM for the FOB portion, and deferred payment of at least one year for freight. By its terms, the tender closed September 12, 1986. - GFS records indicate that the notice of tender was telexed to a list of 33 potential suppliers. By the close of the tender, GFS had received responses from 10 suppliers, three of which indicated that they would not participate. The other nine companies submitted bids as follows: Compan FOB US Gulf C&E Isken.../Yenbu C&E Baghdad Al-Haddad $274.00 Balfour (Oct.) $267.00 / $273.00 (Nov) $268.00 / $274.00 (Dec) $270.00 / $276.00 Coſmet $235.00 Continental $226.00 Entrade $219.85 $254.85 $299.85 Euro Maghrib $233.00 $253. 60 Riceland $221.28 $243.29 / $249.88 67 21 GSF counteroffered to all participants at the following price levels: $220/MT, FOB U. S. Gulf, $243.28 C&F Iskenderun or $248.78 C&F Aqaba. This counteroffer was accepted by a number of the participants, and GSF concluded contracts with Comet (15,000 MT), Entrade (30,000 MT), Euro Maghrib (15,000 MT) and Riceland (30,000 MT). Subsequently, GSF asked Entrade to provide an additional cargo of 15,000 MT on the same terms, and Entrade agreed. Note that Entrade concluded its sales of all three cargoes on a C&F basis, in which negotiations clearly identified the FOB value of the sale as $220/MT. The FOB portion of the sales were to be financed under the GSM program, and those three cargoes were subsequently registered with the GSM program under three different guarantee numbers. Entrade also agreed to arrange for freight financing for two of the three cargoes through the Turkish Central Bank in accordance with the Iraqi-Turkish transportation protocol; freight for the third shipment was paid on a cash basis. It should be noted that in the two cases where Entrade agreed to payment of freight on a deferred payment basis, it later asked GFS to open letters of credit for the FOB portions of the sales at $228/MT, an increase of $8/MT above the amount previously bid and agree to. GFS agreed to this request. Thus, where Entrade agreed to deferred payment terms for freight, it subsequently increased the FOB portion of the price which it reported to CCC in its GSM registration. In the case where GFs paid freight on a cash basis, there was no increase FOB price ($220/MT) registered with CCC. GSM-102-53030 & GSM-102-53031 On March 26, 1986, GFS issued a notice of its intent to purchase 30,000 MT of No. 2-4 U.S. ric in two cargoes for May/June 1986 shipment. The conditions o. che tender were for GSM guaranteed financing for the FOB portion of the sale; freight was to be paid on a cash basis. GFS file documents contains a list of 29 prospective suppliers to whom the notice was sent. The notice established a closing date of April 4, 1986 for initial bid responses. GFS documents indicate that GFS received responses from twelve suppliers. Entrade was among the twelve responding suppliers, and initially offered to supply 30,000 MT at the following prices: C&F Aqaba C&F Isken. C&F, Yenbu $323.95 $3.17.45 $323.95 Other suppliers participating included Woodward & Dickerson, Riceland, Euro Maghrib, Comet Rice, Continental, Genpro, American Rice, Haddad Bros., and Trans Ocean. After evaluating the offers, GFs issued its counteroffer to all participants asking 68 22 for revised bids. GFS records contain an exchange of numerous telexes between GFs and Entrade between April 14, 1986 and April 18, 1986 during which the price was gradually negotiated to contract prices of $270.98, C&F Aqaba, and $264. 46, C&F Iskenderun. The final payment terms remained as originally proposed -- GSM guaranteed financing for the FOB portion of the sale, and cash for the freight portion. During the entire bid and negotiation process, Entrade's bids were always on a C&F basis; no FOB prices were quoted. As in the other cases, GFS eventually purchased a much greater amount -- 105,000 MT -- than the 30,000 MT it has announced in its original notice. GFS entered into contracts for purchase with five different companies -- Entrade (30,000 MT), Euro Maghrib (15,000 MT), Riceland (15,000 MT), Trans Ocean (30,000 MT) and Woodward & Dickerson (15,000 MT) -- all at almost identical prices. The FOB prices registered for these sales all ranged between $241.48 and $244.00 per MT. c. Sugar Sales The State Establishment for Foodstuffs and Trading Co., Baghdad, ("F&T") is the entity within the GOI responsible for purchasing and importing foreign sugar. Similar to the practice of GFS in rice tenders, F&T maintained a list of potential suppliers -- about 15-20 companies -- which are notified of its tenders through telex messages. Typically, the closing date of a tender was within a week of the day of notice. Sugar tenders differed from rice tenders in a number of respects. Most significantly, F&T bought its sugar on an "any origin" basis. While tenders for rice and corn were for U.S. product to be financed under the GSM program, F&T did not limit its purchases to U.S. origin. During the period under review -- 1986-1988, U.S. export sugar was trading at a significant premium to the world market. F&T was clearly aware of this price premium; evaluation documents reviewed uniformly contained a reference to the prevailing London spot price for refined sugar which F&T said that it constantly monitored. F&T bought U.S. sugar only where it determined that the premium that it had to pay for U.S. sugar was justified by the advantages associated with GSM-guaranteed credit. Where, in the evaluation of F&T, the U.S. price was too high even, it would purchase on a cash basis from other origins. Another difference in the tenders was that F&T typically purchased only the amounts for which it had originally tendered. Unlike the case of rice -- where GFS would purchase amounts well in excess of those originally announced in the tender notice -- F&T tendered for and purchased much smaller quantities. oftentimes, it purchased for next month delivery and, therefore, 69 23 Wig 858Fātiſg iſ th& 83 livil&Rt 8f th& $53t Rizkit. Iñá883, is mentioned above, when determining the level of premium it was paying for U.S. sugar, F&T analysts appear to have gauged U.S. bids against the daily spot price in the London market. Finally, the sugar tenders differed from the rice tenders in that there were generally very few U.S. participants. Although the F&T supplier list contained a number of U.S. suppliers, in the cases we reviewed F&T received bids from only one or two companies offering to supply U.S. sugar. As a result, F&T’s decision to purchase was often a choice not between different U.S. offers, but between a higher U.S. price offer on deferred payment terms and a lower third country price on cash payment terms . In some cases, F&T received only one responsive bid to its tender. When that occurred, and if F&T felt that its supply requirements made it urgent that it purchase anyway, the tender changed into a price negotiation with the single bidder. Even where there was more than one bidder, F&T appears to have counteroffered or asked for a revised bid from participants almost as a matter of course. As a result, participants in the tenders aware of this practice could have bid very high prices initially, knowing that they would invariably get another chance to obtain the business. GSM-102-10735 & GSM-102-10736 On April 21, 1986, F&T issued a notice of its intention to purchase 12,000-14,000 MT of white refined sugar for May 1986 shipment. F&T records indicate that approximately 16 potential suppliers were informed by telex message. Two different versions of the invitation were sent. U.S. companies were asked to tender offers with payment financed under the GSM program; non-U.S. companies were asked to tender on deferred payment terms of at least one year. Closing date for the tender was April 23, 1986. Two U.S. companies and four European companies responded with bids; five other companies responded that they would not participate. The following bids were received and considered: 70 24 Company Cash Price/MT Credit Price/MT Credit Terms Alrahba $238 (Aqaba) $295 (Aqaba) 360 days FOB Cash freight SCOA Int'l $228 (Isken.) $285 (Isken.) 360 days Fob - Cash freight $232 (Aqaba) $290 (Aqaba) 360 days FOB Cash freight $305 (Isken.) 540 days FOB Cash freight $312 (Aqaba) 540 days FOB Cash freight Duffus $231 (Isken.) Cargill $303 (Isken.) 360 days FOB Cash freight $327 (Isken.) 720 days Cash freight Int'l Farmers $282 (Any Port) 3 yrs (GSM) Foe Cash freight Entrade $262.45 (Isken.) 3 yrs (GSM) FOB 1 yr freight F&T officials provided us with a copy of the competitive study that was conducted and presented to its committee for decision. The committee directed F&T to seek negotiations with Entrade for a lower price. Through a series of telex offers and counteroffers over the following five days, a final contract price of $259.00/MT, C&F Iskenderun was achieved and agreed upon. Essentially, Entrade's offer of $259.00/MT, C&F Iskenderun on three years deferred payment terms represented an FOB price of $229. 05/MT, and freight at $29.95/MT on one year deferred payment terms. As such, Entrade's offer represented not only the lowest C&F offer, but an FOB price that was lower than any of the cash FOB prices quoted by other participants in the tender. In addition, the credit terms offered by Entrade -- 3 years FOB financing under GSM, and on year freight financing -- was clearly the most attractive financing package offered. USDA analysis indicates that the Entrade offer was approximately $16/MT higher than its replacement cost, FOB basis (as indicated by its supplier invoice), and approximately $12-14/MT higher than a benchmark world price. F&T documents indicate that their competitive analysis, at the time of the purchase, also indicated that the Entrade price was $12/MT above a benchmark world price (based on the London spot priced of $21.7/MT on April 23, 1986, the day of tender closing). 71 25 Nonetheless, F&T officials told us that they felt the Entrade offer was very advantageous in that market for a number of reasons: (1) it was a deferred payment offer lower than the cash offers in hand; (2) they had been receiving bids for U.S. sugar at $50-70/MT above the London spot price, while the Entrade offer was only $12/MT above that price; and, (3) the offer contained freight financing. As a result, F&T inquired with Entrade about providing a second cargo of 12,000-14,000 MT at the same price, and Entrade accommodated. These two cargoes were registered with CCC under guarantees GSM-102-10735 and GSM-102-10736. GSM-102-55.245 On December 14, 1986, F&T issued an invitation to its list of 16 potential suppliers to bid on the supply of 12,000 to 14,000 MT of white refined sugar, with a shipment for Jan/Feb 1987. The request was sent in two forms: U.S. suppliers were asked to bid payment terms under the GSM program; non-U.S. suppliers were asked to bid on deferred payment of at least one year. Closing date for bids was December 17, 1986. F&T received only three bids from the trade, two of which were from U.S. suppliers proposing sales guaranteed under GSM. The bids were as follows: Company Foe Price/MT CºE Price/MT Pa Int Term SLOL $189 (Isken.) Cash $1.94 (Aqaba) Cash Cargill $240 (Isken.) 3 yrs. (GSM) FOB 1 yr. freight Entrade $254 (Isken.) 3 yrs. (GSM) FOB 1 yr. freight $260 (Aqaba) 3 yrs. (GSM) FOB 1 yr. freight Fºt rejected SLOL's offer because it failed to provide any financing whatsoever. It attempted to negotiate a more favorable price with Cargill, but Cargill refused to lower its offer. cargill, whose original bid indicated April/May shipment, did make one concession by agreeing to move shipment date to February. F&T then booked one cargo at $240/MT, C&F Iskenderun, which represented allocations of $220/MT FOB and $20/MT freight. This sale was eventually registered by Cargill with CCC under the GSM program and assigned guarantee GSM-102-55051. Cargill registered the port value as $218.03/MT. 72 26 At the same time, F&T also continued negotiations with Entrade for a lower price. In a telex exchange over the next several days, Entrade eventually agreed to a lower price of either $24.4/MT, C&F Iskenderun, or $248/MT C&F Aqaba, destination at buyers option. This cargo was booked for Iskenderun, but later diverted, while in route, to Aqaba with an agreed upon price adjustment to $246/MT. This sale was registered with CCC and issued guarantee GSM-102-55.245; Entrade reported the FOB value as $228.50/MT, which would allow $17.50/MT for freight. GSM-102-55585 On or about January 25, 1987, F&T sent notice to its list of suppliers of its intention to purchase 12,000-14,000 MT of white refined sugar for March delivery. Again, F&T asked its suppliers to bid deferred payment terms under GSM (or, if a non-U.S. supplier, deferred terms of at least one year) for the FOB portion of the transaction. F&T also sought freight financing. Only three companies sent any response. One of those, Rionda, replied only to say that it would not participate. The other two participants were Cargill and Entrade whose bids were as follows: Company FOB Price/MT C&F Price/MT Payment Terms Cargill $290 (Isken.) Cash Entrade $286 (Isken.) 3 yrs. (GSM) Foe 1 yr. freight F&T immediately eliminated the Cargill for two reasons: (1) a cash offer higher than Entrade's offer on deferred terms; and (2) cargill offered for July/August delivery instead of March delivery as indicated in tender ar-ouncement. Thus F&T had only Entrade's bid to consider. F&T negotiated with Entrade for a price reduction in a series of exchanges between January 28 - 31, 1987, arriving at a final transaction price of $282/MT, C&F Aqaba. Allocation of this price was $263/MT for the FoE portion, and $19/MT freight. F&T's file documents indicate that its evaluation of a benchmark price for sugar at that time was $218/MT, based on the prevailing London spot price. F&T officials explained that their decision to purchase the sugar at a premium of $40-50/MT over the London spot price for several reasons: (1) they had only two bids of which Entrade’s was the lower; (2) Entrade offered total financing; (3) F&T had an immediate need to purchase and could not wait; and (4) the market was very volatile and F&T feared large increases in price. 73 27 (2) Arrival at Destination The second topic of discussion between the delegations was the issue of proof of arrival at destination. USDA noted that, as a result of the investigation in Atlanta, there had been questions raised as to whether the commodities purchased by Iraq under the GSM program had arrived at their intended final destination in Iraq. USDA explained that it had two goals in the discussions: first, to document whether shipments made in the past, in fact, had arrived at destination in Iraq; second, to understand how Iraq’s overland shipment system worked so that a system could be implemented if documentary "proof of arrival" were made a program requirement for all transactions in the future. Geographically, Iraq is almost entirely landlocked with the exception of a narrow landlink to the Persian Gulf in the south of Iraq near the city of Basra. During the Iraq-Iran conflict, the Basra area was the center of some of the most intense fighting, and the port facilities around Basra were effectively closed to international shipping. As a result, Iraq was forced to make arrangements to operate through foreign ports on the Mediterranean or Red Sea in Turkey, Jordan and Saudi Arabia, and to bring commodities overland by truck to Iraq. Shipments were made primarily through the ports of Aqaba, Jordan, and Mersin and Iskenderun Turkey, with a small volume imported through Yenbu, Saudi Arabia. USDA noted that, in the course of its administrative review of the program, it had inspected both bank and exporter files for a number of GSM-guaranteed transactions where shipment had been made to Iraq through those foreign ports. In almost every case, the records documented shipment as far as the ocean port, but contained little or no record of the overland portion of the shipments to Iraq. GOI officials expressed surprise that proof of arrival was an issue. They explained that Iraq maintains a very rigorous system of tracking shipment of agricultural commodities from the foreign ports to their destination in government stores in Iraq, and offered to provide whatever documentation was required to satisfy USDA’s inquiry. According to GOI officials, the transportation and accounting system works as follows: Agricultural commodities purchased from the United States are off-loaded at the ports and consigned to representatives of the Iraqi Ministry of Transportation (IMT). The IMT has arrangements in each of the ports for unloading and transportation overland to Iraq. 74 28 In Jordan, Iraq has entered into annual contracts with several companies, but most often with a European-Jordanian joint venture headed by Gearbulk. That joint venture operates a floating pier operation which unloads the contents of ships into a floating vessel, and then off-loads the contents into a fleet of trucks, with capacity of 30-50 MT each, operated by IMT. As the trucks are loaded, a trucking manifest is prepared identifying the type of commodity, quantity, ship, date of unloading, name of driver, and truck number. The trucks then proceed through Jordan, and are checked through Iraqi customs at the Al-Rabhat customs entry point. At Al-Rahbat, lists are maintained by shipload. As each truck clears through customs, a copy of the truck manifest is collected, and the truck's entry is recorded on a list maintained for the particular shipload. The original copy of the truck manifest is endorsed by customs officials, and the truck then proceeds to a government clearing house on the outskirts of Baghdad. At that point, the trucking manifest information is recorded on a second list of shipments received from the particular vessel. The truck is then assigned to a government store or storage facility. When the truck arrives at the storage facility, the manifest is again endorsed by the facility operator to indicate final arrival at destination. This manifest then serves as a record of arrival at final destination. While in Baghdad, the USDA team also met with representatives of the Gearbulk-led joint venture who told us that they kept computerized records of each shipment received, and of the trucks that were loaded from each ship. These records are maintained in their offices in Amman, Jordan, and they offered to make these records available to USDA at its request. The system operated in much the same fashion in the Turkish ports, except that the trucking services were provided by private Turkish truckers under contract. The Turkish program operated according to the provisions of the Iraqi-Turkish transportation protocol under which Iraq was provided credit facilities for the inland freight portion of the transactions through the Turkish Central Bank. On of the features of this arrangements was to permit Turkish carriers to obtain the trucking portion of the business. Trucks proceeding from the ports at Mersin or Iskenderun entered Iraq at the customs post in the north of the country, and either were directed to government stores in the north of Iraq, or proceeded to the government clearing station near Baghdad. GOI officials explained that documentation to establish the arrival of all shipments into Iraq was available, but that it involved literally thousand of documents due to the fact that very large commodity shipments (10,000-25,000 MT per vessel) had to be transported inland by trucks with capacities of 30-50 MT each. Thus, each shipment would involve truck manifests and customs documents for hundreds of truckloads. Because of the 29 inability of the USDA team to attempt to check and audit this huge number of documents (all of which are in Arabic or Turkish), USDA requested GOI to provide samples for specific shipments of the truck manifests, the customs clearance documents, and the custom ship/truck lists. Those samples were provided and will be translated and reviewed. 3. After-Sales Service The USDA team also raised the issue of so-called "after-sales service" with GOI officials. As background, USDA noted that, due to some complaints that had been received from exporters, USDA had initially raised this issue with GOI initially during discussions in November 1988. At that time, USDA had been informed that at least one Iraqi state trading enterprise had been routinely requesting that exporters provide either cash rebates or goods, either in the form of additional commodities or non-agricultural items, as so-called "after-sales service" in connection with GSM-guaranteed transactions. At the time, USDA noted its objection to this practice and asked GOI to take action to stop such requests. In the summer of 1989, USDA received information from several exporters that they were continuing to receive requests for "after-sales" service. That information indicated that the requests were either that successful bidders utilize designated Iraqi shipping companies, or that the company provide additional goods in connection with the sale. In one case, USDA obtained a copy of a "broadcast" telex, apparently sent to a number of companies doing GSM business with Iraq, requesting after-sales service in the form of trucks and truck parts. USDA immediately issued a notice to exporters clearly restating USDA policy on this ‘ssue, and notified GOI of its objection to this practice. During consultations in November, 1989, USDA sought a firm commitment from GOI that it would end the practice. At the conclusion of those meetings, Deputy Minister of Trade Al- Obaidi gave assurances that all Iraqi enterprises would be instructed not to request or accept after-sales service in connection with GSM transactions. At the meetings in Baghdad, USDA informed GOI representatives that, although it had received no additional complaints or information that requests for after-sales services had been made by Iraq since the November meeting, it wished to obtain: (1) formal assurances that the practice had been eliminated with respect to CCC transactions; (2) information about any instances in the past in which after-sales services had been requested by Iraq and provided by exporters. With respect to the first request, Deputy Minister Al-Obaidi stated that the Ministry of Trade had issued a directive to all 76 30 purchasing entities instructing them not to engage in this practice with respect to any CCC guaranteed transactions. Mr. Al- Obaidi provided a letter to Mr. Dickerson formalizing this assurance. With respect to past instances of after-sales service, USDA explained that, although CCC's regulations do not specifically forbid a purchaser from requesting after-sales service, the regulations do require exporters, when registering export sales for the purposes of obtaining GSM guarantees, to report the port value of the sale, net of any "discounts or allowances." USDA explained that additional consideration, in the form of after- sales service would be considered an "allowance or discount", and that the failure of an exporter to report a net value would violate program requirements. After some discussion of this issue, GOI agreed to provide, and later did provide, a list of instances in which after sales services were requested and provided. That list has been provided to USDA-OIG for further investigation. 4. Imposition of Special taxes Very recently, USDA received a complaint from exporters that GOI was attempting to require U.S. exporters to pay a "stamp tax" in connection with GSM sales. According to information received, the tax was an internal tax required by the GOI to be levied on the issuance of certain classes of official and commercial documents, including the opening of commercial letters of credit. It was unclear, from the information obtained from the exporter, how significant this tax obligation was . USDA viewed this tax as a strategy by GOI to generate immediate hard currency. Moreover, USDA was concerned that exporters, subject to this requirement, would simp" -- increase the cost of the commodity to accommodate this addiu-J.-al obligation. Because this tax appeared to be the legal obligation of the purchaser, who was responsible for opening the letter of credit, USDA considered the payment of such a tax to be "an allowance or discount" within the meaning of the GSM regulations, requiring the exporter to net the value of the tax payment from its contract price when reporting port value for purposes of the GSM guarantee. USDA immediately informed the GOI that it objected to this practice for several reasons: (1) the practice of a government imposing a tax on itself appeared to be a sham transaction; (2) an attempt to pass this tax on to U.S. exporters appeared to be a device to use the GSM program to generate hard currency; (3) the practice simply added additional cost to the program without any benefit to U.S. agricultural exports; and (4) the practice created a situation where U.S. exporters could, either intentionally or inadvertently, violate program reporting 77 31 requirements. USDA asked GOI to intervene immediately to put an end to this practice. In the discussions in Baghdad, representatives of GOI provided USDA with an Arabic-language copy of the decree imposing the stamp tax in question. GOI representatives insisted that the tax was a legitimate tax, and was levied even in cases where government enterprises were involved. They noted that the law - imposing the tax did not stipulate precisely who was responsible for the tax, only that a tax should be imposed on certain transactions. They did agree, however, that the tax was an internal tax, and that the responsibility for payment would normally fall upon the purchasing entity opening the letter of credit. Deputy Minister Al-Obaidi stated that the GOI had considered the objections of USDA, and a decision had been made by GOI to exempt GSM transactions from the application of the tax. He stated that officials of the GOI were still working on the precise legal mechanism for creating the exemption, but that all government purchasing entities had been instructed not to request or require the payment of the tax in cases of GSM transactions. In the letter to Mr. Dickerson, Mr. Al-Obaidi formalized this commitment. At the conclusion of the meetings, GOI officials provided USDA with copies of the documents that had been requested in the meetings, and a final copy of the letter of commitment signed by Mr. Al-Obaidi. 78 32 CONCLUSIONS As a result of its administrative review, and its analysis of bank, exporter and Iraqi records, USDA has reached some initial conclusions about past conduct of the Iraq GSM-102 program. They are as follows: (1) USDA analysis indicates that during the period 1985- 1987, sale prices to Iraq for corn, rice and sugar under the GSM- 102 program were much higher than price levels in other markets. Price levels paid by Iraq appear to be at least $10-20/MT higher than benchmark world prices for rice and corn, and $15-40/MT higher for sugar. Consistently high bid prices in the public tenders reviewed suggest that exporters perceived Iraq to be a high risk market during the Iraq-Iran war. In addition, Iraq’s policy of seeking freight financing which few suppliers were able or willing to provide, also appears to have raised price levels. In the case of sugar, it appears that the tight supply of refined sugar that could be certified as U.S. origin, as required under the GSM program, also accounted for a substantial portion of the high prices bid. Records indicate that there were very few U.S. suppliers participating in the Iraq GSM market, and all were bidding high prices. (2) In some of the higher priced transactions, a portion of the high reported FOB prices -- approximately $8-10/MT -- represented an artificial reallocation by the exporter of either freight costs or freight financing charges. In at least two cases reviewed, it is clear the FOB price reported by the exporter (Entrade) to CCC for guarantee purposes was $8-10 higher than the FOB portion of a C&F bid made by that exporter to by Iraq. In two other cases, the FOB price reported to CCC by Entrade was $8- 10 higher than Iraq’s FOB counteroffer. Iraq agreed to the request of the exporter to open FOB letters of credit at these higher prices. It appears that this "allocation" technique was used to shift some of the freight financing of a C&F sale to the loan guaranteed by CCC during a time period in which CCC did not permit financing of freight under its guarantees. Inaccurate information may have been submitted to CCC in connection with certain of the GSM transactions described above. (3) The USDA administrative review uncovered no evidence to suggest that there has been diversion of commodities sold to Iraq. The lack of "proof of arrival" in either bank or exporter records appears to be linked to the complexity of overland shipment system that Iraq had to develop after its Basra port was closed during the height of the Iran-Iraq war. Although it appears that Iraq maintains records to establish proof of arrival for its GSM purchases, actual confirmation of this would involve 79 33 the translation (from Arabic) and compilation of literally hundreds of documents including trucking manifests, customs documents and warehouseman lists. (4) On several occasions during the period 1987-1989, state enterprises of the Government of Iraq appear to have requested "after sales services" from U.S. exporters, either in the form of requests for additional agricultural products, for non- agricultural products (e.g., truck parts or tires), for cash rebates or discounts, or for use of designated Iraqi shipping companies. Iraq has identified several exporters who apparently provided after sales service in response. At this juncture, additional investigation is merited to determine the precise extent of this practice. The information already obtained has been turned over the USDA-OIG with request for further investigation. Iraq's Deputy Minister of Trade has provided CCC with a letter confirming that the Government of Iraq has instructed all of its state enterprises not to request or accept after sales services in connection with any future GSM contracts. (5) Iraq has also requested some exporters to assume responsibility for paying a domestic Iraqi "stamp tax" in connection with GSM transactions. Iraq’s Deputy Minister of Trade has confirmed in a letter to CCC that Iraq has changed its policy and will, in the future, specifically exempt GSM transactions from application of this tax. The results of this administrative review suggest that USDA conduct additional inquiry in two key areas: first, the extent and precise reasons for high pricing in certain transactions; second, the extent to which "after-sales services" have been provided in connection with GSM-guaranteed sales, and whether the port values of those sales were pronerly reported when GSM guarantees were sought. Note that clais administrative review proceeded on limited information regarding the BNL investigation in Atlanta and focused largely, although not exclusively, on transactions by one exporter. Additional information is being developed in the course of the BNL investigation in Atlanta which may shed further light on these and other GSM program issues. 80 Mr. CRowder. Three, I would like to discuss with you steps we have taken to improve the management and operation of the pro- gram, because you have heard this morning and from your own ex- perience in the past you know that some changes were needed. And four, I would like to summarize some conclusions about what we know from the cooperative review efforts of the Office of Inspec- tor General of Foreign Agricultural Service, and I might add, Mr. Chairman, drawing also on the results that the GAO had done. Let me at this stage review some history and go back to August 1989. In August 1989, prior to the time that the U.S. attorney's in- vestigation of the BNL affair began in Atlanta, USDA began con- sidering formulation of the fiscal year 1990 GSM program for Iraq, and I might add, as well as for other countries. It was that time of the year to begin that for those fiscal years. At that time, Iraq was requesting an allocation of $1 billion in GSM-102 guarantees and an additional $150 million in GSM-103 guarantees. That request was considered by USDA, and program options were being discussed in the interagency committee, the Na- tional Advisory Council on International Monetary and Fiscal Policy, or the NAC, as you have referred to this morning. Mr. Rose. Let me ask you my second question briefly at that point. Does the 1985 farm bill, which authorized GSM-102 and –103, re- º that the National Advisory Council approve export guaran- tees' Mr. CRowder. I don’t think so, Mr. Chairman. Mr. Rose. I don't think it does at all, and I’m interested in why you were dealing with the National Advisory Council on Interna- tional Monetary and Fiscal Policy. Mr. CRowDER. I may have misspoken. Hang on. I'm hearing some rumblings behind me. OK, the 1985 farm bill does not.— Mr. Rose. Well, would you please provide for the record a memo from your General Counsel as to what authority you have to use the National Advisory Council on International Monetary and Fiscal Policy to run the GSM-102 and -103 programs? Mr. CROwdER. Sure. [The material was not submitted at time of printing.] Mr. ROBERTS. Would the chairman yield at that point? I’d like to know who uses who—or whom, being a former English teacher. It's my understanding this is an interagency group that gives advice and recommendations to Government agencies such as Agriculture on the international financing matters, including Agriculture's de- cision to extend the GSM guarantees on credit, and council mem- bers include, no, not the member of the trilateral, but the Depart- ments of the Treasury, State, Commerce, the Federal Reserve, U.S. Import-Export Bank, the International Development Cooperation Agency, and the U.S. Trade Representative. Mr. Rose and I would prefer to have the president of the Kansas Wheat Growers and the president of the North Carolina Peanut Council and he and me and maybe one other. Well, two staff members. Mr. COLEMAN. He and I. Mr. ROBERTS. Yes, he and I. Tom was an English teacher, too. [Laughter.] 81 I have concern over the foreign policy impact in regard to deci- sions that I feel are trade decisions that come under the jurisdic- tion of this subcommittee and the full committee, and you know where—as we have discussed many times, Dick, we need to “sell it, don’t smell it”—where the price of wheat at $2, and the wind blow- ing 80 miles an hour, and dust in my people's eyes, and the yellow ribbons blowing off the barbed wire fences, I have a little blood pressure about that. And the chairman is coming at it from a dif- ferent angle, obviously: Are they leading you into a tar pit of wrongdoing and cover-up, et cetera, et cetera, et cetera. So we need to get that pretty clear. I need to know what they're up to, and he does, too, and we're sort of coming at it from different angles. Mr. CROWDER. Both are fair questions. Let me address the overall question and then let Mr. Dickerson respond to the operational question with respect to that. The first is that the NAC is what it says. It's an advisory com- mittee, and it's part of the credit assessment process that we go through in review. Second, with respect to the operation of the pro- gram, Congressman Roberts, we tried to operate this program—I know what GAO said about the guarantees and so forth—but as a commercial program, and the commercial people do, in this case, not like the S&L, assume the risk. They assume the interest, they assume a 2 percent off the top, they assume in a lot of cases freight and some other things, so it's not just like that. Let me back up and say that we operate this program—and I know the GAO comments about it not being a commercial program because of the Government involvement in terms of the guaran- tees—but we try to operate this program to facilitate commercial transactions in the export market to move grain there, and that's the focus of this program, it has been the focus of this program since I have been here, and will continue to be the focus of the pro- gram as long as I'm here, because I feel like you do about selling it, and I would like to now ask Mr. Dickerson to comment, if he would, on the operational side with respect to the NAC. And we will, Congressman Rose, have the memo sent to you. Mr. Rose. I want Mr. Dickerson to—whatever he wants to say, I want to hear, but I have here a document from the FAS, “Summa- ry of NAC Actions: GSM-102 Announcements,” and it has a NAC approval number. Do you get approval from this interagency for- eign-policy type board before you make a commodity loan? Mr. DICKERSON. It's a question of semantics. It's a question of the use of that language, and I think that's improper. The NAC is ex- actly what it says. It's an agency or it's a council that— Mr. Rose. Well, this says, “approval number and approval amount.” Mr. DICKERSON. It's basically the consensus of that group, but it's not a requirement that the NAC give us approval for our Mr. Rose. In other words, you don’t have to get approval from NAC. Mr. DICKERSON. That's correct. Mr. Rose. You can do what you want to do. Mr. DICKERSON. The NAC provides advice and it provides coun- sel, just as– Mr. ROSE. And they can't veto, can they? 82 Mr. DICKERSON. That's correct, sir. Mr. ROSE. They cannot veto your requests for loan guarantees. Mr. DICKERSON. I think in a practical sense if we have a destina- tion that's sensitive enough that it would require further consider- ation by various departments of Government, it could very well be elevated for consideration at higher than the working level. But ba- sically it's just that. It's an advisory council, it does require majori- ty vote or a consensus. Mr. Rose. Thank you. Mr. CRowdER. Moving on in time, in late August, based on infor- mation that it had received from an informant that a large amount of undisclosed loans— Mr. Rose. I need to stop you one more time, and I’ll be very quick. I want to put in the record a letter dated June 11, 1986, from me to Richard Smith, the Administrator of the Foreign Agricultural Service, in which we informed the Foreign Agricultural Service about the problems with BNL and we told the Foreign Agricultural Service that they were all using BNL, all the tobacco dealers were using BNL. You're also aware that I ask in this letter for USDA and FAS to investigate tobacco shipments to Iraq in 1986, and if the USDA had gotten on top of this problem at that time, we might have discovered the BNL connection much earlier than what you're beginning to tell us about in August 1989. [The letter follows:] tºº $.5. Boust of Representati **::::::::::: * - Committee on flgritulture -- *** T fºubtemmittee on Estatto sat ºt ----- Bees: 1301. Leaguertº Rºsest Oſhtº &lastington, PC 20515 June 11 , 1986 Mr. Richard A. Smith Administrator Foreign Agricultural Service U.S. Department of Agriculture Washington, D. C. 20250 Dear Dick 1 At a recent tobacco meeting in my district the attached PAs cable was given to me, regarding Iraqi purchase of U.S. tobacco. Because the issues raised in this cable have been a matter of concern to the Tobacco and Peanuts, subcommittee, I am calling this particular cable to your attention, as well as the attention of your staff in the Tobacco Division. I wonder if you would be so kind as to ask the particular individual who sent the cable to expand on what he or she meant by the comment "Barazanchi, while pressured to accept the Zimbabwe offer, would rather continue purchasing U.S. tobacco..." - specifically, . I would like to know who it is that is pressuring Mr. Barazanchi to purchase 2 imbabwe leaf. I understand that the individuals who are designated cooperators with the PAS are responsible for arranging the sale of the zimbabwe tobacco in question. To that end, I would refer you to a number of questions the Subcommittee submitted for the record at our recent hearing which are directed at the Foreign Agricultural Service. Additionally, I would also like some further information on the so-called blended tobacco which contained a blend of U.S. and foreign leaf. Could you please direct the consular officer in question to ask Mr. Barazanchi which companies sent him this blended leaf and whether or not the tobacco in question was represented as a U.S. tobacco at the time he purchased it. I would also be curious as to how he deterrained it was a blended product. I am sure you would agree with me and the other Members of the Subcommittee that it is imperative that everything possible be done to protect the reputation of U.S. leaf abroad, particularly because of the importance of tobacco balance of trade payments to our economy. As the Subcommittee intends to continue its review of this issue, I look forward to a timely response to the questions I have asked. 84 81 In addition, , due to the possibility that there may be some action here which might be construed as fraudulent, I would request that all further inquiries and responses from Mr. Barazanchi be marked as confidential and that they not be :::::: *** to your regular mailing list of subscribers to these cables. Thanking you in advance for your attention to my request. With best wishes. Sincerely, Charlie Rose Chairman Enclosure cc 1 Gary Blumenthal Molly Eiler s 85 Honorable Charlie Rose Chairman Subcommittee on Tobacco and Peanuts Committee on Agriculture House of Representatives Washington, D.C. 20515 Dear Mr. Chairºan: This is in response to the questions you raised about Iraqi tobacco purchases in your June 11 letter to this agency. Thanks to GSM-102, export credit guarantees, the U.S. was able to capture the Iraqi market in 1904 and 1985 from Zimbabwe, a traditional supplier. However, this year, a coalition of Zimbabwe interests offered three-year credit at more attractive terms than GSM-102, and at a lower leaf price. In your letter, you refer to our Baghdad Agricultural Trade Officer's report citing pressure on the Iraqi buyer. The Zimbabwe group obviously is making a very strong bid to retrieve its traditional market in Iraq. In Zºº": Govermºent financial officials are doing everything they can to reduce outflows of scarce :* exchange and therefore favor lower-cost imports... we believe the Iraqi . official took the opportunity of the visit by Mr. Ron Whitehead, of fobacco Associates to solicit an improved U.S. offer. In fact, the Iraqi foreign exchange shortage is so severe that the Government is requesting financing of freight on all commodity imports. Although transportation cannot be financed under our GSM-102 program, it would be possible for U.S. companies to do so, and we have discussed this possibility with Tobacco Associates. The FAS tobacco market development program agreement has always been jointly signed by three cooperators: Tobacco Associates (TA), Burley and Dark Leaf Export Association (BOLEA) and Leaf Tobacco Expert Association (LTEA). All three are non-profit associations and none carries out any business transactions. LTEA"s members, as tobacco exporters, are an essential part of the sales chain, and LTEA's cooperator role is solely in connection with market development. Some LTEA members also handle foreign leaf, but as stated, FAS involvement with LTEA is solely on the basis of market development. Additional details on this issue are covered in the FAS response to the subcommittee's questions. which you should be receiving shortly- 87 Mr. Rose. You weren' t around II] 1986, Were yóü? Mr. CROWDER. No, sir, I wasn't. Mr. ROSE. You were ahead of the curve. That was not on your watch. Go ahead, Mr. Crowder. Mr. CROwdER [continuing]. Estimated at that time to be about $3 billion, had been made to Iraq officials by the Banca Nazionale del Lavoro, BNL, the Office of the U.S. Attorney General began its in- vestigation of BNL when it was preliminarily determined that a portion of these undisclosed loans, approximately $720 million as of September 1989, involved the taking of assignments of BNL of pro- ceeds under GSM-guaranteed sales of U.S. agricultural goods, That investigation was referred to a grand jury, and USDA’s Office of Inspector General, along with investigators from numerous other Government agencies, began to cooperate with the U.S. attorney in the investigation. Now, because the investigation was being conducted under the rules of grand jury secrecy, the USDA program officials did not learn about the general nature of the investigation until the first week of September, when early press reports of the investigation appeared. Mr. ROSE. Let me interject a point right there. Mr. CROWDER. All right. Mr. Rose. USDA learned of the general nature of the BNL inves- tigation during the second week of September. When USDA offi- cials met with BNL officials, did you offer to come and testify or even inform any of us in Congress about this? It's my contention that the effect of the rules of grand jury secrecy effectively served to cover the scope and the scale of the BNL affair. Did you come up and talk to us? Mr. CROWDER. At that time, no, we did not, Mr. Chairman. Mr. ROSE. All right. Go ahead. Mr. CROWDER. The following week, bank officials from BNL- Rome asked for a meeting with USDA officials and disclosed that BNL's Atlanta branch had made substantial loans to Iraq, alleged- ly without authority from BNL's head office in Rome. Subsequent to that meeting, USDA began to see press reports speculating that the investigation was looking into possible kickback payments and other illegal activities. Now, as a result of these press reports, I asked Larry McElvain, the Director of Commodity Credit Corporation, Operations Division, and Kevin Borsch, who is here with me today, the attorney respon- sible for the GSM program within the Office of General Counsel, to go to Atlanta to learn more specifics. During their initial 2-day visit on October 11 and 12, 1989, the team learned of allegations that BNL-Atlanta officials conducted an extensive “gray book” loan scheme which included CCC guaranteed loans. They also learned that the investigation was looking into a number of issues, including kickback payments, possible diversion of funds, potential- ly bogus consultant payments, and other issues. At that point, however, the investigation was at a very prelimi- nary stage, and there was no evidence available to USDA to indi- cate that in fact program violations had occurred. Mr. ROSE. Let me interject something at this point. During the November 16, 1989, hearing, the Office of Inspector General in- 88 formed the committee of tobacco export irregularities. The tobacco exporters, 8 of whom representing 24 companies, subsequently pled guilty to felonies involving violating the CCC regulations, Customs violations, or the provision of after-sales services or bribes or moneys to the Iraqi Government. According to the IG's testimony, the Foreign Agricultural Service had to be aware of irregularities with respect to tobacco shipments to Iraq. Again, my staff, the GAO, the OIG all knew in the summer of 1988 that these exporters used BNL. Mr. Crowder, I have a memo of September 1989 that was sent by you, talking about program—it was to you. I have a September 1989 letter to you, talking about program irregularities. Let me read parts of this. “Foreign Products Division, Foreign Agricultural Service.” The person's name who sent it has been rubbed out, but I'm sure we can find this in your records. “The purpose of my letter is to alert you to the increasing amount of pressure placed on our organiza- tion as an exporter of commodities to Iraq under the GSM-102 pro- gram. The nature of this letter is confidential and is intended to assist you during your forthcoming negotiations with the Iraqi au- thorities. Kindly refrain from using our name.” Mr. CRowder. Read that again for me, please. Mr. Rose. “The purpose of my letter is to alert you to the in- creasing amount of pressure placed on our organization as an ex- porter of commodities to Iraq under the GSM-102 program.” I’ll get to the meat of the coconut. “The Iraqi state organization with whom we negotiate our contracts has from time to time ap- proached ‘blank' and apparently other exporters in an effort to re- ceive free of charge various nonagricultural commodities as after- sales services. All of the inquiries relate to industrial goods ranging from tires to trailers, trucks, and spare parts, apparently needed by the Iraqi industry. The recent telex requests have exhibited ex- traordinarily threatening language where the future business rela- tions are being judged by our response to requests for free goods. ‘Blank' is apparently concerned about these demands and would appreciate a prompt involvement of CCC to remind the Iraqis that their requests are unreasonable and not in accordance with GSM- 102 program requirements. We appreciate the significant benefits offered by USDA programs,” et cetera. Now, that's September 7, 1989, and you're saying that in October 1989, during an initial 2-day visit, the team learned of allegations— OK. Mr. CRowder. That was the gray book. They learned of the alle- gations in the gray book, if you're in that. At the top of page 5, where we're going to now, Mr. Chairman, in the dates, it says about the same time one of USDA's commodity divisions—and you're referring to what we're referring to right here—was in- formed by several exporters that they had received pressure from Iraq to provide additional goods in the form of after-sales service. So we're in agreement there in connection with GSM sales. And as was pointed out earlier this morning, while the provision of goods itself would not represent any program violations so long as the exporter deducted the value of those goods from the sales 89 price at the time he registered them for a GSM guarantee, we were concerned that this practice could lead to program abuses. Mr. ROSE. All right. Let me hold you there. That bothers me. How does what you just said—would not represent any program violation SO long as the exporter deducted the Value of those goods from the sales price at the time he registered for a GSM guaran- tee—how does this square with the Foreign Corrupt Practices Act? I'm sure the House Foreign Affairs Committee would have prob- lems with exporters bribing foreign officials, even if you all don’t seem to. During the November 16, 1989, hearing, the GAO told the com- mittee, “If a U. S. businessman makes a payment to a foreign gov- ernment official, such activity would be prohibited by the Foreign Corrupt Practices Act.” Now, here you’re saying the provision of after-sales services would not represent a problem so long as the exporter deducted the value of those goods from the sale price at the time he registered for a GSM guarantee. Mr. CRowder. A program violation of our program. Of our pro- gram. It says any program violation. Mr. ROSE. It would violate none of your programs, but it might violate the Foreign Corrupt Practices Act, and you don't have any concern for that. Mr. CROWDER. Yes, sir— Mr. Borsch. Can I address that, please, Congressman? Mr. ROSE. Yes, sir. Mr. BORSCH. In fact, we had concern about that, and I think, as testimony indicates, that's why we immediately sent that informa- tion to the U.S. attorney in Atlanta who was handling that affair. Of course, they have jurisdiction over prosecution of the Foreign Corrupt Practices Act. My understanding is that, as a result, thus far there have been no indictments on those issues in the Atlanta investigation. Mr. ROSE. All right. Now, we're talking in the 1989 timeframe. Mr. BORSCH. Yes, sir. Mr. ROSE. I have here a cable that you all received. It went to the American Embassy in Baghdad. It's a May 31, 1988, telex. “Problems associated with Iraqi maritime vessels. Exporter advises that they continue to be pressed by Iraqi maritime reps to arrange freight at rates exceeding rates obtained via non-Iraqi sources. Again, we are not seeking to become embroiled in details of buyer/ seller contracts, but in the interest of smooth program implementa- tion, request you contact appropriate Iraqi officials and remind them that United States exporters remain at liberty to arrange freight via the competitive marketplace in order to meet contract schedules. Efforts by Iraqi maritime which are seen by exporter as pressure tactics are, at minimum, viewed by CCC as counterproduc- tive and shall likely work to the serious detriment of the program both in general and with Iraq in particular. We understand export- er has undertaken to convey to you some background information in this connection. We expect to receive copy and plan to forward comments to you as may be appropriate.” Now, this was to the Foreign Agricultural Service from— Mr. CRowder. From an exporter. 90 Mr. ROSE. From George Pope, who worked for FAS. Now, this is 1988, and now you're saying in 1989 that all the lights are sudden- ly coming on. Go ahead, Mr. Crowder. Mr. Roberts. Could I ask a question? Mr. Rose. Very well. Mr. Roberts. I want to back up a little bit. The chairman has indicated in a display of judicial excitement that you condone bribes. You don't condone bribes, do you, Dick? Mr. CRowdER. Not at all. Mr. Roberts. Second, we have two things. We have the gray book, and then we have this letter, and we have had a statement here that I didn't really pick up in terms of what you did when you were alerted. You gave that information because it's a violation of-which law is it, Charlie? Mr. ROSE. Foreign Corrupt Practices Act. Mr. Roberts. The Foreign Corrupt Practices Act, and that was turned over to the U.S. attorney in Atlanta. Mr. CROwdER. Yes. Mr. Roberts. And that you did not have any jurisdiction over that, they were looking into it, and a violation would not be of your particular program but certainly would be under that particular act, so you turned it over to them? Mr. BorsCH. It might be under that act. I can't say. It depends upon, as I understand it from the U.S. attorney, what is paid and how it's paid, but certainly, we turned the information we had over to the U.S. attorney for their evaluation in the case in Atlanta. Mr. Roberts. So when the red lights came on, you did something. Mr. Borsch. That's correct. Mr. Roberts. All right. When did you go to-in 1988, I think. When did you go to Baghdad and warn the Iraqis of this kind of practice? Wasn't this in 1988? Mr. Borsch. I'm afraid that all of us are 1989ers, I think, up here, Congressman. The 1988ers are still back there. [Laughter.] Mr. Roberts. Their reunion is coming on in just a moment. [Laughter.] Mr. Rose. Let me just clarify one thing. This cable is from Mr. Pope to the American Embassy in Baghdad. My staff, correct me if I'm wrong. Is that correct? And this is dated May 31, unclassified, 1988, and you're talking about things you did in 1989, and we're saying you had notice of it a year. Go ahead, Mr. Coleman. Mr. ColeMAN. Mr. Crowder, since you were not with the Depart- ment in 1988, let's talk about what you and the Department have done since you've been on your watch. I want to know what your procedures are, if any, when you have reason to believe that a vio- lation of the Foreign Corrupt Practices Act has occurred. Do you have any procedures in place as to what you do if you have reason- able cause to believe that? Mr. CRowdER. If we have cause to believe that not only the For- eign Corrupt Practices Act or any law has been violated, we imme- diately take it to General Counsel. Mr. ColeMAN. To the General Counsel? Mr. CROwdER. Office of General Counsel. 91 Mr. CôLEMAN. AñdyOllarò thé Général COllieſ: Mr. Borsch. I am not. I’m with the Office of General Counsel. Mr. ColeMAN. All right. But you're here to speak for them now. What do you do with it after it is forwarded to your office? Mr. BorsCH. Well, our procedure is to inform the Inspector Gen- eral. The Inspector General under the Inspector General's Act has certain responsibilities in those areas, and they work with the U.S. attorneys, and whenever we get an indication that there may have been a law violated, we have a meeting with them, they get the information, and then we wait until the investigation process and then whatever criminal process has run its course before we can begin to look at it either civilly or administratively. Mr. Col.FMAN. These various handoffs here end up in the Depart- ment of Justice. Mr. BORSCH. Well, there is usually— Mr. ColeMAN. If there's a basis to the allegation or Mr. Borsch. Yes, there's usually a referral for evaluation to the Department of Justice, as I understand it, yes. Mr. ColeMAN. And what you have said in your testimony, Mr. Crowder, is that basically this is a shakedown operation that some exporters were receiving. They passed that information on to you, and you immediately took it to the authorities through this chain of command which has just been detailed? Mr. CROWDER. That is correct. Mr. Col.FMAN. Thank you. Mr. Rose. But you don't have any explanation as to why you didn't know about this 1988 George Pope telex? Mr. CRowDER. Let me ask Mr. Dickerson to comment on the 1988 George Pope memo. Mr. DICKERSON. I, like Dr. Crowder, was not at the FAS at that time, but my understanding of that issue is that exporters who had sold to Iraq on a CNF basis, therefore responsible for providing ocean freight, had been requested by Iraqi ministries to use Iraqi flag vessels at higher than freight rates that could be obtained from non-Iraqi suppliers of freight, and as a result of that, those exporters came to the USDA, came to FAS and George Pope, com- plained of that, and that cable is a result of those issues being brought to FAS by the exporters. Apparently, this was brought up during the consultations in Baghdad in 1988, at which time they were discussing the fiscal year 1989 credit guarantees. Mr. Roberts. Excuse me. This is sort of an Iraqi cargo preference thing here? Is this what we're talking about? [Laughter.] Mr. DICKERSON. I think you just about got it right. Mr. ROBERTs. All right. Mr. Rose. Go ahead, Mr. Crowder. Mr. CROWDER. Well, let me pick up where I left off. It will be a little duplication of what we've been talking about, but just for con- tinuity in the script here, we were concerned that this practice could lead to program abuses, and as indicated by Kevin, we imme- diately provided the information that we had to the Office of In- spector General and the U.S. attorney in Atlanta, and we did that immediately. In addition, the attorneys conducting our administrative review interviewed the concerned exporters. The exporters said they had 92 refused to provide additional goods over a concern that this might have placed them at a competitive disadvantage in the Iraqi market. USDA also relayed this information to its agricultural at- taché in Baghdad, who was instructed to tell key Iraqi officials that this practice must desist. It's unacceptable. Further inquiry was made to the extent that this practice was part of our administra- tive review process. Now, despite grand jury restrictions that prevented USDA from learning the specifics of the Atlanta investigation, USDA was able to proceed on an independent administrative review of the BNL's GSM records under our regulatory authority, and I directed USDA attorneys to return to Atlanta, where, during the following week, they spent 2 days reviewing approximately 50 sets of transaction files, roughly half of them existing GSM guarantees. Mr. ROSE. Let me make one little footnote there. Mr. CRowDER. Sure. Mr. Rose. If all the records were tied up in a secret grand jury proceeding, how could you conduct an effective independent admin- istrative review of the BNL's GSM records? Mr. CRowder. I’ll let Kevin answer that one. Mr. Borsch. We went to Atlanta at Dr. Crowder's direction and spoke to the U.S. attorney, and they informed us that the BNL transaction records on GSM sales could be made available to us. We went to the BNL offices in Atlanta. At that time, there were investigators from I would estimate between 8 and 10 different Federal and State agencies looking through various and sundry records. They had one gigantic room about the size of the area that we're in here set up with tables and boxes, and there people from the Georgia banking regulators and the Federal Reserve and many others, and we got in there, and they had people from the law firm that was representing BNL in Atlanta, and they had their parale- gals down— Mr. Rose. Wait a minute. You were in a room with secret grand jury jocuments. and BNL's lawyers were in the room at the same time'. Mr. Borsch. I don't know that they were secret grand jury docu- ments. All I know is we requested that we be able to look at BNL's GSM transaction records, and— Mr. ROSE. I thought grand jury investigations were secret. Mr. BORSCH. This is not a grand jury investigation. Mr. Rose. Well, isn't that what Mr. Crowder told us was going on? That's what he said back on the last page. Mr. BORSCH. I think you were confused between what the U.S. attorney was doing and what we were attempting to do, Congress- man. This is not a grand jury investigation. Those records were available, we cleared it with the U.S. attorney that we could look at those records, and as a matter of fact, the Department of De- fense and a number of other agencies were in looking at those doc- uments. Mr. ROSE. The Department of Defense was looking at it? Mr. BORSCH. That's right. Mr. Rose. Why? Mr. BorsCH. I have no idea. You'd have to ask them, Congress- IIla Iſl. 93 Mr. Rose. You know, we've asked for those documents, and we've asked to see them, and we've been told they're all part of a secret grand jury proceeding and nobody can see them. But BNL's law- yers, the Defense Department, the U.S. Department of Agriculture all got a chance to go in there and find out whatever they wanted. That is very interesting. Mr. BORSCH. I just want you to be clear, Congressman. They weren't in a grand jury. They were in a room in BNL's own offices in Atlanta, and they were being looked at by any number of inves- tigators. Mr. ROSE. But you said that you talked to the U.S. attorney and that the U.S. attorney said that they could make some of the grand jury investigation documents available to you. Mr. BoRSCH. No, I didn't say that, Congressman. You said that. I said that I asked if we could see the GSM BNL documents, and they said yes, we could. Mr. Rose. Well, that's what I said. I mean, how did I just contra- dict myself? Mr. BoRSCH. I don't know that they're grand jury documents, Congressman. I don't know that of my own knowledge. Mr. RoSE. Well, you know that there was a grand jury investiga- tion of BNL going on at this time. Mr. BORSCH. Yes, I do. Mr. ROSE. And you were down in Atlanta looking at BNL records. Mr. BORSCH. Yes, sir. Mr. ROSE. And you had asked the U.S. attorney for permission to look at those records. Mr. BORSCH. Yes, sir. Mr. Rose. Thank you. Mr. Col.FMAN. May I follow up? Mr. Rose. Your witness. [Laughter.] Mr. Col.FMAN. Were you at any time asked to supply any infor- mation that you became acquainted with in that room to this com- mittee? Mr. BorsCH. I’m sorry, I didn’t understand that question. Mr. Col.FMAN. Were you at any time requested by this committee to provide any information that you gleaned from those files in this big room in Atlanta? Nobody ever asked you to give this to them? Mr. BORSCH. No, sir. Mr. ColeMAN. To your knowledge, were there any Members of Congress in this room when you were there? [Laughter.] - § Borsch. In BNL in Atlanta? * * Mr. Col.FMAN. Yes. ! Mr. Borsch. No, sir. I’m pretty sure of that. - Mr. Col.FMAN. I think what the chairman is stating here, and it may be just confusion, but the fact that Somebody is under a grand jury investigation doesn't mean that all information that may be going into that grand jury is off limits to anybody else for some other purpose or that in fact a lot of information is irrelevant to a grand jury investigation that .*.*. out of the same transac- tion or source or what have you. This idea about some cloak of se- crecy and conspiratorial efforts being made to deny people informa- tion, it seems to me, it was just the opposite. If you're in a big room 47–860 O - 92 – 4 94 with all these files, and you've got attorneys representing practical- ly every agency of the Federal Government down there, it was just the opposite. They were turning over all this information. I don’t see any cloak of secrecy. Mr. Borsch. Well, we had no problem getting access to that in- formation. Mr. ColeMAN. Thank you. Mr. ROBERTS. Mr. Chairman. Mr. ROSE. Yes, sir? Mr. ROBERTS. I'm just a poor smalltown newspaper man. I don’t understand all this legal stuff. But I don't think you can have it both ways, and I think what the chairman is trying to point out, and I would ask Dick to respond, I don't see how a Federal agency can say, “I’m sorry, we can't provide you the information because of the grand jury proceedings,” while at the same time we're able to get the information in regard to the specifics of their activities along with several other agencies of the Federal Government and State agencies. Now, Mr. Coleman has pointed out that perhaps some of this in- formation doesn't really relate to the grand jury proceedings, and I know the chairman doesn't want to change the grand jury proceed- ings in the United States in that they operate in at least some degree in-camera, but could you explain this? I still don't under- stand it. Mr. CRowdER. Congressman Roberts, I'd have a difficult time ex- plaining grand jury procedures at all. What my statement said was that we at USDA did not know the specifics of the Atlanta investi- gation, but we were able to have access to the GSM records associ- ated with BNL, and I will have to depend on the attorney to go beyond that. Mr. Borsch. I might say something about this, and maybe this will help. The access to records gained by the U.S. attorneys under the aegis of their grand jury subpoena, they have legal authority to do that. For our legal authority to look at those GSM records ema- nates from our regulations which were codified in the CFR, which say that if we ask for records of a program participant, they have to give us access. So we also have that legal authority to go—we don't go through the U.S. attorney. We go down to Atlanta, and we make the re- quest on the bank itself on the basis of our independent authority, and that's what we did there. We wanted to make sure that we weren't stepping on the toes of the U.S. attorney or getting in their way, and so we basically came down and said this is what we wanted to do, but we didn't get those documents from the U.S. at- torney. We got them from the bank under our regulatory author- itv. 'Mr. ROBERTs. If I might continue, Mr. Chairman, but it was based on the fact that you were able to get that information under your regulatory authority that eventually led you to the decision that you would not go ahead with additional requests in terms of Iraq's continuation in the program. Mr. BORSCH. That was the first step, yes, and we pursued that regulatory authority, as Dr. Crowder, I think, will describe, in seek- ing records from 95 Mr. Roberts. So the fact that the chairman is upset because the Department of Defense will not provide the subcommittee or his staff the information he requires because they say, there was a grand jury proceeding going on, at least you were able under your regulatory authority to find out enough to say, “Whoa, let's take a look here.” Mr. BorsCH. It took a lot of work, but yes, sir. Mr. ROBERTS. I think you're to be commended for that effort, not blamed for it. Mr. ROSE. Mr. Crowder, where are you in your—you're at the top of page 6? Mr. CRowDER. At the top of page 6, Mr. Chairman. Mr. ROSE. All right. Go ahead. Mr. CRowDER. Thank you. While this initial review produced no direct evidence of program violations, our attorneys found a pattern of fairly high prices charged to Iraq by Entrade International Limited, a New York cor- poration which is an indirectly owned subsidiary of a large Turkish concern, ENKA. The BNL file provided no information regarding the after-sales services issue. Mr. ROSE. Now, let me try to clarify something right here. The BNL files provided no information regarding the after-sales serv- ices issue, but you were aware, were you not, that after-sales serv- ices was an issue? Mr. CRowdER. I think we said that on the prior page. Mr. ROSE. And you are aware that the Justice Department press release on BNL dated February 28, 1991—and I’ll highlight it—the indictment charges that Drogue, Barton, and DeCarlios, without authority and in contravention of BNL's internal policies and pro- cedures, caused BNL to extend the following credits to the Iraqi Government: $1.9 billion extension of credit to the Iraqi Govern- ment through the Rafadan Bank for the purchase of CCC agricul- tural commodities; more than $88 million in standby letters of credit issued for acceptance as performance bonds by the U.S. De- partment of Agriculture under specific CCC programs involving ex- ports to Iraq; $250 million extension of unsecured credit through Rafadan Bank for the purchase of agricultural products, other goods and materials, and freight charges; a $70 million extension of unsecured credit to the Iraqi Government through the Iraqi Gov- ernment-owned Rashid Bank for the payment of freight charges and * purchase of agricultural products and other goods and ma- terials. In other words, the subject matter of that investigation with BNL was clearly right on top of the whole question of GSM-102 and –103. Is that not correct? Mr. CROwdER. Yes, sir. Mr. ROSE. I have many cables that show the whole question of after-sales services. One is to Comet Rice that says—it's from the grain board of Iraq, and it says, “We kindly request you to cover the amount of spare parts totaling U.S. $32,000 which are request- ed from such and such a company as after-sales services, so please transfer the above amount urgently and inform us, enabling us to contact above supplier to ship the spare parts. Regards.” And you all had this in 1987, December 8, 1987. 96 And then from the grain import department again to Comet Rice in 1982 and 1983—I’m sorry. This is from Pete Vegas of Comet Rice to the grain board of Iraq. “In 1982 and 1983, Comet did almost all of the United States rice business with the Government of Korea. In 1983, our company was investigated by a House subcommittee for possible illegalities for our dealing with Korea. The investiga- tion took 6 months. Our chairman, Jerry Murphy, along with all key management of Comet, had to testify before the committee. The indictment made national news in the United States. We were proven totally innocent of any illegalities and commended for our honesty and integrity. Our relations with Korea then and now are excellent, based on trust and respect. The investigations were insti- gated by our competitors, who had previously controlled the busi- ness. As you know, we plan to buy a facility in Aqaba, Jordan, to better service your business.” Mr. ColeMAN. Mr. Chairman, can I inquire, are you stating that this memo from two third parties to each other was sent to FAS here? Mr. ROSE. Yes, they have it. Mr. ColeMAN. And what was the date that that was sent to them and they received it? Mr. Rose. The IG would have to tell you that. Mr. ColeMAN. I see. After you've introduced that, could I ask a question then? Mr. ROSE. Yes, sir. Just a minute. One of the things that Comet asked Iraq was, “How can Comet be sure that an employee in the grain board does not use your telex number to have money transferred to a personal account in Europe? How can Comet be sure that you are being fair by charg- ing and receiving from our competitors at the same amount?” Mr. ColeMAN. Well, let me ask, I don’t see anything on here that shows a stamp received or anything, but our information is that it was sent. Could I ask somebody here from the Department—I know you've got probably thousands if not millions of pieces of paper down there. Do you have any knowledge that this was received by the Department? Mr. CROWDER. Mr. Ebbitt just told me that he does not think we have that. That's his document. Mr. COLEMAN. Whose? Mr. CRowder. The OIG's. We do not have that in FAS. I have not seen it, nor have any of my people seen it. It's an Office of the Inspector General document. It's nothing that we in the program have seen. Mr. ColeMAN. It was received by OIG. Is that what Mr. Ebbitt is saying? Mr. EBBITT. We obtained that document, Congressman. That's our document. Mr. ColeMAN. What was the date you obtained it? Mr. EBBITT. It would have been during the field work we were doing in roughly July 1990. Mr. ColeMAN. So you had already commenced something to in- vestigate when you received this document? Mr. EBBITT. That's correct. 97 Mr. ColeMAN. This document didn't trigger anything on your behalf? Mr. EBBITT. We were in the midst of doing the work associated with the draft report that we talked about earlier. Mr. Rose. My point is, if the gentleman would yield, that this shows—I mean, Comet Rice was doing a good job of arguing with the Iraqis. I mean, this holds them up, in my opinion, to doing an excellent job. Evidence is everywhere, Mr. Crowder, that after-sales services were being demanded of virtually everybody that was doing business with Iraq under the GSM Program. If you had it and didn't do anything about it, then I question the judgment of those that were in charge, and you say Baghdad was instructed to tell all key Iraqi officials that this practice must desist. “D” words—don't, desist. I mean, I doubt the judgment of just talking to them in that kind of language. Mr. Roberts. Mr. ROBERTS. I thought we had a previous answer from the OIG, or maybe it was the GAO, that only 10 percent of these sales were involved in this fashion. Is that not correct? Mr. CROWDER. Of the samples that they— Mr. Roberts. I’m not trying to justify 10 percent, I’m just— Mr. CROWDER. No, and you shouldn't try to justify any. We don't justify any. Any is unacceptable. But I believe that the statement made by OIG, and I’ll have Jim correct me if I misstate this, is that of the transactions they sampled, 10 percent of those transactions had after-sales services associated with them, not that 10 percent of the value of the sales were made up of after-sales. Mr. Roberts. On page 14 of your testimony, it says “The amount of after-sales services detected represents approximately one-twen- tieth of 1 percent of the total value of registrations, or a total of $459,000 under guarantees worth $90 million, and $342,000 of the after-sales service payments involved Iraq.” What do these folks do in terms of their bargaining with the private exporters? Is this 100 percent? Most people I talked with indicate you either do business this way or you don't do it. I’m not condoning it. Don't misunder- stand me. Mr. CRowder. Well, these are private exporters they're dealing with in this case, Congressman. So this is what they're doing. I think what we’ve seen here, though, is in all of the evidence that will unfold as we go through until we get to a place where a con- clusion was made on this, there's a pattern by the Iraqi people that we should not forgive to try to get something from something else or try to get around the program rules. There's no question that this is where that trail leads, and that's the reason there was no question when we got there through administrative review that we didn't go forward and would not go forward. Mr. Roberts. I think everybody agrees with that point, it's just the “when” of it that I think is the question. Mr. CRowder. I can address that. If you're asking me what were we doing and where—it was a question that either you or Congress- man Coleman asked of the OIG this morning—we were developing the evidence that we had, and the fact of a request, as I indicated earlier, does not trigger a program violation. As was answered this morning earlier, when we made the decision on the initial $500 * 98 million, we asked if there were any evidence that Iraq should be precluded from participating in the GSM Program in fiscal year 1990. We asked that question of the Inspector General, and we asked that question of the U.S. attorney, and the answer from both of them was no, that there was no evidence that they had that we should preclude them. Now, we can take that a step further. As we went through the year and in reference to the large number of meetings that we had on this issue—and the Inspector General was an important re- source to us as we went through and helped us with what we were doing—in our meetings, we continued to ask if there were evidence available that would suggest that even after we had put the pro- gram in place that we should suspend it, and the answer was no. But by the time we got to early 1990, and we had made the trip to Baghdad in April, it was obvious to us that we should not go for- ward at that time. But based on what we had in our own hands, based on what we were asking the Inspector General, and based on what we were asking the U.S. attorney, we were all told that there was no basis for precluding the participation of Iraq in this $500 million guarantee. Mr. ColeMAN. Mr. Chairman, may I follow up on that? Mr. ROSE. Sure. Mr. ColeMAN. May I have Mr. Ebbitt come forward? Because, Mr. Ebbitt, the question that the chairman is asking is—and since you just stated that you had received this informa- tion, and you had previously answered a question of mine about whether or not in these meetings you at any time advised them not to proceed, and Mr. Crowder just reconfirmed that—on the one hand, you had this information of the shakedowns and things going on, which you just acknowledged represented what the chairman has in his hands, and on the other hand, you have a question here by the FAS asking your advice, “Is there any reason why we can't go on?” Could you explain to us why, when you had this informa- tion, had you investigated it? What was done with it, and why didn't you speak up or why didn't somebody from your office speak up? "Mr. EBBITT. We obtained that information, Mr. Coleman, in ap- proximately July 1990. July-August is the time period that we were working at exporters reviewing their records. Mr. CRowder. It was post the time period I’m talking about with respect to going forward with the decision. Mr. ColeMAN. It was after the fact. So this document here is to- tally after the fact, not only for you now but also for the Inspector General? Mr. EBBITT. That's correct. Mr. Col.FMAN. Well, that clarifies that. Thank you. Mr. ROSE. Go ahead, Mr. Crowder. Thank you. Mr. CRowder. Let's see if I can pick up in the right place. I didn't mark it this time. Mr. Rose. Second paragraph, page 6. Mr. CRowdER. That's right. We had gone through the Turkish concern. Then I directed our attorneys to continue gathering infor- mation by making a thorough investigation of Entrade's records as well. On October 23, 1989, USDA made a written demand to En- 99 trade's attorney for access to that company's records. Because En- trade's records were being reviewed by investigators working with the U.S. attorney during late October and November, USDA did not gain access to those records until November 26, 1989. Those records were extensive, and USDA attorneys were required to make four separate trips totaling 8 days in November and Decem- ber to complete their review. In the meantime, consideration of Iraq's request for the fiscal year 1990 GSM allocation was at a critical juncture. However, under the circumstances, it was not prudent to grant Iraq's full re- quest until there was more information about the nature of the At- lanta investigation. Indeed, we decided after lengthy consultation with other agencies in the NAC process to extend $500 million in guarantees, with any additional funding of the fiscal year 1990 pro- gram dependent upon the results of our own administrative review and any results of the Atlanta grand jury investigation being con- ducted by the U.S. attorney and the Office of Inspector General. We also made it clear to Iraq that the program would be termi- nated if abuses were discovered, and we made that clear. Initially, there were indications that the Atlanta investigation would result in indictments by November 15, 1989, and as you know, the investi- gation proved to be very complex and difficult and proceeded more slowly than initially anticipated. In the end, it took 18 months for the investigation to be completed and indictments to be returned. Mr. ROSE. Let me stop you right there. Mr. CROWDER. Sure. Mr. ROSE. I want to question you about the NAC process for just a minute. Mr. CROWDER. OK. Mr. ROSE. It was prudent not to grant Iraq's full request. Iraq wanted $1 billion. Mr. CRowder. They wanted $1 billion in GSM-102, and they wanted I believe $150 million was the initial request, I think, at that time in GSM-103. Mr. Rose. And you said, “No, we're going to give you $500 mil- lion.” Mr. CRowder. Well, if we go back to the process, if you're inter- ested in a little bit of history, they came to me and Mr. Rose. Who came to you? Mr. CROWDER. The Iraqis had a delegation here, and I met with them one afternoon, and I told them that as we looked at next year and when they were requesting this much, I said this is not accept- able given the potential for abuses given where we are in this pro- gram, and at that time I offered them $400 million, knowing that I would be willing to go the additional at that time. But they said, “Look, it's all or none. If you don't give it to us now, we're going to go home.” Mr. ROSE. But you were the one that recommended that it be $500 million? Mr. CRowdER. It was recommended to me, and I made the deci- sion at the Department. That is correct. Mr. ROSE. I have a memo here to Chairman Greenspan of the Board of Governors of the Federal Reserve System from Charles Sigmund, confidential, unclassified. “For your information”—he's 100 writing to the Chairman—“the Agriculture Department”—and it's dated September 28, 1989—"For your information, the Agriculture Department in recent weeks has been seeking to place on the NAC agenda consideration for additional CCC credits for Iraq of $30 mil- lion supplementary for fiscal year 1989 and $1 billion for fiscal year 1990. The Federal Reserve questioned the appropriateness of considering additional CCC credits for Iraq at this time, and we were successful in having these requests removed from the NAC agenda. We learned yesterday, however, that the request for NAC approval for a $1 billion CCC credit for Iraq for fiscal year 1990 has now been placed on the NAC agenda for October 3. Department of Agriculture staff is contacting NAC agencies to mobilize support for this credit, and they are scheduled to meet with Federal Re- serve staff tomorrow morning. If the $1 billion CCC credit for Iraq will remain on next week's agenda, we would be inclined to have the Federal Reserve vote against granting Iraq the full $1 billion CCC credit, but if pressed, we would be willing to go along with the current Treasury proposal for granting Iraq the smaller CCC credit—that is, $600 million.” Mr. Crowder, something's wrong. Mr. CRowder. Mr. Chairman, there's nothing wrong. Mr. ROSE. Tell me about it. You say you wanted only half a mil- lion dollars, and a memo to Alan Greenspan says you and your staff were down there lobbying for $1 billion. Mr. CROWDER. Go ahead, Paul. Mr. DICKERSON. If I could respond, the original request to meet with the NAC went forward with a proposal for a $1 billion line. That's quite correct. The timeframe that Dr. Crowder is talking about when he sat down with the Iraqis is subsequent to that date, and there had been additional information that was ongoing as a result of the BNL-Atlanta issues and so forth. Additional informa- tion was forthcoming during the time that the Iraqis were actually in Washington for consultations in very early days of October. So the request to meet and consider the $1 billion is prior to the timeframe in which Dr. Crowder is referring to having offered the Iraqis $400 million at the conclusion of our initial consultations in Washington in October 1989. Mr. Rose. Is this memo incorrect? Mr. DICKERSON. That memo is correct. Mr. ROSE. So you did ask on the 27th of September for a $1 bil- lion CCC credit? Mr. DICKERSON. That's correct. Mr. Rose. And Treasury had already told you the farthest they were willing to go was $600 million. Is that right? Mr. DICKERSON. That's my understanding. I wasn't at that meet- ing, but that's correct. I believe that's correct. Mr. Rose. Mr. Roberts, any questions? Mr. Roberts. Well, it's obvious that anything that's not classified certainly isn't confidential. [Laughter.] Except to the minority when we have a hearing. What is the Federal Reserve and the Treasury and all of these outfits doing telling the Department of Agriculture what to do and when to do it and why to do it and how much to do it in regard to our export policy? I’m going to-if you got the black hat here for 101 Hºlly stepping up to the problem—I’m going to have to rephrase that. The chairman is obviously extremely concerned over this particu- lar issue, as we all are, but if it's one thing for the past 20-some years I've been around this place it is that everybody in Washing- ton thinks that it's their grain. OK? The Treasury, the State De- partment, the World Council of Churches, the Consumer Federa- tion of America, everybody. Their grain. It's the farmer's grain, and he is urged—or his tobacco product or rice—he is urged to put that seed in the ground and to help feed this country in a troubled and hungry world, and it's your mission under these export programs to move that product to all countries, unless they are absolute ne'er-do-wells, which, in this particular case, Mr. Hussein obviously turned out to fit that category and then some. And here we have this national advisory group sitting up there in their pin-striped suits and their brief cases with their peanut butter sandwiches telling my farmers how much grain is going to be exported despite the fact that wheat is about $2.20, and we don't have a market. My concern is, as we drag these programs through the mud or whatever we're dragging them through, and having letter after letter after letter here that nobody on my side has seen or you've seen dated back to the time when K-State won a football game—I have a little concern about that. So I'm sort of coming at it from the other way. Do you sit down there and have Treasury—when you, say, “We need $1 billion for Iraq, and I will give you the credit,” and when they came in, you said, “No, adios, go back home, you can't have it,” even though they paid $800 million on the $500 million, so we were to the good for it. But what concerns me is the other side of this coin or, as Mr. Harvey says, the other side of the story. On the wheat exports now, we've gone from preaching to meddling on tobacco. If you want to do this on tobacco, that's fine by me. I’m off the subcommittee. So is the chairman. [Laughter.] But at any rate, when we get to wheat, I get a little upset about this. Do we have Treasury and the Federal Reserve–Alan Green- span is sitting there telling us how much wheat to export? Mr. CRowder. Can I respond? Mr. ROBERTS. Yes. Mr. CRowder. The answer is no, and I will go back to the discus- sion we had earlier that the NAC is an advisory committee, it is a process that we go through to get the input on, it is not the consen- sus, it is not a majority, it is an advisory, and USDA is free to move on its own, and the amount of credit guarantees awarded to Iraq in fiscal year 1990, the $500 million, was a USDA decision. Mr. Roberts. So eventually you moved on your own, and you told the Iraqis no? Mr. CRowdER. We told the Iraqis no, and they went home. Well, the first thing they did when they left my office—I believe it was a Friday afternoon—they went out and lobbied everybody else, and I got lots of Mr. Roberts. All the countries that I mentioned before? Mr. CRowdER. No, people in town. The industry people. Mr. Roberts. You mean the exporters that wanted you to move? 102 Mr. CRowDER. Well, and farmers and everyone else. They lobbied everybody. Mr. ROBERTS. You mean the rice exporters who come to this com- mittee and say it's a fine program, but we want to move this prod- uct, or the tobacco exporter or whatever, or the wheat exporter. Mr. CRowDER. We got lots of calls the first part of that next week. But they went back home, and subsequent to that, Mr. Dick- erson went to Iraq. Was it in December? Mr. DICKERSON. November. Mr. CRowder. November. With authority to negotiate $500 mil- lion in credit guarantees for Iraq during fiscal year 1990, with the consideration of any additional credit guarantees that year a func- tion of the outcome of the administrative review. Mr. Roberts. But the bottom line is that the NAC- Mr. CRowdER. It was strictly a USDA decision. Mr. ROBERTS. But the bottom line is that the NAC, if I can use that acronym, is an advisory group, you make the final decision, it is not a big NAC, it's a knick-NAC, right? [Laughter.] Mr. ROSE. Thank you. Mr. Crowder, we are roughly in the middle of page 7. Please pro- ceed, sir. Mr. CRowder. As indicated, Mr. Chairman, while awaiting the results of the grand jury investigation, I had regular meetings with representatives of the Office of the Inspector General. I’m repeat- ing myself here. Although they could not provide us with any detail about the Atlanta investigation, I asked if there were any evidence that we should not proceed with the initial $500 million allocation, and they're consistent answer was no, they had no basis to recommend that the program not go forward. Now, the attorneys' initial 2-day review in New York confirmed that Entrade had been able to make sales during the period Sep- tember 1985 to February 1987 at what appeared to be unusually high prices. Based on this information, but lacking any specific in- formation to indicate whether these high prices indicated any pro- gram violations, I decided to institute a price review process for all subsequent transactions, and this price review process has been re- ferred to both by OIG and GAO this morning, Mr. Chairman. After gathering additional market data and reviewing pertinent information in Commodity Credit Corporation files, the USDA ad- ministrative review team presented me with an initial report. Es- sentially, that assessment indicated a pattern of unusually high sales prices paid by Iraq and to some exporters. The Entrade files also indicated, but did not definitely establish, that after-sales serv- ice might have been provided in connection with one or two trans- actions. At this point in the administrative review, USDA had also become aware of one other issue involving Iraq. Iraq was demand- ing that U.S. exporters pay a so-called stamp tax. Commodity Credit Corporation's general sales manager received an inquiry about the permissibility under the regulations of this practice from an export on January 30, 1990. As in the case of after-sales service, this practice in itself constituted no program violation unless the 103 exporter failed to deduct the value of the service from the sales price of the transaction at the time the sale was registered. Now, we felt that in this case there was also a potential for abuse, another case. We again shared this information with OIG and the U.S. attorney and directed our attaché in Baghdad to inform Iraqi officials that the practice must be discontinued. Mr. ROSE. Do you think in the light of all that you knew at this point in time that your action that the practice must be discontin- ued was a sufficient step for you to take? Mr. CRowDER. I think it was a minimum step to take. hº ROSE. I agree it was a minimum step. No question about that. Mr. CROWDER. We didn't know the extent of it, we didn't know if the exporters had included that or would have included that in the guarantees. At that time, that's all we knew, Mr. Chairman, and it was one of two things, stop the program or investigate it further, and we did not have evidence at that time, and the IG agreed with us that we did not have evidence to suspend the program that was in place. Mr. ROSE. Go ahead. Mr. CRowder. In early 1990, I had several meetings with repre- sentatives of Iraq, including Iraq's ambassador, Mr. Al-Mashat, in which Iraq pressed for an additional $500 million tranche of GSM guarantees. In the first meeting, I told them flatly that there would be no additional credit guarantees until these issues were re- solved. After the meeting, I learned the Iraqi Embassy was at- tempting to exert political pressure on USDA to extend additional fiscal year 1990 guarantees. Mr. COLEMAN. Could I interrupt you there? Mr. CRowder. Sure. Mr. COLEMAN. What kind of pressure? Mr. CRowder. Contacting the industry and then have the indus- try contact us and then have people— Mr. Col.FMAN. Industry in this case meaning whom? Mr. CROWDER. U.S. exporters, growers, and producers. Whoever in this case they could. Mr. ColeMAN. And those people in turn did in fact contact the Department? Mr. CRowder. We have a big file of letters from this time period, all the way through June 1990. In fact, one— Mr. Rose. We would like a copy of those letters. Mr. CRowder. Would you? That's fine. I brought some of them with me, and I’d be glad to have them as part of the record. Mr. Cole:MAN. So producer organizations were being contacted by the Iraqi Ambassador. Is this the one we’ve seen on television so much during this whole Persian Gulf affair? Mr. CRowder. The one I've been seeing on television. Mr. ColeMAN. And he's churning up this so-called grassroots con- tact with the Department to continue the program, and Mr. CRowdER. That was our impression. M., CoLEMAN. How many of these contacts would you say were made: Mr. CRowder. I don’t know. I cannot answer that. We got a lot of phone calls and we got letters, and I can share a lot of letters. 104 There are some letters I recall that were sent to some Congress- Ine Il Mr. ColeMAN. Excuse me. I didn't hear that. Mr. CROWDER. I said there were some letters from some associa- tions and individuals out there sent to Congressmen who would suggest that we feel like you should—the importance of this pro- gram is such that you should exert pressure on “USDA—Crowder” to get this program moving along. Mr. ColeMAN. So some were even from the producer to a Member of Congress, and they were supposed to contact the De- partment? Mr. CRowDER. They did contact the Department. Mr. Col.FMAN. Do you have records of Members of Congress con- tacting the Department? Mr. CROWDER. Yes. Mr. Col.FMAN. Would you please make those available, too? Mr. CRowder. Sure. That's what I’d like to make available. Mr. ColeMAN. That's the type of pressure you're talking about. Mr. CRowder. All the way through until June 1990. Mr. ColeMAN. Thank you. Mr. ROSE. Well, he's gotten a little ahead of your script, Mr. Cole- man, but go on and read through it. Mr. CRowDER. We did not make any additional guarantees avail- able. Mr. Rose. Well, let me go back. There's one point you left out. Mr. CRowder. OK. Mr. Rose. Initially, Iraq refused to cooperate in this request. However, after it became clear that such a visit, that is, to Bagh- dad, would be a prerequisite to any further consideration of credit guarantees, Iraq ultimately consented to the visit, and it was ar- ranged for the second week of April 1990. Now, Mr. Roberts is complaining about not being told, I want to complain. Did you tell the House Agriculture Committee anything about this visit? Mr. CRowdER. I don’t know whether I have the set of dates with me. I briefed at various times or the staff briefed at various times— Mr. ROSE. We'd like a copy of your notes of your staff briefings, please, sir, for the record. [The information follows; the hearing continues on page 256.] 105 United States Foreign Washington, D.C. Department of Aqricultural 20250 Agriculture Service 3 APR 1991 The Honorable Charles Rose Chairman Subcommittee on Department Operations, Research and Foreign Agriculture Committee on Agriculture U.S. House of Representatives Washington, D.C. 20515 Dear Mr. Chairman, In response to your letter to Secretary Madigan, dated March 28, 1991, I have attached the information you requested, as well as, information Under Secretary Crowder and I stated we would submit for the record, during the March 14, 1991 hearing before the Subcommittee on Department Operations, Research and Foreign Agriculture. In addition to this information, I have included a list of documents in the possession of USDA relating to Banca Nationale de Lavoro, Iraq and the GSM-102/103 export credit guarantee programs. I would invite your staff at their convenience to visit the Department to review the files included in this list. #7. F. Paul Dickerson Attachments CC: Congressman Pat Roberts Congressman E (Kika) de la Garza Congressman E. Thomas Coleman Senator Patrick Leahy Senator Richard Lugar 106 Contents Include: A: B: Correspondence between USDA and Administration members of the National Advisory Council (NAC), Correspondence between USDA and Members of Congress, as well as, trade associations, producers, private exporters, and members of the Iraqi-Business Forum dating from fiscal year 1990, that urged the extension of GSM-102 export credit guarantees to Iraq, Memorandum dated December 22, 1989, to Mr. Jim Cubie, Chief Counsel, Senate Committee on Agriculture, Nutrition and Forestry, Foreign Agricultural Service response to the draft Office of the Inspector General (OIG) report on the GSM-102 and GSM-103 programs, Memorandum from Under Secretary Crowder to Inspector General Leon Snead requesting that the OIG initiate an investigation to determine any GSM-102 program violations, Congressional staff briefing dates, USDA press release on travel to Baghdad to conduct an administrative review of past GSM programs with Iraq, Memorandum addressing the whereabouts of the "missing" Rafadain bank file, Articles mentioning the "Condor" missile on which Dave Kunkel based the memorandum of December 23, 1989, and List of documents in USDA possession relating to Iraq, BNL, and FAS export programs. 107 \; \ u \ – Reference is rade to NAC Action 35-33, dated January 24, 1985, approving the progra-ing of $47 million additional GS"-102 credit guarantees for Iraq. An FY 1985 program for Iraq totaling $580 million has been announced for GS"-102 credit guarantees for wheat, rice, feed grains, animal protein concentrates, seeds, beef and poultry meat, breeding animals and/or poultry, tobacco and other commodities. An additional $30 million has been announced for blended credits for flour sales to Iraq. The J. S. Nepart-ºrt ef ‘gricºl tºrr is considering switching the current tler - a credit all ºcation º f $30 -illion to GSM-5 direct credits because of the recent sº spersion of tº s bienied credit program. This would not result in any increase in the overall level of CCC credit programs that have been errºr-ver'. While vºc understand the cºncern of other agencies about the credit worthiness of Iran, it is the opinion of USDA that Iraq will continue to honor its corritments under the GS"-102 and GSM-5 programs. The following allocation of GSM-5 direct credits is proposed: $30.0 million (proposed GSM-5) Arnount: $680.0 million (cumulative GSM-102 for FY 1985) Purpose: To finance sales of U.S. agricultural commodities Terms: Three (3) year terms. Guarantor: Rafidain Bank and/or other eligible banks Expert ºut-orizatiºn foriod: Through September 30, 1985 Sincerely, / - -*. - 1 . / ºrry F. Trynºlds Oi!---to r Prº --à- nº vºlc ---n - " i \ is icº r . 108 º United States Foreign Washington D.C : f Oepartment of Agricultural Agriculture Service [. OPY FCR CFFICIAL JSE CNL / FILE 8 QEC 982 Mr. Robert S. Watson 1 -- Secretary National Advisory Council on International Monetary and Financial Policies Department of Treasury washington, D.C. 20220 Dear Mr. Watson: We are considering a Government of Iraq (GOI) request for a $210.0 million allocation in CCC GSM-102 credit guarantees. The purpose of this allocation would be to finance exports of about 750 thousand metric tons of wheat valued at $120 million, 200 thousand metric tons of rice valued at $80 million and 100 thousand metric tons of barley valued at $10 million. Iraq is a net importer of agricultural commodities. While the U.S. has traditionally supplied a portion of Iraq's grain import requirements, a GSM-102 allocation is viewed as a means by which to offset declining U.S. market shares. For example, U.S. wheat exports to Iraq dwindled from a 403,000 MT average during the 1976/77 - 1979/80 marketing years to lj8,000 MT in the 1980/81 marketing year to 49,000 in the 1981/82 marketing year. The U.S. share of the Iraqi rice and barley markets has also declined in the past three years. Accordingly, the Department of Agriculture is proposing to use GSM-102 credit guarantees to offer financing support to Iraq in order to maintain and increase our market share of these major cereal imports. In view of the foregoing, the following information is provided: Amount: $210 million in GSM-102 credit guarantees. Foreign Bank The Rafidain Bank of Iraq, or other eligible Guarantor: banks. Purpose: For credits and guarantees covering credit sales of U.S. wheat, rice and barley secured by foreign bank letters of credit. Terms: Three (3) years. Export Authorization through September 30, 1983 period. FOR OFFICIAL USE ONLY 110 FOR OFFICIAL SE ON!" NOW rises Mr. Michael O'Connor National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. O'Connor: The U.S. Department of Agriculture is considering programing $12.0 million in GSM-103 intermediate credit guarantees to allow programing for the sale of U.S. tobacco to Iraq during fiscal year 1987. The total of the various GSM credit lines for sales of U.S. agricultural commodities to Iraq will be kept within the $500.0 million level reviewed earlier. In FY 1984 and FY 1985 the United States was able to capture a large share of the Iraq tobacco market through GSM-102 credit guarantees. However, Zimbabwe is aggressively attempting to recapture the Iraqi market with a three-year financing offer with better terms than GSM-102. A condition of the offer is that Iraq buy Zimbabwe tobacco for three years. Credit guarantees under GSM-103 in FY 1986 enabled the U.S. to avoid being preempted in the Iraqi º; The GSM 103 guarantees are expected to maintain our market share in Y - In view of the foregoing, USDA proposes the following allocation of GSM-103 credit guarantees: Amount: $12.0 million. Purpose: For credit guarantees covering credit sales of U.S. agricultural products secured by foreign bank letters of credit. Terms: More than three and up to five years. Guarantor: Rafidain Bank and/or other eligible banks. Export Authorization Period: Through September 30, 1987. The views of the National Advisory Council on International Monetary and Financial Policies are requested. Sincerely, 7%. Kerry E. Reynolds Director, Program Development Division Export Credits !!! JR OFFICIAL USE ONLY ſº United States Foreign Washington, D.C. |ſºld Ajālū 3}}} §3% Agriculture Service NOV 2 & 1985 Mr. Michael O'Connor National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 ga aº ºf 45T Reference is made to previous NAC Action 86-313, dated November 18, approving a program of $12 million in GSM-103 export credit guarantees. Dear Mr. O'Connor: The U.S. Department of Agriculture is considering a program for credit guarantees of $75 million for the purchase of additional agricultural commodities in FY 1987. The total of the various GSM-103 credit lines for sales of U.S. agricultural commodities to Iraq will be kept within the $500.0 million level reviewed earlier. The additional credit will help to solidify the market for U.S. wheat and establish one for U.S. hatching eggs, table eggs and/or day-old layer/broiler or breeder chicks in Iraq. In FY 1985 and FY 1986 the United States was able to capture a large share of the Iraq wheat market through GSM-102 credit guarantees. GSM-103 credit guarantees are necessary to increase our market share. The United States has never sold hatching eggs or breeding chicks to Iraq before due to lack of competitiveness. The EEC has been subsidizing exports of both to Iraq. GSM-103 guarantees would enable us to place U.S. exports in a position competitive with EEC products. In view of the foregoing, USDA proposes the following allocation of GSM-103 credit guarantees: Amount: $75.0 million $102.0 cumulative Purpose: For credit guarantees covering credit sales of U.S. agricultural products secured by foreign bank letters of credit. Terms: More than three and up to five years. Guarantor: Rafidain Bank and/or other eligible banks. Export Authorization Period: Through September 30, 1987. The views of the National Advisory Council on International Monetary and Financial Policies are requested. Sincerely, Kerry E. Reynolds Director, Program Development Division Export Credits FOR OFFICIAL USE ONLY 112 U.S. DEPARTMENT OF AGRICULTURE FOREIGN AGRICULTURAL SERVICE NOVEMBER 28, 1986 T0: Suzanne Early, USTR (Room 423) Hazen Gale, Treasury (Room 2221) Davel Stebbing, State (Room 3526) Proposed GSM-103 Program Country: Iraq Commodity: Wheat Prices: Competitive world prices at time of sale. Total Walue: $50 million Buyer: Iraqi Public and Private Sector Terms: Between 3 and 7 years Relevant Import Data: The United States supplied an average of 36 percent of Iraqi wheat imports from 1981 to 1985, Australia supplied 41 percent and Canada 19 percent. Since 1983, Australia has gained market share at the expense of the United States in a market averaging 2,077,000 metric tons between 1981/82 and 1985/86 and showing slow growth. Over 90 percent of U.S. wheat exported to Iraq from 1983 to 1985 was covered by the GSM-102 program. IRAQ WHEAT IMPORTS BY ORIGIN (July–June) 1981/86 1986/87 1981/82 1982/83 1983/84 1984/85 1985/86 AVERAGE FORECAST Origin TWI-g TWT-4 Tr— TWT-I. TMI-I Tir-i –THF- Australia 816 58 403 24 859 32 1216 50 765 45 812 41 U.S. 49 4 925 55 1171 44 868 35 655 35 723 36 Canada 230 16 310 18 632 24 367 15 347 20 377 19 Argentina 277 20 50 3 0 0 0 0 0 0 65 3 TOTAL 1,397 1,697 2,664 2,450 1,715 2,077 2,800 ------------------------------------------------------------------------------ Policy Clearance Requested By: Kerry Reynolds, 382–9221 113 U.S. DEPARTMENT OF AGRICULTURE FOREIGN AGRICULTURAL SERVICE NOWEMBER 28, 1986 TO: Suzanne Early, USTR (Room 423) Hazen Gale, Treasury (Room 2221) Davel Stebbing, State (Room 3526) Proposed GSM-103 Program Country: Iraq Commodity: Hatching eggs, table eggs and/or day-old layer/broiler or breeder chicks Prices: Competitive world prices at time of sale. Total Walue: $25 million Buyer: Iraqi Public and Private Sector Terms: Between 3 and 7 years Relevant Import Data: Hatching Eggs: The EC supplied 96 percent of the Iraqi market from 1982 to 1983. Due to foreign exchange problems in 1984-85, the total import market dropped 80%, and Cyprus began making inroads, capturing 21% of the reduced 4,826 MT market. Table Eggs: Turkey and Jordan are the principal suppliers, but data about trade with Jordan is unavailable. Turkey exported 52,000 MT of table eggs to Iraq in 1984 and 1985 for $59 million each year. The U.S. was able to export table eggs only in 1982, after which it was not competitive. Breeder Chicks: Almost all imported breeding chicks come from the EC, mainly supplied by the Netherlands and France. An average of 71,000 chicks for $2.6 million was imported from 1982 through 1985. The United States did not have an established share of the market during that period. 114 Iraq Hatching Egg Imports (U.N. Data) Metric Tons (Million Dollars) Origin 1982 1983 1984 1985 EC 25,607 7,015 137 3,578 ($34) ($8) ($0.6) ($6.5) Yugoslavia 716 237 399 250 ($0.8) ($0.4) ($0.6) ($0.4) Cyprus 8 121 119 998 ($0.04) ($0.5) ($0.4) ($0.3) Iraq Table Egg Imports (U.N. Data) Metric Tons (Million Dollars) Origin 1982 1983 1984 1985 Turkey 10,270 77,780 52,901 52,000 ($16.5) ($47.2) ($59.0) ($59.0) U.S. 6,686 --- --- --- ($7.8) Brazil 2,169 --- --- --- ($2.1) Iraq Breeding Chicks Imports (U.N. Data) Thousands (Million Dollars) 1982 1983 1984 1985 Origin EC 68 61 92 64 (Neth & ($2.6) ($2.4) ($2.95) ($2.4) France) Austria --- 16 --- --- ($0.08) Policy Clearance Requested By: Kerry Reynolds, 382–9221 115 JR triºli tº Liiſ *t 35. United States Foreign Washington, D.C. § Department of Agricultural 20250 ºf Agriculture Service MAN 0 5 1857 Mr. Michael O'Connor National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. O'Connor: The U.S. Department of Agriculture is considering programing $10.0 million in GSM-103 intermediate credit guarantees to allow programing for the sale of U.S. protein concentrates to Iraq during fiscal year 1987. We are proposing that protein concentrates be included within the $75 million GSM-103 reviewed as NAC action 86-327 by reducing the amount allocated to wheat. In FY 1984 the United States was able to capture a large share of the Iraq protein concentrate market through GSM-102 credit guarantees. However, the last two years neighboring countries using subsidized ingredients from the EC have captured the Iraqi market. The use of the intermediate credit program will allow us to be more competitive in the Iraqi market. In view of the foregoing, USDA proposes that coverage of the $75 million GSM-103 intermediate credit guarantees previously reviewed be expanded to include protein concentrates. The views of the National Advisory Council on International Monetary and Financial Policies are requested. Sincerely, ~ ſ wº Kerry E.” Reynolds Director, Program Development Division Export Credits FAS:Ec:PDD:AME:DKunkel:dk:05-Jan-1987:382-9216:[GEIGER) IRAQ/87gsml.03/#668 Clearances: Kunkel, º, * ds/Delaplane, McElwain/Godsey, Nunn (ASCS), Whiteman cc: Treasury (10), Pope, Chewning, Fannin, Ferguson (01CD) 116 m FOR tº:... --- - - := United States Foreign Washington, D.C. | /7 §: of Agricultural 2O250 2^ § Agriculture Service Jº * JA'; U 7 ºf 2 * Mr. Michael O'Connor National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washingtºn, D.C. 20220 Dear Mr. O'Connor: Reference is made º: 86-224, dated September 4, 1986, supporting the programming of $680 m on in GSM-102 export credit guarantees for Iraq. At that time $500 million was established as the exposure ceiling for all credits extended by CCC. - The U.S. Department of Agriculture currently is consulting with a high-level Iraqi buying team on their FY 1987 plans to purchase U.S. agricultural commodities. They have indicated a strong need for additional credits because they intend to purchase more commodities this year than in FY 1986. Since they are completing their purchasing plans and are likely to tender during the next week, they need to know the level of credits that will be available. For these reasons, USDA is considering additional FY 1987 GSM-102 credit guarantees of $200 million. Continued high levels of credit are necessary to maintain Iraq as a major market for U.S. agricultural products. In order to facilitate additional sales to this important market, USDA also may wish to allocate as much as 10 percent of its Iraq credit program to provide freight coverage under the GSM-102/103 programs. The following allocation for GSM-102 credit guarantees is proposed: Amount: Up to $200.0 million for FY 1987. Cumulative: $700 million (for all programs) for FY 1987. Purpose: To finance sales of U.S. agricultural commodities. Terms: - - Three (3) year terms. Guarantor: Rafidain Bank and/or other eligible banks. Export Authorization Period: Through September 30, 1987. The views of the National Advisory Council on International Monetary and Financial Policies are requested. Sincerely, Kerry E. Reynolds Director - . . Program Development Division Export Credits - 117 OEPARTMENT OF THE TREASUR Y - - - - - - - - - 7 wast-4 in GTON nuary 14, 198 January 13, 1987 - MEMORANDUM FOR MIKE O'CONNOR From : Nancy J. rarius)tº- Subject: Treasury's views on an additi 00 million in GSM-102 credit guarantees f Iraq for FY 1987 USDA requested the views of the NAC agencies because it is conside ring additional FY 1987 GSM-102 credit guarantees of $200 million for Iraq. Treasury advises USDA that it should not go forward with these additional credits for Iraq based on the following financial and economic reasons: - The US only reschedules official debt in a multilateral framework, while Iraq has agreed to reschedulings only in a bilateral context. In the case of a default on these CCC credits, the potential for a Paris Club rescheduling is slim. Notwithstanding Iraqi opposition to reschedule in the Paris Club, other factors precluding a multilateral rescheduling include the absence of an IMF program and Iraqi refusal to publish current economic data. - Although Iraq has remained current to CCC, it has rescheduled bilaterally with many of its official creditors including Japan, Italy, Germany, France, Britain, Turkey and Yugoslavia. In addition, it appears that reschedulings during 1983-85 allowed Iraq to postpone needed macroeconomic adjustment, contributing to the severity of the current financing situation. While the lack of current data makes it impossible to assess Iraqi financing needs accurately, external debt is estimated at $50 billion, of which $15 billion is owed to OECD countries. - Iraq's oil revenue outlook is clouded. Despite some potential for increased oil revenues in the future, the effects on the oil market of the recently-concluded OPEC quota agreement, from which Iraq alone considers itself exempt, are uncertain. Iraq's protracted conflict with Iran adds a substantial element of political risk as well. - Iraq's foreign exchange reserves were estimated at $30 billion at the start of the war. According to estimates by Wharton Econometric Forecasters Associates, foreign exchange reserves had been drawn down to about $800 million at the end of 1983. Some further erosion likely occurred in 1984 as the current account deficit for civilian goods was estimated at $3.2 billion. It appears that current account deficits were 119 - FOR OFFICIAL USE ONLY - ; FA United States Foreign Washington, D.C. §). Department of Agricultural 20250 S$3.7 Agriculture Service JAX 1 : 357 . Mr. Picnaei O'Connor National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. O'Connor: Reference is made to NAC actions of September and November 1986 which agreed to $102 million in GSM-103 intermediate credit guarantees for Iraq during FY 1987. Said agreement was commodity specific. Following last week's credit consultations with a high-level Iraqi delegation in Washington, USDA now would like to restructure some of the GSM-103 coverage. Specifically, we would like to announce credit lines of $20 million for tobacco, $25 million for protein concentrate, and $3 million for meat. A $12 million tobacco line received NAC agreement last November; it has been announced and Iraqi buyers are tendering under it. Iraq has requested an additional $8 million, and we propose to provide such credits in order to maintain our dominant position in Iraq's tobacco market. The NAC also agreed last week to a $10 million GSM-103 line for protein concentrate for Iraq. Subsequently, the Iraqis requested a total availability of $25 million for this commodity. It will be used as a feed component to assist development of Iraq's livestock industry, and we expect Iraq to tender in the near future. During the credit consultations, Iraq also requested CCC credits for purchases of red meat. We propose to meet some of Iraq's needs through a direct credit sale (see separate letter). The $3 million GSM-103 proposal would supplement the direct sale. Accordingly, USDA proposes the following reallocation of GSM-103 credit guarantees for Iraq: Amount: $26 million in new announcements within $102 million already agreed to. Purpose: For credit guarantees covering credit sales of U.S. agricultural products secured by foreign bank letters of credit. Terms: - More than three (3) and up to seven (7) year terms. Existing tobacco and protein concentrate lines would be lengthened to seven (7) years. For official use only 120 For officIAL use only Mr. Michael O'Connor 2 Guarantor: Rafidain Bank and/or other eligible banks. Export Authorization Period: Through September 30, 1987. We request the views of the National Advisory Council on International Monetary and Financial Policies. Sincerely, %q24,44. Kerry E. Reynolds Director Program Development Division 121 - - ſºft Wii.III. Uſ: MI; ſº º United States Foreign Washington, D.C. § }) Department of Agricultural 20250 - Agriculture Service JAN 14 1987 Mr. Michael 0'Connor National Advisory Council ... . . ternational Monetary and Financial F : ; cies Department of the Treasury Washington, D.C. 20220 Dear Mr. O'Connor: Section 104 of the Food Security Act of 1985 requires the Secretary of Agriculture to purchase 200,000,000 pounds of red meat, in addition to those quantities normally purchased and distributed by the Secretary, and to assure the export of the meat purchased. To date this requirement has almost been met, prima, ily tº rough a large CCC sale to Brazil. USDA proposes to fulfill the requirements of Section 104 by concluding a direct sale to Iraq for up to $20 million. Iraq requested U.S. beef during credit consultations in Washington last week, and, given the limited number of buyers available for purchases of this type, it is an excellent opportunity to conclude our obligations under the 1985 Act. As with our proposed direct dairy sales to Iraq, any direct sales of red meat would count against the $700 million ceiling currently in place for credits to Iraq. Eligible Country: Iraq Eligible Commodity: rved Meat Prices: Competitive world prices at time of sale -- * - 1 vs " ... - . * 20 million Buyer: State Establishment for Foodstuff Trading Terms: Payment to be made in U.S. Dollars over 3 years; 1/3 of principal payable each year with interest payable semi-annually at T-Bill average plus 1.5 percent. The views of the National Advisory Council on International Monetary and Financial Policies are requested. Sincerely, **4. Kerry E. Reynolds - Director Program Development Division 122 *FA united States Foreign Washington, D.C. : } Qepartment of Agricultural 2O250 *º Agriculture Service APR 2 8 1987 - 2&_ Mr. Michael O'Connor 21. | National Advisory Council on International Jº- / Monetary and Financial Policies Department of the Treasury f % Washington, D.C. 20220 Dear Mr. O'Connor: Reference is made to NAC Action 87-5, dated January 9, 1987, regarding the increase in programming of $200 million in GSM-102 export credit guarantees for Iraq. At that time, $700 million was established as the exposure ceiling for all credits extended by CCC. Within the aforementioned credit exposure, USDA is considering establishing a new line of GSM-102 coverage for meat/vegetables processed under the "retort" system in plastic pouches to be consumed by the Iraqi military. Also, USDA is considering establishing a GSM-102 line for canned beef. Said line would be in lieu of a GSM-103 line, which was recommended in our letter to the Council of April 6. That proposal is hereby withdrawn. The terms of 3 years would remain the same. In view of recent interagency discussions concerning processed food stuffs, we are furnishing this information for use of the members of the National Advisory Council. Sincerely, T.S. R. Wºffºrces ^ KERRY E. REYNoLos Director Program Development Division 123 United States Foreign Washington, D.C. Department of Agricultural 20250 Agriculture Service Fºr OFFICIAL USE ONLY SEP | | 1987 Mr. Michael O'Connor National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. O'Connor: The Commodity Credit Corporation is considering a sale of dairy products to the Government of Iraq. The following sets forth the principal features of the proposed agreement. Eligible Country: Republic of Iraq. Eligible Commodities and Proposed Quantities: 2,000 Processed Cheese Total Value: $3.0 million Buyer: Government of Iraq, State Establishment for Foodstuffs Trading. Terms: Three-year deferred payment through an irrevocable letter of credit. Repayment drafts for accrued interest will be drawn seminannually from the invoice date. Drafts for the f. a.s invoice value will be drawn annually. The interest rate will be the bond equivalent rate of the most recent 52-week U.S. Treasury bill auction average published on the date of invoicing, plus 1.5 percentage points, rounded to the nearest one-eight of a point. POR OFFICIAL, USE OBLI 124 m FOR OFFICIAL USE ONLY Relevant Import Data: Cheese: The EEC supplied an average 38% of Iraq's 26,600 MT of cheese imports from 1983-1985. During the same period Australia supplied another 33% while ‘Jew Zealand held a 7% share. U.S. cheese exports to Iraq were negligible during this period. The U.S. has since become the major supplier of dairy products to Iraq. Jnder two contracts with CCC, Iraq imported 26,000 metric tons of nonfat dry milk, 3,300 metric tons of butteroil, 6,000 metric tons of cheese, and 5,000 metric tons of butter in FY 1985–1987. We have discussed the policy implications of this proposal with members of the Trade Policy Review Group and now request the Council's wiew of this proposed sale. If a deferred payment plan is granted, we would reduce Iraq's GSM-102/103 credit line by an equivalent amount. Sincerely, 4%už 44. Karry E. Reynolds Director Program Development Division FOR OFFICIAL USE ONLY 125 @ 47– H. Foreign ºwn oc. - FILE COPY Department of ricultural Agriculture §: SEP 29 1987 Mr. Michael 0'Connor National Advisory Council in International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. O'Connor: The Government of Iraq has requested that $1 million of its GSM-102 allocation for fiscal year 1987 be allocated to the GSM-103 intermediate export credit guarantee program to cover additional purchases of table eggs. Council members will recall that an initial $500 million GSM-102 program, and an additional $200 million program were favorably reviewed for GSM-102 and 103 on September 15, 1986, and January 9, 1987 (NAC actions 86/224 and 87/5, respectively). This is to advise that the Department of Agriculture plans to agree to the Government of Iraq's request. The transfer is necessary to complete the Government of Iraq's planned purchases of table eggs, currently programed at $9.0 million. The action will not increase the total exposure of the United States in Iraq, but will facilitate additional sales of U.S. agricultural commodities to that market. In view of the foregoing, the following transfer of GSM-102 credit guarantees to GSM-103 is being undertaken: Amount: $1.0 million (decreasing GSM-102 to $593.6 million and increasing GSM-103 to $88.0 million). Purpose: For credit guarantees covering credit sales of U.S. agricultural products secured by foreign bank letters of credit. Terms: Four (4) to seven (7) years. Guarantor: Rafidain Bank and/or other eligible banks. Export Authorization Period: Through September 30, 1987. Sincerely, %942. Apaº. - Kerry E. Reynolds, Director Program Development Division FOR OFFICIAL USE ONLY 860 O – 92 - 5 126 United States Foreign Washington, D.C. Department of Agricultural 2O250 Agriculture Service 00P w UUPY JUL 5 388 Mr. Michael O'Connor National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. O'Connor: Please refer to NAC Actions 87-187, '87-250, and 38-64 dated, respectively, August 25, 1987, October 16, 1987, and April 5, 1988 regarding the programing of $1,025 million in GSM-102 export credit guarantees for Iraq. The U.S. Department of Agriculture is considering establishing a $1.0 million GSM-102 export credit guarantee line for the sale of natural calf rennet to Iraq on up to 3-year terms during fiscal year 1988. Because we intend to real locate $1.0 million from the existing undesignated line to create the rennet line, this action will not affect the current level of the program. Rennet is derived from the stomachs of calves and is used to curdle milk in the production of cheese. The export credit guarantee programs (GSM-102/3) have played a significant role in establishing markets for a wide-range of U.S. agricultural commodities in Iraq. Providing GSM-102 credit guarantees for rennet will assist U.S. exporters in meeting European competition. We request the views of the National Advisory Council on International Monetary and Financial Policies. Sincerely, ** Kerry E. Reynolds Director Program Development Division 127 ! , (, ‘ United States H - eign Washington, D.C. ; ' C or . . Department of Agricultural 20250 º AgnCulture Service APR 28 1989 Mr. Allen E. Clapp National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. Clapp: Please refer to NAC Action 88-158 dated August 16, 1988 regarding the programing of $1,000 million in GSM-102 export credit guarantees for Iraq. The Department of Agriculture plans to redefine coverage under the GSM-102 credit guarantee program of a commodity line outside Chapters 1-24 -- solid wood products (plywood and lumber). To clarify the lines' components, we intend to redefine plywood as "wood panel products (plywood, hardboard, fibreboard, and particleboard)". Given the likeness of these products in use and the need to provide financing to remain competitive in the Iraq market, the Department of Agriculture believes that the redefinition will help to maintain exports to this market. This change is based on the need to more accurately reflect the products to be exported under plywood line. The forest products industry considers all of these products as similar in use and raw material composition; they differ primarily in the method of manufacture. The industry commonly uses "plywood" as a generic term which includes all of the above products. During discussions leading up to NAC action 87-89 dated June 30, 1987 (which concerned the programing of higher-value-added products or commodities outside Chapters 1-24) the similarities between plywood, fibreboard, and particleboard were reviewed ad nauseum. - This proposal is time sensitive, and we definitely need a poll on May 2. Given the urgency and the considerable similarities of the wood panel products, we were tempted to just go ahead with the change. However, we have agreed to submit for NAC review the inclusion of any commodity outside Chapters 1-24 and a-deal's-a-deal. Had we been more prescient, we would have submitted "wood panel products" for review last August. This clarification does not change the length of terms from twelve months and will not affect the current level of the line or the over-all program. We request the views of the National Advisory Council on International Monetary and Financial Policies. Sincerely, %a Apaº Kerry E. Reynolds Director Program Development Division Mr. Allen E. Clapp National Advisory Council on International Monetary and Financial Policies Department of the Treasury Washington, D.C. 20220 Dear Mr. Clapp: S&S. - | Sºč Please refer to NAC Action agº tº dated August 1é 1988 regarding the programing of $1,000 million in GSM-102 export credit guarantees for Iraq. The Department of Agriculture plans to redefine coverage under the GSM-102 credit guarantee program of a commodity line outside Chapters 1-24 -- solid wood products (plywood and lumber). To clarify the lines' components, we intend to redefine plywood as" wood panel products (plywood, hardboard, fibreboard, and particleboard)". Given the likeness of these products in use and the need to provide financing to remain competitive in the Iraq market, the Department of Agriculture believes that the redefinition will help to maintain exports to this market. This change is based on the need to more accurately reflect the products to be exported under plywood line. The forest products industry considers all of these products as similar in use and raw material composition; they differ primarily in the method of manufacture. The industry commonly uses "plywood" as a generic term which includes all of the above products. During discussions leading up to NAC action 87–89 dated June 30, 1987 (which concerned the programing of higher-value-added products or commodities outside Chapters 1-24) the similarities between plywood, fibreboard, and particleboard were reviewed ad nauseum. 129 This proposal is time sensitive, and we definitely need a poll on May 2. Given the urgency and the considerable similarities of the wood panel products, we were tempted to just go ahead with the change. However, we have agreed to submit for NAC review the inclusion of any commodity outside Chapters 1-24 and a-deal’s-a-deal. Had we been more prescient, we would have submitted "wood panel products" for review last August. This clarification does not change the length of terms from twelve months and will not affect the current level of the line or the over-all program. We request the views of the National Advisory Council on International Monetary and Financial Policies. Sincerely, Kerry E. Reynolds Director Program Development Division FAS: EC: PDD:AME:JBReynolds: 382–9236:27-Apr-1989: [Reynolds]IRAQ/ clearances: KReynolds, CTDelaplane, DKunkel, Howard cc: Whiteman, Nunn, Chewning, PDD Files 130 - Aº *: - DEPARTMENT OF AGRICULTURE of FICE OF THE seCRETARY was Hington, D.C. 2025o É § ~. º A \%. - j ; X The Honorable Patrick J. Leahy Chairman, Committee on Agriculture, Nutrition and Forestry United States Senate Washington, D.C. 20510-6000 Dear Mr. Chairman: Thank you for your letter of February 12, 1990 expressing your concerns regarding the ongoing investigation of the Atlanta agency of Banca Nazionale del Lavoro (BNL) and the implications of that investigation for the Commodity Credit Corporation (CCC) in connection with guarantees issued under the Export Credit Guarantee Program (GSM- 102) with respect to sales of agricultural commodities to Iraq. We are committed to keeping the Committee fully informed of significant developments in this matter. As you mentioned in your letter, representatives of the Foreign Agricultural Service (FAS) and our Office of the General Counsel briefed Committee staff about the BNL matter on December 4, 1989. In addition, at the request of Committee counsel, we prepared and submitted a detailed report to the Committee shortly thereafter. We have received no response or reaction to that report. Representatives of this Department are, and have been, available to meet with the members of the Committee or Committee staff at any time, and have been instructed to initiate contact with the Committee if the Department learns of any significant developments in that matter. In your letter you expressed concerns that the Committee had not been informed about CCC's recent actions temporarily suspending the issuance of guarantees under the GSM- 102 program for sales to Iraq. Those suspensions did not result from the BNL investigation in Atlanta. They were short-term suspensions, which occur automatically whenever CCC receives a notice of late payment in connection with sales under one of its GSM-102 guarantees. We do not consider such suspensions to be significant reflections of Iraq's or any other entity's reliability for making payments. 131 The Honorable Patrick J. Leahy 2 RECENT TEMPORARY SUSPENSION OF IRAQ'S LINE OF GSM-102 GUARANTEES Under GSM-102 regulations, exporters or their assignee banks holding the right to payment under guaranteed foreign bank letters of credit are required to report to CCC when any payments under those letters of credit are delinquent within ten days after the scheduled payment was due. This late notice is not a claim on CCC and does not trigger any obligation for payment, but it simply alerts CCC to the possibility of a claim in the future. CCC program managers then make inquiries with the foreign bank issuing the letter of credit to determine the reason for the late payment. As a matter of prudence and precaution, CCC automatically suspends making further guarantees under the program for that country until the matter is resolved. This action is viewed by us as a "technical" suspension. Typically, the reason for delinquent payment involves some complication with the transfer of funds among the foreign bank, its correspondent bank in the United States, and the U.S. bank which holds the right to receive payment. Ordinarily, these problems are resolved within a few days, and the line of export credit guarantees for that country is then reinstated. The recent technical suspensions of Iraq's GSM-102 line of export credit guarantees were not unique. Although the record of foreign banks for making timely payment in connection with sales for which export credit guarantees have been issued has been very good, there have been occasional late payments involving several countries. The most recent technical suspensions occurred in January of this year. On January 22, CCC was notified by a U.S. bank that Bank Rafidain was late on a letter of credit payment guaranteed under the GSM-102 program, and the line of export credit guarantees for Iraq was placed in temporary suspension. This problem turned out to be, as is usually the case, the result of complications in the funds transfer process. After inquiry by CCC operations personnel, the matter was resolved quickly, payments were made, and the line of export credit guarantees was restored two days later on January 24, when all payments were fully current. On January 26, CCC received another late notice regarding Bank Rafidain, this one originating from Banca Nazionale del Lavoro. Again, as is CCC's customary practice, the line of export credit guarantees was temporarily placed in suspension. The amount in question was approximately $225,000. CCC made appropriate inquiry, and again it was determined that the problem involved only bank transfer difficulties. CCC received assurances from Bank Rafidain that it intended to make payment on the letter of credit in question and that, in fact, it had already made efforts to do so. Bank Rafidain also provided CCC with copies of telexes instructing its corresponding banks to effect the funds transfer. The transfers were effected on February 16, and the Iraq line of export credit guarantees was restored that afternoon. 132 - The Honorable Patrick J. Leahy -5 Our decision to suspend temporarily the GSM-102 line of export credit guarantees for Iraq under these circumstances does not signal any change in policy towards Iraq, nor does it involve circumstances which should arouse undue concern at this time. Occasional late payments, while never condoned, do occur from time to time in a program as large as GSM-102 but can be, and are being, managed appropriately. CURRENT IRAQI GSM-102 OBLIGATIONS In your letter, you also asked for a report on several other issues including the current status of Iraqi obligations under sales with respect to which GSM-102 export credit guarantees have been issued. As you are aware, CCC is required by Congress, under section 1125 of the Food Security Act of 1985, to make available not less than $5 billion annually in short term export credit guarantees. In consultation with the National Advisory Council on International Monetary and Financial Policies, $1 billion of GSM- 102 guarantees was allocated with respect to sales of agricultural commodities to Iraq in both FY'88 and FY'89. Due in large part to the uncertainty that developed as a result of the BNL investigation, the FY 90 line of export credit guarantees for Iraq was set at a current level of $500 million. Iraq has participated in the GSM-102 program since its inception in 1983. Historically Iraq has been exemplary in repaying its GSM-102 obligations; CCC has, to date, never received a claim as a result of a export credit guarantee issued in connection with a sale to Iraq. Because GSM-102 guarantees are issued for letters of credit for which repayment terms are three years or less, the outstanding Iraqi indebtedness under such sales reflects guarantees issued for the most recent three year period, the years in which the Iraqi guaranteed indebtedness has been the largest. As of the most recent accounting, CCC records indicate a total outstanding guaranteed indebtedness, principal and interest, of approximately $2.189 billion. During the period 1985-1987, a substantial portion of the letter of credit proceeds resulting from GSM-102 guaranteed sales were assigned by U.S. agricultural exporters to BNL's Atlanta agency which provided the financing. In recent years, the receipt by BNL of such proceeds has been much less significant. Since the initiation of the BNL investigation last fall, no assignments of letter of credit proceeds in connection with Iraqi sales have been made to BNL, and BNL has indicated that it does not intend to receive further assignments of such proceeds. In September, shortly after the BNL investigation had resulted in wholesale restructuring of its Atlanta operations, CCC met with representatives of BNL's new management and its counsel. At that time, Iraqi obligations with respect to which GSM-102 guarantees had been issued which were held by BNL totalled approximately $761 million in principal and interest. Since that time, Iraq has made a number of payments as they have come due, and the current outstanding obligations held by BNL, as of the most recent accounting, totaled approximately $531.8 million. 133 The Honorable Patrick J. Leahy THE BNL INVESTIGATION Vou also asked for a report on any investigation conducted by the Department of Agriculture in connection with the BNL affair, as well as a report on the status of the Justice Department investigation in Atlanta. In August, 1989, the Office of the United States Attorney for the Northern District of Georgia was told that the directors of BNL's Atlanta agency were operating an undisclosed, or "greybook", loan program for Iraq. Sometime later, agents of the Federal Bureau of Investigation served search warrants and seized BNL records. When authorities at BNL's Rome headquarters learned of the problem, the Atlanta directors and employees were dismissed and new management, under the direct control of BNL- Rome, was brought in. A number of state and federal agencies concerned with banking regulation have participated in the investigation. Investigators from USDA's Office of Inspector General (OIG) became involved when it was learned that a portion of the BNL greybook portfolio consisted of loans made in conjunction with GSM-102 guaranteed export sales. USDA-OIG personnel have been working with the Office of the U.S. Attorney since that time but, to date, have been restricted in the amount of information that they have been able to convey to USDA officials because of confidentiality requirements attendant to the grand jury investigation. USDA has remained in regular contact with the Office of the U.S. Attorney in Atlanta to monitor the progress of the criminal investigation. While the U.S. Attorney has been unable to divulge specifics about the progress of the case, it is our general understanding that the investigation centers primarily on issues of possible violation of banking regulations and reporting requirements. However, investigators are also looking to determine whether there were inaccuracies in connection with applications made for CCC export credit guarantees. The U.S. Attorney has indicated no definitive timetable for the investigation. In October, 1989, at the direction of Under Secretary Crowder, representatives of the CCC's Export Operations Division and USDA's Office of the General Counsel travelled to Atlanta to meet with the Assistant United States Attorney in charge of the BNL investigation. They discussed the general background and direction of the investigation and conferred about means of cooperation between USDA and the Office of the United States Attorney. After discussing the limitations that the grand jury process would place on disclosure of information, we decided to conduct our own administrative investigation, under the authority provided in 7 C.F.R. 1493.14, of GSM-102 guarantees of sales to Iraq with respect to which BNL received assignments of proceeds. In October, after conferring with the Office of the U.S. Attorney to insure that such an administrative investigation would not conflict with grand jury proceedings, attorneys from USDA's Office of the General Counsel returned to Atlanta to inspect BNL's records pertaining to sales to Iraq with respect to which GSM-102 guarantees were issued. 134 The Honorable Patrick J. Leahy Based on that initial review, USDA attorneys subsequently requested access, again pursuant to our regulatory authority, to inspect exporter records of certain agricultural product sales to Iraq that had been financed by BNL with the assistance of GSM-102 guarantees. Due to circumstances surrounding the criminal investigation, USDA review could not be completed until the end of December, and several additional weeks were required to organize and analyze the information obtained. A draft report of the results of that investigation was just recently completed and has been provided to CCC and FAS officials. Due the pendency of grand jury proceedings in Atlanta and the possibility that the individuals and transactions discussed in that report could possibly be subjects of the criminal investigation, we are carefully controlling the circulation of the report at this time. However, the USDA attorneys that have conducted our administrative investigation would be available to meet with you and other members of the Committee, or with members of your staff, to discuss the report. Such a briefing obviously should be conducted in a manner that respects the delicate situation surrounding the grand jury proceedings in Atlanta. Finally, the pendency of the criminal investigation in Atlanta has not prevented us from making adjustments in management procedures that will further protect the integrity and operations of the export credit guarantee program. As a result of information gleaned from our investigation of the BNL matter, as well as in response to recent audits of the program conducted by USDA's Office of Inspector General, FAS has made a number of such changes. Several proposed modifications in GSM-102 regulations have recently been submitted to the Office of Management and Budget and will soon be published for public comment. Perhaps the most significant change is the recent institution, at the direction of Undersecretary Crowder, of a comprehensive system of price review for sales with respect to which GSM-102 guarantees are made. At this juncture, we do not know whether the BNL investigation in Atlanta will result in criminal prosecutions involving violations of the GSM-102 program. We are monitoring the situation carefully, and have the assurance of the Assistant U.S. Attorney in charge of the case that her office will ultimately provide USDA and CCC with access to any additional information of relevance to us. OTHER ISSUES You mentioned that there were "rumors" that foreign policy pressures have encouraged the Department to give Iraq special treatment in this case. To the contrary, the extension of GSM-102 guarantees in connection with sales to Iraq have recently been subject to special scrutiny because of the BNL investigation. Our current FY'90 line of GSM-102 guarantees for Iraq is only half of Iraq's original request and about half the size of such lines of GSM-102 guarantees which have been made available to Iraq for the past two years. The decision to limit our initial commitment for FY'90 reflects a prudent "go-slow" approach under the present circumstances. 135 The Honorable Patrick J. Leahy () Second, we do not believe there is a need at this time for additional authority for our export credit guarantee programs. As you are no doubt aware, current law dictates that CCC make available "no less" than $5 billion in export credit guarantees annually and clearly permits the Department to extend greater amounts if circumstances so justify. CCC has recently begun to develop a new and more Sophisticated program for country risk assessment which will better aid program managers in determining whether various lines of GSM-102 guarantees should continue to be maintained at current levels or should be adjusted (upward or downward). The flexibility on funding levels in current law, along with improved risk assessment techniques, should give us adequate tools to meet new market opportunities for U.S. agricultural exports, including any opportunities which may arise in Eastern Europe or the Soviet Union. Sincerely, T Oſ.a 2C4'N º cutter Secretary cc: The Honorable Richard G. Lugar 136 A > 7 - 2 - STROM THURMOND - - SOUTH CAROLINA - –3. 5 commit TEEs 22 - *:::::::::: lamittī Ştatts Stilatt & ,- - as - T. c.2 uscºunces WASHINGTON, DC 20510 - - ! 2.2 March 23, 1990 Mr. John Frydenlund Director of Congressional Relations Department of Agriculture Washington, D.C. 20250 Dear Mr. Frydenlund: Enclosed is a copy of correspondence I have recently received from Mr. A. F. Hardee. I believe you will find it self-explanatory. Your reviewing this material and providing any assistance and/or information possible under the governing statutes and regulations will be greatly appreciated. Thank you for your attention in this matter, and I look forward to hearing from you soon . With kindest regards and best wishes, Sincerely, Strom Thurmond ST/hm Enclosure Please include in your response case number # 00812100.48 137 T. R. M I L L E R M | LL C O M P A NY, IN C. ºffs A LABA MA 2- P -->4.27 *2C * * * * > --> → ott a st REET BREWTON p o Box 706 a. * * ºwº ſº L-1 --------- A F -sancy) - ascetº s---s -------- March 12, 1990 ---ecº Honorable Storm Thurmond United States Senate Washington, DC 20510 Dear Senator Thurmond: Last year we produced a fairly large quantity of Southern Yellow Pine for the country of Iraq. We are now completing production on a large crier to Egypt. These sales help our Southern Pine Industry. In addition, other Southern sawmills such as Langdale, North Florida Lumber Co., Sherrod Lumber Co., Louisiana Pacific, Georgia Pacific, Temple, Westvaco, Union Camp, ITT-Rayioneer, Franklin County Timber, and many other Southern sawmills benefit directly and indirectly. Also, Southern truck companies and ports benefit as well. In the overall economics situation, these sales help our balance of trade posture worldwide. - - In order to compete favorably with Canada, Scandinavia and Russia, we need to continue payment guaranties. The U. S. Department of Agriculture, Foreign Agricultural Service has authority (through various programs already in place) to provide us with credit guaranties. Our industry needs these guaranties to be assured of the economic validity within these global markets which we are trying to competitively penetrate. We need your help urgently to continue these programs. Iraq credit guarantees are being threatened because of various political reasons. If our programs are cut off to Iraq, it would possibly stop other Middle Eastern Countries from purchasing our lumber. We are currently talking with Algeria, Egypt, Morocco, Tunesia and several other countries. We need to increase wood products exports rather than decrease them. 138 Honorable Storm Thurmond U. S. Senator - March 12, 1990 Page 2 Please contact Abner Deathridge, U.S. D. A. Foreign Agricultural Service, at 202/382-9247 to get specific details to help us continue to export Southern Yellow Pine through southern ports. Thank you for your help. Sincereſy, (Sarſdy Hardee gl 139 T. R. M | L L E R NM | L L CO M P A N Y. NC Aft * * * * P-II- . . . . . . = -2 = = - BREW TON º A LA 3 A ** * …--- !arch 3, 1990 Honorable Sam Nunn United States Senate washington, DC 20510 : Dear Senator Nunn : Last year we produced a fairly large quantity of Southern Yellow Pine for the country of Iraq. We are now completing production on a large order to Egypt. These sales help our Southern Pine Industry. In addition, other Southern sawmills such as Langdale, North Florida Lumber Co., Sherrod Lumber Co., Louisiana Pacific, Georgia Pacific, Temple, Westvaco, Union Camp, ITT-Rayioneer, Franklin County Timber, and many other Southern sawmills benefit directly and indirectly. Also, Southern truck companies and ports benefit a well. In the overall economics situation, these sales help our balanc of trade posture worldwide. In order to compete favorably with Canada, Scandinavia and Russia, we need to continue payment guaranties. The U. S. Department of Agriculture, Foreign Agricultural Service has authority (through various programs already in place) to provi us with credit guaranties. Our industry needs these guarantie to be assured of the economic validity within these global markets which we are trying to competitively penetrate. We need your help urgently to continue these programs. Iraq credit guarantees are being threatened because of various political reasons. If our programs are cut off to Iraq, it w possibly stop other Middle Eastern Countries from purchasing lumber. We are currently talking with Algeria, Egypt, Morocc Tunesia and several other countries. We need to increase woo products exports rather than decrease them. 141 £3-)/2.7% J. BENNETT JOHNSTON LOUISIANA limitri Stattº Stilätt washingTON, DC 20510-1802 June 7, 1990 The Honorable Clayton Yeutter Secretary of Agriculture Department of Agriculture - 14th and Independence Avenue, SW r Washington, D.C. 20250 . . … : : Dear Mr. Sesetary: 24%. . . . . ; ---- A number of Louisiana rice growers have contacted ge the last week concerning the continued delay in implemenki FY 1990 Iraq GSM-102 program. As I understand it, the ºl contemplated that Iraq would receive a $1 billiot allº this program in FY 1990. Half that amount; about 85% was made available last fall. This has been 9xhaust February Iraq requested that the remainder b ºr-º- date U8DA has neither approved nor turned ¢ the reason...that alleged irregularities: invºl extension ºf credit to Iraq by a foreign bank administrative review by the Department. * * * º º The concerns of my constituents have sharp reasons. First, the price of rice has dropped, hundredweight, and roughly $2 per barreiſ, via thº Many believe that this decline is re 3 tº tº by OsbA, on the Iraqi request, since: ſºlºis tº commercial market, for U.S. ricey ºccot º jºr ... ºr of our-total ºries expºrtº repºrt from Usta reviewing; the ºogº º #:::::::::::::::: Rºſes that jº £irsk." - :::::::::rf isº #1. At that time, (october 1965?? tº sº prºgram's termination ties ... + = **:::: * : • . . . . . .". *** - ... Both the U.S. Attorney’s of: U88&that they did not have - º to indicate that Iraq. should: - additional-Pr 1996 Gºfalºeºs Unless the Department has addit the May-review, this assessment; - It is true that the Departiº 1985 and 1987, prices for rice and a were "significantly higher" than for were sold to other countries. It is . º report notes that wartime conditions agº. . . discrepancies. Nothing in the reportiujºs + v.j 47-850 - 080 142 The Hon. Clayton Yeutter June 7, 1990 Page 2 under GSM-l92 was misused (as barter to purchase war supplies and material, for example) or that there was an organized, deliberate effort to misuse the program. I am also told that the other prime discrepancy highlighted in this report ("after sales services" requests of exporters) has been corrected through an agreement with the Iraqi Deputy Minister of Trade. Rice growers are confused and frustrated by the Department's continued lack of action on the Iraqi request. On the basis of the facts described to me, I certainly understand these frustrations and find no reason to leave the program in limbo, putting at risk our most important commercial rice market and resulting in downward pressure on U.S. rice prices. Indeed, based on the information I have about the report's general thrust, there appears to be no reason not to proceed with the program and make further credits available immediately. I am convinced that it will require your personal attention to resolve this continuing deadlock, and urge you to review the Department's findings and make a decision to either suspend theº program, or move forward with it. Otherwise, I fear we may lºss: the Iraqi market by default. It would be grossly unfair to g.º. rice producers to do so unless additional facts are knowntº Department which would justify the suspension of this pro; Other countries are ready now to supply Iraq with rice, will turn to them to meet their needs if we fail to Make decision. I urge you to review this issue personally, and as: as possible so that a rational and timely decisión can reached, and steps taken to prevent ses+ous disruptions sis orderly, rice marketing for the remai of FY 1990...g. -- . * R -:... : . Bennett Johnston ... - ºr ... United states:senator JBJ's 1hm : ..., *...* Enclosure -.” . . . . . - 143 C&CCWS A503–S * July - 6 -230 The Honorable J. Bennett Johnston United States Senate Washington, D.C. 20510-1802 Dear Bennetti Thank you for your letter regarding your interest in the results of the administrative review of the Commodity Credit Corporation (CCC) Export Credit Guarantee Program (GSM-102) for Iraq and your concerns relating to the current status of additional CCC credit guarantees for Iraq during fiscal year 1990. The report released on May 21, 1990, covers a limited review focusing on those issues that surfaced as a result of the situation at Banca Nazionale del Lavoro (BNL) and was not intended to cover the entire program with Iraq. As you are aware, the review did raise some questions which, in our judgment, now require an expanded review of commodities and exporters by the Office of the Inspector General (OIG) . This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand jury into loans extended by BNL to Iraq. It has been alleged that this bank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not know at this time if any indictments will be handed down that will relate to the CCC programs or individuals that have participated in the programs. We share the concerns you have raised in your letter and recognize that Iraq has become an important market for U.S. rice as well as other commodities as a result of the GSM-102 program. We must, however, be assured that the program will be operated in a manner that not only recognizes the interest of agricultural exports but that is consistent with our commitment to absolute program integrity. At this time, we feel enough questions have been raised that we should not advance any proposals with respect to the GSM-102 program for Iraq until OIG has completed its review and until we can determine if any indictments will be handed down by the federal grand jury that may relate to our programs. After these reviews and investigations have been completed, this matter will be reevaluated. Sincerely, Signed Clayton Yeutter fas/ec/cccoo/ncá%in/lw/447-8211/8-29-90” “ºtrol No. 35-y10740 - n CC: Yeutter, crowder, Veneman, Campbell, OCR, EC&R, Anderson, Assoc. Admin. , } º CCO, Hºyºtage. Dickerson, Goldºsit, whitºcelvain, Raul 47-860 082 697 ----'kºtt- - …” - T / / - – - : * ~ ſ \ - - - - - - - - "." C-At-A ANDRE v. S :: --SS:X ---j : : - . . := -- ois-arc "º was “sº § *...” 5 > --> wavs AND MEANS Congregg of the (Hnited $tates º: #ouge of Representatiurg sº ºver . “sº * * * *50: Washington, £90. 20513 * - J. --> --> -- May 7, 1990 The Honorable Clayton Yeutter Secretary of Agriculture Room 2 OO-A 14th & Independence Ave., S.W. Washington, DC 20250 Dear Secretary Yeutter: We are writing to inquire about the status of USDA approval of a $500 million GSM-102 export credit guarantee allocation for Iraq. We understand that due to alleged transactional irregularities committed by the Atlanta branch of an Italian bank involving the GSM credit guarantee program that further allocations to Iraq have been held up by the Department of Agriculture. While we would never want to hurt the integrity of the GSM credit guarantee program, the withholding of these credits will have a significant economic impact on our area. As I am sure you are aware, Iraq is the 12th largest importer of U.S. agricultural products and large export market for United States rice and wheat. Not only is the Houston area involved in rice growing, but the Houston ports play a key role in the exportation of rice and wheat. commodity shipments from the United States to Iraq have ceased in recent weeks due to the lack of credit guarantees. Before further setbacks for *he rice and wheat industry and our ports are incurred, we ...uld like to know when the Department of Agriculture foresees the investigation of the credit guarantee program as it pertains to Iraq coming to a conclusion. Thank you for your consideration and timely response. We look forward to coming to an understanding with regard to this situation. Sincerely, *4,w/4 4-4*7 J Brooks Mike Andrews 145 JUN ºngº The ºblº ſº flºš U.S. House of Representatives Washington, D.C. 20515 Dear Congressman Brooks: Thank you for your letter signed jointly by you and Congressman Michael A. Andrews expressing your interest in the continued participation of Iraq in the Export Credit Guarantee Program (GSM-102). The Department of Agriculture recently completed its administrative review of the GSM-102 program with Iraq and issued a public report on May 21, 1990. A copy of that report is enclosed for your convenience. As you will note, the administrative review determined that there had been several problems arising from past GSM-102 guaranteed transactions with Iraq involving unusually high commodity pricing and requests by Iraq for so-called "after sales services." The information obtained in the administrative review has been turned over to the Department of Agriculture's Office of the Inspector General (OIG) with a request that OIG conduct further examination of these issues. In addition to this examination, a federal grand jury has been conducting a review into loans extended by Banca Nazionale del Lavoro in Atlanta to Iraq. At this time, we do not know if there will be any indictments handed down that will relate to our programs. We share your concerns regarding the GSM-102 program for Iraq. Iraq has certainly been an important market for U.S. rice and wheat, as well as a number of other products. We must, however, be assured that the program will be operated in a manner that both recognizes the interests of U.S. agricultural exporters and that is consistent with our commitment to absolute program integrity. We are hopeful that the OIG review will give us this assurance. Upon completion of the ongoing reviews, we will reevaluate the situation. Sincerely, Richard T. Crowder." , Programs grge. Secretary International Af:... . . - '' Enclosure FAS/EC/CCOOD/Larry cºvivº-silve-o-º: Control Number? 35-X855.53 cc; Yeutter, Crowder, Ve Campbell, OCR, EC&R, Anderson, Assoc. Admin. , CCO, Hovermale, OGC, * , Goldthwait, Whiteman, McElvain \ 2 ~3° \" letter sent to Michael A. Andrews º 146 commitſ"EE ºn AcRiculture. Nutritics THad v. YCHRAN --------- 3. 5 7% Ano Forestry . | 3.2/ comMittee on APPROPRIATIONS *Hmittà Statts $5tmatt committee on WASHINGTON, DC 20510 LABOR AND HUMAN RESOURCES SELECT COMMITTEE ON INDIAN AFFAIRS April 26, 1990 The Honorable Clayton Yeutter Secretary of Agriculture Department of Agriculture 14th & Independence Avenue SW Washington, DC 20250 Dear Clayton: We urge you to take whatever steps necessary to expedite the review of the Iraq GSM credit guarantee program, with the objective of correcting any operational deficiencies and extending the second half of the credit guarantees. It is imperative that the review be completed in a timely manner in order to minimize American export losses in this important expanding market. Iraq must import agricultural and wood products, with or without U.S. credit guarantees. Our major concern is that without access to U.S. credit guarantees, Iraq will turn to other countries to supply this demand. This will certainly result in an extensive loss of U.S. market share in Iraq, particularly in regard to rice and wood products. Iraq, with GSM credit guarantees, purchases a significant amount of these products produced in our State. Loss of the Iraqi rice market, in particular, would cause severe economic problems for Mississippi. We appreciate your timely consideration in this matter. Sincerely, TRENT LOTT %. COCHRAN - - United States Senator United States Senator > - º Lyl sva “wimpy “uoszepuvy Boad moo ºf 32 v I, aul "Aces pun "zepaozog - 06/8/9:3Ps: a*a*nexo:uez-Taawu I***oºl/M*7P Sova Izgº LX-st as Moºr i06/zz/g: Apq :uosozgy: dowI:opo 250 “A33v *qosozgy 250 “25 assw “uo: Sur TIngs 200 °25 °ossw “Awaucoal Tosunoo Texeues) Hºog :--> (uvauvoo zozvues on auss sea zozzet Two; ausp; uv) sextusotbürº Ære-ex50s 2033 hex tro-Reto peußS * KTexecurs *uerqpoo xoa eues on aues BuTeq sp. zea:3et retfurºs v. • K3;xpeau" sex5ozd eantosque oz queurapunoo ano q3TA auea's Tsuoo sº pure sizeaxodze Ternatino;xBe "s" n 3o s2 sexezu] eq+ sex Tubopez q3 og 3 sun retrusu e up tre+Bozd 3 ºu? enuYauco o-, etc.u eq TTT's ea 3 eq3 Ingedou exe on “saanpozd req30 3o requinu º sv TTest sv 's 25mpord poon pure epTx • S n zo; 3 extrem ºurezzodºr; tım ueeq KTuTuzzes swu bex I "bex I 3oz ºrexboxd EOT-MSO eq3 BUT prefer suzestrop rinoſ erºus on - * sensºr oset13 3o uo";3 ºuTurºre zettºrn; 35mpuop Dro astra asenber º q37A (DIO) teretºed zoneedstºr 3o es;230 s.v.Gsſ, oa read Peurn: treeq seq. me?Aez ear-exas TūTºrpe eq2 uţ peure-qo uotavºzozu'ſ eqJ. ..." see Taxes settes re32 e. pettee -es zo; bex I KG 53 senbez Pue Bufolºzd K3Ypotººoo q6;U ITTwnshun Butateau'ſ burr q37A suo;35ustreza pee-trerunſ 20t-Rs5 ased moz; Bufs;ze suetoozd Tuzeaes useq. pew exega 3 sq.3 peupuzeaep aelaez eafºuza słu Tºpe eq3 'ezou TTT a noiſ sw “pesoteue exe esseTex seezd BUT ſubdwoope sqf pure 3xodex qugº 3o Edoo V *066T *T2 Kº uo 33edez of Tond º penss; put ºrexbozd. EOT-MSD buzi eu- 3 o aeraea eaf2 texas TuTurpe rino penetdwoo MT3 uesex en * (COT-RSD) ºrex5ozd ee-trexºnſ) 3TPezo 3xodxs eq3 UT buzi Jo uo;3 edforazed penuTauoo eq3 up a sexe-up znoſ ºutssex.dxe “uerqpop zo-sues Ra peu5; soo sum uppus. “O661 ‘92 IT-dw peawp rea: et ano& rog syſtivuz Kuww : 3 (102, I-90 OTSOC o' G 'uoz ouTuswn eavues sea was pe: Tun 33 o'I aus-J, etouxotion eqJ. D6ét g : emſ S - Log hy -- - - : *... --> , Yo - 5 - 5 :: * > .-: BRAZIER FOREST INDUSTRIES, INC. 45C0 Columcia Center 70°5th Awenue, Seattle, WA38:04 Tee-r:re: 2C5) 385-58CC. Fax. 226) 386-5346 Telax: 5338C39 Je: ,-er 11, 1983 FAX number: (202) 447-727 Mr. Clayton Yeutter Secretary of Agriculture United States Department of Agriculture - ' ' ' Yetween 12th and 14th Streets, S.W. • ash ins r. 20250 Dear Mr. Yeutter: In reference to the decision in process on the GSM-102 credits to Iraq, the internal working problems of foreign banks should not cause the United states lumber and agricultural industries to suffer severely. A hostile decision towards these two important U.S. industr 2 sult ! - a positive trade position for our competitor nacions; our - - - - gain. We ask for your he 2 in this crisis. Very Truly Yours, BRAZIER FOREST ºr. INC. Concerned American LPK/kp 149 - ... 1 - 24 º - - .v - > - ~ BRAZIER FOREST INDUSTRIES, INC. 45CC Cºlº-ca -- - - - ". - - - " . . October 11, 1989 F-A - L-per: 222 ) . .7-72.71 Mr. Clayton Yeutter Secretary of Agriculture United States Department of Agriculture The Mall between 12th and 14th Streets, S.W. Washington, D.C. 20250 Dear Mr. Yeutter: In reference to the decision in process on the GSM-102 credits to Iraq, the internal working problems of foreign banks should not cause the United States lumber and agricultural industries to suffer severely. A hostile decision towards these two important U.S. industries will result in a positive trade position for our competitor nations; our loss, their gain. We ask for your help in this crisis. Very Truly Yours, BRAZIER FOREST ºf --- Concerned American LPK/kp TTEXED Manufacturers anc - stric-tºrs 2" rester" --res: ~~~ducts 151 :- 3 3: ... := -::- - - - - - - -== Braz-er F2: ...: - “. . . . . ... iſ 44.3% / ~ 2 - 34/3 S. T Ac P + 2 .” -- ~ / BRAZIER FOREST INDUSTRIES, INC. 45CC Columbia Center, 70° 5th Avenue, Seattle, WA38134 Telephore: 2C6) 385-58CO Fax:(208).386-5346 elex: 3838C53 F A C S : M I L E - J R G E N T To fax number (202) 447-727 To: Mr. Clayton Yeutter, Secretary of Agricultura From: John M. Brazier, President Mark W. Peters, Trading Division Manager Date: October 9, 1989 Re: Potential Decrease of GSM-102 Credits to Iraq Dear Secretary Yeutter: This facsim e is to u ,ently object to the potential deerease of GSM-102 credits to Iraq. It is unfair and econom!eally unsound to rastrict letter of credit guarantees to Iraq as a response to several bad individuals in the Italian bankins Industry. As you know, the United States is effective and competitive in the lumber export business. Producers in the Northwest and all over the country rely on this marke as a substantlal consumer of U.S. forest products. The restriction of eradits is an unfair punishment to an entire industry because a very few individuals took advantage of a program. Our company has over 300 employees and we know that * existence of this offshore market provides employment and enhances our balance of trade. Having personally travelled to Iraq, we have found that purchases of lumber g-----toed by U.S. letters of credit are desperately needed to rebuild this country Th Feople Invelved in this program are honest, straightforward and trustworthy. Please do not let the act!ons and internal procedures of an Italian bank spoil the geed this program can do for both our countries. Sincerely, IER FOREST INDUSTRIES, INC. Mark W. Peters Trading oivision Manager JMB, MWP/lp Maruºanwººes aº º-triº tree ºf wastar-sa-aa-tº-ºn- 152 W47.2 BRAZIER FOREST INDUSTRIES, INC. ^ ---ºr " +520 Colum-cºa Telecrore 206, 222-5322 73. 223 F A C 3 | " | L E - U R → E 'N T * : * = ... - - - - e - 2 - 2 -- 7 - 2 To: Mr. Clayton Yeutter, Secretary ºf Agricul: , re From: John M. Brazier, President Mark W. Peters, Trading Division Manager Date: October 9, 1989 -- - - Re: Potential Decrease of GSM-102 Credits to Iraq Dear Secretary Yeutter: - - - This facsimile is to urgently object to the potential decrease of GSM-102 credits to Iraq. It is unfair and economically unsound to restrict letter of credit guarantees to Iraq as a response to several bad individuals in the Italian banking industry. As you know, the United States is effective and competitive in the lumber export business. Producers in the Northwest and all over the country rely on this market as a substantial consumer of U.S. forest products. The restriction of credits is an unfair punishment to an entire industry because a very few individuals took advantage of a program. Our company has over 300 employees and we know that the existence of this offshore market provides employment and enhances our balance of trade. Having personally travelled to Iraq, we have found that purchases of 1-reer guaranteed by U.S. letters of credit are desperately needed to rebuild this country. The people involved in this program are honest, straight forward and trustworthy. Please do not let the actions and internal procedures of an Italian bank spoil the good this program can do for both our countries. Sincerely, BRAZIER FOREST INDUSTRIES, INC. 4. Ghn M. Brazi esident Mark W. Peters Trading Division Manager JMB, MWP/lp *arl'ac:lrers arc - sºr c-12's 2" ", estern screst cº-c.c:s * - 3: . C - - - - - --- c. * * 33r r;..." -:5-> - - - l | | 5:9 -t:-452." - \ ſ y ." 2 ſ: - cº - - IAC P º - - ~...~ : « K. - @) champion, -> cura"--- October 10, 1989 Mr. Clayton Yeutter Secretary of Agriculture The Mall between 12th & 14th Sts., S.W. Washington, D. C. 20250 Dear Mr. Yeutter: I am the manager of a Ponderosa Pine sawmill on the west coast. I have been purchasing raw materials far above the local market price due to a shortage of the timber supply. Logs are exported from this area to the Pacific Rim countries far above what I can pay. I understand the U. S. Government has made a decision to reduce by 2/3 the GSM-102 credits to Iraq. This decision is being made based on the procedures of lending by an Italian bank. I feel this type of decision further restricts the west coast operations and their ability to compete in the export market. Please consider the Iraq credits. Sincerely, J40,446 Ted Condiff Operations Manager Klickitat Operations TC/13 154 Wu T322. -- - Z. @) champion October 10, 1989 Mr. Clayton Yeutter Secretary of Agriculture The Mall between 12th & 14th Sts., S.W. Washington, D. C. 20250 Dear Mr. Yeutter: I am the manager of a Ponderosa Pine sawmill on the west coast. I have been purchasing raw materials far above the local market price due to a shortage of the timber supply. Logs are exported from this area to the Pacific Rim countries far above what I can pay. I understand the U. S. Government has made a decision to reduce by 2/3 the GSM-102 credits to Iraq. This decision is being made based on the procedures of lending by an Italian bank. I feel this type of decision further restricts the west coast operations and their ability to compete in the export market. Please consider the Iraq credits. Sincerely, Ted Condiff Operations Manager Klickitat Operations TC/ls 155 %ated Saſed &vićanatºon w//5:37 3289 Neal Creek Mill Road - * * WWER P. O. Box 185 :=\ \ Cóell, Oregon 97044 --> Nº. C0. INC. 5C3) 354-1297. Fax (503) 354-2824 HANV -- ... .sº October 10, l089 Secretary of Agriculture Clayton Yeutter Mall Between lzth & lººth Street S.W. Washington, DC 20250 Dear Mr Yeutter: It has recently come to my attention that the Department of Agriculture is reducing by nearly two-thir GSM-lo2 credits to Iraq. This affects nearly 3 III ion board feet of Lumber and millions of feet of plywood that is presently being shipped by American processors. It appears that the reasoning behind this cut is because of internal procedures of an Italian Bank which handled GSM-lo2 letters of credit. It is inconceivable that trade relations between any two countries should be affected by the internal problems of any bank. This type of government intervention amounts to an embargo on our agricultural products. I urge you to encourage our legislators to continue an active trade agreement with Iraq. The American public should not suffer a trade problem because of an internal problem with an international bank in Italy. Thank you for any help you can provide. American industry needs to be able to market a finished American product to nations around the world in order to maintain a balance of trade. Sincerely, HANEL LUMBER COMPANY, INC. L. Sterling Manel - President * cc: Niedermeyer-Martin Oregon Congressional Delegation oregon Senators + ----------- Žc A STtºr LCL :Sº ANA 7 : ), b ///34% º, C 33 er i0, 1989 - - - 3-2 #Cºp - r P O 3Ux 39 *:: . . I dº tºº ºut c < r , 5- - r - tº - . . . .” - F 1 - “lt - r = wº, --><-- "i - Mr. * 1 between 1 - Lh and - tº $ 1 fee u = , S. º. •cinington, D. . . 20250 ir Mr. Yout to r, We few l strongly that the Iraq L request for GSM-102 cred its should be granted in total without reductions. This business is extremely Yortant to U. S. lumber manufacturers, aud iſ deniud, the Iraqi business -ll most certainly 80 to 5-audinavian producers. I am aware of the banking problems surruund Lu; this matter, however, we feel that this should be handled so as to allow U.S. manufacturers an opportunity to compute, and at the saue time, pru.ect U.S. interests with proper loan 3uarantees. Since rely yours, ~ MARTAN TIMBER company, INC. / / ! /~ /T 2 v. **Cº- **-2–~ /* James D. Morgan ** Siles Manager 47-860 O – 92 – 6 * - - 42 y.º. LAKE CHARLES STEVEDORES, INC. //36.4% Stevedores/Steamship Agents/Freight Handlers I try- *Qx 111 - - lºc, TELECOPIER COVER LETTER AX 313, 433- ...×laſha -------- - - FAx ' | 4 51: “3, 433-1426 DATE: 22:23:8-2. --232 TWX 2.1Q. 971.7595 - 439.947? CABLE: ACS." oslºvER To tº ºxidº Zºº SECRETARY OF AGRICU.T.JRE &Asºlº, B.C. FAX NO. 202-447-7271 Re: 658-122 cºſts to fººd There are — pages including this cover pace and they consist of the following: DEAR SECRETARY YEUTTER: … : " , 2PRECIATE YOU GIVING CONSIDERATION TO ExTENDING TO THE FULLEFT THE CSM-l: . . . . . tº ºc TRAQ. ANY REDUCTION IN SAID CREDIT's MoULD BE HARMFUL : THE --MBER ºvs ..., 3, 5 IN TURN Wovºp HAVE ADVERSE EFFECTS ON THE MARITIME IN. - THANK Zvu ::: AD/ANCE FOR YOUR FA7CRABLE RESPONSE AND WITH . . : : - " - Washington D.C. 20250 C-c Subject : GSM-102 Credit Program Dear Secretary Yeutter: It has been called to our attention that the Republic of Iraq is to be singled out in the administration of the subject U.S. D.A. loan program. This is a matter that is of extreme importance to the Port of Longview and the Pacific Northwest as a region. We are promoting the export of increased volumes of lumber and feel that any obstructions or obstacles will adversely effect our ability to compete with other nations for this vital marketplace. We urgently request that this program be administered equally, for all nations, and that the Republic of Iraq's loan request be fully funded from the outset, allowing uninterrupted trade relations to be maintained with Iraq. This is vital to the Port of Longview and our region. Sincerely, PO LONGVIEW V. E. Warden Manager-Terminal Operations VEW/agm PO Box 1258. Longview. WA.38632.0"25 Tel 206°425-3305 Twº 289090 FAX 425-86.50 161 Mr. Larry P. Kelson 00. 9 J 1589 Brazier Forest Industries, Inc. - 450ſ) Columbia Center 701 5tn Avenue Seattle, Washington 98104 Dear Mr. Kelson: This is in regard to your letter concerning the Commodity Credit Corporation's (CCC) Export Credit Guarantee Program (GSM-102) with Iraq. As you may know, between October 5 and October 12, 1989, CCC and the Government of Iraq held consultations in Washington to discuss a GSM-102 program for fiscal year 1990. During those consultations, the parties discussed a wide range of issues concerning Iraqi participation in the GSM programs, including various allegations that have surfaced in the press with reqard to the Banca Nationale del Lavoro (BNL) affair. This situation is now under investigation by the United States Attorney's office in Atlanta, Georgia, and other federal agencies. It is unclear at this juncture whether BNL loans to Iraq in connection with GSM sales will become a subject of the broader federal investigation of BNL. In order to insure the integrity of all GSM-102/103 programs, the Department of Agriculture (USDA) has determined that further investigation of the situation is required before a decision can be made on an overall GSM program for Iraq in fiscal year 1990. However, USDA recognizes that Iraq is an important market for U.S. forest products as well as many other agricultural commodities and that the GSM-102 Export Credit Guarantee Program is largely responsible for this market. Therefore, an initial GSM-102 credit guarantee program of $400 million was offered by USDA's delegation to the Iraqi delegation. The two delegations were unable to reach agreement on this offer and agreed that negotiations should be continued at a later date. Sincerely, Palº bºrº *Y- Actiºq ºr Nºon, Jr. Administrator º-º-º-º-nºn, 03-W43567/03-W45802 & ſ cc: REAnderson, Assoc. Admn., 1668-(+265-fºr, CC0, TConway (OGC), FPDickerson, CEGoldthwait, sº; CTDelaplane, DKunkel * > …" t - G. "..." - /. Identical letters sent to: Kºº. 0. On - Li-º- -WT/392 J3 Hurley - 03-W43605 t Brazier/Peters- 03-W43513/03-W47.180 Buxton - 03-W43621 Morgan- 03-W43656 Lundy - 03-W43664 Warden - 06-W48682/03-W46.370 Hansel - 03-W45837 162 -ºwell-EFLN S*A*E → * * * * 5 --Bawa --- ... . . . limited States Stilatt w-> --> ***.*w oc 225 --> * > * ------- - - - - - - - - - - April 13, 1990 -: * > … Mr. Thomas O. Kay, Administrator - Foreign Agricultural Service Cº- U.S. Department of Agriculture 12th and Independence Ave., S. W. - South Building, Room 5071-S --~ "T Washington, D.C. 20250 Dear Mr. Kay: I have been contacted by one of my constituents, A. F. (Sandy) Hardee, of Brewton, Alabama, concerning problems described in the attached correspondence. Your consideration of the attached would be greatly appreciated. Please return your findings and views to me at your earliest convenience. With kindest regards, I am Sincerely, HH/lsc Enclosure 163 in 30 The Honorable Howell Heflin United States Senate Washington, D.C. 20510 Dear Senator Heflin: Thank you for your letter on behalf of Mr. A.F. (Sandy) Hardee of Brewton, Alabama, who requested coverage for wood products under the Department of Agriculture's Export Credit Guarantee Program (GSM-102) to Iraq. At present, the Commodity Credit Corporation has announced $500 million in GSM-102 guarantee coverage for Iraq in fiscal year 1990. The lumber guarantee line was allocated guarantees totaling $23.7 million all of which has been used. The wood pulp/chips line of $31.3 million has a remaining balance of $4.7 million. Iraq's request for an additional GSM-102 allocation is still under review. The Department of Agriculture has initiated, and is currently pursuing, an administrative review of transactions involving sales to Iraq quaranteed under the GSM-102 program. Our staff is also carefully monitoring developments in other investigations that are under way including the investigation of Banca Nazionale del Lavoro in Atlanta. We recognize that Iraq is an important market for wood and wood products as well as other agricultural commodities and that GSM-102 is largely responsible for this market. Since 1984, our credit programs have accounted for over 90 percent of total U.S. agricultural exports to Iraq. Notwithstanding this success, however, we consider it imperative to the overall interests of our export credit guarantee programs that we proceed cautiously regarding additional GSM-102 coverage for Iraq at this time. Sincerely, yº. (..*.*. R. E. Anderson, Jr. Administrator A FAS:EC:PDO:AME:Mark Phillips:sag:382-9216:04-26-90:[KUNKEL) cc: OCR, Brosch (OGC), Anderson, Assoc. Admin, ºrials, CC0, Dickersºn, Goldthwait Whiteman, KReynolds, CDelaplane, º O.Y. 25-X59234 Identical letter sent to Senator Thurmond, Control c. ~ - > - 22- .N ~" Control No. F20762 -2&_ (*~ wº 164 ( ! .2/ BOHEMIA INC. ... “ — Honorable Clayton Reutter Secretary of Agriculture The Mall Between 12th & 14th Streets, S.W. Washington, D.C. 20250 Dear Secretary Yeutter: It has been brought to our attention that a decision is being made that will severely disrupt the sale of wood products to the country of Iraq. We are informed that this decision is due to some internal problems in handling the GSM-102 letters of credit through a certain Italian bank. Although we feel that it is unfortunate that this has happened, we do not feel that the producers of lumber products i the United States should be penalized for the internal problems of this bank. The GSM-102 program has become a very important part of our overall marketing plan and in certain cases, the effects of not having these orders of product going to these countries would mean production curtailments, if not shutdowns. To give you an example of the volume of wood that we have shippe to Iraq since May of this year, it is $1.5 million for our company. At this time we would like to urge you to reconsider your decision and restore the credits extended to the country of Iraq Sincerely, SK/smw 2:30 -a-...- : * ~ *. * ------ F-3. 3.------> E-sers -->: - - - - - -: "...ta -> -->cº-s: > * > . . . * * * = . ;--> - -27- - - - 165 Mr. Steve k + 1 \gore Lumber Sales Manager 3ohemia Inc. 2280 0akmont Way Eugene, Oregon 97.401-5598 Dear Mr. Killgore: This is in regard to your letter concerning the Commodity Credit Corporation's (CCC) Export Credit Guarantee Program (GSM-102) with Iraq. As you may know, between October 5 and October 12, 1989, CCC and the Government of Iraq held consultations in Washington to discuss a GSM-102 program for fiscal year 1990. During those consultations, the parties discussed a wide range of issues concerning Iraqi participation in the GSM programs, including various allegations that have surfaced in the press with regard to the Banca Nationale del Lavoro (BNL) affair. This situation is now under investigation by the United States Attorney's office in Atlanta, Georgia, and other federal agencies. It is unclear at this juncture whether 8NL loans to Iraq in connection with GSM sales will become a subject of the broader federal investigation of BNL. In order to insure the fntegrity of all GSM-102/103 programs, the Department of Agriculture (USDA) has determined that further investigation of the situation is required before a decision can be made on an overall GSM program for Iraq in fiscal year 1990. However, USDA recognizes that Iraq is an important market for U.S. forest products as well as many othee agricultural comedities and that the GSM-102 Export Credit Guarantee Program is largely responsible for this market. Therefore, an initial GSM-102 credit guarantee program of $400 million was offered by USDA's delegation to the Iraqi delegation. The two delegations were unable to reach agreement on this offer and agreed that negotiations should be continued at a later date. - Sincerely, pickersºn Y. º R. E. Aºderson, Jr. Administra | -* FAS:EC/P00:AME: John Reynolds/Wac:10-31-89:382–9216: 03-W51951 REAnderson, Assoc. Admn., 968–H295–9, CC0, TConway (OGC), FPDickerson, CEGoldthwait, GWhiteman, KReynolds, CTDelaplane, DKunkel 166 ‘,-, * : - . . ** Vl 53 a r -, - 2 - . . . . . . - - _z/~ *-- - (- _--—w - / •. º, , ~. * 3: 5 [] w RIEDEL RESOURCES, Ne *555 - - - - - - -- Avc = o eox 3.323, -os---...- : R → ~22 a.222s 5o a , 2-3 Qi October 11, 1989 WIA FAX #202/.447-2166 Mr. Clayton Yeutter Secretary of Agriculture The Mall between 12th and 14th Streets, S.W. Washington, D.C. 20250 Dear Secretary Yeutter: I have ºn advised that the U.S. Department of Agriculture is considering action which would severely limit the GSM-102 credits extended to Iraq, Wh' le Riedel Resources is not directly affect º the lumber and wood products industry, I believe that any action, 2...ich would reduce the ability of U.S. firms to ſº internationally must be jºy -onsidered. I feel that the USDA's decision requires a full analysis 3efore we commit to an action which will affect both the U.S. lumber industry and U.S.-Iraq trade relations in general. ! urge you to exert your influence in this matter to ensure that any U.S. action which restricts GSM-102 credits to Iraq is fully reviewed and evaluated prior to initiation. Thank y Ju for your consideration. Arthur A. Riegel 167 Mr. Arthur A. Rºedel Chairman and CEO Riedel Resources, Inc. 4555 N. Channel Avenue Portland, Oregon 97208-3320 Dear Mr. Riedel: This is in regard to your letter concerning the Commodity Credit Corporation's (CCC) Export Credit Guarantee Program (GSM-102) with Iraq. As you may know, between October 5 and October 12, 1989, CCC and the Government of Iraq held consultations in Washington to discuss a GSM-102 program for fiscal year 1990. During those consultations, the parties discussed a wide range of issues concerning Iraqi participation in the GSM programs, including various allegations that have surfaced in the press with regard to the Banca Nationale del Lavoro (BNL) affair. This situation is now under investigation by the United States Attorney's office in Atlanta, Georgia, and other federal agencies. It is unclear at this juncture whether BNL loans to Iraq in connection with GSM sales will become a subject of the broader federal investigation of BNL. In order to insure the integrity of all GSM-102/103 programs, the Department of Agriculture (USDA) has deters?ned that further investigatſon of the situation is required before a decision can be made on an overall GSM program for Iraq in fiscal year 1990. - However, USDA recognizes that Iraq is an important market for U.S. forest products as well as many other agricultural commodities and that the GSM-102 Export Credit Guarantee Program is largely responsible for this market. Therefore, an initial GSM-102 credit guarantee program of $400 million was offered by USDA's delegation to the Iraqi delegation. The two delega’’’ were unable to reach agreement on this offer and agreed that n°- should be continued at a later date. Sincerely, Paſſ Dekº - Acting ...tº, - R. E. Andercº º- Administratoº "T 2–9216: 03-W53376 Pºstcºlonn Reynoldsº cöö. Tconway (OGC), FPDickerson, - n, Assoc. Admm. > CC: #;. GWhite n, 'KReynoids, CfDelaplane, DKunkel y,” - 2 < _2/ (?/C tº 2– 168 --~/ 7.25 +/ C^{-006-24- B I E R I FARMS 9stablished 1946 July 30, 1990 The Honorable Clayton Yeutter Secretary of Agriculture 14th Street Independence Ave, SW Washington, D.C. 20250 s cr- Dear Secretary Yeutter: -> Our family has produced Texas rice since 1918 and through these 72 years we have learned something about production. As efficient as we have become, it is to no avail if we do not have a marcket. We need our government and those elected to represent us to sustain markets and not eliminate them because of political reasons. I encourage USDA to push for the reauthorization of GSM-102 credit for Iraq. A ban on this credit will cause the rice industry to lose 20% to 25% of its export market. The U.S. rice industry is small and this is a tremendous percentage loss as well as being a staggering political blunder. This market will now be filled by Thailand and Australia and milled in Iraqi mills built with U.S. credits. Surely, we will someday learn that sanctions against food credits for political reasons have proven failures in the past. The ineffective grain embargo imposed on the Soviet Union by the Carter administration taught us the U.S. is not the only supplier of world food. Farming is a way of life that is envied and understood by few. Agriculture can survive storms, drought, and floods but can be brought to its knees by political moves that eliminate markets. Why must agriculture always be the one that has to pay? Our nation is now very dependent on foreigners for energy and manufactured products and if we likewise become dependent on foreign sources for food, we flirt with a catastrophe. A nation that sacrifices its farmers is a nation that faces hunger. Fortunately, our nation has never known hunger, but if we had, I feel agriculture would be held in higher esteem. I am a proud American citizen and the only thing that means more to me than our family farm is knowing my son and grandson can farm it next. Yours º O <----- -. roy Bieri P. O. BOX 441 - ANGLETON, TEXAS 77515 - TELEPHONE (409) 849-7911 169 B I E R I FARMS 98tablished 1946 July 30, 1990 Mr. Richard Crowder Undersecretary of Agriculture Department of Agriculture 14th Street Independence Ave, SW Washington, D.C. 20250 Dear Mr. Crowder: Our family has produced Texas rice since 1918 and through these 72 years we have learned something about production. As efficient as we have become, it is to no avail if we do not have a market. We need our government and those elected to represent us to sustain markets and not eliminate them because of political reas Ons. I encourage USDA to push for the reauthorization of GSM-102 credit for Iraq. A ban on this credit will cause the rice industry to lose 20% to 25% of its export market. The U.S. rice industry is small and this is a tremendous percentage loss as well as being a staggering political blunder. This market will now be filled by Thailand and Australia and milled in Iraqi mills built with U.S. credits. Surely, we will someday learn that sanctions against food credits for political reasons have proven failures in the past. The ineffective grain embargo imposed on the Soviet Union by the Carter administration taught us the U.S. is not the only supplier of world food. Farming is a way of life that is envied and understood by few. Agriculture can survive storms, drought, and floods but can be brought to its knees by political moves that eliminate markets. Why must agriculture always be the one that has to pay? Our nation is now very dependent on foreigners for energy and manufactured products and if we likewise become dependent on foreign sources for food, we flirt with a catastrophe. A nation that sacrifices its farmers is a nation that faces hunger. Fortunately, our nation has never known hunger, but if we had, I feel agriculture would be held in higher esteem. I am a proud American citizen and the only thing that means more to me than our family farm is knowing my son and grandson can farm it next. Yours º *- - e r -. -- " eroy TBieri P. O. BOX 441 - ANGLETON, TEXAS 77515 - TELEPHONE (409) 849-7911 170 ſ B I E R I FARMS 98tablished 1946 July 30, 1990 2 - 153-90 FE s President George Bush The White House Washington, D. C. 20500 Dear President Bush: Our family has produced Texas rice since 1918 and through these 72 years we have learned something about production. As efficient \ as we have become, it is to no avail if we do not have a market. We need our government and those elected to represent us to sustain markets and not eliminate them because of political reasons. A ban on U.S. credit guarantees (GSM-102) to Iraq and the subsequent loss of rice sales valued at $170 million is a staggering political blunder. This market will now be filled by Australia and Thailand, our major foreign competitors. Surely, the ineffective grain embargo imposed on the Soviet Union by the Carter administration taught us the U.S. is not the only supplier of world food. Farming is a way of life that is envied and understood by few. Agriculture can survive storms, drought, and floods but can be brought to its knees by political moves that eliminate markets. Why must agriculture always be the one that has to pay? Our nation is now very dependent on foreigners for energy and manufactured products and if we likewise become dependent on foreign sources for food, we flirt with a catastrophe. A nation that sacrifices its farmers is a nation that faces hunger. Fortunately, our nation has never known hunger, but if we had, I feel agriculture would be held in higher esteem. I am a proud American citizen and the only thing that means more to me than our family farm is knowing my son and grandson can farm it next. Yours trul - n &. Leroy Bieri P. O. BOX 441 - ANGLETON, TEXAS 77515 - TELEPHONE (409) 849.791 | 171 T. H. F. W. H. T I. # O U S E U F F I C E REFERRAI, AUGUST 22, 1990 TO : DEPARTMENT OF AGRICULTURF ACT 10N REQUESTF.D: DIRECT REPLY, FURNISH INFO CUPY DESCRIPTION OF INCOMING: MEDIA : LETTER, DATED JULY 30, 1990 TO : PRESIDENT BUS}] l'ROM : Mik. I,EROY RIE. RI BIERI FARMS POST OFFICE LOX 441 ANGLETON TX 775 15 SUBJECT: OPI’OSFS A BAN ON UNITED STATES CREDIT QUARANTIES (GSM-102) TO IRAQ AND TH1. SURSEQUENT LOSS OF RICE SALES PROMPT ACTION IS ESSENTIAL -- LF REQUIRED ACTION HAS NOT BEEN TAKEN WITHIN 9 WORKING DAYS OF RECEIPT, PLEASE TELEPHCNF THE UNDERSIGNED AT 456-7486. / | RETURN CORRESPONDENCE, WORKSHEET AND COPY OF RESPONSE (OR DRAFT) TO : - \AGENCY LIAISON, ROOM 91, THE WHITE HOUSE, 20500 SALLY KELLEY DIRECTOR OF AGENCY LIAISON PRESIDENTIAL CORRESPONDENCE 172 p' -– WHITE HOUSE -- CORRESPONDENCE TRACKING WORKSHEET C O - OUTGOING C H - INTERNAL Z ox. 1 . INCOMING §::::º 90 12.7 L 4 + - Name of correspondent ZZMr.ZZMrs. ZZMiss/ZMs. 2–2. Z-f , * --~ D MI Mall Report User Codes: (A) (B) (C) subject 4. P-2-3-2-4-2 4 4–6– z' 2 - 2 (. 4. — cº-º-º- 7-7 - - CL (it a a (CZ-- Z 95 ſyn – / C 2. ) Z. *… 27 . . . ºf {{<- 2.4-2. - 24-22 2 2, 2, …4.4. / - - wº ROUTE TO: ACTION DISPOSITION Tracking Type Completion Action Date of Date Office/Agency (Staff Name) Code YYmmºnoo - Code YY/MM/DD cocozy - ORIGINAT Asoza Zizo – 2010–1 J/ Referral Note: * Ara Ž/ 28-2} &W) ºzzº— – as Referral Note: - r I - º f Referral Note: - I I - | I Referra. Note: Referral Note: Action Coo- disposition cooes: A - Appropriº-Action I - Info Copy Ontyſºlo Action Necessary A - Answered C - Completed C - Commentºecommendation R - Direct Reply wºopy 8 - Non-Special Referral S. Suspended D-Draft Response S. For Signature F-Furnish Fact sheet x - interim Reply to be used as Encoeure FOR outgoing connes PonoeNCE: Type of Response - initials of signer - “A.” Completion Date - Date of Outgoing Comments: Keep this worksheet attached to the original incoming letter. Send all routing updates to Central Reference (Room 75, OEOB). Always return completed correspondence record to Central Files. Refer questions about the correspondence tracking system to Central Reference, ext. 2590. 17; Mr, Leroy Bferſ 5 ſeri F3rms P. J. Box 441 Angleton, Texas 77515 Dear Mr. 816 ri: Thank you for your letter to the President and to Secretary Yeutter requesting that guarantees of credit be made available under the Commodity Credit Corporation GSM-102 Program with respect to purchases by Iraq. Obviously, events since the date of your letter have nullified near-term prospects for Iraq as a U.S. rice market. We regret the impact of the current freeze on U.S. exports to Iraq and are doing our best to help find alternative markets. In this regard, I am pleased to inform you that we recently announced the opportunity for sales of 100,000 metric tons (2.2 million hundred weight) of U.S. rice to five East European countries-- Hungary, Yugoslavia, Romania, Czechoslovakia, and Poland--under the Export Enhancement Program. Sincerely, retary older, Unº. . Programs i-wa-d T C *...** REWRITTEN/OGC: J Robert Franks:8-30-90 FAS:EC:PDD:AME:Mark Phillips: jj:382-9216:09-19-90:Control # 35-Y43541 and 04-Y53490 cc: Crowder, Weneman, Campbell, EC&R, Anderson, Assoc. Admin., CC0, Dickerson, Goldthwait, Whiteman, KReynolds, CTDelaplane, Sally Kelley 174 nestern union Telegram - ~ : TTP Mugwi wsH1-0 13254A283 10/10/89 . . . . ~ ICS IPMWGWD WSH * – 0080 1 1 0-10 0958P Est , ºf L- f ICs IPMWGW1 | º - 2C2 4-042.23 48.283 10/10/89 K". ICs IFMRNC2 CSP & 1967.29330 FRR TDRN SAN DIEGO CA 231 1 0-10 0821 F. EST FMS THE U. S. DEPT . OF AGRICULTURE, DLR 1.4TH AND INDEPENDENCE Ave was HINGTON DC 2025 o ATTN : SECRETARY CLAYTON YUETER OUR REF: 2O5/L.677 £3 W43] |7 DEAR SIRS, *=Tacfºll, AS A U.S. CITIZEN OF IRAQI ORIGIN, I AM WRITING TO YOU REGARDING THE SUSPENSION OF THE GSM PROGRAM TO THE NATION OF IRAQ. * I - t - * - 1 - - - DURING MY LAST VISIT TO BAGHDAD IN AUGUST OF THIS YEAR, I WAS VERY MUCH IMPRESSED WITH THE VARIETY OF AGRICULTURAL PRODUCTS OF AMERICAN ORIGIN IN THE LOCAL MARKETS. I ALSO NOTICED THAT THE IRAQI PEOPLE WERE VERY SAT ISFIED WITH THE QUALITY OF THESE PRODUCTS. I WAS MORE wu 1201--- III II Telegram I Ask You To separa TE THE GsM PROGRAM FROM such unpred ICT ABLE uestern union IMPREssed TD F Ind some of THE Products our cor-Pany ExPORTED TO THE TTRAQI customers DURING THE LAST 3 YEARS THROUGH THE GSM PROGRAM CREDIT FACILITY, SUCH AS YEAST, CORN STARCH, MILK POWDER, AND YELLOW spl. IT PEAs. ANY INTERRUPTION OF OUR AMERICAN AGRICULTURAL PRODUCTS suppl. Y will. L NoT BENEFIT THE NEW FAVORABLE OPINION OF THE GENERAL Publ. IC IN THIS count RY. -* IF SUCH A SCANDAL WAS MADE BY AN ITALIAN BANK, WHY SHOULD IT EFFECT THE ExPORT OF U.S. AGRICULTURAL PRODUCTS UNDER THE GSM PROGRAM? IF BANCO DEL LAVORO HAS LENDED TO OTHER COUNTRIES BESIDES IRAQ, WHY SHOULD PUNISHMENT BE DIRECTED AT IRAQ ALONE7 I Am wri T Inc. This LETTER TO ExPRESS MY DISSAT Isr ACTION OF ANY INTERRUPTION IN OUR SUCCESSFUL RELATIONS WITH THE COUNTRY OF :RAQ, For non-commerc I AL REASONs. DEcIsIons, as THESE DEcIsIows. MAKE IT IMPossi BLE_10_PEAN FºR LONG-TERM DEAL INGS. 4. al-º-o-, - zº. ‘º --- REST REGARDS | 3 × 3 - - S.--& 3 ( / RAY. KAF. A.J.I VICE PRESIDENT -S cº- 24-3-2 ‘72 / o 7 175 OCT 30 1383 "r. Qay Kafaji Vice President Luxor California Exports, Inc. 1333 Camino del Río South San Diego, California 92108 Dear Mr. Kafaji: This is in regard to your letter concerning the Commodity Credit Corporation's (CCC) Export Credit Guarantee Program (GSM-102) with Iraq. As you may know, between October 5 and "ctober 12, 1989, CCC and the Government of Iraq held consultations in Washington to discuss a GSM-102 program for fiscal year 1990. During those consultations, the parties discussed a wide range of issues concerning Iraqi participation in the GSM programs, including various allegations that have surfaced in the press with regard to the Banca Nationale del Lavoro (BNL) affair. This situation is now under investigation by the United States Attorney's office in Atlanta, Georgia, and other federal agencies. It is unclear at this juncture whether BNL loans to Iraq in connection with GSM sales will become a subject of the broader federal investigation of BNL. In order to insure the integrity of all GSM-102/103 programs, the Department of Agriculture (USDA) has determined that further investigation of the situation is required before a decision can be made on an overall GSM program for Iraq in fiscal year 1990. However, USDA recognizes that Iraq is an important market for U.S. agricultural commodities and that the GSM-102 Export Credit Guarantee Program is largely responsible for this market. Therefore, an initial GSM-102 credit guarantee program of $400 million was offered by USDA's delegation to the Iraqi delegation. The two delegations were unable to reach agreement on this offer and agreed that negotiations should be continued at a later date. Sincerely, Paul *...* Iºr Acting Adm" R. E. Anderson, Jr. Admini Strator ~" - FAS:EC:PDD:AME: John Reynolds/ft:20-0ct-1989:382-9216:DEC 3526 #ºtº cc; REAnderson, Assoc. Admn., Hovermale, CC0, TConway (CGC), FPDickersoh;2 CEGoldthwait, KReynolds, CTDelaplane, DKunkel ſºlºt,...... ./ * - 5 - - >< "- -" - -- *~", º --~~ * \ 176 r. Fºr r - ºr º, "ºf +E i !" . . . . . . . . * * * * ~ I I ot, a ... JJ . . . ~ * : * : * : ; , ; TRA ºf 4 tº H Raº | M. M. E. D. º, T. ºf iſ it; Tº gº. T Hº!. Tº JLJR RICE TRADE RACK. - . . . . Tº ſ" tº . . . ſ. Fº i) EEP FREEZED THIS DEC ISI () N. CT 5T ºf . Rºl ºf . , F JE fºr " : Yù THIS. CAN'T BELIEVſ we D mi) & tº ſº a ". • L T F. S. 4 ºr: . lºyeece.2 % CN || A 7 : 28 S. U - NYTHING 177 STATE OFFICES: ALABAMA c **22 ***** Avenue woar- O3 RICHARD SHELBY X87 % - - - - 40 - - - -- 2E=a. 3.-->w- --------- ~~, Aawec sea. --> - 8 *w wºr-AM. A. 35:23 --vº "e: ºn 5 Ax-vº ---5 v2. ºſnitco 35tates .5emate _T.” Z-, -25. 3 - 234 awc -zean, A-F A-55 c wad Sox crºw", a 2.2ca- - ** - - - - 3---Ex-Ea cºwp-E - sa=: A. ::vana - "es cº, A2 Nº. was ring ton. O.C. 205 to -->'s, ºs ºssºs - 225, "72-7460 May 10, 1990 - - C - 3 3- losse-5-aee- * * ---" 438 - S ---> *--->E P ....... ºf: - - M-Bi-E. A. 3-66-2 :::, . . . . . . . . . " -205, 594 - 4 -64 on 15 -ee s-aeer 828 - -s ------ouse -o-º-o-ER-A- as “c- *2C5, 832-’303 Mr. Franklin E. Bailey a * 1 is ºne EN58oad Avenue - - - Roo 2- v.3 -C-Rt- Director of Congressional Relations :::::::::::..º.º." -o-, 7-9-50-7 Department of Agriculture 210 East Administration Building Jefferson Drive, S.W. Washington, D.C. 20250 Dear Mr. Bailey: I am enclosing a copy of a letter I received from Mr. J. R. Whitehead. Any information you may have regarding this matter would be appreciated in order that I may be able to respond to my constituent's inquiry. PLEASE REPLY, IN DUPLICATE, TO THE ATTENTION OF MY STAFF MEMBER, WENDELL CHAMBLISS, USING THE NAME OF THE ABOVE-MENTIONED CONSTITUENT IN YOUR CORRESPONDENCE. Thank you for your prompt assistance to this matter. Since rely, Richard Shelby RCS/w jo Enclosure 178 JSO3-S JUL 02 S90 Mr. James Clipson, Jr. P. O. Box 832 Eagle Lake, Texas 77434 Dear Mr. Clipson: Thank you for your letter to President Bush regarding your concerns relating to the current status of additional CCC credit guarantees for export sales of rice to Iraq under the Commodity Credit Corporation (CCC) Export Credit Guarantee Program (GSM-102). The Department of Agriculture recently completed its administrative review of the GSM-102 program with Iraq and issued a public report on May 21, 1990. A copy of this report is enclosed for your convenience. The report covers a limited review focusing on those issues that surfaced as a result of the situation at Banca Nazionale del Lavoro (BNL) and was not intended to cover the entire program with Iraq. The review, however, did raise some questions which, in our judgment, now require an expanded review of commodities and exporters by the Office of the Inspector General (OIG) . This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand jury into loans extended by BNL to Iraq. It has been alleged that this bank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not know at this time if any indictments will be handed dowr, that will relate to the CCC programs or individuals that have participated in the programs. We share the concerns you have raised in your letter and recognize that Iraq has become an important market for U.S. rice as well as other commodities as a result of the GSM-102 program. We must, however, be assured that the program will be operated in a manner that not only recognizes the interest of agricultural exports but that is consistent with our commitment to absolute program integrity. At this time, we feel enough questions have been raised that we should not advance any proposals with respect to the GSM-102 program for Iraq until OIG has completed its review and until we can determine if any indictments will be handed down by the federal grand jury that may relate to our programs. After these reviews and investigations have been completed, this matter will be reevaluated. Sincerely, Žazº R. E. Anderson, Jr. Administrator Enclosures ſº FAS/EC/CCCOD/Larry McElvain/lw/447-621.1/6-28-90 Control No. 04-Y08036 z” cc: Anderson, Assoc. Admin., CCO, Hovermale, Dickerson. Goldthwait. Whit an.2% McElwain tº D.ſaitºv. ' 179 JACKSON SAWMILL COMPANY, INC. MANUFACTURERS OF YELLOW PINE LUMBER JACKSON, ALA 30545 AREA QDE now P. O. Box Won - 240-24.24 \, , , , , , , ; 5 ºn Jo v.- * - Y in * . . . . . . . r1 ºf . . . . . . . Q- - - + r. ." 1 * - - - - i., " - tº r * * * * : (. . . . . . . . . . . . . .” J. . . . . . . . . ; , , , 13:5; - s: . . . . i 1 * * * * * * * -- a" “ . . . . . . c 1 - 2 - “ct it . . . . t. the o it ac - - - r ºr er: t + 1 -r-ſ" -, - ..." - - I - *- } :: */ ** 1: . ;-)^* . . . . . ~ 1 m.” v : t , ~ Star , a t t = t \º r = <- 1 1 ::t 1 - tº 2.2 ſtiºn i t . Je= f :) - * , . . . . . . . . . . . . . . -- ", , ; t i f : l l ºr k -º-; w , th l = 2 r Edward Wild Louisiana Farm Bureau Louisiana Rice Growers American Rice Growers - O. Bor 6-7 RI. I, Bor 468 6/9 | RI. I, Bor 302 Euxicº, LA 70535 Mer Rouge, LA 71261 - Welsh, LA 70591 Buford Perry R. E. Girouard Northeast La. Ricº Growers Louisiana Farm Bureau Rt. 1, Bor 471 Rt. 1, Bor 15 Lake Providence, LA 71254 Kaplan, LA 70543 The Louisiana Representatives of the U. S. Rice Producers’ Leg- islative Group are extremely concerned of the Export Credit Guarantee Program with the current status (GSM-102) for Iraq. The United States Department of Agriculture has made an allocation of only $500 million toward the total Iraqi request of over $1 bil- lion of GSM-102 credit guarantees to purchase rice and other U. S. agricultural commodities for this fiscal year. Iraq is the twelfth largest importer of U. S. agricultural products and is the largest U. S. commercial export rice market, representing approximately 25 percent of U. S. commercial rice exports in recent years, importing more than twice as much rice as the next largest purchaser. Without access to the U. S. credit guaran- tees, alternative supplies from U. S. competitors will be pur- sued. In the case of rice, Thailand could easily replace the U. S. as the primary supplier. This would result in a loss of a vital portion of the U. S. export market for rice. Loss of this commercial market would have severe economic impacts throughout the rice industry. 191 The Honorable Richard T. Crowder June 6, 1990 Page Two On May 21, the USDA released the results to date of the adminis- trative review. While the report raised some questions, most of the discrepancies occurred five years ago and have been corrected in the interim. The review contains no finding or conclusion which would warrant the suspension of the program for rice or any other agricultural commodity. One of the issues investigated was the unusually high FOB prices obtained in sales to Iraq. These price levels, if not warranted by the quality of U. S. rice, were easily justified because of the high risk involved due to the war-time conditions in Iraq and the limited number of sup- pliers willing to participate in that market. We hope the USDA is not opposed to the U. S. exporters receiving higher prices for higher quality rice. If proper oversight and administration of this program were used in the past, this vital program and the market it serves would not be in question. There are no questions concerning the current operation of the program, and as stated in the department's news release, the U. S. government has not incurred any losses as a result of GSM-guaranteed sales to Iraq. It is also important to note that over all the years Iraq has used the GSM credit guaran- tee program, all scheduled payments have been made. In our opin- ion the current treatment of this market-oriented program by administrators, whose philosophies are market-oriented as well, is unwarranted. In trying to service the projected export demand, the USDA revi- sited and decreased the initial acreage reduction level for rice for 1990. The USDA has increased the potential supply of rice available to the market and has severely decreased the potential sales to our major commercial market by restricting GSM-102 guarantees. This is obviously counter-productive and will lead to additional costs in operating the rice program at a time when we have been asked to accept measures to hold down the cost of farm programs. Considerable efforts and industry and taxpayer monies have been used to develop the Iraqi market. Markets are difficult and expensive to gain, and as you well know, they are even more dif- ficult to re-gain. Therefore, we ask that the Iraq GSM-102 pro- gram request be funded. Sincerely, John Denison, Chairman Louisiana Representatives U. S. Rice Producers' Legislative Group JD:mtl 192 - $WJ JUL 2 5 1990 Mr. John R. Denison Chairman Rice Advisory Committee Louisiana Farm Bureau Federation -> w- ' Rt. 1, Box 50 Iowa, Louisiana 70647 Dear Mr. Denison: Thank you for your letter regarding your interest in the results of the administrative review of the Commodity Credit Corporation (CCC) Export Credit Guarantee Program (GSM-102) for Iraq and your concerns relating to the current status of additional CCC credit guarantees for Iraq during fiscal year 1990. The report released on May 21, 1990, covers a limited review focusing on those issues that surfaced as a result of the situation at Banca Nazionale del Lavoro (BNL) and was not intended to cover the entire program with Iraq. As you are aware, the review did raise some questions which, in our judgment, now require an expanded review of commodities and exporters by the Office of the Inspector General (OIG) . This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand jury into loans extended by BNL to Iraq. It has been alleged that this bank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not know at this time if any indictments will be handed down that will relate to the CCC programs or individuals that have participated in the programs. We share the concerns you have raised in your letter and recognize that Iraq has become an important market for U.S. rice as well as other commodities as a result of the GSR-102 program. We must, however, be assured that the program will be operated in a manner that not only recognizes the interest of agricultural exports but that is consistent with our commitment to absolute program integrity. At this time, we feel enough questions have been raised that we should not advance any proposals with respect to the GSM-102 program for Iraq until OIG has completed its review and until we can determine if any indictments will be handed down by the federal grand jury that may relate to our programs. After these reviews and investigations have been completed, this matter will be reevaluated. Ann M. Veneman Sincerely, Deputy Under Secretary /s International Affairs and / Commodity Programs ww.ccº. lvain/lw/447-621.1/7-3-90 Control No. F-21221 cc; crowder, Veneman, Campbell, OCR, EC&R, Anderson, Assoc. Admin. , CC0, Hovermale, Dickerson, Goldthwait, Whitenan, McElvain, Raul 27/202 1% HOWELL HEFLIN Aua BAMA Cow-urtet on agaicultunt mura-t-o- -o-º-o------ ºn-art-º-o-E-------d natural Resounces cº-ºrte-o-t-e Judicia- st-Err co-ºrte-o-E---> 128 sewart -ant Building was…aro- Oc 2.05 -O-O-O ! 12021 224-4 124 Mr. Clayton Yeutter Ly-20-4”- 4– 27/2,~, ~ - 3. /4 % ſ limited Stattà Stilatt washington. DC 205-10-0 101 c June 19, 1990 C Secretary of Agriculture U.S. Department of Agriculture 14th St. and Independence Ave., S.W. Washington, Dear Secretary Yeutter: I have been contacted by one of my constituents, Mr. J. R. Whitehead of Jackson, Alabama concerning problems described in the attached correspondence. I share Mr. Whitehead's concerns and would greatly appreciate your consideration of the attached. Please return your findings and views to me at your earliest convenience. With kindest regards, I am HH/lsc Enclosure Sjøferely, Howell Hef State Offices: 355 Fºot-i Building * 800 Fºrt--we-ut No-r- - a ----- Biswind-aw AL 15203 205). 131-1500 + 1-3 st Jost-sr-r -37 us cou-twou- -o-º-º. -- 36602 1205) 432-77-15 Fºot-au Count-ouse. B-29 15 Lit stateſt Mo-too-tar AL 36.10- 1205) 285-9507 105 Main st-ter Po Box 22- Tu-cu- AL 256.7- izoº) 381-7060 194 JACKSON SAWMILL COMPANY, INC. MANUFACTURERS OF YELLOW PINE LUMBER JACKSON, ALA 36545 3. anewºooee; * 2- º º A. . . . . . . *, *) r + tº intº r , 1- 1 - " "rºw-it : ºc. f i i tº l; trºri S L trº, Srºn, 1 tº ‘. .283 -1, it " "," ºn 3 tº Ut tº Rºi i ! at . . . was n ºr 1 or , D . . . . ,’t) 51 X º:# i jº.it "Benatºr Hºt 1 1 r. : r - am qr tº l y onc Lºrreſt about the holdt, ack of rurrent fund 1 nq urn- dº Ltie USSI)^ IRAQ Gºrt pro ºr ar, hºw thr’ ‘ienate Agricul tº ire Committee ºut it ely ſnº i : t , t d 1 : for : “asons. A-, yºu fully know, this program is operated • ‘ct as: º grant or subsidy to for e i gn qovernments. but rather as a quar , irº tee of payment to domest it: suppliers by our government. Iraq tº.1%. , alway", theert ... r1ependab l tº trade partner under th 1 s program. Th 1 rº quarantee program has great ly facil tated the development of trade with many countries, and, simply put , has make the trade with I raci po'ss lb le. without this guarantee program, this positive trade with Iraq would he nº qat:ed. Over the past scºveral years, i ra my company and many other sawmills th is area have part 1 - 1 pated in 5upply inq q.reat quant 1 ties of our fi nº Alabama Southern ſ” 1 ne lumber to Ir acı . The response we have re- celved has been overwhelming about the high quality and suitability of the Southern P 1 ne lumber we are shipping. it has taken years to solid lify this now established market for our product. At times this business has kept our 85 employees working during lulls in the domestic market. Senator. He f l in, Jackson Saw Mill, point, our customers; Sc and n navl a , the USDA 1RAQ GSM program is very 1 tº employees and suppliers. important to in Iraq would find If cut inff at this 1 t necessary to invite Canada, and South America to supply their lumber needs and de- stroy our bus 1 nes's relationship that has taken these years to build. I ur grº you to not let poll tical deal . affect a well lished relationship with a rel 1 able trade paſſ t estab- ner - Your help to sus- tair, this market will I work to stab 1 lize employment and strengthen our country ‘º balance of trade. G i r er J. R. Whitehead, Presiderit 135 JUL 25 1990 The Honorable Howell Heflin United States Senate Washington, D.C. 20510-0101 Dear Senator Heflin: Thank you for your letter on behalf of your constituent, Mr. J. R. Whitehead of Jackson, Alabama, regarding your concerns relating to the current status of additional CCC credit guarantees for export sales of rice to Iraq under the Commodity Credit Corporation (CCC) Export Credit Guarantee Program (GSM-102). The Department of Agriculture recently completed its administrative review of the GSM-102 program with Iraq and issued a public report on May 21, 1990. A copy of this report is enclosed for your convenience. The report covers a limited review focusing on those issues that surfaced as a result of the situation at Banca Nazionale del Lavoro (BNL) and was not intended to cover the entire program with Iraq. The review, however, did raise some questions which, in our judgment, now require an expanded review of commodities and exporters by the Office of the Inspector General (OIG), This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand jury into loans extended by BNL to Iraq. It has been alleged that this bank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not know at this time if any indictments will be handed down that will relate to the CCC programs or individuals that have participated in the programs. We share the concerns you have raised in your letter and recognize that Iraq has become an important market for U.S. rice as well as other commodities as a result of the GSM-102 program. We must, however, be assured that the program will be operated in a manner that not only recognizes the interest of agricultural exports but that is consistent with our commitment to absolute program integrity. At this time, we feel enough questions have been raised that we should not advance any proposals with respect to the GSM-102 program for Iraq until 01G has completed its review and until we can determine if any indictments will be handed down by the federal grand jury that may relate to our programs. After these reviews and investigations have been completed, this matter will be reevaluated. Sincerely, Ann M. Veneman Deputy Under Secretary International Affairs and Commodity Programs ATM FAS/EC/CCCOD/Larry McElvain/lw/447-6211/73-90 Control No. Enclosure 35-Y.15997 cc: Crowder, Veneman, Campbell, OCR, EC&R, Anderson, Assoc. Admin. , CC0, ºssie. Dickerson, Goldthwait, (U Whi + eman / Mr Flva in SS r 196 35 -///3-34- v_º_- .*** *ArcaERY - ------------ : - - - - - - - - - -- a--- 3UDGE" Coºl"EE - - -air ore ces ºr Congregg of the (Hnited $tates ...:”. ga-i-t f * * * * * * 3-3, 225-5080 ARMED SERVICES #}ouge of 3&tpresentatiurg * * *) = -s." ----> *-*** • *- :------- - - - tes. --e La 7" 4:45 -------- --> &lashington, DC 20515 .3 -a, -3.8-4.550 - ------aso-º- - - ----------- June 14, 1990 Honorable Clayton Yeutter Secretary of Agriculture U.S. Department of Agriculture Independence Avenue Between 12th and 14th Streets SW Washington, D.C. 20250 Dear Secretary Yeutter: I am writing you regarding the recent suspension of the Export Credit Guarantee Program (GSM-102) for Iraq. As you know, the Iraqi market is worth approximately $200 million in milled rice alone. The state I represent has a large proportion of rice growers so I am naturally concerned whether the problems with this program can be solved. Will you please inform me as to when this matter will be resolved and how this resolution will affect our rice farmers. Please direct your response to my Washington office as soon as possible. Thank you, in advance, for your cooperation in this serious matter. Sincerely, JIM. McCRERY Member of Congress JOM: jg Enclosures (3) 198 Representative McCrery Page 2 (continued) stating that USDA had discovered irregularities with part of Iraq's GSM-102 export credit guarantee program. As a result, the USDA's office of Inspector General is conducting further investigations and no further credit guarantees to Iraq will be issued until the investigation is completed, so far as I can determine. It is reasonable to assume that if Iraq cannot get the necessary credit guarantee for its rice purchases from the United States, it will turn to Thailand and others for its rice supplies. This would be an important strategic opportunity for Thailand. We have spent a considerable amount of effort, as well as industry and taxpayer money, to develop the Iraqi market. To suddenly lose it would be a severe setback for our industry's economic wellbeing. I have in my possession and have read a copy of a USDA Administrative Review of Iraq GSM-102 Program completed by the FAS General Sales Manager, Mr. Paul Dickerson and Mr. Kevin Brosch of USDA General Counsel's office. While the report raises some possible questions of rice purchases in 1985, in my opinion, it contains no findings or conclusions which would warrant suspending the program for rice or most other commodities, for that matter. It has been suggested that the only course of action for the industry at this time, is political intervention through elected officials. We feel compelled to report the situation to you. As a concerned representative of the Louisiana Rice Industry, I feel you can put pressure on USDA (Crowder) and get this problem solved soon because rice prices are going down more and more each week. We cannot afford to lose this business. I feel we need to solve this problem in a few weeks or the RICE INDUSTRY is in trouble. Sincarely, % Ralph L. Cowen, Chairman Louisiana Rice Promotion Board P. O. Box 61 Midland, LA 70557 (318) 783-6496 199 FACTS OF IRAQI MARKET AND GSM-102 CREDIT GUARANTEE PROGRAM DESCRIPTION OF IRAQI MARKET -- Quantity: 520,000 metric tons -- Quality: United States No. 2, maximum 4% brokens, long grain rice -- Milled Rice Value: Approximately $200 million -- Percent of Commercial Exports: 23% -- Percent of High Quality Long Grain Exports: 38% -- Rough Rice Value: $160 million -- Acres: Approximately 355 thousand -- Iraq usef $1 billion of the $5 billion GSM Credit Guarantee Program, including approximately $150 to $170 million on an annual basis to purchase 500,000 to 600,000 metric tons of rice. -- Iraq is the 12th largest importer of United States agricultural products and the largest United States export rice market, importing more than twice as much rice as the next largest purchaser. -- Without timely access to the U. S. line of credit guarantees, Iraq will find alternative food supplies. In the case of rice, Thailand could easily replace the United States as the primary supplier. -- Since Iraq represents one fifth of total U. S. exports, loss of this commercial market would have a severe cross-regional impact. 200 FARM Louisiana Farrn Bureau BUREAll Federation. Inc. LOUISIANA P.O BOx 95004 - 95.16 AIRLINE HIGHway BATON ROUGE. LA 70895-9004 . PH =na to 27.<^* wo-ce of Louisiana Agriculture May The Honorable Jim McCrery U. S. House of Representatives 1721 Longworth House Office Bldg. Washington, DC 20515 Dear Congressman McCrery: The Louisiana Farm Bureau Federation (LFBF) is very concerned with the current status of the Export Credit Guarantee Program (GSM-102) for Iraq. Iraq requested over $1 billion of GSM-102 credit guarantees to purchase rice and other U. S. agricultural commodities for this fiscal year. The U. S. Department of Agri- culture (USDA) has made an allocation of only $500 million. Iraq has used the allocation for agricultural purchases and has asked for an additional allocation in excess of $500 million. No addi- tional allocations have been issued because of a review of some discovered past irregularities with part of Iraq’s GSM-102 pro- gram activities. i i ! . The administrative review was undertaken in response to allega- tions that surfaced as a result of the investigations of the Atlanta, Georgia, agency of Banca Nazionale del Lavoro (BNL), about possible irregularities in the GSM-102 program for Iraq. On May 21, Undersecretary of Agriculture Richard T. Crowder released the results to date of the USDA’s administrative review. While the report raises some questions, most of the discrepancies occurred five years ago and have been corrected in the interim. The administrative review focused on unusually high prices obtained during 1985-87 by exporters financed through BNL, arrival of agricultural commodities shipped under the GSM pro- gram, after sales service in connection with GSM program sales, and payment of certain Iraqi domestic taxes. As a result of its administrative review, the USDA's has reached some initial con- clusions about past conduct of the Iraq GSM-102 program. Regard- ing the unusually high price levels, it was stated that these price levels may have resulted in part from supplier, perceptions that Iraq was a high risk market due to wartime conditions; because of the limited number of U. S. suppliers who were 1st vice President 2nd vice-President 3rd vice-President- - - - Secretary-Treasurer Mant in cancienne Guenn LaHAYE SHELev Roe ERT P.O Box 36 Rt 2 Box 189A 4.0143 Loosermore Rd Marnou, La. 70554 Gonzaies. La 70.737 President Ronald anoe RSon PAUL Ransom Po Box 79 Route 4 Box 138 - Ethe La foºd Monroe, La 71205 Belle Rose La 70341 201 May 31, 1990 Page Two willing to participate in this high risk market; and, Iraq's pol- icy of seeking freight financing which only a limited number of suppliers were able or willing to provide. There was no evidence to suggest that there was any diversion of commodities sold to Iraq, and it was found that Iraq maintains records to establish proof of arrival for its GSM purchases. The review did find that several exporters apparently provided after sales service in response. However, Iraq's Deputy Minister of Trade has provided CCC with a letter confirming that the government of Iraq has instructed all of its state enterprises not to request or accept after sales services in connection with any future GSM contracts. Iraq’s Deputy Minister of Trade also has confirmed that Iraq has changed its policy and will, in the future, specifically exempt GSM transactions from application of this tax. The review contains no finding or conclusion which would warrant the suspension of the program for rice or any other agricultural commodity. The discrepancies that were reviewed occurred many years ago and have been corrected in the interim, and there are no questions concerning the current operation of the program. The review did state that the U. S. government has not incurred any losses as a result of GSM-guaranteed sales to Iraq. It is also important to note that over all the years Iraq has used the GSM credit guarantee program, all scheduled payments have been made. Therefore, LFBF asks that the Iraq GSM-102 program request be funded. Iraq is the twelfth largest importer of U. S. agricul- tural products and is the largest U. S. export rice market, representing 20 to 25 percent of U. S. commercial rice exports in recent years and importing more than twice as much rice as the next largest purchaser. Without access to the U. S. credit guaran- tees, alternative supplies from U. S. competitors will be pur- sued. In the case of rice, Thailand could easily replace the U. S. as the primary supplier. This would result in a loss of U. S. market share. Loss of this commercial market would have a severe economic impact. Considerable efforts and industry and taxpayer monies have been used to develop the Iraqi market. Mar- kets are difficult and expensive to gain, and they are even more difficult to re-gain. We would greatly appreciate any assistance you can give in order that the requested additional credit guarantees be issued to Iraq. Thank you for your efforts. Sincerely, ſºnzu, 4.4 ar- Ronald Anderson President RA: mtl - WNS §§333&s- - ACADIA RICE GRDWERs Association courſ&cle csowie, LA as, - ſº- May 25, 1990 TO: REPRESENTATIVE JIM MC CRERY HOUSE OF REPRESENTATIVES 1022 LONGWORTH HOUSE OFICE BUILDING WASHINGTON, D. C. 20515 SUBJECT: URGENT - IRAQ GSM-102 PROGRAM As you know, Iraq is our industry's single largest commercial export market. In recent years, purchases from Iraq have been as high as 500,000 to 600,000 metric tons, representing 20% to 25% of our total U. S. exports. These purchases would not have been possible without GSM-102 credit guarantees through USDA, because Iraq simply would not have purchased our high quality rice which is what they prefer, and which is more expensive than competitive rice in Asia. There are currently some problems with the program that will have to be overcome before Iraq can receive the necessary credit guarantee. We do not know if this is just a temporary situation or a permanent one. Regardless, the loss of Iraq as a market and the potential of them purchasing their import needs from the competition will have a severe economic effect on the United States industry. The purpose of this letter is to give you some background on the situation as we know it. Background At the beginning of this fiscal year (October, 1989), Iraq requested over $1 billion of GSM-102 credit guarantees to purchase rice and other U. S. agricultural commodities. However, USDA made an allocation of only $500 million, pending completion of a Justice Department investigation of questionable practices by an Atlanta branch of the Italian bank, Banca Nazionale del Lavoro, which handled a large part of the financing under the GSM-102 program. Iraq has used the $500 million for agricultural purchases and has asked for an additional allocation in excess of $500 million. On May 17, Under Secretary of Agriculture, Richard T. Crowder presented briefings to members of the Senate and House Agriculture Committees, stating that USDA had discovered irregularities with part of Iraq's GSM-102 export credit guarantee program. As a result, the USDA's office of Inspector General is conducting further investigations and no further credit guarantees to Iraq will be issued until the investigation is completed, so far as I can determine. 203 REPRESENTATIVE JIM MC CRERY MAY 25, 1990 PAGE 2 It is reasonable to assume that if Iraq cannot get the necessary credit guarantee for its rice purchases from the United States, it will turn to Thailand and others for its rice supplies. This would be an important strategic opportunity for Thailand. We have spent a considerable amount of effort, as well as industry and taxpayer money, to develop the Iraqi market. To suddenly lose it would be a severe setback for our industry's economic wellbeing. I have in my possession and have read a copy of a USDA Administrative Review of Iraq GSM-102 Program completed by the FAS General Sales Manager, Mr. Paul Dickerson and Mr. Kevin Brosch of USDA General Counsel's Office. While the report raises some possible questions of rice purchases in 1985, in my opinion, it contains no findings or conclusions which would warrant suspending the program for rice or most other commodities, for that matter. It has been suggested that the only course of action for the industry at this time, is political intervention through elected officials. We feel compelled to report the situation to you. As a concerned representative of the Louisiana Rice Industry, I feel you can put pressure on USDA (Crowder) and get this problem solved soon because rice prices are going down more and more each week. We cannot afford to lose this business. I feel we need to solve this problem in a few weeks or the RICE INDUSTRY is in trouble. sincerely, * (Lenny'ſ Hensgens, President Acadia Rice Growers Association 223 East Hutchinson Avenue Crowley, LA 70526 (318) 783-3283 ENCLOSURE 204 JUL * 5 1990 ... -- . . . . . . . . . . * *:: I tº ' ', . .- : : rºſt-ser, at i".”: * + 3 + . . .: ..., , , . . . 20% : * tº-1 i t …fict esºman Mcf. tery: Thank you for your letter regarding your concerns relating to the current status of additional CCC credit guarantees for export sales of rice to Iraq ºtider the Commodity Credit Corporation (CCC) Export Credit Guarantee Program i is SM-102). the u-partment of Agriculture recently completed its administrative review of *:::: *sh-102 program with Iraq and issued a public report on May 21, 1990. A rº, ºf this report is enclosed for your convenience. The report covers a . 1 ºn 1 : *d review focus inq on those lissues that surfaced as a result of the * : * 14t ton at Banca Nazionale del Lavoro (BNL) and was not intended to cover - He ent i re program with Iraq. The review, however, did raise some questions wh 1 cm. in our judgment, now require an expanded review of commodities and -xporters by the Office of the Inspector General (OIG) . This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand Yury into loans extended by BNL to Iraq. It has been alleged that this pank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not The Louisiana Farm Bureau Federation (LFBF) is . concerned with the current status of the Export Credit Guarantee Program (GSM-102) for Iraq. Iraq requested over $1 bil- lion of GSM-102 credit guarantees to purchase rice and other U.S. agricultural commodi- ties for this fiscal year. The U. S. Department of Agriculture (USDA) has made an alloca- tion of only $500 million. Iraq has used the allocation for agricultural purchases and has asked for an additional allocation in excess of $500 million. No additional allocations have been issued because of a review of some discovered past irregularities with part of Iraq's GSM-102 program activities. The administrative review focused on unusually high prices obtained during 1985-87 by exporters financed through the Banca Nazionale del Lavoro (BNL), arrival of agricultural commodities shipped under the GSM program, after sales service in connection with GSM program sales, and payment of certain Iraqi domestic taxes. As a result of its administra- tive review, the USDA has reached some initial conclusions about past conduct of the Iraq GSM-102 program. Regarding the unusually high price levels, it was stated that these price levels may have resulted in part from supplier perceptions that Iraq was a high risk market due to wartime conditions; because of the limited number of U.S. suppliers who were willing to participate in this high risk market; and Iraq's policy of seeking freight financing which only a limited number of suppliers were able or ºing to provide. There was no evidence to suggest that there was any diversion of commodities sold to Iraq, and it was found that Iraq maintains records to establish proof of arrival for its GSM pur- chases. The review did find that several exporters apparently provided after sales service in response. However, Iraq's Deputy Minister of Trade has provided CCC with a letter confirming that the government of Iraq has instructed all of its state enterprises not to request or accept after sales services in connection with any future GSM contracts. Iraq's Deputy Minister of Trade also has confirmed that Iraq has changed its policy and will, in the future, specifically exempt GSM transactions from application of this tax. Prescen: -s: -ce President and vice-President 3rd vice-President Secretary-Treasurer aonald ANDERSON Paul. RANSCM Martin CANCIENNE Guenn La-AYE SHE-Bºw Roe ERT Po Box *s Rc-te-Box -38 Po Box 36 at 2 Box 189A * Loose” º Erre La Torx, -orroe - a "-2-5 Bene Rose La T-34- -ar-ou - a "C554 Gorzawes La "073' • 208 The Honorable Clayton Yeutter June 13, 1990 Page Two The review contains no finding or conclusion which would warrant the suspension of the program for rice or any other agricultural commodity. The discrepancies that were reviewed occurred many years ago and have been corrected in the interim, and there are no questions concerning the current operation of the program. The review did state that the U. S. Government has not incurred any losses as a result of GSM-guaranteed sales to Iraq. It is also important to note that over all the years Iraq has used the GSM credit guarantee program, all scheduled payments have been made. LFBF believes the current treatment of the Iraq GSM-102 program request is unwarranted and should be corrected immediately. Iraq has participated in the GSM-102 program since 1983 and has purchased more than $4.5 billion in U.S. agricultural products. Iraq is the twelfth largest importer of U. S. agricultural products and is the largest U. S. export rice market, representing 20 to 25 percent of U.S. commercial rice exports in recent years and importing more than twice as much rice as the next largest purchaser. Without access to the U.S. credit guarantees, alternative supplies from U.S competitors will be pursued. In the case of rice, Thailand could easily replace the U.S. as the primary supplier. This would result in a loss of U.S. market share. Loss of this commercial market would have a severe economic impact. Considerable efforts and industry and tax- payer monies have been used to develop the Iraqi market. Markets are difficult and expensive to gain, and they are even more difficult to regain. Therefore, LFBF asks that the Iraq GSM-102 program request be funded. Sincerely, &_&_ Ronald Anderson President RA:mtl 209 {JUL 25 1990 # Coz-5 Mr. Ronald Anderson President Louisiana Farm Bureau Federation, Inc. P. O. Box 95004 Baton Rouge, Louisiana 70895-9004 Dear Mr. Anderson: Thank you for your letters regarding your interest in the results of the administrative review of the Commodity Credit Corporation (CCC) Export Credit Guarantee Program (GSM-102) for Iraq and your concerns relating to the current status of additional CCC credit guarantees for Iraq during fiscal year 1990. The report released on May 21, 1990, covers a limited review focusing on those issues that surfaced as a result of the situation at Banca Nazionale del Lavoro (BNL) and was not intended to cover the entire program with Iraq. As you are aware, the review did raise some questions which, in our judgment, now require an expanded review of commodities and exporters by the Office of the Inspector General (OIG) . This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand jury into loans extended by BNL to Iraq. It has been alleged that this bank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not know at this time if any indictments will be handed down that will relate to the CCC programs or individuals that have participated in the programs. We share the concerns you have raised in your letter and recognize that Iraq has become an important market for U.S. rice as well as other commodities as a result of the GSM-102 program. We must, however, be assured that the program will be operated in a manner that not only recognizes the interest of agricultural exports but that is consistent with our commitment to absolute program integrity. At this time, we feel enough questions have been raised that we should not advance any proposals with respect to the GSM-102 program for Iraq until OIG has completed its review and until we can determine if any indictments will be handed down by the federal grand jury that may relate to our programs. After these reviews and investigations have been completed, this matter will be reevaluated. Ann M. Veneman Sincerely, Deputy Under secretary /S/ International Affairs and Com Programs FAS/EC/CCCOD/Larry McElvain/lw/447-621.1/7-03-90 Control No. 35-Yllº22 & F-21333 cc: Crowder, Veneman, Campbell, OCR, EC&R, Anderson, Assoc. Adain., CCO, Hovermale, Dickerson, Goldthwait, ". McElvain, Raul *IU }^ 210 /33333. - - co--- - 2 Finance FA comMtAct. SciENCE AND TRAnsportanon - 2. Joint economic Joint CoMMITTEE on taxation LLoyd BENTSEN Texas (Hmittb ştates §emate _ſ /* * WASHINGTON, DC 20510 June 28, 1990 Mr. Franklin E. Bailey Office of Congressional Relations U.S. Department of Agriculture Washington, D.C. 20250 Dear Mr. Bailey: 1 recently received the enclosed constituent inquiry, and I would very much appreciate your providing me with any perti- nent information you might have regarding the matter. Your kind assistance is greatly appreciated. Sincerely, Lloyd Bentsen Enclosure PLEASE REPLY TO: 1100 Commerce, Room 7Cl4 Dallas, Texas 75242 J11 June ll, 1990 The Honorable Lloyd Bentsen United States Senate. SH-703 Hart Senate office Building Washington, D. C. 20510-4301 Dear Senator Bents en: I am deeply concerned about the delay in the USDA Administration’s recommendation on funding or not funding the balance of Iraq's request for credit under the GSM-lo2 credit program. Mr. Paul Dickerson and Mr. Keven Brosch of the FAS General Council’s office have just completed a report relating to some questions that were raised about Iraq. I am told that most of these discrepancies that were raised occurred five years ago and have been corrected. It is reasonable to assume that if Iraq cannot get the necessary credit guarantee for its rice purchases from the U.S. , it will turn to Thailand and others for its rice supplies. This would be an important strategic opportunity for Thailand. The rice industry has spent a considerable amount of effort (15 years) as well as taxpayer money, to develop the Iraqi market. To suddenly lose it would be a severe setback for our industry’s economic wellbeing. I have enclosed FACTS OF IRAQ'S MARKET and GSM-lo2 CREDIT GUARANTEE PROGRAM. Senator Bentsen, I would appreciate any consideration you might be able to give in this matter. Sincerely, Zerº" Jack Wendt Rice Farmer 602 Hillcrest Drive Richmond, Texas 77.469 Žl; July, 2 : 1990 The Honorable Lloyd Bentsen United States Senator 1 100 Commerce, Room 7014 Dallas, Texas 75242 Dear Senator Bentsen: Thank you for your letter on behalf of your constituent, Mr. Jack Wendt of Richmond, Texas, regarding the status of additional CCC credit guarantees for export sales of rice to Iraq under the Commodity Credit corporation (ccc.) Export Credit Guarantee Program (GSM-102). The Department of Agriculture recently completed its administrative review of the GSM-102 program with Iraq and issued a public report on May 21, 1990. A copy of this report is enclosed for your convenience. The report covers a limited review focusing on those issues that surfaced as a result of the situation at Banca Nazionale del Lavoro (BNL) and was not intended to cover the entire program with Iraq. The review, however, did raise some questions which, in our judgment, now require an expanded review of commodities and exporters by the Office of the Inspector General (OIG) . This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand jury into loans extended by BNL to Iraq. It has been alleged that this bank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not know at this time if any indictments will be handed down that will relate to the coc programs or individuals that have participated in the programs. We share the concerns you have raised in your letter and recognize that Iraq has become an important market for U.S. rice as well as other commodities as a result of the GSM-102 program. We must, however, be assured that the program will be operated in a manner that not only recognizes the interest of agricultural exports but that is consistent with our commitment to absolute program integrity. At this time, we feel enough questions have been raised that we should not advance any proposals with respect to the GSM-102 program for Iraq until OIG has completed its review and until we can determine if any indictments will be handed down by the federal grand jury that may relate to our programs. After these reviews and investigations have been completed, this matter will be reevaluated. Sincerely, FAS/EC/CCCOD/Larry McElvain/lw/447-621.1/7-11-90 Control No. 25-Y23892 Enclosure cc: !h. Office, Crowder, Weneman, Campbell, OCR, EC&R, •SS. An n. Assoc. Admin. cco. Hovernale, Dickerson, fº º cºoldthwait, Whiteman, McElvain ºf: -" ~ (?"fease see a trached ye (w #x tattºſ) -.W - -sº S 214 {- Texas - - - - - - - at aru ºf unrec ſtyRs. ~~~ S. M. TRUE, JR. Austry a rasor Bob Ti-Rºtr & atº President Cruver - **** _º_-_ Lelaxo whart Harlax H +iu frº-Ax, Tahoka McCregor n BUREAU º º C H dowdy Russ arºwold ice President wichita Falls Trinity Billie Ray Huddles TON TOMMY c walker CERALD M. CLArk * LDD Lwalde Secretary-Treasurer don's Mith Bob stallwaan Sulphur Springs Columbus Bill Tullos CERALD M. Cuark San Angelo Edna Steve N. B. Bearden Harlingen STATE OFFICE: P. O. Box 2689 • Waco, Texas 76702-2689 • 817-772-3030 zºv - June 28, 1990 F- |< * , *- --> - Zºn Mr. Richard T. Crowder, UnderSecretary 'C S - : for International Affairs and Commodity Programs ſº a — Room 212-A C-4-4 U.S. Department of Agriculture Administration Building Washington, D.C. 20250 Mr. Secretary, The Texas Farm Bureau would respectfully request that you reconsider the current restraints on the use of GSM-102 funds by the country of Iraq. These funds are extremely important to the U.S. Rice industry as it attempts to main- tain its share of the Overall world market for rice. U.S. rice producers have struggled economically for the last several years, and this year prices have not shown any appreciable improvements even though our carry-over stocks are the lowest in many years. The driving force behind the U.S. rice price is our export market. As you know, many of agricultures' major foreign customers are countries that must borrow money to purchase their food supply. Iraq has been one of the b199est customers for U.S. produced rice. While we recognize that there are some problems beyond our control with Iraq, it is incumbent on us to inform you, and other government officials, that this action is devastating to the U.S. rice market and ultimately the U.S. rice farmer. We would respectfully suggest that it is somewhat inconsistent for your administration to suggest that world market share should be the avenue of sur- vival for United States producers and continue your current restraints on the GSM monies. Your quick action on the release of GSM-102 funds for the country of Iraq would be greatly appreciated by our organization as well as many others who sup- port your administration's actions. At the very minimum, producers should be advised as to a completion date for the review of the Iraq investigation. Sincerely, 2/ 227. 3–9. S.M. True, Jr. President SMT: bb 215 Jul. ~ * Mr. S. M. True, Jr. Texas Farm Bureau President P. O. Box 2689 Waco, Texas 76702-2689 Dear Mr. True: Thank You for your letter regarding your concerns relating to the current status of additional CCC credit guarantees for export sales of rice to Iraq under the Commodity Credit Corporation (CCC) Export Credit Guarantee Program (GSM-102). The Department of Agriculture recently completed its administrative review of the GSM-102 program with Iraq and issued a public report on May 21, 1990. A copy of this report is enclosed for your convenience. The report covers a limited review focusing on those issues that surfaced as a result of the situation at Banca Nazionale del Lavoro (BNL) and was not intended to cover the entire program with Iraq. The review, however, did raise some questions which, in our judgment, now require an expanded review of commodities and exporters by the Office of the Inspector General (OIG) . This review is currently in process and hopefully it will be completed in the near future. In addition to this review, there has been an ongoing investigation by a federal grand jury into loans extended by BNL to Iraq. It has been alleged that this bank extended loans to Iraq beyond legal lending limits set by U.S. law. Many of these loans were covered by CCC credit guarantees. We do not know at this time if any indictments will be handed down that will relate to the CCC programs or individuals that have participated in the programs. We share the concerns you have raised in your letter and recognize that Iraq has become an important market for U.S. rice as well as other commodities as a result of the GSM-102 program. We must, however, be assured that the program will be operated in a manner that not only recognizes the interest of agricultural exports but that is consistent with our commitment to absolute program integrity. At this time, we feel enough questions have been raised that we should not advance any proposals with respect to the GSM-102 program for Iraq until OIG has completed its review and until we can determine if any indictments will be handed down by the federal grand jury that may relate to our programs. After these reviews and investigations have been completed, this matter will be reevaluated. Sincerely, - º McElvain/lw/447-621.1/7-11-90 Control No. Richard T. Cº. º /lw/ / i-ternational Affairs an cc: Crowder, Weneman, Campbell, OCR, EC&R, Anderson, Assoc. gº Admin. , CC0, Hovermale, blººn. Goldthwait, Whitenan, s Enclosure McElvain 09 Cº- ºv’ & - * * * s ſu) / please 5eo arracked Velº fºr in hal) & * 216 TE-S 16°9′ 592-93 592-93 892-93 *=Lex L-xOR 493-24 LuxOR CALIFORNIA :::::::::::: ExPORTS CORPORATION -ax sº sº...? 1333 CAMINO DEL RIO S_*311 * SAN DIEGO C*92-93 £1.7 /r !, eee tº-_ 1 Ó TZ/2 - 2/3 yerº 2. 7-4-2 January 4, 1990 ce--4/~72 tº 4- 67% - Fax Message to 1 (202) 426-6470 No. of Pages: 1 ~~~ | V-C4 USDA-FAS WJL Washington, D.C. 6) C.J., & O'Cao- ATTN - David Kunkel -tz, *** 8-v 9 - Our Reft MSSE-2O1 / FAx3°64 A%20w orrº, 7-CC vºv- Re: Extension request for GSM-103–64385 (2-4°T) Dear David t we ask for your consideration in extending the acceptable shipping period for GSM-10E-64385, active dry yeast , up to March 10, 1990. The supplying company must concentrate on its domestic business during the month of January, so can only ship the remainder of approximately 70 M/T of the registered 1, Ooo M/T in the month of February. -ocking forward to your positive reply. Thank you. Bºst rºgardº, Br step 218 JAN 29 1990 Mr. Bryan Estep Luxor California Exports Corporation Su íte 311 1333 Camino Del Río San Diego, California 92.108 Dear Mr. Estep: This letter is in regard to your request for an extension of the shipping period on your company's sale of active dry yeast to Iraq under the fiscal year 1989 Export Credit Guarantee Program (GSM-102). The sale numbered GSM-102-64385 provides for the export 1,000 tons of yeast with shipment through December 31, 1989. Pursuant to Commodity Credit Corporation (CCC) regulations your application of September 27, 1989 implied that your company had the commodity available and that you would be able to perform. Your statement that your supplier would rather fulfill domestic markets instead of perform under their contract with your company does not provide justification for an extension. Accordingly, in lieu of the extension an alternative would be for your firm to cancel that portion unshipped and register it under the fiscal year 1990 GSM-102 program. Sincerely, 4. erry/E. Reynolds Director Program Development Division -------------- cc: CGoldthwait, GWhiteman, KReynolds, CTDeJaplane, McElvain/Godsey, DKunkel do 219 - LUXOR CALIFORNIA EXPORTS CORPORATION 1335 CARTNODETRIO ST-3T. SANEIEEETEE.T.: Marc n 2, 1990 Secretary of Agriculture C : a v to ºn Y eu t t er- United States Department of agricu iture wash 1 ng to n, D. C. Dear Secretary Yeur ter: I had the pleasure of talking to you during the mid-seventies at one of Ray Goldberg s seni nars. At the time we met , I was a farmer raising fruits, vegetables, and grains. I was at tending the seminar as a member of the Board of Directors of Tri-Valley Growers. 5 ince that t 1 me. my career has taken me in to food process 1 ng and internatic ral market i ng of food products. It is in the capac 1 ty of an international marketer that I am writing you today. I have just returned from any third trip to Iraq since the / beginning of the year . I t has become obvious to me during my recent trips that US agriculture is loos in sales due to the current restrictions of the GSM 102 TanâTó3 credit lines. Your department has been very successful in developing the Iraq 1 market for US products. It is a shame to be in danger of loosing our momentum given the potent la 1 s of this market. I fear that 1.f- we de lay expanding the lire, we will suffer substantial setbacks which may cost us years to rebuil c. Currently, Iraq ls buying for cash from other sources. It is my opinion that if we were to expand the line at this time, we would get a substantial port i on of these cash purchases in addition to our cred it sales. I urge your personal involvement in expanding the cred it line to Iraq. we need this market and cannot further risk loos i ng our market share to the EEC, Austral 1 a, Brazil 1, New Zealand ( al 1 of which have had cash sales to our customers in the last month ) . Please restore... the Geri ine to at least last year's one billion dollar level - - If I can provide further in formation or be of service in th l = matter please contact me at the letterhead address. Thank you for your consideration. Yours truly EXPORT MANAGEMENT CORPORATION 220 MAR 2 | 1990 Mr. Gus Olson Luxor California Exports Corporation 1333 Camí no Del Río S. #311 San Diego, California 92.108 Dear Mr. Olson: Thank you for your letter regarding the Iraq GSM-102/103 program. I understand the importance of maintaining sales of agricultural commodities to Iraq and will do my best to maintain our market position. The Department of Agriculture recognizes that Iraq is an ſmportant market for U.S. agricultural commodities and that the GSM-102 program is largely responsible for this market. On the other hand, the benefits of future sales must also take into account the risk associated with providing credit guarantees. We have Iraq's request for an additional GSM-102 allocation under review. As part of this review we will take into account the uncertainty caused by the ongoing investigations of Banca Nazionale del Lavoro (BNL) by the United States Attorney's office in Atlanta, Georgia, and other federal agencies. We are carefully monitoring developments in the various investigations that are under way. The Department of Agriculture recognizes that Iraq is an important market for U.S. agricultural commodities and that the GSM-102 program is largely responsible for this market. On the other hand, we must proceed cautiously in order not to jeopardize the overall GSM-102/103 credit guarantee program. Sincerely, *** ~ Kerry E. Reynolds - Director Program Development Division FAS:EC: PDD:AME: Mark ºrmiesº 2–9216:03-21-90 03-X37150 cc; Yeutter, Crowder, Veneman, Campbell, EC&R, Anderson, Assoc. Admin, CC0, Dickerson, Goldthwait, Whiteman, KReynolds, CDelaplane, DKunkel }}] AMMAN RESOURCES Resº.… Nº. 1554 6"6438 - " , Har tº ºu 35 tele, 247?? - MRES.O ... º Scy "n": ** ... ... ." - --- FRCM * Aſ A K. To ATT :- DR-30) -- , vſ. REFERENCE: DAJAN 1 U. 2, 2:23rtment ºf a griculture PAUL DITF.C.ſºſ)N Number of page: to follow \,x' 32? FACSIMILE MESSAGE .*.*.* *Art, ... [.,...: I was 37: Pax No. 962 6 676925 Far No: --> -25 5-7 C. ) excluding cover comments: RE: 334 PROſ. RAMHC, IRAQ we are very disap::i-tad with trº USDA dec. s. … . . the ab:ve programme, we as are r lººr -... ." ... cºor-: * * * *r re-a== - 1 re; and ---. … .º.º. finan, a ‘ly ºn prºmºte America- scricult arºl ºr ºut: . ~1.2 uu-l--tº 2. ~3°-ºl tº-ºn, ºr acike: , er, “ar: to *-*3r: ‘...t. ---. . . .2 tº Iroq. ſh- r- sº iry fºr the ºro, is-ºr cº Anct" ºr cºcc.ie: 3-3 the unſ; ----tak i ! i-y cuppl" -r-, ... "unlun -- : L'ºe Sau- ! t -> . * * *-*. Jnata minority politics- - - : * * * *.*, '1+... = 1 ºr jo:3. “ot go nions .. 4 in cuan:2 rº business practice. w: have tº ºvciop and 's-itive:e ot" ºr relial… . . . - - *xtre+ i =riº: a with UTDA threat , - 3 J3: -, nºr-a-yenra." ºtm, tra: Amºr--s a super '-i rul Hy a expºne ºn: s 1 autu... iu' s , 1. a-1 i < 1-, i ; I am a “closing to: who at aro Americar photog uſ facili - iws -- ill in 3-1 - 3 tº handl - An-1 ran rice. we snail start:", tº “twº- it tº titl Harºl' . F.C. wheat ard upgrading Vietnamºw r it:w. ſeq2rds 47–860 O – 92 – 8 222 in Nga - ruuni inſ; 510ſºnſ: Uniºnſ: 1 ly - bit/RAſ. *ºttiſ) 10NS LOM).INI, 19thin itns/DAY UNLOAll ING 12th It, 1ſºns/DAY ſnati:INº. . .tulu (UN5/UNY Muñſºn I'at KM:1Nſ, t'ſ). A mur iºnſ). Ji tri 224 TO : James Cubie Chief Counsel Senate Committee on Agriculture, Nutrition and Forestry FROM : F. Paul Dickerson General Sales Manager and Associate Administrator SUBJECT: GSM 102/103 Programs Involving Iraq As we discussed in the briefing on Monday, December 4, I agreed to provide your staff with an update and comments on the Iraq situation in connection with the GSM 102/103 programs and the investigation of the alleged bank fraud at Banca Nazionale del Lavoro in Atlanta. Enclosed is an informal response to your request. We would request that you keep this information confidential. Enclosure 225 BANCA NAZIONALE DEL LAWORO (BNL) Recently, articles in the press have discussed aspects of the so-called "Lavoro Affair" of the investigation of alleged bank fraud at Banca Nazionale del Lavoro-Atlanta (BNL) involving off-the-book loans made to Iraq. Some questions have been raised regarding credit facilities provided to Iraq including export credit guarantees extended under the GSM 102/103 programs administered by the Commodity Credit Corporation (CCC), an instrumentality of the U.S. Department of Agriculture. A number of facts about the GSM-102/103 programs may be helpful in understanding the situation in the BNL matter, and the status of the programs with respect to Iraq. o The GSM-102/103 programs are not foreign aid or foreign assistance programs. Rather, those programs were instituted to assist the U.S. agricultural sector to develop and maintain commercial export markets for U.S. agricultural products. GSM export credit guarantee programs provide short term or intermediate term credit facilities to allow U.S. agricultural exporters to sell their products to countries that are unable to participate at the current time in the cash markets, but who are able to repay on a commercial basis over a more extended term. Iraq is only one of more than forty countries currently participating in these programs, more than eighty different types of U.S. agricultural commodities have benefited from these programs since their inception. o The decision to extend lines of credit guarantees to foreign countries is made by USDA/CCC only after consultation with other federal departments and agencies through an interagency consultation process. Through the National Advisory Committee on international Monetary and Financial Policies, USDA/CCC consults with the major federal agencies concerned with international credit policy, including the Departments of the Treasury, Commerce and State, the Federal Reserve, the Office of the U.S. Trade Representative, the Ex-Im Bank and others. The decision whether to extend credit guarantees, and for how much, is the result of very thorough review of many factors, including considerations of credit-worthiness, past performance in the program by the foreign country, benefits to U.S. agricultural sectors, and long term market opportunities. o The current decision to commit to an initial tranche of S500 million during FY 90 represents the result of close interagency scrutiny of the Iraqi situation, including consideration of factors arising from the BNL matter. o Under the GSM credit guarantee programs, CCC issues guarantees to U.S. exporters. The CCC guarantee covers the risk of non-payment by a foreign bank under a letter of credit opened to finance the purchase of U.S. agricultural exports. CCC qualifies foreign bank for participation. CCC has safeguards to insure the integrity of the GSM programs. In Iraq, CCC has qualified Bank Rafidain, which has had a superior record of repaying all loans which were made subject to the GSM programs. Thus, CCC's risk with respect to GSM loans to Iraq booked by BNL is the risk of non-payment by Iraqi banks and is unrelated to the financial position of BNL. o Since 1983, CCC has approved credit guarantees for approximately $4.6 billion in connection with export sales of U.S. commodities to Iraq. To date, no claims have ever been made on CCC as a result of any Iraqi default. CCC's records indicate that Iraqi banks have consistently and fully limit their obligations under these sale and loan agreements. o Since early September, when the Lavoro affair first became public, USDA's Office of Inspector General has been conducting an investigation with the Office of the United States Attorney in Atlanta regarding possible improprieties with respect to CCC programs. USDA's Office of the General Counsel and CCC have also been conducting an administrative inquiry. Those investigations are on going. o CCC guarantees are extended only for credit sales of U.S. agricultural exports, and only to export companies operating in the United States. BNL may have lent money to Iraq for non agricultural products, but none of those sales would have been eligible for CCC guarantees. According to press reports, BNL had current loans to IraQ booked at approximately $8 billion. The amount of CCC guaranteed loans in that portfolio was approximately $700 million in principal for all shipments of agricultural commodities. The remainder of the portfolio did not involve CCC guarantees. 227 o CCC extends credit guarantees to exporters of U.S. agricultural goods who may, at their option, assign their rights to sale proceeds (and the related guarantee) to a bank or other financial institution. CCC did not issue guarantees to BNL; rather, BNL received assignments of those guarantees from various exporters. o Iraq has consistently met its financial obligations in connection with this program, and, in recent days has publicly expressed its intentions to continue to do so. In addition, Iraq is the tenth largest foreign market for U.S. agricultural exports (in particular, purchasing approximately 20% of U.S. rice exports). o USDA is continuing to investigate the situation arising out of the Lavoro matter and is prepared to take whatever action is necessary as a result of these ongoing investigations. 228 12–4–89 2-90 5–90 8–90 9-90 10-16-90 BRIEFINGS RELATING TO BNL/GSM 102 BRIEFED SENATE AGRICULTURE COMMITTEE STAFF BRIEFED SENATE AGRICULTURE COMMITTEE STAFF BRIEFED HOUSE AND SENATE AGRICULTURE COMMITTEE STAFF BRIEFED HOUSE AND SENATE AGRICULTURE COMMITTEE STAFF BRIEFED HOUSE BANKING COMMITTEE STAFF F. PAUL DICKERSON TESTIFIED BEFORE HOUSE BANKING COMMITTEE WE DO NOT HAVE SPECIFIC DATES FOR ALL OF THESE BRIEFINGS, BEST GUESS. OTHER BRIEFING OCCURRED DURING THE YEAR BY DR. CROWDER THAT WERE WITH MEMBERS. I DO NOT HAVE DATES FOR THESE. (DID NOT SCHEDULE) HOUSE AND SENATE COMMITTEE STAFF WERE KEPT CURRENT THROUGHOUT THE COURSE OF 1990 AND TO DATE BY PHONE AND/OR MEETINGS DURING FARM BILL DELIBERATIONS. NUMEROUS PHONE CALLS WERE RESPONDED TO, AS WELL AS BACKGROUND INFORMATION PROVIDED TO STAFF. ??? 1 & #6 Bºlºf L/6 // 4 /M €. C) £C ſo <2 0.” Hovermeſe P45/ (/3/74 //uk, Ö///en 1245////4" 2. ſº C2.2/ 2^ 2… [Sce, A.Ae. scº *~ (Sesa-42 Jº 2.2 (/~s/<- 52.e. fe 43 C yº. //a2.2/ Sznań. % C&c & Co Waw-s. Con re. S-r-, \{e_{k-1 Co-ree . 230 INFORMATIONAL MEMORANDUM FOR UNDER SECRETARY CROWDER FROM: David J. Hovermale Director, Legislative Affairs SUBJECT: Iraq/Banco Nazionale Del Lavoro Date/Time: Friday, February 8, 4:00 in 328 Senate Russell Purpose: To update senior committee staff on issues relating to Iraq/Banco Nazionale Del Lavoro. Expected Chuck Riemenschneider - Staff Director Committee Jim Cubie - Chief Counsel Staff: Bill Gillon – Senior Counsel Lynnett Wagner – Professional Staff Minority Staff John Ziolkowski – Professional Staff Brent Baglien - Counsel Randy Green – Professional Staff USDA Staff: Richard T. Crowder Paul Dickerson Kevin Brosch David Hovermale Staff Concerns: Have received numerous calls from 60 minutes, ABC, Wall Street Journal to name a few. Is there something new? Want to be updated on status of investigations/audits. Want to discuss the memo CNN aired. Update on claims. 232 INFORMATIONAL MEMORANDUM ON RAFIDAIN BANK FILE 2 Informal Interviews Relevance of File Questionable OIG Indicated Satisfaction With CCC's Response The fact finding interviews conducted by OIG were informal, and the OIG interviewer indicated he was gathering background information on how the program worked, not that he was conducting a review of the program or operations. During the interview when asked about the whereabouts of the Rafidain Bank file by OIG, because of the informal nature of the discussion CCC officials candidly responded that they were not sure exactly where the file was or when the bank limit was set. Never did CCC indicate the file did not exist, insinuate it was missing, or volunteer to locate the file at that time. OIG made no further inquiries on the subject and issued their final report on January 26 without providing CCC an opportunity to review or comment on their findings. Even if the file had been entirely missing, it is questionable how the absence of this particular file would be crucial in the investigation of Iraq or BNL. The bank limit as well as the date when the limit was established were documented in the GSM computer system. Furthermore, because a CGA was in place, the bank limits were permitted to be overridden, allowing the actual guarantee registrations to exceed the bank limits. Clearly, at the time of the review interviews, CCC had nothing to hide in this regard. In OIG's original review letter, they stated "Based upon these initial observations, we will be initiating a more in-depth review in the near future." Subsequently, because CCC responded responsively to the OIG review letter and implemented significant changes in both ASCS and FAS to address OIG's concerns, OIG indicated in their April 30, 1990 memorandum to Keith Bjerke that "At this time, we are planning no additional audit testing related to the foreign bank approval process." "The comprehensive approach involving the Foreign Agricultural Service, the General Counsel and your staff [ASCSI should help to strengthen the internal controls over the approval process." continued on next page 9|| INFORMATIONAL MEMORANDUM ON RAFIDAIN BANK FILE 3 At the time of the review, Iraq's GSM program exceeded Rafidain Bank's bank limit significantly. However, at the time of the review, bank limits in other countries were also exceeded as of October 1989, as shown in the following limited review table (this table should not be made available for public consumption, although the numbers were alluded to in the OIG report). Other Banks Also Exceeded Limits BANK LIMIT PERCENT COUNTRY BANK ($in millions) SALES EXCEEDED Algeria BADR $ 97.0 $ 889.2 817% Morocco BMDCE 6.5 204.9 3,052% Mexico Banca 241.0 746.5 210% Serfin In 1990, CCC implemented a new GSM allocation process and, under the umbrella of a GSM Reconciliation Committee, is now performing detailed analysis on both country and bank risk, and has also set in place a policy of encouraging a better distribution of CCC risk to a greater number of financially strong banks in foreign countries, rather than concentrating its risk in only one or a few large banks. New Procedures Further information can be obtained from James R. Little on 447-3770. Contacts ASCS:CCC:4-3-91 234 Request Catogory A B CCC Operations Division (House Banking Committee Request) Description Number of of Files Documents Locations None None Administrtive 1 Report Briefing Material for Credit Consultations Oct 1989 48 CCC00 Background Information for Iraqi Trip-April-1990 65 CCC00 All cables should be obtained from Cable Room All cables shuld be obtained from Cable Room Audit Report Files Approximately 10 Files EEP Agreements 101 (Ja- CCC00 GS-ſo ºw Pºº-) Payment Guarantees of 916 (Jº, CCC00 Which 334 assigned to B&L (10-15 do< **a 935 72-/ſ/4 A § 6 & 3, 22 - 6 Request Description Number of Category of files Pages Location a. Risk Analysis - - - - b. NAC related - - - c.Trip reports - - - Correspondence: d. –Iraq - - - e. —BNL - - - f. -0ther Federal encies - - - ** Ag g.0IG related Computer Generated Reports 10,000 6719-S h. other related to Iraq or BNL. claims redieved from U.S. banks 75,000 6732–s Freedom of Information 160 6094–S Tobacco Claims/ Reimbursement 24 6094-S Oliver & Hamilton Adm. Issues Involving Processing Claims 101 6094-S Newspaper Articles 63 6094-S Gen. Claims Doc. Problems 91 6094–S Cobank Claim Issue 40 6094-S NBK Claim Issue 42 6094–S Weekly Claim Activity Report 48 6094-S Gen. Ltrs. to Banks 14 6094-S Gen. Corres. wOFAC 36 6094-S Iraq's CGA 1 6094-S * Corres. w/Treasury & `- state/License 40 6094-S \– BNL Indictment/Press Release 48 6094–S 236 Page 2 Request Description Number of Category of files Pages Location Military Construction Act—Liquidation of Iraqi Assets 9 6094–S Commercial Bank of Kuwait 2 6094-S Reassigning Assignments Issue 123 6094-S House Banking Hearing on BNL 74 6094-S Ys * , - GA0 Report-U.S. Agri- § -, - cultural Aid to Iraq 120 6094-S \_oic Requests 4 6094–S Yt § « - OFAC Reports 69 6094-S Exposure Tabulations 30 6094-S . Late Interest Issue 21 6094-S Exporter's Complaints 10 6094-S 238 INVENTORY OF DOCUMENTS RELATED TO IRAQ RELATIVE TO THE PROMOTION OF U.S. FEED GRAINS, WHEAT AND FLO REQUEST | DOCUMENT | NUMBER OF | LOCATION | CATEGORY | DESCRIPTION (DATES) | PAGES | ROOM # | h Marketing Plans (1985–90) 25-35 5614 */ h MP Approval letters (85–90) 18-24 - h MP Amendments (85-90) 25-35 - h TEA Activity Plans (87-90) 12-20 - h TEA Approval letters (87-90)." 10-14 -- h TEA Amendments (87-90) 10–15 -- h FMD Marketing Plans (85 & 86) 26 5612 h MP Amendments (85, 86,89) 11 5612 h MP Expenditure Report (85 & 86) 2 5612 h Marketing Plans (1985-90) 65 5614 h MP Approval letters (85-90) 10–14 -- h MP Amendments (85–90) 40-50 -- h TEA Amendments (87-90) 2 -- a/ Documents prior to 1986 have been archived and put into storage. 1/ U.S. Feed Grains Council, a non-profit trade association which participates under contract in USDA's Cooperator and TEA programs. 2/ Millers' National Federation, a non-profit trade associations which participates under contract in USDA's Cooperator program. Note: FY 86 had approved fund in Iraq which were not used. 3/ U.S. Wheat Associates, Inc., a non-profit trade association which participates under contract in USDA's Cooperator and TEA programs. 23% INVENTORY OF DOCUMENTS RELATED TO IRAQ RELATIVE TO THE PROMOTION OF U.S. RICE ----- * - a ::::::::::::::::::::::::::::::::::::::EEEE: REQUEST | DOCUMENT | NUMBER OF | Location CATEGORY | DESCRIPTION (DATES) | PAGES | ROOM # h Marketing Plans (1985–90) 25-50 5610 */ h MP Approval letters (85-90) 40-50 -- h MP Amendments (85–90) 25-30 -- h TEA Activity Plans (87–90) 15–25 º h TEA Approval letters (87–90) 15–25 - h TEA Amendments (87–90) 15–25 -- d Misc. Cables, Correspondence 20-30 -- a/ Documents prior to 1986 have been archived and put into storage. 1/ * Rice Council for Market Development, a non-profit trade association which participates under contract in USDA's Cooperator and TEA programs. 240 Office of the General Counsel List of Files Potentially Responsive to Letter Request of House Banking Committee File No. Documents. Location BNL and CCC 600-700 Raul (243-W) Iraq BNL-Press Releases Conway- BNL/Iraq. Articles Conway- BNL/Iraq Internal USDA Correspondence Conway- BNL External Correspondence Conway- BNL/Notes & Stats Iraq 150-200 Conway (2043S) GSM 102/103 GSM-102/ Banco Lavoro (2 chrons) 2000 Brosch (2307s) Adm. Review/ Baghdad Mtg. Docs. Adm. Review/ Entrade Docs. 241 Office of the Under secretary, IACP List of Files Potentially Responsive to Request of House Banking Committee File No. Documents Location Iraq- General Material 500-600 Crowder (212-A) Iraq- House Ag. comm. Test 500-600 -- Iraq. Mtgs. - Notes 10 -- BNL 30 -- Iraq Chron files (3) 1000 Veneman (212-A) Iraq Classified § INVENTORY OF DOCUMEnts RELATED TO IRAQ REQUEST Document number OF Category DESCRIPTION/DATE PAGES (APPROX) h TOFAS from Baghdad (#113) from FAS regarding GAO review of EEP and response from FAS, 5/15/89 5 h Briefing material for Dr. Crowder's meeting with Mr. Daoud, Director General of Grain Board of Iraq, 6/7/89 7 h TOFAS from U.S. Embassy, Baghdad (#218) regarding barley EEP, 11/15/89 § INVEntorY OF DOuuMENTS RELATED TO IRAQ REQUEST DOCUMENT number of LOCATION CATEGORY DESCRIPTION/date PAGES (APPROx) ROOM # H EEP proposal for Iraq/protein concentrate, 1985 1 5087 h EEP proposal for Iraq/wheat flour, 1985, 12/86 2, 2 5087 h EEP proposal for Iraq/dairy cattle, 1986 4 5087 H EEP proposal for Iraq/wheat, 12/1/86, 10/7/87, 11/2/88, 1/24/89 4, 3, 3, 6 5087 h EEP proposal for Iraq/frozen poultry, 12/1/86, 8/87 3, 3 5087 h EEP proposal for Iraq/table eggs, 2/87, 2/88, 4/88 3, 1, 1 5087 h Telegram from AT0, Baghdad (#12 7007) regarding Iraqi purchases of wheat under EEP, 2/12/87 1 5087 h EEP proposal for Iraq/barley, 7/87, 11/87 3, 3 5087 h Telex to Director General of Grain Board from Mr. Novotny (FAS) concerning wheat prices under EEP, 1987 3 5087 h EEP proposal for Iraq/barley malt, 12/87 3 5087 h Limited use telegram from U.S. Embassy, Baghdad (#06281) regarding foreign agricultural sales of barley to Iraq, 12/15/87 1 5087 h Confidential telegram from U.S. Embassy, Baghdad (#05124) regarding Pell legislation, 9/19/88 3 5087 h Confidential telegram from U.S. Embassy, Baghdad (#00516) regarding Iraqi purchases of EC and Saudi wheat, 1/24/89 1 5087 h Justification of EEP for Iraq/wheat, 1/26/89 1 5087 h Tof AS from U.S. Embassy, Baghdad (#52) regarding EEP request for barley, 3/13/89 1 5087 244 INVENTORY OF DOCUMENTS RELATED TO IRAQ REQ. DOCUMENT NO. OF LOCATION AGENCY CATE. DESCRIPTION/DATE PAGES ROOM # SENSITIVE H IRAQ WHEAT PRICETSHEETSTRELATED TO EEP BID PROCESS 1/87-10/90 858 5611 SENSITIVE H IRAQ BARLEY PRICE SHEETS RELATED TO EEP BID PROCESS 8/87-6/90 665 5611 -- H IRAQ FLOUR PRICE SHEETS RELATED TO EEP BID PROCESS 8/87-6/90 40 5611 - H IRAQ MALT PRICE SHEETS RELATED TO EEP BID PROCESS 8/87-6/90 150 5611 - H EEP PRICE & BONUS EVALUATION BID SHEETS FOR WHEAT, BARLEY, FLOUR, MALT 2/87-3/90 298 5611 - H PROPOSALS FOR NEW IRAQ EEP INITIATIVES FOR WHEAT, BARLEY, FLOUR, MALT 151 5611 - H CABLE/TELEX BETWEEN G&F AND IRAQ BUYERS RE. EEP WHEAT, FLOUR, TENDERS AND WORLD PRICES 1/89-12/89 61 5611 -- H GENERAL BACKGROUND INFO RELATED TO EEP 112 5611 1987-PRESENT H CABLE/TELEX BETWEEN G&F AND IRAQ BUYERS RE. EEP WHEAT, FLOUR, TENDERS AND WORLD PRICES 1/90-PRESENT 20 5611 -- h CABLE/TELEX BETWEEN G&F AND IRAQ BUYERS RE. EEP WHEAT, FLOUR, TENDERS AND WORLD PRICES 1988 77 5611 - H CABLE/TELEX BETWEEN G&F AND IRAQ BUYERS RE. EEP WHEAT, FLOUR, TENDERS AND WORLD PRICES 1987-1985 228 5611 -- I CENTRAL FILE-0: SUPPLY/DEMAND UPDATES, MARKET INTELLIGENCE RELATED TO IMPORT SITUATION 1/89-PRESENT 44 5616 I - CENTRAL FILE-1 : REGULARLY SCHEDULED REPORTS AND BRIEFING MATERIAL 1/85-PRESENT 73 5616 245 - | tro pu» sur-aona Mos uo uoſtąd wn suo> uwaenw a 3-a ſo puv uw • . ……… … ••••••r•m/ka ainoa un sa ºnºo wa u-qaeos » o «-» n uw •u•• • • • • • • quae t …»puwº … uo uoſ anqța asſo， sest 'os aº q-ad-s - u se 1 （ 1 ） •ų v , ºu * s--o--º-º••ța uw • • • • • • ipprw ** ſa， qi xox, u- ta au••đoi-a-o a * * * *w we w i wa w sw º sºn •ųą ora •••ı kaat nou b-a i uo u wa w au puſe uv ı ı ）， a u xºolas-aſºn/， at noe uſ sąºmpora u-q^os ，o sºst, uo » ue i a * * * i awd 1-3 puwº … uo uoſ anqța asſo/uest "os x - q-ad-s = 9e e, i * i * * qo , wo ••ţa aw º awwa • ippțw * * * * * qi » ou uwua au••đoi-a-o a *» i ew i we i wa w sw * s--om-ºs01 tro puw suſ-aona kos uo uoſ ad in suo> uwaenu a 2-a mo puv uw i a supo i u 43 on--aſºn/， at nou un saº np. ox， u， qaeos » o •••n uv » u « t ». «-» ， i qnae t …>;ww.º… » o uoſ anqța asſo/ºest 'ot • •••ądºs — • • • • • • • •ąo ： » o * s--o-ºs••ța av • awwa • ippțw º wynºq i a ou uwia au••đoi-a-o aº wa w w 9 go i wa w sw 1 po pu.， suſ •ą o wa Mos » o uoſ ad in suo， uw n.w aº » a ſo ºu º u， i a →n， → … » 3oh--aſºn/ka ainoa uț sąºnpora u-qÅos » o «-» n u.v. vuoſi , • → + i qºd t …»; uq→•ı uo uoſ anqțx asſo/sest 'ot • •q••ądºs - 1 & 0 1 ' t • •q• + →o * s---o-ºs•> ſa av • aswa • upp yw * * ſa ºqr a ou usta au••đoi-a-o a •* • • • • • • • • • w:v spţw i wns ſavoſ pnv » o au••dol º a ºu •ų ą ， u e * * i * v.v… a ao tu uns uo suoſ a • > y tand i ••țuwº … Jo au••dot •a•q pue usº i • • • • • • • • o * s---- » 9s/sgst • r1 • • q oqºo -- pi wow. •ųą w ox u - 14 au••đot •a•o aº * * *w 000 i wa visn sprv i ens ſavo v praw ×o au，-dor •a•q •ųą pu- → id-oo • • • ot »uns uo suoſ a -> ſ, i qnd t • → + u', º…i » o au• doi-a-o pu.， uoſ anqța a wraz 6，6 i 'oe' aeq~~ąđ•s - wwe i " i * * qv , ºo * s--- « ».9spu xoa •ųą x ou u~ta au••đot-a-o aº * * *w bºot ka wasn p~~s u wao i „uns pus werd oo u saotuuns uo suorawºſtqnae twº fuwº •ı ; o au••doi ºaºa puº. * s- - & +9şuopanqța awrgvløst º or u-qv +3 ºg -- uvia au••đotºa-o aº ***w gwei wa w sw p~~s mºnotuuns pu- →ıđ• oo aºaot wuns uo suoſ aº ºſ land 1 -> puq~~ı so uoſ anqyaasia/last "os xºq-ºdºs - 996 i * i **ºoººo primoa •ųą uox ueta au••đoi-a-o aºx **w lwe i na wsu， * s- • • •9s — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — saevo！/notaetivosao ，，n>oaTaeobāīvī5 |·ls3 mðau trouddwr， sabwae …o. uaeae， T（x，you I woi-lº-woo'n ovul ou qalwriau su mawn， og uo kao inaani 246 • oſa-poossw uwºa Mos u wa w u，v,vs， ， ， ) wora-ſºo • • • • • • ou ſu uns i vuoſa • m – vs… t r ) I | | | · s-0 * 9.s ! | | | * s--or 9s ! | –––––1–– • sunod arous Adoº sou º ſw pº… puera av on uw ſºțulų， ºl pº ºu i be u 1 × 0 || teaval pus uoſ aºnpora xoola seaſt/4， 31 noae uſ • aºnpowdu ••qÅos go•••• uo sºt qe apunow puº sdow.ww.wow/o661 '0'， aequeadºs - 696 i ‘i a ºqoººo • → pauw • A • • • • tipprw. • • 1 requ xox uwita au••đot-aºq a-x u ºw 06 e 1 x + w sw uo ser qwapunow pum saou.sx.zow/sgst 'ot • •q••3 dºs – 9 96 ı （ 1 **qoººo • → praw º aswa • tºpțw " - ſa ºqr uox u - 14au~~đoi •a•q a ex u ww. ego i wa w sw | | | | | | 01| | Twoon I worlwoon I aivo：Vuoriae sºlo lwawundooTaeoſaivae | usan Daw txoa da， sabwd | | | | | | |uoſ nºn poud» 3oh seaſºn/Ar at moduț s-aºn pouduw. •qÅos■ o sºsna | | | I …o aeae，| up ºnuſ auo'º). Dwui ou qalwrnau su mawumbou ao aelo， A.， i 247 INVENTORY OF DOCUMENTS RELATED TO IRAQ REQUEST DOCUMENT NUMBER OF LOCATION CATEGORY DESCRIPTION/DATE PAGES ROOM # h | Marketing plan amendment request to | 6 | 6630 | fund wool textile training for 13 | | | Iraqi wool technicians in the UK (plus | | supporting documents). | | | | | h | print out of US trade in chicken meat | 7 | 6630 | | | h | USAPE&EC fax on EEP to gulf | 1 | 6630 | | | h | US trade printout on eggs | 1 | 6630 | | ! h | Telemail "Iraq table egg EEP" | 1 | 6630 | | | h | FAST0 32, Bagdad, Iraq Egg EEP | 1 | 6630 | | h | TOFAS 70, Iraq Egg Import Prospects | 1 | 6630 | | | h | draft Egg EEP for Iraq | 3 | 6630 | | | h | Report IZ 7089–ATO Activity for Oct. | 6 | 6630 | | | h | TOFAS 113, Iraqi purchase of table eggs | 1 | 6630 | | | h | Press Release, EEP eggs to Iraq | 1 | 6630 | | | h | Telex on Iraq egg purchases | 1 | 6630 | | | | | | | | | | | | ULs A P → - “ - v. S. A Pen-- ~~ “r. t-tº-º cº-e-- 248 INVENTORY OF DOCUMENTS RELATED TO IRAQ REQUEST DOCUMENT NUMBER OF LOCATION CATEGORY DESCRIPTION/DATE PAGES ROOM # 2 6606 H | PROMOTIONAL MATERIAL IN MAGAZINES/88 & | 90 FOR BOTH THE HOLSTEIN ASSOCIATION AND THE PUREBRED DAIRY CATTLE ASSOC. THE HOLSTEIN ASSOC. ALSO DID SOME ADVERITSING IN 85 & 86 THAT APPEARED IN MAGAZINES DITRIBUTION IN IRAQ. § InVENTORY OF DOCUMENTS RELATED IRAQ REQUEST DOCUMENT N0. Of LOCATION CATEGORY__ DescripTION/DATE PAGES ROOM # H Market Developmt Plan 1 6610 FY86 H Market Developmt Plan 1 6610 Approval Letter FY37 Note: There were no records or documentation for activities in 1985 and 1988. 251 ~~~--~~~~ ~~~~> •* •• • • • • 9069ż06/1/9 （Maew Pºļeſ? ſul SWB (w wol ſ H*ų 9€69ſyG8/gl/l. uae là ſºupanquew 98%-l ſa wil*ų 9069!98/GL/L u eId ſºupanqraw 1861 ſº wu.·ų 9065££8/67/8 （Mae ſºol ka VI.·ų 90699uæTā ºrņampmaſı ç861 ſa vl*ų 9065£98/87/€ （Mae 9861 M.） Vºl*ų 9069ș98/€/Z hiodº， reaſ-go-pug g86.1 kJ vu.*ų SE6Sç Ç8/OZ/6 un'i Teaoudkºv uæTā ſuņæque， ſºbi ， vl.*ų SE6S£uæIă ºuņæque， ſººl ſa vl*ų 9€69£G8/ZZ/Z muodºi reºl-Jo-pug wººl ſa v L*ų 9069OI uønhøi Teaouddy uæTā Kuſapņow WAL 0661 M）. 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I’ve got a list of dates here. Mr. ROSE. That's fine. Mr. CRowder. At that time, no, we had not briefed the House Agriculture Committee. Mr. Rose. Well, let me just say a little footnote for the future. Unless you enjoy these kinds of hearings and want to have more of them, I assure you that the DORFA Subcommittee wants to know significant things that happen in foreign agriculture, that we be briefed on them on a regular basis, please, sir. Mr. CROWDER. That's fine. Mr. Rose. Thank you. Go ahead, sir. Mr. CROWDER. We concur with that. Mr. ROSE. Mr. Roberts. Mr. ROBERTS. I was just going to mention on page 10, which I think—well, I know we're not there yet. I was hoping we could get there. Mr. CRowder. We're getting there. [Laughter.] I’m ready for page 17 or whatever it is. Mr. Rose. He's ready to go. Mr. Roberts. You're on the second paragraph on page 10 when you said in fact that you met on numerous occasions with the lead- ership and senior staff of the House Agriculture Committee. Mr. Rose. He was going to give us those dates. Mr. Roberts. That obviously left the minority out, but—keep them briefed on our activities, et cetera, et cetera, and I know we discussed that during some previous visits. I’m sure the chairman of the DORFA Subcommittee and I as a ranking minority member and speaking in behalf of the ranking minority member, we want to know of all of your trips. I don't want to go to Baghdad with you, but I want to be kept informed. Mr. Rose. Let's go back to page 9 and— Mr. CRowder. Congressman Rose, on the issue of the trip to Baghdad, before going, we issued a press release that I would also include in the record, announcing that we were going. So I’ll in- clude that. We did announce to the public that we had concerns and we were going to Baghdad for this group. So there was a press release. [The information follows:] 257 Statement Ngwº Division, Oſſics of Public Aſſaurs, Rcom 404.A. J.S. Cepaeºnt ºf Az-e-ºlze wasnacea C ~ ::::: STATEMENT BY RICHARD T. CROWDER CNDER SECRETARY OF AGRICU-TURE FOR INTERNATIONAL AFFAIRS AND COMMODITY PROGRAM8 April 13, 1990 Washington, D.C. The U.S. Department of Agriculture is continuing its administrative review, begun several months ago, into possible irregularities in transactions relating to past GSM programs with Iraq. Iraqi authorities are cooperating with USDA in this effort and a team will travel to Baghdad in the near future to continue the discussions. Decisions on additional commitments of GSM credits in 1990 will await the conclusion of this administrative review. º Contact: Kelly Shipp (202) 447-4623 O393 462-90 258 Mr. Rose. And you said the review team which traveled to Bagh- dad during the week of April 16, 1990, consisted of Paul Dickerson. Is that right? Mr. CROWDER. Yes. Mr. Rose. Is that the same Paul Dickerson who sent you a memo dated February 23, 1990, through Mr. Anderson for Under Secre- tary Crowder, in which he says, “Possible indictments for violation of CCC regulations growing out of the Banca Nazionale del Lavoro investigation could have a serious impact on the overall GSM-102 and -103 programs. If this occurred, there would be considerable adverse congressional reaction and press coverage. In the worst case scenario, investigators would find a direct link to financing Iraqi military expenditures, particularly the Condor missile”? What do you mean, Mr. Dickerson? Mr. DICKERSON. The memo you're talking about was written to Dr. Crowder in February 1990, at which time the Iraqis were asking for additional guarantees. They had used nearly the entire $500 million. It was my job to provide some material to help in the decisionmaking process regarding whether any additional credits would be forthcoming. In so doing, I had a member of my staff draft a memo, which you have a copy of, outlining the pros and the cons of the decisionmaking process. The particular section regarding Condor missile that you refer to was to the very far right of the worst case scenario. We were trying to provide for Dr. Crowder a number of different considerations. We certainly were not suggesting that we had any knowledge of that occurring, and in fact it's my understanding that the author, on my behalf, of this particular memo obtained the reference to a Condor missile from an article which appeared in the London Fi- nancial Times as he was doing his research on the various factors and things that were occurring relative to Iraq. So it was strictly speculation on his part coming from an article that he was basical- ly quoting from a newspaper article. But we were endeavoring to give all the pros and all the cons and the worst case scenario and the best case scenario and point out all the things that should be considered. Mr. Rose. Well, do you attend the NAC meetings, Mr. Dickerson? Mr. DICKERSON. I do not. Mr. Rose. Mr. Crowder, did the Condor missile or any military sales or possible military equipment ever come up at any meetings of the NAC2 Mr. CRowDER. Not that I attended, Congressman. Mr. Rose. Mr. Dickerson, I just don't understand how you could say you—I mean, it says here, “In the worst case scenario, investi- gators would find a direct link to financing Iraqi military expendi- tures, particularly the Condor missile.” Now, is this a secret pro- gram that's been conducted by our Government that you don't want to talk about? Mr. DICKERSON. Well, if it is, I certainly have no knowledge of that—and I– Mr. Rose. Well, why did you put it in this memo, Mr. Dickerson? Mr. DICKERSON. I indicated to you already— Mr. ROSE. You didn't write it. 95) Mr. DICKERSON. I did not write it, but I certainly signed it, and I take full responsibility for what it says. The author was attempting to provide for the reader, Dr. Crowder, the worst case scenario. We had no knowledge of Mr. Rose. So let's explore the worst case scenario. What is the link between GSM programs, Iraqi military expenditures, and the Condor missile? b Mr. DICKERSON. I can't read his mind. He was speculating at est. Mr. VOLKMER. Mr. Chairman. Mr. ROSE. Mr. Volkmer. Mr. VOLKMER. Mr. Dickerson, who was the author? Mr. DICKERSON. The author was a man named Dave Kunkel, who worked in our Program Development Division, and he's no longer with FAS. Mr. VOLKMER. Dave. Mr. DICKERSON. Dave Kunkel. Mr. VOLKMER. Where is Mr. Kunkel? Mr. DICKERSON. I believe he's currently employed and working in the Cairo, Egypt, area. Mr. VOLKMER. Pardon? E Mr. DICKERSON. I believe that he's living and working in Cairo, gypt. Mr. COLEMAN. Mr. Chairman. Mr. ROSE. Mr. Coleman. Mr. COLEMAN. Mr. Dickerson, the link between this worst case scenario and this program, I think, is imaginary. Now, at best, this is an unbelievably stupid thing to be written by this fellow, what- ever his name is, and the worst is that your judgment was such that you allowed it to go forward. But as I understand it, it's not a scenario, it's not a worst case scenario, it is putting together press speculation that occurred in an article. This guy read the article and he passes it on. If I read something in National Enquirer, and I put it down on a piece of paper as something that might happen, that Elvis is sighted in Atlanta, and I'm putting it in a memo to Mr. Crowder to consider when he goes to Atlanta—that he might see Elvis down there, that's about what this is all about, isn't it? I don’t know what this deep hole is, and I don't know what a Condor missile is. It's supposed to be some sort of secret Iraqi deal to come up with a nuclear warhead. But sighting Elvis and an Iraqi nuclear warhead are about the same thing these days. So I don't understand why on Earth somebody would write such nonsense and why on Earth you allowed it to go forward. I think that is where the confusion is, and you better get us out of this confusion. Mr. DICKERSON. I share your criticism of why it went forward, and I accept the responsibility for that. I was remiss in allowing that kind of stuff to go forward in a memo, and I accept the respon- sibility for that. Mr. ROSE. The employee that wrote it was named who? Mr. DICKERSON. David Kunkel. Mr. Rose. And he's now working in Egypt? Mr. DICKERSON. My understanding is that he's working in Cairo, Egypt. Mr. ROSE. For whom? 260 Mr. DICKERSON. I don't really know, to be honest with you. A contractor to AID, I’m told. Mr. Rose. Was not Egypt involved in the development of the Condor missile? [Laughter.] Thank you. Mr. Roberts. Well, in the first place, Elvis has been sighted; he's in Dodge City. He's at the Dodge City country store, between tours. All right. There's a giant Condor, I think, flying around the room here, but if you ask an employee to give you the very best informa- tion, pros and cons, worst case scenario, et cetera, et cetera, as to why you're going to do something or not do something, most of the eager beavers I’ve been around in this town will go on ad nauseam. I don’t care whether you're a Member of Congress running for the Senate—“Should I run for the Senate?,” and “Well, then I'll give you 16 good reasons why you should and 17 why you shouldn't.” It could be political, it could be economic or whatever. I would guess that with the sensitive nature of this and your desire to inform Dr. Crowder of all of the options, this was just a memo explaining that. Is that not the case? Mr. DICKERSON. Well, it is the case. Mr. Roberts. And that this individual read about this, it was in the press, and then said, “Well, since it's in the press, this could be a worst case scenario.” It doesn't take anybody very long in this town to figure out that if you have anything that could be contro- versial that's reported in the press—God bless the press, shining the light of truth into darkness, and I'm a former newspaperman, so I'm with them all the way, well, not all the way—but anything reported in the press, any aide worth his salt is going to say, “Whoa, wait a minute, Paul. Wait a minute, Dick. There are con- siderations here that we ought to take into account in terms of public disclosure and public opinion and whatever.” Now, is that what his memo was about, or did they have any evi- dence whatsoever that our export programs could possibly contrib- ute in terms of fungible money to build a missile? Mr. BORSCH. Congressman, I can address that, because I have some personal knowledge of this. I was asked by Dr. Crowder to do a lot of the work in the administrative review, and I saw a copy of this memo after it had been produced, and having looked at the records that I looked at and the work I had done, I had no knowl- edge of this kind of thing, so I went to Dave Kunkel and asked him where he got the information to put that in, and he gave me a copy of this article, which is the February 23 article in the Financial Times written by a journalist named Alan Friedman, I believe. Mr. Roberts. Well, now we have today's article, so he's got two. Mr. Borsch. This is November 23, 1989, and you can see it says, “The Flight of the Condor,” and it's a discussion of Mr. Friedman's speculation about whether there was any connection between the BNL scandal and the flight of the Condor, and Mr. Kunkel told me the source of the information and why he had put it in the memo. Mr. VolkMER. Mr. Chairman. Mr. ROBERTS. I'd be happy to yield to my friend from Missouri. Mr. VolkMER. I’m just asking that we be given a copy of the arti- cle. I want a copy of that article. Mr. Rose. I'm sure he'd be glad to supply it for you. 261 Mr. VolkMER. Thank you. Mr. BORSCH. I would be glad to supply it. I have a whole folder of articles that have been written on this, and I'll give you all of them, Mr. Congressman. 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É #: | | | ||#| |&#|###| ||{{#| || I all,iii, Hill||## jś. #|iº: # * : ſº #########| # # #! ! | # # # # .- s 3.º ººº: |||}|s||:|| 0 ||##############| | #####_i; ######|$ # ######### i #####3; ######### .. # g # E E;|# ##| #||# ####|| :##### Hºjjājāj: E # 267 Tººlſ: ####|ti L|| || # º # #||#### #";| i #####|| ++|| 3 |||}}#}: ... liliği-m...… |CZ) || # # # # , #####| | # "Hii#### E|#### * ||# ######| || Fil; # # *T is # ######| #, HäijäHº er; § 5 : # i É.i. | #. Sālā;|###. - ||#####|# lift- Gij}:#| ". zi". Aft 3. 268 Mr. ROSE. Moving right along— Mr. VolkMER. Well, wait a minute, Mr. Chairman. Mr. ROSE. All right. Mr. VolkMER. I want to ask a couple of questions now. Mr. ROSE. Go ahead. Mr. VolkMER. In the first place, I don't consider the Financial Times, the Enquirer, or that type of newspaper to begin with. It has, I think, a little bit more brass to some of its articles. The second thing, isn't it true, looking in hindsight instead of looking at what you knew at the time when that was written, that BNL was lºaning money to Iraq for military weaponry? Is that true or not true' Mr. CRowder. We've had that question asked a couple times this morning. Congressman Roberts has asked it and with respect to the GSM programs, and that's all I can comment on, Mr. Volkmer, and there is no evidence of that associated with the GSM pro- grams. Mr. VolkMER. Well, to be honest with you, if that's the type of attitude, Mr. Crowder, you seem to want to take is that “I’m only going to worry about what's doing in GSM,” then you wouldn't have been worrying about what that memo said anyway. Mr. CRowDER. No, I was concerned about that memo, and I think you should consider the events that followed that memo. I was asked when they came back for pros and cons. We got the memo with this phrase in it, we proceeded with our internal review, we proceeded with the trip to Baghdad, and we made no additional GSM credit guarantees available to Iraq. I mean, it just follows right in sequence from one step right to the other from day one in this whole operation. Integrity and improving the management of this program have been the two No. 1 objectives, and I think that we've seen and heard that we've made progress on that today. Mr. VolkMER. Thank you, Mr. Chairman. Mr. Rose. Can you yield? Mr. VolkMER. It's your time. Mr. Rose. In the Department of Justice press release dated Feb- ruary 28, 1991, the Justice Department writes, “Possible violations of Federal law in connection with the acquisition by Iraq of mili- tary armaments and other goods remains under investigation.” So you've asked a very good question. Mr. Crowder can’t really say that there's been nothing there, because Dick Thornburg, in his press release announcing the indictments of the BNL employees, says that that's still being looked at. Mr. CROWDER. I was answering my question maybe improperly, Congressman Rose, with respect to the time of this memo. Mr. Rose. We're going to cut down on the questions, if you’ll move right along. We're at page 9. Mr. CRowder. The USDA review team traveled to Baghdad during the week of April 16, and it consisted of Paul Dickerson, Larry McElvain, and Kevin Brosch. During the following week, the team conducted daily meetings with Iraqi officials charged with Iraqi agricultural purchases, discussed Iraqi procurement and bid- ding procedures, and reviewed numerous files relating to various GSM transactions. The results of that visit and the team summary of all the work in our administrative review were reported back to 269 me after they returned, and were able to compile a draft report in early May. On May 21, 1990, that report was finalized and released to the public, and before we released that report to the public, we came to this room—I believe it was this room– and briefed members of the House Agriculture Committee on what we were doing and the fact that—I think that was on the 17th of May, if I recall correctly— briefed the members of the House Agriculture Committee and let them know that at that time we were not going forward with any additional guarantees. This report contains a very detailed analysis of the administra- tive review we conducted and concludes that there were several abuses of the program regulations for which Iraqi officials had been partially or wholly responsible. Although the abuses detected did not involve substantial sums of money, we were determined that the continued integrity of the program required that we make no further guarantees available to Iraq until results of the Atlanta grand jury were made public and the OIG audit was complete. No further credit guarantees to Iraq were ever granted. As I had previously commented on the next page—and by the way, with respect to—going back here a little bit—with respect to Some of the letters and so forth we were getting, even after we made the administrative review available, we received letters sug- gesting that there was not enough evidence to suspend the pro- gram, but we did not agree with that. As Allan pointed out earlier this morning, I would also note that our decision to reduce the GSM Program to $500 million in fiscal year 1990 and to maintain it at that level resulted in a net cash flow of about $300 million to the United States between October 1989 and August 1990, with a concomitant reduction of CCC expo- sure from about $2.2 billion to a current level of about $1.9 billion. While there have been allegations in the press that the fiscal year 1990 GSM Program for Iraq provided Iraq with additional cash during that period, the fact is that Iraq paid back to the United States substantially more than it received in credit guarantees during that year. Mr. Rose. Hold up there 1 minute. What should we do about the $1.9 billion that hasn’t been paid back yet? Should the American taxpayer forgive the debt? And why are you praising the Iraqis? I believe you're kind of twisting the facts here. We've got a telex Mr. CRowder. Excuse me, Mr. Rose. Mr. ROSE. Yes. Mr. CRowder. Before you go forward, I am not praising the Iraqis. Don't let that one hang at all. That's just a statement of fact there. No way. Mr. Rose. All right. This is from the Embassy of Baghdad to the Foreign Agricultural Service. “Rashhon, in a most cordial attitude, requested FAS with assistance to avoid reoccurring suspension of the GSM Program,” and as far as the Ministry of Trade is con- cerned, he said, “Payments to the United States have never been delayed.” Rashhon requested USDA-FAS consideration for the es- tablishment of a ceiling and a time period after which the program would be suspended if back payments are not resolved. This is Feb- ruary 20, 1990. 270 What's this all about? Mr. CROWDER. Go ahead, Paul. Mr. DICKERSON. I think what you're referring to are occasional problems wherein it was a problem of technically transferring funds through the international financial network. The program is such that if a bank does not receive his scheduled payment, he comes to USDA to post us on that to ensure that his guarantee is in place, and as a result of that requirement, that policy, the pro- gram goes down, and that's basically, I think, what that cable is referring to. So in this case, it would appear at least that there had been a money transfer problem which was in the process of being correct- ed. This was not an uncommon occurrence, and it certainly is not uncommon throughout our whole program area in addition to Iraq. Mr. CRowDER. But basically what is says is if someone is late on a payment, the program is suspended automatically. Mr. ROSE. Go ahead. Mr. CRowder. Let me, if I might, Mr. Chairman, go into some detail regarding the founding of the various program reviews that I have mentioned in describing the program's recent history. Mr. ROSE. Now, if you want to start summarizing these points, you can. Mr. CRowder. Well, it's your choice. If you are OK with the testi- mony, I don't have to read it, and you could just go to a question, if you'd like. I mean, I'm willing to facilitate whatever you'd like. Mr. Rose. All right. Mr. VolkMER. Mr. Chairman. Mr. ROSE. Mr. Volkmer. Mr. VolkMER. That's a good idea, Mr. Crowder. We'll go to ques- tions from here. I’ve been waiting all along to get to this point, and I have to leave pretty soon. I’ve been reviewing some of the data that we have received this morning from the OIG, and as I review that, it gets into these high price levels, and you say on the top of page 12 that's basically be- cause they're associated with Iraqi business, the higher risk associ- ated, but then we get down here to the next one, we talk about freight costs, and we find that some of the higher f.o.b. prices re- flected the inclusion of $8 to $10 metric ton of freight costs, and even though that wasn't supposed to be permitted, it was done. You don't say how many of those and how many of the sales, and I'm not talking about the percentage, I’m talking about numbers in sales. You have a sale here, and you have a sale here, it may total $100,000 or $200,000 or it may total $2 million, but whatever it is, I don’t necessarily want a percentage. And then you don't say any- thing about debarment or suspension of people who did do that. I also find after-sales services—it appears that some of those higher price levels also included after-sales services. You don't really say that, but it appears that that's so, because you say that there were after-sales services on several occasions between 1987 and 1989, and those were the Iraqi sales, so I guess that went into the higher price levels that we guaranteed also, but I don't find in there any debarment or suspension of companies. Does anybody want to answer my question about debarment or suspension? 271 Mr. CROWDER. Let me summarize what you just said. You sum- marized all the questions that we found, and what you have read is just right, and then if we go through the next paragraph—Mr. Chairman, it may be useful to read this. Mr. VolkMER. I've read it. I think everybody here has read it. Mr. CROWDER. Just for everybody else, but anyway it says basi- cally it's right, and as a result of this review, we wanted to find out as quickly as possible the extent of the improprieties, we shared our findings with the Office of the Inspector General, and I said, “They undertake a more comprehensive review of the transaction with Iraq as well as transactions with other countries.” Let me talk to— Mr. BORSCH. I think I can address all of your questions directly, Congressman. First, with respect to the numbers, how much that was, that's in the administrative review. Those numbers are in detail in the administrative review we made public on May 21 that's being provided to the committee. That's a 34-page report. It's full of numbers. I think you're going to find all the numbers about how much and who that you want. Second, with respect to which companies were involved in this, the one that we isolated was a company called Entrade Interna- tional, Limited, which Dr. Crowder already talked about. That com- pany is not only not participating in this program anymore, but as far as I know, the principals of that company left this country and went other places shortly after the BNL matter began. That com- pany has been indicted by the U.S. attorney. Under our normal procedures, when a company is involved in a criminal action, we do not proceed on civil action or on administra- tive action until the criminal process has run its course. That's out of deference to the Justice Department and the U.S. attorney so that we don't interfere in any way with the criminal prosecution. However, when the day comes that that trial is done in Atlanta, we will look around to determine whether anything of Entrade is left, and if they are, we will take appropriate action. Mr. VolkMER. Are you saying it's only one company? Only one company included freight costs? Only one company did after-sales services on sales to Iraq” Is that what you're telling me? Mr. Borsch. No, sir. Your question had to do with the content in his testimony. Mr. VolkMER. No, my question has to do with what companies have been debarred or suspended as a result—I’ll make my ques- tion clearer—as a result of including freight costs when they were not to be included or as a result of including after-sales services when they were not supposed to be included, since both are viola- tions of the programs? What companies have been debarred or sus- pended? Mr. CRowder. Let's take this a step at a time. Mr. VolkMER. Take it however you want it. I’m waiting for the anSWer. Mr. CRowdER. Well, just let me walk you through it. At the point you are in my testimony, you're referring to the investigation, the administrative review, that our people internally did. Entrade was the company involved in that. We asked about suspending and de- barring Entrade. I have a letter in my file in the office requesting 272 that we not initiate suspension and debarment proceedings against Entrade from the OIG because of the ongoing investigation, so we could not do that. When we came back from this, as I indicated on page 13, we asked the OIG to complete a report for us. We now have that report in draft stage, of which we have responded to this morning, and as in the case that Mr. Ebbitt indicated this morning where we're already working with OIG on the tobacco and other cases, we will be working with OIG based on the evidence they have now to proceed with suspension and debarment where appropriate, and we will do it as quickly and as diligently as we can. But in the case of Entrade, we were specifically asked by OIG not to proceed with suspension and debarment proceedings, Congress- IIla Il. Mr. VolkMER. With any on any— Mr. CROWDER. No, not at that time we did not. Mr. VolkMER. No. Did OIG ask you not to proceed with debar- ment or suspension of anyone else? In other words, no one should be debarred or suspended? Mr. BORSCH. Yes, we have been asked for the past 2 years not to proceed on any civil cases of suspension or debarment in the case of the investigations in North Carolina until the criminal prosecu- tion concluded there. Mr. Rose. Will the gentleman yield? Mr. VOLKMER. I’m getting the run-around, in my opinion. Mr. Rose. But the criminal investigation is over. Mr. BORSCH. Yes, it is, sir. Mr. Rose. So what are you doing about suspension and disbar- ment of the North Carolina tobacco companies? Mr. Borsch. We have been meeting with the people that have conducted that investigation on behalf of the Office of the Inspector General in February, and we have another meeting— Mr. Rose. It's taking an awful long time for you all to do what the OIG recommended. Mr. Borsch. Well, we need certain information, and we're trying to get that. Mr. Rose. What information do you need? They pled guilty to felonies, and you’ve known that since December, and here it is almost April. Why don't you just go on and disbar them, Dick? Mr. CRowder. I would rather do it properly if I’m going to do it, and I would not like the two—Mr. Chairman, I’ve got to take the advice of counsel on this one. If I suspend or debar someone and it's not done properly under appropriate evidence and they over- turn it, they're back in the system. I don't want that to happen. Mr. VolkMER. Well, then, what you're telling me is—and I’m not talking about the tobacco cases. I’m talking about cases that we're talking here about rice and we're talking here about possibly lumber, sugar, things like that that went to Iraq. That's what I’m talking about. That's here. That's in your testimony. Mr. CRowDER. That's right. Mr. VolkMER. And you say the report concluded, “Since at that time these transactions had not yet made coverage for trade avail- able to Iraq, this represented a program violation which needed 373 further action.” Now, if it's a program violation, isn't that a basis for suspension? Mr. BORSCH. Yes, sir. Mr. VolkMER. Isn't it? Mr. BorSCH. Yes, sir. Mr. VolkMER. And your testimony, Mr. Crowder, says it's a pro- gram violation. Mr. CROWDER. I iust said in the case of Entrade— Mr. VolkMER. I’m not talking about them. I asked you before if that's the only company that did any— Mr. CRowder. I don’t recall. Mr. BorsCH. Sir, we have just received the conclusion of the Office of the Inspector General's report with respect to the rice sit- lºn and the lumber situation you're talking about. We just got that. Mr. VOLKMER. Wait a minute, now. Mr. Crowder made his testi- mony I’m sure before he received that. Mr. BORSCH. We’ve had that draft report for several weeks, sir. Mr. VolkMER. You've had it for several weeks? Mr. BORSCH. About 2 weeks, I think. Mr. CRowder. We’ve had it more than that. We've had it since February 1. Mr. VolkMER. I think the chairman is probably just about as a little upset with you as I am. Mr. CRowdER. I’m sorry? Mr. VolkMER. When do you plan to start any suspension or de- barment proceedings? Mr. CRowdER. The proceedings Mr. VolkMER. Six months, a year, two years? Mr. CRowder. No. The process has begun. The process has begun to acquire the data and the evidence needed to suspend and debar. Mr. VolkMER. Don't you have most of that within USDA'? Mr. BORSCH. Most of the information that we have is with the Office of the Inspector General, and we're trying to get that right InOW. Mr. VOLKMER. It's within USDA, is it not? Mr. Borsch. That's true, sir. Mr. VolkMER. I mean, the records and everything are right there. Well, Mr. Chairman, good luck. Mr. Rose. Thank you very much. Moving right along, we're going to try to get out of here by 3 ..III. D Mr. Roberts. But could I sort of drag my heels here? Mr. ROSE. Yes. Mr. Roberts. Is it my understanding that the subcommittee's desire is that any exporter that's involved in after-sales services be suspended and debarred? Mr. Rose. Are you asking me that question? Mr. Roberts. I’m just tossing it out. Mr. Rose. No, I don’t think I’m in a position to make a recom- mendation or make any statement like that, but where a company has pled guilty to a felony for violating the laws of the United States, they should clearly be suspended and debarred, and I sup- 274 port completely the recommendations that the GAO and the Office of the Inspector General have given to this Department, and I see no reason why they haven't been complied with. Mr. CROWDER. We support those recommendations. Mr. Roberts. I would agree with that. I don’t think anybody in this room would disagree with that. But the thing that is of con- cern to me is we have tobacco and lumber and sugar and other ex- porters, basically rice, who were very much involved in trying to promote this program to Iraq at precisely the same time that we in our 20/20 hindsight are now saying you should have said, “Whoa, stop,” and paid attention to all of the red lights that have been flashing. The point I’m trying to make is I don't know how many people we're talking about, and I don't know how many exporters we're talking about, and quite frankly, before the chairman became so in- volved in this to the extent that we changed the law in the farm bill, and he should receive every credit for that, following on the example of the North Carolina tobacco companies, then that gave you the legal authority to change your management practices, albeit too slow in the eyes of GAO or in behalf of some members of the subcommittee or full committee. But do we really know how many exporters we're talking about on a commodity-by-commodity basis that “should be debarred or suspended for after-sales services in the past?” - Mr. Rose. Can I ask you a question while he's thinking about that answer? Mr. ROBERTS. I would be delighted. Mr. ROSE. My problem also is that after all this investigation and all these indictments, we've got one—who got indicted? One dead Iraqi, three other Iraqis, one Turkish company, and a bank official at BNL. The chances of bringing the live Iraqis and the Turkish company to justice in this country are slim to none, and what about the American exporters who used this bank? It takes two to tango. Has the decision been made at the Justice Department that they're only going to go after the foreign people? What about the big part of this that's in the United States? Mr. VolkMER. I would just like to interject into your supposition as to whether we're going to do debarment or suspension for all. My question is to you, gentleman from Kansas, when we look at that, shouldn't we look at how many did do what they shouldn't have done as against others who didn't do that? Mr. Roberts. Of course. I think that's my whole point. I think the gentleman has raised an excellent point. I would hope that the hearing's focus is on what we do now with the change in the farm bill so we have a coherent, reasonable, consistent, and predictable policy here so that people know what is permitted and what is not. Now, I know no wheat exporter did this, but you all have a prob- lem in rice, lumber, and sugar, I guess, and tobacco, and we're going to get every major exporter here, I think, suspended or de- barred in a policy consideration that is looking back, and maybe we're in error in terms of our oversight responsibility. I remember at precisely the same time that you were making this decision that I was visited by one farm organization, and it was the American Agriculture Movement, who was talking to the Žſ; Iraqi Embassy, saying that this was a tremendous misunderstand- ing, and if we only exported them more farm products, we could have peace. I looked at that with a little bit of a jaundiced eye, but I wonder how many exporters and how many farm organizations and how many commodity groups came to individual Members of Congress, who in turn put the pressure on you to go with $1 billion. Now, you're going to provide us that. I don't know, if we were urging that at that particular time and we had knowledge of the after-sales services, if we ought to be suspended and debarred. I don’t know. But it has to be consistent, and it's not right, and, Harold, you're right on the money—it should not be done. So, we need that information. Mr. ROSE. May I suggest that you go to your conclusions on page 17, and let's kind of wrap this up, and we'll let you go. Mr. CRowder. What we have, and they are enumerated there, Congressman Rose, is a list of things that we have tried to do in response to the suggestions that we have received internally from GAO and OIG. Let me try to draw some of these things together and summarize both where we stand with respect to the program's use for exports to Iraq and the status of the program more generally. It is clear, I think, Mr. Chairman, there have been program vio- lations detected both by our Operations and Compliance personnel and by OIG. FAS–and this gets to the point we were just talking about—and OGC are working with the OIG to obtain necessary de- tails and proceed with all appropriate action—and I emphasize “ap- propriate action”—against those guilty of violations in the most ex- peditious manner possible. While we may be relieved that no pattern of massive abuse has been uncovered, I would stress our view that even one program vio- lation is too many. I think it's also important to emphasize again that nothing has been discovered which would indicate any wrong- doing on the part of any Department employee. No evidence has been uncovered to suggest that the program has been misused in any way to support Iraqi procurement efforts. The Department has put in place, Mr. Chairman, improved systems for better program administration and for more protection of program integrity. Mr. Chairman, we have not completed all of our work, either in connection with program violations, as you pointed our earlier, which the IG discovered as a result of our program review for Iraq or in making further improvements in the management of the pro- grams, and our efforts will continue in the future, and I can prom- ise you and the whole subcommittee that. I thank you for this opportunity, and I would look forward to working with you and the subcommittee on this issue in the future in improving the operation of these programs which are so impor- tant to American farmers. [The prepared statement of Mr. Crowder appears at the conclu- sion of the hearing.] Mr. ROSE. Mr. Crowder, I thank you. In closing, just a couple of things. I know you want to defend all the people in your Department, but I want to know where the Ra- fadan Bank file is, and that was a key part in this whole business. You said no evidence has been uncovered to suggest that the pro- 277 the IG, in their draft report, has some after-sales services to Mexico— *i. COLEMAN. What was that request from Mexico? Do you reCa.11: Mr. CRowdER. What product it was on? Mr. COLEMAN. No, what were the after-sales services that they requested? Mr. BORSCH. In this case, it was cash. It was a request from an agent who was supposedly the agent of the purchaser in Mexico to have cash paid back into an account here in the United States. Es- sentially, they increased the invoice by a certain amount when there was a payment out at the bank in the United States against documents. They then took a certain portion of the amount of money and put it into this guy's account. Mr. COLEMAN. Is that an isolated incident, or is this the usual method of doing business? Mr. CRowdER. We think it's an isolated incident. Jim, do you want to comment on that? I think it was 1 of the 11 companies or something in Mexico that you looked at, Jim. Mr. COLEMAN. Mr. Ebbitt. Mr. EBBITT. I was just looking at the draft report here to refresh my memory, and if I could just for a second. Mr. ColeMAN. Is that the report that was circulated here this morning? Mr. Crowder. No, that's a draft. The one that we got comments in on this morning. Mr. BORSCH. I just wanted to mention, too, Congressman, that in the case that we uncovered that we've just discussed in Mexico, there is no additional exposure for the CCC at this time, because we've required the exporter to post a bond in the amount of the overage, for which CCC is beneficiary, so we have no exposure on that sale whatsoever. Mr. ColeMAN. Well, again, these after-sales services are given by the exporter to the recipient country, not by the Department of Ag- riculture? Mr. DICKERSON. Of course not. Mr. ColeMAN. You have nothing to do—have in most cases no knowledge, and if you did have knowledge about it, you report it to the IG, who reports it to the Justice Department. So I mean, let's make the clear distinctions here what we're talking about. Mr. DICKERSON. That's correct. Mr. Col.FMAN. Thank you. Mr. ROBERTs. As the overweight person said as they crawled through the barbed wire fence, “One more point, and I’m through.” Through the chairman's leadership and efforts, we can't do this anymore. After-sales is not allowed. Verboten. So if the Philippines wants to buy wheat and they want to put in an after-sales require- ment to the exporter, “Please let us have the means to truck the wheat in regard to five trucks,” you can't do that. Now, Iraq, with all due respect to how many trucks or trailers this involved, was a client state of the Soviet Union, and it is in my humble opinion, defense expert that I am not, that a good Ivory Soap-pure 99 percent of their military wherewithal came from the Soviet Union, proven to date to be not very good. I just don't think 278 that the after-sales net proceeds here in terms of a jack, a truck, and a trailer really contributed much to their war machine. Now, that's just a supposition on my part. But it should not be permit- ted, and it should be said again that through the chairman's ef- forts, it will not be permitted. Now, there are some that will say, “Well, others will do it, and we will lose sales,” and that's a question I guess we can have an- other hearing on. But it was this member who thought that we should proceed with the Soviet Union in their request upon the loosening of the Jackson-Vanik trade restrictions, and we had a hearing in this very room on this subject, and we heard testimony from all sorts of people saying that it was the best thing to do on behalf of human rights, and the Soviets came in and said, “Hey, we'd like some GSM export credit also for transportation,” because of their infrastructure problems. Now, we're having a great debate in the Congress now should we step back from this, should we trade with the Baltic States, should we trade with Mr. Gorbachev, if he's still around, et cetera, et cetera, and I’m just wondering how does this square with the new requirement if the Russians have in fact wanted some transporta- tion assistance to get the wheat and final product to the shelves and to the people of, say, Leningrad or whatever. Now, do we have a problem or not? Mr. CRowdER. No, we do not have a problem there. The situation with the Soviets is that we were a little bit late to the table, if you will, in terms of providing them credit—at that time we did pro- vide them credit guarantees, I should say. They had booked a lot of their vessels. When we negotiated the $1 billion line of credit with them, they asked us if we would guarantee part of the freight. Mr. ROBERTS. Yes. Mr. CRowder. We agreed to guarantee $50 million of freight out of the $1 billion in credit guarantees. That's the issue with the Soviet Union, and it was to get them through that time when they didn't have vessels on their own so they could start buying our product— Mr. ROBERTS. Which is a separate issue— Mr. CRowder. Which is a separate issue from after-sales. Mr. ROBERTs. From your exporter requirements. Mr. CROwdER. That is correct. Mr. Roberts. So it's all right for Uncle Sam to do it when we deem it appropriate in our foreign policy, but it's not all right for the exporter to do it. Mr. CRowdER. Well, this was not foreign policy; this was, Con- gressman Roberts, done so that we could move Kansas wheat in January and February, and rather than waiting for a Soviet vessel to arrive— Mr. Roberts. I think that's letter No. 41 that he's going to pull out of the woodwork here. [Laughter.] I understand that, and I’m for it, although there now is a foreign policy debate going on as to whether or not we should continue it because of the ability to repay. But the point I want to make is it's all right for the Federal Government to do it, but you can’t have an exporter do it. 279 Mr. CRowder. We provide the guarantee on the freight. We don't provide an after-sales service. We guarantee the freight. Mr. Roberts. I'm just being troublesome. I'll yield back, Mr. Chairman. Mr. Rose. Thank you all very much. We will excuse you at this time. Mr. CRowDER. Thank you, Mr. Chairman, for the opportunity to discuss this with you. Mr. Rose. Thank you very much. I'm willing, if it's consented to by my colleagues, that we ask the following two panels to answer questions for the record and that I'll be glad to furnish you with a copy of the questions that I would ask them for the record, and then if you wanted to ask them a follow-up question, you can do that. What's your pleasure? Mr. Roberts. I think you've made an excellent suggestion, Mr. Chairman, considering the time of the day and the lateness of the hour. Mr. ROSE. In that event, the subcommittee will stand in recess until next week, at which time our staffs will get together and work out the questions that we will send to these panels and any questions you want to ask additionally to what we would ask, and then we will consider the hearing closed. Is that OK? Mr. ROBERTS. Yes, sir. Mr. ROSE. All right. Thank you all very much. I want to thank all the panels that are here. We're going to let you off the hook and get back to other things. I apologize for keeping you, but I think you've been in- structed by what you’ve heard here today. Thank you. The subcommittee stands in recess subject to the call of the Chair. [Whereupon, at 2:15 p.m., the subcommittee adjourned, to recon- vene at the call of the Chair.] [Material submitted for inclusion in the record follows:] 281 INSTITUTION'S OPERATING ENVIRONMENT, THE ROLE OF THE FINANCIAL SYSTEM OF THE FOREIGN COUNTRY, AND THE INSTITUTION'S MANAGERIAL AND OPERATIONAL PROCEDURES. ANOTHER WIDELY RECOGNIZED AND UTILILED ANALYSIS TECHNIQUE IS THE FEDERAL DEPOSIT INSURANCE CORPORATION'S (FDIC) SYSTEM CALLED "CAMEL" WHICH SPECIFIES METHODS FOR ANALYZING CAPITAL, ASSET QUALITY, MANAGEMENT, EARNINGS AND LIQUIDITY. WE RECOMMENDED THAT CCC EMPLOY THESE KINDS OF TECHNIQUES IN THEIR OPERATIONS. WE ALSO FOUND THAT WHEN CCC OFFICIALS WANTED TO INCREASE A FOREIGN BANK CREDIT LINE ABOVE WHAT THEY BELIEVED SECURE, THEY OFTEN REQUIRED CREDIT GUARANTEE ASSURANCES (CGA'S) FROM FOREIGN GOVERNMENTS WHICH GUARANTEED REPAYMENTS FROM THEIR BANKS IF DEFAULTS SHOULD OCCUR. AT THE TIME OF OUR REVIEW, CCC HAD APPROVED CREDIT THROUGH 28 FOREIGN BANKS THAT EXCEEDED CCC’S ESTABLISHED CREDIT LIMITS BY $3.5 BILLION. CCC ALSO ALLOWED FOREIGN BANKS TO EXCEED THEIR ESTABLISHED CREDIT LINE LIMITS BY GRANTING WAIVERS. A WAIVER WAS A MEMORANDUM SIGNED BY THE GENERAL SALES MANAGER WHICH DOCUMENTED THE REASON FOR EXCEEDING THE CREDIT LINE. THIS REASON WAS USUALLY "MARKET DEVELOPMENT." WE RECOMMENDED THAT CCC ESTABLISH PROCEDURES WHICH BETTER CONTROLLED THE WAIVER PROCESS AND BETTER PROTECTED CCC'S INTEREST.S. BECAUSE OF CONCERNS OVER FINANCING SALES TO IRAQ, WE ATTEMPTED TO REVIEW CCC'S DOCUMENTATION FOR THE $514 MILLION CREDIT LINE ESTABLISHED FOR IRAQ'S RAFADIAN BANK. AT THE TIME OF OUR REVIEW, CCC WAS UNABLE TO LOCATE ITS FILE ON THIS BANK. WE RECOMMENDED THAT CCC TAKE IMMEDIATE STEPS TO OBTAIN CURRENT FINANCIAL INFORMATION FOR RAFADIAN BANK. IN RESPONSE, CCC DID OBTAIN AN UPDATED FINANCIAL STATEMENT FOR 1988. 282 BASED ON OUR STUDY, THE CCC OFFICIALS TOOK IMMEDIATE STEPS TO ESTABLISH AN INTER-AGENCY TASK FORCE TO REVIEW CCC'S CAPABILITY FOR MANAGING CREDIT RISKS. AS A RESULT, CCC TOOK TWO PRIMARY ACTIONS. FIRST, THE TREASURER'S OFFICE WAS REORGANIZED TO BETTER FOCUS ON PROGRAM ACCOUNTING AND BANK RISK ASSESSMENTS. SECOND, THE GENERAL SALES MANAGER IMPLEMENTED A NEW DECISION-MAKING PROCESS TO ENABLE CCC MANAGEMENT TO BETTER EWALUATE THE CREDIT RISK INVOLVED WITH ALLOCATING EXPORT GUARANTEES. ALONG WITH THESE ACTIONS, CCC AGREED TO DOCUMENT THEIR CREDIT RISK ANALYSIS OF FOREIGN BANKING INSTITUTIONS, TO PERFORM PERIODIC ONSITE WISITS OF FOREIGN BANKS, AND TO PROVIDE BETTER TRAINING TO STAFF. WE HAVE SCHEDULED A FOLLOWUP REVIEW OF THIS PROCESS FOR THIS FISCAL YEAR. TOBACCO EXPORTS UNDER GSM 102/103 PROGRAM MR. CHAIRMAN, ON FOUR PREVIOUS OCCASIONS WE HAVE APPEARED BEFORE YOU TO DISCUSS OUR AUDIT AND INVESTIGATION ACTIVITIES REGARDING TOBACC0 EXPORTS UNDER THE GSM 102/103 PROGRAMS. AT THOSE HEARINGS, WE STATED THAT TOBACCO OF FOREIGN ORIGIN WAS BEING COMBINED WITH U.S. TOBACCO AND EXPORTED UNDER THE GSM PROGRAMS IN FISCAL YEARS 1986, 1987, AND 1988. IN DECEMBER 1990, WE COMPLETED OUR AUDIT AND INVESTIGATION ACTIVITY IN THIS AREA. WE FOUND THAT 14 FIRMS AND 17 AFFILIATES (A TOTAL OF 31 COMPANIES) EXPORTED FOREIGN TOBACCO, WHICH THEY REPRESENTED TO BE U.S. TOBACC0. THE LOAN GUARANTEES (FOR 102 OF 115 GSM LOAN GUARANTEES) TOTALED $134.7 MILLION FOR 80.9 MILLION POUNDS OF TOBACC0. THE FOREIGN CONTENT REPRESENTED 46.2 MILLION POUNDS (57 PERCENT) OF THE TOBACCO EXPORTED UNDER GSM 102 LOAN GUARANTEES. COMPANIES WERE ABLE TO EXPORT FOREIGN TOBACCO UNDER THE GSM PROGRAMS BECAUSE EXPORTERS MISREPRESENTED THE TOBACCO'S ORIGIN TO FAS AND CCC. ALSO, THE EXPORTERS DID NOT DISCLOSE THE FOREIGN CONTENT TO THE FOREIGN BUYERS OR TO THE 284 - - United States Geiteral Accounting Office GAO Testimony For Release Iraq's Participation in the on Delivery - - : - - - Expected at Commodity Credit Corporation's 10:00 a.m. EST GSM-102/103 Export Credit Thursday March 14, 1991 Guarantee Programs Statement of Allan I. Mendelowitz, Director International Trade, Energy, and Finance Issues National Security and International Affairs Division Before the Subcommittee on Department Operations, Research, and Foreign Agriculture Committee on Agriculture House of Representatives GAO/T-NSIAD-91–13 GAO Form 160 (12/87) %5 Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss Iraq's participation in the Department of Agriculture's Export Credit Guarantee Program and Intermediate Export Credit Guarantee Program, referred to as the GSM-lo2 and GSM-lo3 programs, respectively. The GSM-lo2/103 programs are managed and operated by the Foreign Agricultural Service (FAS). Under these programs, the Agriculture Department's Commodity credit Corporation (ccc) guarantees that U.S. exporters or their assignees, such as financial institutions, will be repaid for a credit sale made to a foreign buyer in an eligible country. If the buyer defaults, the exporter can file a claim with the CCC for the loss. Under GSM-lo2, CCC guarantees repayment for credit sales of 3 years or less; under GSM-lo3, CCC guarantees repayment for credit sales of more than 3 but less than 10 years. Over the past several years we have completed a series of reviews on the management of these programs for you and other subcommittee chairs. On November 14, 1990, we issued a report to Congressman Charles E. Schumer, Chairman, House Task Force on Urgent Fiscal Issues, entitled International Trade: Iraq's Participation in U.S. Agricultural Export Programs, (GAO/NSIAD-91-76, Nov. 14, 1990). Our testimony summarizes this report and (l) provides information on the development of Iraq as a U.S. agricultural export market and the extent to which Iraq has benefited from its inclusion in the l 47-860 O – 92 – 10 286 GSM programs since 1983 (see app. I) ; 2) examines agricultural, trade, and foreign policy considerations that influenced decisions to continue offering guarantees to Iraq under the GSM programs despite a growing concern about Iraq's creditworthiness; and 3) discusses the Justice Department's investigation of the Banca Nazionale Del Lavoro's (BNL) unauthorized and unreported loans to Iraq, a portion of which were guaranteed by CCC under the GSM programs, and a subsequent administrative review by the Department of Agriculture. IRAQ." S_PARTICIPATION IN THE GSM PROGRAMS Export credit guarantees approved for Iraq under the GSM programs increased from about $400 million in fiscal year 1983 to about $l. 1 billion in each of fiscal years l988 and 1989. Another $500 million was approved for fiscal year 1990, bringing the total export credit quarantees approved to almost $5 billion. Support for Iraq also included a precedent-setting innovation: Iraq was permitted to receive export credit guarantees for both the exported agricultural commodities and their shipping costs. On August 2, 1990, the President announced a trade embargo on Iraq, including a prohibition on granting credits for the purchase of U.S. agricultural commodities. At that time, CCC had about $2 billion in export credit guarantees covering loans to Iraq. 287 When the GSM programs were first offered to Iraq in 1983, the Uſitāl Śtätää and Iſiſ. Wärſ. WGFKÍñj Gh F355tablishing diplôlitig relations, which had been severed in 1967. Also during this time, Iraq was in the middle of its 8-year war with Iran, and the United States was seeking ways to assist Iraq. In addition, the U.S. farm sector was experiencing a surplus of many commodities. Despite some short-term credit problems, Iraq seemed likely to once again become a cash market and a significant market for U.S. agricultural commodities. COUNTRY RISK ANALYSIS FAS chooses for participation in the GSM programs those countries that have the potential to become commercial purchasers of U.S. agricultural commodities but cannot currently make such purchases without credit guarantees. Part of the process in determining program funding levels is a risk assessment that examines a country's economic, financial, and political conditions. Agriculture's country risk analysis for Iraq in 1988 indicated that its economic situation had improved somewhat in 1987 and was expected to continue to get better in 1988. However, it was noted that Iraq faced severe economic difficulties because of its ongoing war with Iran. Furthermore, from the mid-l980s on, Iraq had pursued a policy of rescheduling old debt and remaining current only on debt owed to those countries willing to extend new credits. 289 States had more to gain from maintaining a cooperative relationship with Iraq than from isolating the country. Coincident with congressional efforts to impose sanctions against Iraq, Agriculture was seeking approval to reallocate $36.5 million in fiscal year 1988 export credit guarantees to Iraq from existing credit lines approved for other countries. Prices of U.S. commodities had increased significantly, and without additional export credit guarantees Iraq would have been unable to meet its import requirements for the rest of the year. Some Agriculture staff members expressed strong concern over Iraq's human rights atrocities as well as CCC's vulnerability should Congress impose sanctions on Iraq. In a September 22, 1988, memo to the CCC General Sales Manager about a press release announcing over $30 million in additional loan guarantees to Iraq, eight senior Agriculture staff members warned: "However, we also note the strong likelihood that Iraq will not make scheduled payments for these purchases if the United States proceeds with economic/political sanctions against Iraq, as is currently being strongly considered in Congress. Until the specifics of this move toward sanctions are better known, we believe that the immediate issuance of this press release would constitute an inordinately high financial risk to the Corporation, with potential for program repercussions from Congressional reaction." 290 Despite these concerns, the reallocation was approved by the General Sales Manager because (l) Iraq was current on its payments under the GSM programs; (2) without additional credits, Iraq could not have maintained its import requirements, given the higher commodity prices; and (3) the State Department's official position at that time was that no evidence existed linking the Iraqi government with the gassing of the Kurds. Ultimately the proposed sanctions were not enacted, partly due to foreign policy interests and pressure from U.S. agricultural trade groups. INTERAGENCY DELIBERATIONS ON IRAQ'S PARTICIPATION IN GSM FAS approved a program level of $1 billion in GSM-lo2 credit guarantees and $50 million in GSM-lo3 guarantees for Iraq for fiscal year l989 based on Iraq's long-term ability to pay and on the market potential for U.S. agricultural exports. When the National Advisory council on International Monetary and Financial Policies (NAc)? considered this funding level in August 1988, two members opposed the large size of the program and stated that $600 million was a reasonable credit limit for Iraq, given its huge *The National Advisory Council on International Monetary and Financial Policies is an interagency group that gives advice and recommendations to government agencies, such as Agriculture, on international financing matters including Agriculture's decisions to extend GSM credit guarantees. Council members include the Departments of the Treasury, State, and Commerce; the Federal Reserve Board; the U.S. Export-Import Bank; the International Development Cooperation Agency; and the U.S. Trade Representative. 6 291 deficit and its policy of bilateral rescheduling of debt. Another NAC member favored the $1 billion level and suggested the possibility of increasing it. During l988 and l989, warning signs were increasing concerning Iraq's creditworthiness. According to an April 1989 analysis by one NAC member, Iraq had rescheduled or refused to repay most payments owed to foreign creditors. Only those creditors providing larger amounts of new money were being repaid. Because of Iraq's policy of rescheduling old debt while at the same time taking on new debt, it was predicted that Iraq's debt would continue to grow at a faster pace than its income, thus preventing Iraq from being able to service its debt. According to an internal Agriculture briefing document, by August 1989 only the United States and Great Britain were offering credit to Iraq. FAS risk assessment documents noted that Iraq was effectively tying repayment of past debt to continued participation in the GSM export credit guarantee programs. Despite such problems, FAS believed that it had little choice but to continue the programs because it feared that by stopping or severely reducing the programs, the important Iraqi market would be lost and Iraq would refuse to pay its past CCC-guaranteed loans. FAS proposed an additional $30 million in GSM-lo2 credit guarantees for Iraq for fiscal year 1989 and $1 billion in GSM-lo2 guarantees 292 for fiscal year 1990. It submitted this proposal to the NAC in September 1989. Because of preliminary findings from the BNL investigation and the discovery of possible improprieties in the Iraqi GSM programs, two members of the NAC requested that discussion of the GSM programs for Iraq be delayed pending the outcome of the investigation. In October 1989, before the Iraqi delegation came to Washington to negotiate its fiscal year 1990 GSM level, Agriculture resubmitted its $l-billion GSM proposal to the NAC. FAS officials explained that Iraq had thus far proved to be a good credit risk for coc, that no evidence of wrongdoing by the Iraqi government had been found in the BNL investigation, and that lack of positive action on the GSM programs would induce Iraq to make its agricultural purchases elsewhere. one member of the NAc supported the $l-billion level, noting that Iraq had great strategic importance to the United States. Further, in NAC discussions about the fiscal year 1990 allocation, this member saw no reason to disapprove the fiscal year 1990 program. Although some uncertainty did inevitably exist, clear-cut Iraqi government involvement in any wrongdoing regarding BNL was not evident. This member recommended going ahead with a fiscal year 1990 allocation to Iraq, seeing "... no financial difficulties looming where CCC guarantees would be called . . . ." 293 - - However, that member was more negative in other forums where there were discussions of a different issue that could have left CCC guarantees vulnerable. In a February 1989 published report on human rights violations occurring in calendar year 1988, and in congressional testimony, that member characterized Iraq's human rights record as "abysmal" and "unacceptable." Yet in the NAC, that member chose not to present this point of view, instead allowing discussions to center on commercial concerns and bypass human rights issues. Two NAC members opposed the $l-billion level. One of these members had previously stated that a $600 million-$700 million limit was more appropriate; now this member was unwilling to support any program for Iraq unless assurances were given that the problems brought to light by the BNL investigation were being addressed. As an alternative, FAS later proposed a two-tranche approach, with an initial $400-million allocation and the remainder to be offered if no improprieties involving Iraq surfaced in the BNL investigation. Although other members of the NAC approved the $400-million level, two members voted no. In meetings with FAS officials in October 1989, Iraqi officials rejected FAS' $400-million offer, saying that this level was not sufficient to meet its import needs and that they did not want further guarantees to be linked to the outcome of the BNL 294 investigation. Agriculture officials representing the FAS and the Office of the General Counsel went on a fact-finding trip to Atlanta in October 1989 to review the preliminary findings in the BNL case and their possible relevance to the GSM programs. They concluded that there was no reason to delay Iraqi participation. In November 1989, Agriculture officials traveled to Iraq and offered $500 million, with additional guarantees contingent on not finding evidence of Iraqi complicity in the BNL scandal. Iraq agreed to the $500 million, but again would not accept conditions on further guarantees. In effect, the fiscal year l990 allocation was limited to $500 million, half of the preceding year's allocation. By February 1990, Iraq had exhausted nearly all of its 1990 GSM allocations and requested an additional $573 million. Although FAS recognized that there was considerable risk involved in granting more credits to Iraq, it also believed that there was tremendous opportunity for increased agricultural exports. However, FAS knew there would be strong interagency opposition to a proposal for further credit guarantees for fiscal year l990 while questions remained unanswered regarding alleged program irregularities involving BNL and Iraq. As the $500 million in credit guarantees were exhausted, Iraq no longer considered commodity offers from the United States. Instead, it began purchasing commodities from Argentina, Australia, lC) 295 Canada, the European Community, Saudi Arabia, Thailand, and Vietnam. Australia, Canada, and Thailand provided some new credit; the remainder of the purchases were for cash. To clear the way for further negotiations, Agriculture asked for consultations with Iraqi officials to discuss program irregularities and to review pertinent documents. These discussions were held in April 1990. Nevertheless, consideration of additional GSM guarantees was deferred because the BNL investigation was still ongoing and Agriculture's Office of the Inspector General had not yet finished its review of unresolved issues raised in Agriculture's administrative review--high pricing in certain transactions and the extent to which "after sales services"? had been provided in connection with GSM sales. THE BANCA NAZIONALE DEL LAVORO INVESTIGATION In August 1989, the Office of the U.S. Attorney for the Northern District of Georgia was notified that officials at the Atlanta branch of the Italian-owned Banca Nazionale del Lavoro had been keeping a second set of books and had advanced unauthorized and unreported loans to Iraq. This discovery led to the initiation of a grand jury investigation by the Office of the U.S. Attorney, *These services included providing nonagricultural products, such as truck parts, tires, and air conditioning equipment, some of which could have military application. FAS first advised Iraq in September 1988 that providing these services was not acceptable under the GSM program, however, Iraq continued to request such services until April 1990, when FAS obtained a written commitment from Iraq that such requests would cease. ll 296 U.S. Department of Justice, focusing on bank fraud and evasion of bank regulatory requirements. Agriculture's Office of the Inspector General joined the investigative team in September 1989, when it learned that a portion of these loans were guaranteed by CCC. By October 1989, Agriculture had initiated a separate administrative review of Iraq's participation in the GSM programs. To date, the Justice investigation has resulted in a 347-count indictment of 10 defendants, including Iraqi government officials and 3 of BNL's Atlanta branch officials, for making fraudulent loans to Iraq totaling more than $4 billion. BNL provided about $1.9 billion of the almost $5-billion total loaned to Iraq under the GSM programs. As of August 2, 1990, when Iraq invaded Kuwait, Iraq owed BNL approximately $347 million on its GSM loans. In closing Mr. Chairman, the GSM programs to Iraq were driven by foreign policy and agricultural trade objectives which exposed the U.S. government to substantial financial loss. During the period in which the exposure to Iraq was growing, there were significant program irregularities including the provision of after sales services, the export of non-U.S. origin commodities, and unauthorized banking practices. On a number of occasions over the past 3 years we have pointed out the need for stronger internal controls and better management of the GSM programs. Had Agriculture responded to our concerns more quickly, information on l2 297 program irregularities might have surfaced sooner and resulted in a smaller U.S. government exposure to financial loss. Two types of changes should make the future of the programs less problematic. Agriculture is attempting to address problems GAO identified through management and regulatory reform. Furthermore the l990 Farm Bill mandates a variety of management reforms and prohibits the use of GSM export credit guarantees for foreign policy or foreign aid purposes. Implementation of this provision, in effect, restricts program determinations to the consideration of export market opportunities and financial risk to the CCC. With decisionmaking so constrained, future financial risks should not be borne by the CCC as a result of foreign policy or other objectives that now are prohibited by law. This concludes my statement, Mr. Chairman. I will be happy to try to answer any questions that you and members of the Subcommittee may have. (Attachment follows:) 13 298 APPENDIX I APPENDIX I IRAQ's PARTICIPATION IN THE GSM EXPORT CREDIT GUARANTEE PROGRAMS (Dollars in millions) Total guarantees Guarantees Percent Fiscal year approved to Iraq to Iraq 1983 $ 4,737.4° $ 401.9 8 1984 3, 43 l.2 513. 3 15 1985 2,512.8 340. 1 lA 1986 2,535. l 392.9 15 1987 2,872.9 652. 5 23 1988 4,504.3 l, ll3.2 25 1989 5, 195.3 l, 0.88.8 2l 1990 4, 289 - 5 48l. 2 ll Total $3 O, O78.5 $4,983 - 9 l'7 *Includes $1,028. 1 million under the Commodity Credit Corporation's (CCC) Blended Credit Program, which combined direct loans with credit guarantees. Source: CCC Guarantee Program Commitment Reports prepared by the U.S. Department of Agriculture's Foreign Agricultural Service, CCC Operations Division. l4 - 301 -3- RECENTHISTORY OF GSM-102/103 PROGRAMMING FOR IRAQ In August, 1989, prior to the time the U.S. Attorney's investigation of the BNL affair began in Atlanta, USDA began considering formulation of the FY 1990 GSM program for Iraq. At that time, Iraq was requesting an allocation of $1 billion in GSM-102 guarantees and an additional $150 million in GSM-103 guarantees. That request was considered by USDA and program options were being discussed in the interagency committee, the National Advisory Council on International Monetary and Fiscal Policy (NAC). In late August, based on information it had received from an informant that a large amount of undisclosed loans -- estimated at that time to be in the range of $3 billion -- had been made to Iraq by officials of Banca Nazionale del Lavoro Atlanta (BNL), the Office of the United States Attorney began its investigation of BNL. When it was preliminarily determined that a portion of those undisclosed loans -- approximately $720 million as of September 1989 -- involved the taking of assignments by BNL of proceeds due under GSM-guaranteed sales of U.S. agricultural goods. That investigation was referred to a grand jury. USDA's Office of Inspector General, along with investigators from numerous other government agencies, began to cooperate with the U.S. Attorney in the investigation. 303 -5- About that same time, one of USDA's commodity divisions was informed by several exporters that they had received pressure from Iraq to provide additional goods, in the form of "after sales services," in connection with GSM sales. While the provision of goods itself would not represent any program violation so long as the exporter deducted the value of those goods from the sales price at the time he registered for a GSM guarantee, we were concerned that this practice could lead to program abuses. We immediately provided the information we had received to the Office of the Inspector General and the U.S. Attorney in Atlanta. In addition, the attorneys conducting our administrative review interviewed the concerned exporters. The exporters stated that they had refused to provide the additional goods, but were concerned that this might have placed them at a competitive disadvantage in the Iraqi market. USDA also relayed this information to its agricultural attache in Baghdad who was instructed to tell key Iraqi officials that this practice must desist. Further inquiry was made into the extent of this practice as part of our administrative review process. Despite grand jury restrictions which prevented USDA from learning the specifics of the Atlanta investigation, USDA was able to proceed on an independent administrative review of BNL's GSM records under our regulatory authority. I directed USDA attorneys to return to Atlanta where, during the following week, they spent two days reviewing approximately fifty sets of transaction files--roughly half of the then existing GSM guarantees on BNL's books. While this initial review produced no direct evidence of program violations, our attorneys found a pattern of fairly high prices charged to Iraq by Entrade International, Ltd., a New York corporation which is an indirectly owned subsidiary of a large Turkish concern named Enka. The BNL files provided no information regarding the after sales service issue. I directed our attorneys to continue gathering information by making a thorough review of Entrade's records as well. On October 23, 1989, USDA made a written demand to Entrade's attorneys for access to that company's records. Because Entrade's records were being reviewed by investigators working with the U.S. Attorney during late October and November, USDA did not gain access to those records until November 26, 1989. Those records were extensive and USDA attroneys were required to make four separate trips totalling eight days in November and December to complete their review. In the meantime, consideration of Iraq's request for an FY 1990 GSM allocation was at a critical juncture. However, under the circumstances, it was prudent to not grant Iraq's full request until there was more information about the nature of the Atlanta investigation. Instead we decided, after lengthy consultations with other agencies in the NAC process, to §§ additional credit guarantees until these issues were resolved. After that meeting, I learned that the Iraqi embassy was attempting to exert political pressure on USDA to extend additional FY 1990 guarantees. I called Mr. Al-Mashat to my office and told him that such pressure tactics would not work. I also informed him that I wanted to have USDA's administrative review team travel to Baghdad to review Iraqi records pertaining to some GSM transactions about which we had serious questions. Initially, Iraq refused to cooperate in this request. However, after it became clear that such a visit would be a prerequisite to any further consideration of credit guarantees, Iraq ultimately consented to the visit and it was arranged for the second week of April, 1990. During this period, USDA was receiving substantial pressure not just from Iraq, but from U.S. agricultural interests and members of Congress who wanted to see additional credit guarantees extended. We did not make any additional guarantees available. The USDA review team, which travelled to Baghdad during the week of April 16, 1990 consisted of Paul Dickerson, the CCC General Sales Manager, and Messrs. McElvain and Brosch. During the following week, the team conducted daily meetings with Iraqi officials charged with Iraqi agricultural purchases, discussed Iraqi procurement and bidding procedures, and reviewed numerous files relating to various GSM transactions. The results of that visit and the team summary of all the work in our administrative review were reported to me after they return and were able to compile a draft report in early May. On May 21, 1990, that report was finalized and released to the public. The report contains a very detailed analysis of the administrative review we conducted, and concludes that there were several abuses of program regulations for which Iraqi officials had been partially or wholly responsible. Although the abuses detected did not involve substantial sums of money, we determined that the continued integrity of the program required that we make no further credit guarantees available to Iraq until the results of the Atlanta grand jury were made public and the OIG audit was complete. No further credit guarantees to Iraq were ever granted. I should note that during the administrative review process, USDA met on numerous occasions with the leadership and senior staff of the House and Senate Agriculture Committees to keep them briefed on our activities, to report any progress on the information we had uncovered, and to share with them what we knew about the Atlanta investigation. I would also note that our decision to reduce the Iraq GSM program to $500 million for FY90, and to maintain it at that level, resulted in a net cash flow of approximately $300 million to the United States between October, 1989, and August, 1990, with a concomitant reduction in CCC exposure from approximately $5 billion to the current level of *2.2 310 -12- High price levels: Based on extensive review of transaction documents and discussions with exporters familiar with the Iraqi market, the conclusion was that the price levels associated with Iraqi business were likely due to the higher risk associated with participation in the Iraqi market, the limited number of U.S. suppliers willing to participate in this high risk market, and Iraq's policy of seeking freight financing which only a few suppliers could provide. Freight costs: The report concluded that some of the higher FOB prices reflected inclusion of from $8 - 10/MT of freight costs reallocated by the exporters into their commodity value registered for GSM coverage. Since at the time of these transactions the Commodity Credit Corporation had not yet made coverage for freight available to Iraq, this represented a program violation which needed further action. Diversion of Commodities: The USDA administrative review uncovered no evidence to suggest that there had been diversion of commodities sold to Iraq. After Sales Services: On several occasions during the 1987-89 period under review, state enterprises of the Government of Iraq did request after sales services from U.S. exporters. The review identified several exporters who 311 -13- apparently provided such after sales services. This represented a program violation to the degree that registered port values had not been adjusted to exclude the value of after sales services provided. O Domestic Taxes: Iraq had also requested some exporters to assume responsibility for paying a domestic Iraqi stamp tax in connection with GSM transactions. Iraq’s officials confirmed to us in writing that GSM transactions would henceforth be exempt from these charges. As a result of this review I wanted to find out as quickly as possible the extent of the improprieties. We immediately shared our findings with the Office of the Inspector General and asked that they undertake a more comprehensive review of transactions with Iraq, as well as transactions with other countries. OIG has provided you the findings of this audit, but I would like to summarize some of the key findings. In a review of $857 million in transactions covered by loan guarantees, OIG's findings were consistent with the earlier administrative review: 312 -14- O Roughly 10 percent of the transactions reviewed contained after Sales Services. The amount of after sales services detected represented approximatley one-twentieth of one percent of the total value of registrations, or a total of $459,000 under guarantees worth $90 million. $342,000 of the after sales service payments involved Iraq. -- Foreign origin furs and cattle with a total value of about $2.1 million were detected in transactions reviewed. This represented approximatly two-tenths of one percent of the value of the sample tested. The inclusion of foreign content in a GSM-102/103 sale is a program violation. -- OIG raised considerable question about price differences between prices registered for export under the program and benchmarks of "world market price." We are still discussing with OIG just what these differences reflect, and if there is any wrong-doing. While this does not exhaust the findings of the audit, I believe these are the most important of its results. We currently are discussing with OIG a variety of recommendations for further program improvement as a result of the audit. We will move quickly to implement many of these. 3 l 3 POLICW AND ADMINISTRATIVE ACTIONS TO IMPROVE THE PROGRAM The additional measures that we are taking as a result of the audit will supplement a series of steps during the last two years to improve program administration and integrity. Let me enumerate several of the steps we have taken: (1) (2) (3) (4) Compliance Review: An in-house compliance review effort was inaugurated for the GSM-102/103 programs in Spring, 1989; Exporters have been required to submit certifications of U.S. origin for all commodities registered under the programs; Exporters have been reminded repeatedly of their responsibilities and penalties for non-compliance under the program through a series of Notices to Exporters; Explicit instructions were issued to remind exporters that after sales services must be excluded from registered port value; now, of course, under the new farm legislation, the law provides that these may not be paid at all in conjunction with transactions guaranteed under the GSM-102/103 programs; 314 (5) (6) (7) (8) (9) -16- A comprehensive price review has been instituted for all transactions registered under the program; A much improved and more sophisticated country risk analysis system has been adopted to guide all GSM-102/103 programming; Random sampling of exporters' contracts has begun as an additional check on the accuracy and completeness of registration information and to ensure that exporters have valid contracts in place at the time sales are registered; Exporters who have violated program regulations have been put on notice that they will be held liable for the value of any payments made by CCC in connection with their guarantees. The Office of the General Counsel is currently working with personnel of the Office of the Inspector General to initiate suspension or disbarment proceedings in a number of cases. The Farm Bill has reinforced our efforts to strengthen the export programs. As a result, many of the detailed requirements related to the above improvements will be published in regulation shortly. Since passage of the legislation, additional certifications have been required from exporters that no illegal or corrupt payments have been made in connection with the 316 -18- O The Department has put in place improved systems in place for better program administration and more protection of program integrity. Mr. Chairman, we have not completed all of our work either in connection with program violations discovered as a result of our review of the program for Iraq, or in making further improvements in the management of the programs and our efforts will continue in the future. Thank you for this opportunity. I look forward to continuing my work with you and the subcommittee on this issue. (Attachments follow:) 317 07.001 -2-Hy GENERAL SALES MANAGER PROGRAM PRICING REVIEW WASHINGTON, D.C. AUDIT REPORT No. 07001-2-Hy This is a draft report prepared by the U.S. Department of Agriculture - Office of Inspector General and is subject to further revisions before it is released in its final form. This draft is provided to program officials solely for their review and comments on the subjects reported. Recipients of this draft are not authorized to make any further distributions or release of this information except for official review and comments. UNITED ST1:... ES DEPARTMENT 0: AGRICULTURE OFFICE OF HNSPECTOR GENERAL NORTHEAST REGION HYATTSVILLE, MARYLAND 20782 º à ſ: : 5 f ji i #. 47-86O O – 92 – 11 318 TABLE OF CONTENTS I - SCOPE AND SUMMARY II - BACKGROUND INFORMATION III - FINDINGS AND RECOMMENDATIONS l. GUARANTEES WERE NOT ALWAYS BASED ON ACTUAL "PORT WALUE" a. After Sales Services 1. Iraq 2. Mexico Recommendations to the Administrator, FAS b. Freight Charges Inflated Payment Guarantee Recommendation to the Administrator, FAS c. Insurance Costs Included in Port Value Recommendations to the Administrator, FAS d. Two Percent Loss Contingency Included in Selling Price Recommendation to the Administrator, FAS e. Stamp Taxes Included in Payment Guarantees Recommendations to the Administrator, FAS COMMODITIES OF FOREIGN ORIGIN WERE EXPORTED UNDER THE GSM PROGRAM a. Fur b. Cattle Recommendations to the Administrator, FAS PRICING DIFFERENCES a. Wood Pulp b. Rice c. Sugar . Recommendation to the Administrator, FAS WEAKNESSES AFFECTING FAS GSM PRICING REVIEW a. Units of Measure Were Different Than Those Used by Industry Recommendations to the Administrator, FAS b. Guarantees Approved Based on Estimated Sales Recommendation to the Administrator, FAS 07001-2-Hy PAGE N0. 24 25 25 26 " DRAFT 320 TABLE OF CONTENTS IV. EXHIBITS N - 0 - S - COMPARISON OF RICE PRICES CHARGED UNDER GSM PROGRAM TO PREVAILING WORLD MARKET PRICES FOR COMPANY 8 (IN CWT) COMPARISON OF RICE PRICES CHARGED UNDER GSM PROGRAM T0 WORLD PREVAILING WORLD MARKET FOR COMPANY 14 (IN CWT) COMPARISON OF SUGAR PRICES CHARGED TO IRAQ UNDER GSM PROGRAM TO PREVAILING WORLD FUTURE PRICES (PRICE PER MT) INTERVENING PURCHASER - COMPANY 6'S OPERATING PROCEDURES COMMISSIONS PAID BY COMPANY 15 UNDER THE GSM PROGRAM FOR JANUARY 1, 1987, THROUGH DECEMBER 21, 1989 GSM PRICING REVIEW COMMISSIONS PAID TO EXPORTERS 07001-2-Hy PAGE 53 54 55 56 57 58 " DRAFT 322 Bale Bank guarantee Cost and freight (C&F) Cost, insurance and freight (c. i.f.) Free on board (f.o.b.) Futures contract Guaranteed value Intervening purchaser 07.001-2-Hy GLOSSARY OF TERMS A large compressed, bound, and often wrapped bundle of a commodity, such as cotton, hops, or hay. A time draft or bill of exchange drawn on and "accepted" by a bank. By accepting the draft, the bank assumes an unconditional obligation to pay the face amount of the draft at a fixed or determinable future date. Terms of sale whereby the seller's price includes the cost of the goods being sold and all transportation costs, excluding insurance expenses, to the named port of destination. The seller is liable for the goods until they arrive in the destination port. Terms of sale whereby the seller’s price includes the cost of the goods being sold and all transportation charges, including insurance expenses, to the named point of destination. The seller's liability for risk ends after the goods have been shipped and a bill of lading or equivalent document proving such shipment has been obtained by the buyer. The buyer's liability begins when the goods have arrived at the destination point. A price quotation that indicates that the seller assumes all responsibilities and costs for delivering the goods and loading them on a stated carrier at a specific location. An agreement between two people, one who sells and agrees to deliver, and one who buys and agrees to receive, a certain kind, quality, and quantity of product to be delivered during a specified delivery month at a specified price. Contracts are traded in organized markets called commodity futures exchanges. The maximum amount CCC agrees to pay the exporter under CCC’s payment guarantee, exclusive of interest. The guaranteed value will be shown in the payment guarantee. An intermediary who negotiates a contract on behalf of the exporter with the buyer. - DRAFT - V - 324 07001-2-Hy I. SCOPE AND SUMMARY SCOPE AND METHOD010GY This report presents the results of an audit of the Foreign Agricultural Service's (FAS) General Sales Manager (GSM) 102 and 103 Programs. The scope of this audit was initially defined as fiscal year (FY) 1988 GSM 102 and 103 Program sales activities. In FY 1988, GSM loan guarantees totaled $4.5 billion. Our audit scope was expanded to include FY's 1987 and 1989. Loan guarantees totaled $2.9 billion and $5.2 billion in each of those respective years. The objectives of our review were to: (1) determine what type of pricing information was available and if it lent itself to a pricing review system; and (2) identify banks, exporters, buyers, and others, who may have been involved in actions that were contrary to program regulations and/or law. FAS’ Commodity Credit Corporation (CCC) Operations Division’s records showed that in FY 1988, there were approximately 3,000 GSM agreements, involving 10,350 shipments, with port values of $3.9 billion. (Note: The $4.5 billion for FY 1988 cited above represents the guarantees issued for that year while the $3.9 billion represents the port value of the commodity shipped.) We initially designed a stratified statistical sample of 178 shipments which included a separate sampling strata for each of the major importing countries (Mexico, Iraq, and Korea), and a separate strata for all other countries. (See exhibits C and D for details.) Due to the time to carry out the audit objectives for each of the 178 shipments, we judgmentally selected 50 shipments with export values of $194 million, which represented 38 GSM agreements and 25 different exporters. We selected the judgment sample of 50 using the following criteria: (1) the larger of plus or minus 5 percent, or $5.00 per unit, between the agreement price and the reported sales price; (2) the larger of plus or minus 5 percent, or $5.00 per unit, between the FAS commodity division price and the agreed-to export price; (3) a combination of (1) and (2); (4) shipments where pricing data was not available in the FAS commodity division; and (5) shipments that involved missing or incomplete files. Six exporters were subsequently excluded from our review in order to protect the integrity of ongoing or pending Office of Inspector General (OIG) investigations. A seventh exporter was excluded because the exporter had declared bankruptcy and the records were unavailable for review. (See exhibit E for details.) The resulting cample was 29 shipments from FY 1988 representing 18 exporters. (See exhibit F for details.) In addition, we excluded a review of FAS’ pricing review system which they had implemented in FY 1990. However, we will be auditing the FAS pricing § ! à º tº - l - * - **, *..." •. - 325 07001-2-Hy review system in the future. This system was established in December 1989 because our prior, audit (Audit No. 07099-21-Hy) of the GSM program disclosed that the selling price for some commodities may have been excessive, based upon gross profits. Because of large sales volumes identified, and/or potential after sales services, and what appeared to be excessive sales prices to Iraq and Mexico, we determined that our audit scope and sample needed to be increased. We judgmentally selected an additional 12 exporters based on their large value shipments of rice, sugar, and grain sorghum in FY 1988. In total, we judgmentally selected shipments that involved 92 GSM agreements at 22 exporters with guaranteed values of $360 million. In order to assess the extent of any problems at the exporters, we expanded our audit scope to include FY 1987 and FY 1989 GSM agreements. The agreements were judgmentally selected for review based on using large dollar value shipments as the criteria for selection. Our FY 1987 sample involved 76 GSM agreements with guaranteed values of $186 million and our FY 1989 sample involved 79 GSM agreements with guaranteed values of $311 million. The loan guarantees approved for these 22 exporters in FY’s 1987, 1988, and 1989 were $198 million, $413 million, and $340 million, respectively. (See exhibit G for a summary of audit samples by fiscal year, number of GSM agreements, and total guaranteed value; exhibit H for list of agreements reviewed by company, date, country, commodity, and guaranteed value; and exhibit I for a summary of audit samples' guaranteed values by company and fiscal year.) Total GSM loan guarantees for these FY's were $2.9 billion, $4.5 billion, and $5.2 billion, respectively. One additional grain sorghum exporter was selected for review because its management had previously worked at a reviewed exporter where after sales services were found. The exporter had exports of $3.5 million in FY 1990. FY 1990 documents were also examined at an exporter that subsequently reported after sales services after initially stating they had not in their management representation letter to the OIG. At the selected exporters, we examined purchase, cost, and sale documentation for each selected GSM agreement. Further, we determined: (1) if GSM sale prices were in line with other commercial export sales; (2) the origin of the commodity; (3) if a contract was in place at the time the exporter applied for the GSM loan guarantee; and (4) if freight charges were included in free on board (f.o.b.) commodity values. We also examined the exporters' correspondence file. and financial records, such as cash disbursements, cash receipts, wire transfers froſ. banks to individuals, etc., to detect after sales services and/or othe, activities that were contrary to program goals or guidelines. A management representation letter was sent to each of the selected exporters except Company 23, which was selected near the conclusion of the audit because of findings at another exporter. This letter requested management to certify that the auditors were provided all information related to the selected transactions at the time of their review and further, that management had identified and disclosed to the auditor all instances of possible noncompliance with GSM regulations and procedures. All 22 exporters we reviewed responded to our letter. , DRAFT 326 07001-2-Hy We visited the United States (U.S.) bank(s) involved in each selected transaction to ensure that drawdowns against the letter of credit agreed with information the exporter provided. The audit was performed in accordance with generally accepted government auditing standards issued by the Comptroller General of the U.S. Accordingly, the audit included such tests of program and accounting records applicable to the scope of the audit. 327 07001-2-Hy SUMMARY The objectives of our audit were to: (1) determine what type of pricing information was available and if it lent itself to a pricing review system; and (2) identify banks, exporters, buyers, and others, who may have been involved in actions that were contrary to program regulations and/or law. As previously noted, our audit scope was also expanded to determine if after sales services may have occurred in sales to countries in addition - nd also to determine the extent of past problems in improperly guaranteeTig freight charges and whether the practice continues to impact on the GSM Programs. We found that pricing information was available for most commodities. We determined that for three commodities tested (wood pulp, rice, and sugar) that the information could be used to conduct pricing reviews. Details concerning this are found in findings numbered 3 and 4. Finding 4 discusses the weaknesses in FAS' present pricing review system which could be strengthened. We did find instances of program violations at exporters and other affiliated parties, as well as other conditions which hampered FAS’ ability to administer the program. These are presented in findings numbered 1, 2, 5 and 6. Our audit tests made at bankind institutions did not disclose program violations. We also found ºdditional instances) or after sales services to Iraq and one instance involving a sale to Mexico. GSM Program guarantees were also found to have been excessive because exporters were overstating freight costs in their bid estimates on cost and freight (C&F) sales. This occurred because FAS did not include an evaluation of freight charges in their pricing review system. The following paragraphs summarize the conditions found in the findings section of this report. Sales guaranteed by CCC were not always based on actual "port value". Seven of 23 exporters had either: (1) overstated port values by the amount of any after sales services provided to the importer; (2) overestimated freight costs for C&F sales; (3) included insurance costs in the commodity port value; (4) increased the commodity selling price to include a contingency for loss; or (5) included costs for the Iraq Stamp Tax. As a result, payment guarantees for seven of the exporters with sales to Iraq and Mexico were overstated by up to $2.4 million. These two countries had approved guarantees of $6.1 billion under GSM during FY's 1987 through 1989, n.f which we reviewed $610 million. We questioned loan guarantees of $114 million where sales quarantees were not based on actual "port value." (see exhibit A rur monetary results", Also, commodities of foreign origin were exported under the GSM Program. Our review disclosed that furs and cattle of foreign origin were exported under the GSM Program by 2 of 23 exporters. Consequently, the purpose of the GSM Program, which is to increase the exportation of U.S. agricultural commodities, is not being fully realized. We questioned loan guarantees totaling about $36 million where foreign commodities were exported under the GSM Program. (See exhibit A.) CCC's debt exposure is excessive because the selling price for some commodities being sold under GSM are overstated. To evaluate the selling 328 07001-2-Hy prices and CCC's debt exposure under GSM, we compared the 48 sales’ prices to the commodity futures price, or the prevailing world price, for wood pulp, rice, and sugar, and found 39 instances where the per-unit export price exceeded these prices. We reviewed sales made in FY's 1987 and 1988, and in FY 1989 prior to December of that year. FAS instituted pricing reviews in December 1989. Weaknesses exist in the pre-December 1989 FAS GSM pricing review system. Our review disclosed that: (1) units of measurement used by FAS do not correspond to units of measurement used by industry; and (2) exporters do not have a firm fixed price contract or a predetermined method of evaluating the price at the time of registration. Consequently, the accuracy of the pricing reviews performed by FAS could be diminished. The pricing review is also weakened because FAS does not have provisions to evaluate the freight costs in C&F sales. We found that four exporters were using intervening purchasers and other types of arrangements in the contract negotiation process for sales to be registered under the GSM Program. Regulations only permit USDA officials access to records associated with GSM Program sales at the exporter or the exporter’s assignee. Consequently records maintained by other representatives of the exporter which may contain arrangements, communications, or payments which may indicate potential after sales services or other activities contrary to the programs objectives, would go undetected. Also, some firms participating in the GSM Program may not be financially responsible and maintain bona fide offices in the U.S. as required by regulations. Company 6 processes paperwork involved with GSM sales and receives a small commission. All contracts are negotiated by Company 6's parent company in France. Other 016 audits identified two firms that acted as an agent of the foreign parent company and three firms that did not maintain offices in the U.S. Consequently, CCC's risk in the event of default may be increased. Commissions paid to agents acting on the behalf of exporters may be excessive in some instances. Further, these commissions paid to agents may be a means by which the exporter can transfer company profits out of the country to avoid U.S. taxes, make after sales services or other types of payments to the importer or other persons. The commissions paid by three exporters to agents and others ranged from 0.024 to 5.43 percent of gross sales. Audit moneta. 3' amounts and identified internal control weaknesses are highlighted in exhibits A and B of this report, respectively. ... DRAFT 329 07001-2-Hy II. BACKGROUND INFORMATIO Two of CCC's Export Credit Guarantee Programs are GSM 102 and 103. The GSM 102 was announced by the United States Department of Agriculture (USDA) on June 5, 1980, and GSM 103 was required by the Food Security Act of 1985. The express purpose of both GSM programs was to expand the export sale of U.S., agricultural commodities by stimulating U.S. bank financing of foreign purchases on credit terms. GSM 102 guarantees the repayment of credit extended on credit terms up to 3 years and GSM 103 up to 10 years. Although these are CCC programs, FAS has management responsibility for both. This includes, but is not limited to, the establishment of eligibility and participant requirements for commodities, countries, and exporters. CCC's primary responsibilities are to ensure that letters of credit are properly implemented, that documentation is submitted for each export, to provide funds should the purchaser default, and provide accounting functions. The Export Credit Programs are administered by the General Sales Manager of FAS, USDA. The principle objectives of the programs are to expand and/or maintain export markets for U.S. agricultural commodities and also to permit certain developing countries with improved financial conditions to switch from reliance on U.S. financial aid under Public Law 480 (P.L. 480) to private financing at commercial rates of interest, guaranteed through the GSM Program. The Food Security Act of 1985 provides for CCC to make available not less that $5 billion in credit guarantees under its GSM 102 Program, effective the fiscal year ending September 30, 1986, and each fiscal year thereafter, through the fiscal year ending September 30, 1990. CCC was also to make available $500 million under the GSM 103 Program for the fiscal years ending September 30, 1986, through September 30, 1988, and not more than $1 billion for each of the fiscal years ending September 30, 1989, and September 30, 1990. CCC will consider financing any U.S. agricultural commodities to a foreign buyer if credit will expand the market for U.S. exports. The FY 1988 GSM Programs provided guarantees on 64 different commodities with authorized loan guarantees of about $5.3 billion. In each transaction, the foreign buyer's bank must issue an irrevocable letter of credit covering the port value of the commodity exported, payable to a U.S. bank. CCC will guarantet up to 98 percent of the amount owed to the U.S. bank by the foreign bank. -- In April 1990, a delegation of USDA officials traveled to Iraq to address concerns expressed to FAS regarding possible irregularities in Iraqi GSM transactions. USDA officials determined that Iraqi officials were requesting U.S. exporters to provide after sales services and pay a stamp tax on commodities shipped into their country. They also identified potential pricing irregularities for corn, rice, and sugar and the inclusion of freight costs in f.o.b. sales. The Iraqis were requested to discontinue the practice of requesting after sales services and charging a stamp tax on GSM shipments. - 6 - DRAF 330 07001-2-Hy III. FINDINGS AND RECOMMENDALIONS l. GUARANIEES WERE NOI ALWAYS BASED ON ACTUAL "PORT VALUE" Payment guarantees on GSM sales were not always based on actual "port value." Seven of 23 exporters had either: (1) overstated port values by the amount of any after sales services provided to the importer; (2) overestimated freight costs for C&F sales; (3) included insurances costs in the commodity port value; (4) increased the commodity selling price to include a contingency for loss; or (5) included costs for the Iraq Stamp Tax. Based upon our review of published guidelines, it appears this condition has been created, at least in part, by vague references to port value deductions such as "...any discounts or allowances..." and no assurance by the exporters they have complied with all program requirements. As a result, payment guarantees for seven of the exporters with sales to Iraq and Mexico which we reviewed were overstated by up to $2.4 million. The total value of the questioned loan guarantees was about $114 million. (See exhibit A.) These two countries had received guarantees of $6.1 billion under GSM during FY's 1987 through 1989, of which we reviewed $610 million. On January 25, 1988, the GSM issued a notice to exporters which: "...affirmed the requirement that the port value reported in the U.S. Exporters application for a payment guarantee must be net of any discounts or allowances that have been, or will be received by the foreign buyer when export sales are made under either the CCC Export Credit Guarantee Program (GSM-102) or the CCC Intermediate Export Credit Guarantee Program (GSM-103)." The GSM went on to state: "... that any discounts or allowance arrangements agreed to between the foreign buyer and the U.S. exporter for export credit sales covered under either the GSM 102 or GSM-103 program cannot be included as part of the port value. Under no condition should CCC's coverage be based on a port value which would include discounts or allowances that have been passed on to the foreign buyer." If the calculation of "port value" is not performed in accordance with the program regulations, CCC may determine that the exporter is in breach of the contractual obligations, certifications, or warranties that have been made for the purpose of obtaining a payment guarantee. As a result, the exporter corºd be liable to CCC in accordance with 7 CFR 1493.10 (d) for payments made under the guarantee. a. Af le vice Three of 8 exporters with sales to Iraq and 1 of 11 exporters with sales to Mexico provided after sales services totaling about $460,000. This resulted in about $90 million in questioned loan guarantees. (See exhibit A.) We reviewed sales to these two countries totaling $610 million in FY's 1987 through 1989. , DRAFT 331 07001-2-Hy After sales services are defined as payments, goods, or services provided by the exporter as a condition for making a sale. Exporters who we found provided after sales services have been referred for investigation. 1. Iraq Iraq had loan guarantees of about $650 million, $1.1 billion, and $1.1 billion in FY's 1987, 1988, and 1989, respectively. We reviewed sales of $107 million, $149 million, and $129 million in each of the respective 3 years for 8 exporters we selected for review. We found that three exporters had provided after sales services to Iraq totaling $342,002 in FY's 1987 through 1989 sales and an additional $37,672 on a 1990 sale as described by the exporter. This resulted in about $86 million in questioned loan guarantees. (See exhibit J.) Examples of after sales services we identified included: . Company 15 set aside 2 percent of its GSM sales in 1988 and 1990, and l percent in 1989 to provide after sales services to Iraq. The total set aside was $255,603 of which $250,527 was used to provide after sales services. Of the total set aside, $42,697 was for the FY 1990 sales. The after sales services provided to Iraq included such items as spare parts, chemicals, fax and copy machines, and watches. Company 15 did not disclose this in its management representation letter or in discussions with management officials, but later disclosed it to FAS and 0IG. It should be noted that our audit sample did not include 1990 transactions. Company 15 disclosed the 1990 transactions later to FAS and 016. . In April 1988, Iraqi Grain Board officials requested Company 8 to "consider a one dollar per ton payment as after sales services on a shipment of 15,000 Metric Tons (MT) of rice" (GSM agreement number 59786.) This one dollar per-ton payment was to be a condition of sale. Initially, the Iraq Grain Board requested that the funds be transferred to a firm in Munich, Germany, to purchase 15 vacuum cleaners to clean grain silos. The price of the vacuums increased which led Iraqi officials to request Company 8 to transfer $16,000 to a company in Holland to purchase weigh scales. This specific instance was disclosed to 0IG in Company 8's management representation letter. We also identified an additional $79,457 that Company 8 did not disclose as after sales services. Although none of these payments could be specifically identified to individual sale calculations, or cost credits to individual sales (these expenses were paid out of other types of accounts; i.e., miscellaneous), we concluded that all of these transactions applied to GSM sales because all of Company 6's sales to Iraq were guaranteed under the GSM Program. , DRAFT §§ 07001-2-hy went on to state that they had already requested after sales services from the other grain exporters. . The willingness Of companies to provide after sales services to the Iraqis may have influenced who received sales contracts. Iraqi officials had requested Company 11 to provide them with two truckloads of chicken as a "gift." However, Company 11 officials refused this request. After delivery, the Iraqis filed a claim that included two truckloads of chicken (about $30,000) and short-weighted cartons (about $550,000.) The Iraqis proposed to "pull" Company ll's performance bond (about $1 million) to cover the above claims. Company 11 obtained d #. injunction preventing its performance bond from being "pulled. An insurance investigator determined that the temperature for these two truckloads of chicken had exceeded the maximum. As a result, the insurance company paid the $30,000 for this part of the claim. The short weight was the result of the Iraqis reweighing each case of chicken, without a representative of the exporter present, after the chicken had been shipped from the U.S. through Turkey to Iraq. Also, the weight of the cases had been certified at the time of shipment and the reweighing was not part of the sales contract. Company 11 paid about $350,000 as a result of a negotiated settlement. This company had no further sales to Iraq after this transaction. According to Company l l personnel, their legal action to stop the Iraqis from "pulling" their performance bond, and their refusal to provide after sales services, were the reasons they were not being offered any future tenders by the Iraqis. They also stated that if a company wants to continue business with the Iraqis, it must be willing to provide them with after sales services. . Conversely, exporters that provided after sales services may have enjoyed special treatment from the government of Iraq. Company 8 informed the Iraqis that it would sell its product at an amount equal to the lowest C&F price the Iraqis received from any supplier. To perform in this manner the exporter had to be provided bid information by the Iraq, purchasers. . Company 15 received information from the Iraqis il. forming them that another company had made a bid to supply them with the commodity at a lower price. Through a telex, Iraqi officials supplied the exporter with the company's name, bid information, and contract terms. They advised the exporter that they had not shown this information to the president of their "State Establishment", but if future offers were received by this company, they would have to present them to the president of the "State Establishment" for consideration. "State Establishment" personnel recommended that the exporter contact this company and advise them to withdraw this offer and not make any future ... DRAF'ſ 334 07001-2-Hy offers. The company in question sold a commodity to Iraq, but not the one discussed in the above statement. Some companies also used the Iraqis request for after sales service as a tool to induce future sales. Company_15, informed the Iraqis that it would comply with the request if the Iraqis would provide Company 15 with future sales. Company 15 did comply and received future sales. However, this raises concerns about Iraq's intentions to fairly deal with exporters who sought sales. Also, Company 15's selling price was higher than other exporters as shown by the following graph. DIFFERENCE3 BETWEEN IRAQ'S AVERAGE PRICES FOR WOOD PULP FOR COMPANY 15 AND COMPANY WITH NEXT HIGHEST UNIT PRICE AVERAGE PRICE/MT 1260 1160. COMPANY 15 560 * NEXT HIGHEST 1988 1989 º: YEARS Company 18 made sales to Mexicº in FY's 1987, 1988, and 1989 with GSM guarantees of $1,187,697: $9,185,076, and $11,865,621, respectively. During 1987 and 1988, Company ... made cash payments of $101,513 to owners, shareholders, and purchasing agents and appeared to have included $79,605 in the port values reported for GSM Program purposes. This resulted in about $4.1 million in questioned loan guarantees. (See exhibit J.) We reviewed Company 18's cash receipt and payment journals, and payment invoices and drafts, and identified the following $79,605 (see exhibit J) in 1987 and 1988 payments to representatives of the importers. Although we could not verify that these amounts were included in the GSM selling price through the review of bid calculations sheets or employee interviews, it appears probable these values would be included in bid estimates or the exporters ... DRAFT 335 07001-2-Hy would be unable to make any profit on their sales. This exporter did not retain bid calculation worksheets. (1) (2) (3) NUMBER OF FIRM PAYMENTS AMOUNI PAID IMPORTER A (1) l $ 15,500 l 16,000 l 8,533 IMPORTER B (2) 3 23,580 IMPORTER C (3) 1 —15,992 TOTALS 7 $ 79,605 "Commissions" were paid to three stockholders of Importer A. Importer A's total purchases were $3,509,306 of which $2,163,306, or about 62 percent, was guaranteed under the GSM Program. Although the payments could not tied to a specific GSM sale, Company 18's general manager at the time the payments were made admitted that $31,500 paid to two of the shareholders were "returns" on GSM sales requested by the shareholders. Another payment of $8,533 was made to a third shareholder on the same day. Also, all non-GSM sales were cash sales. (See note (3) for comments regarding cash and credit sales.) "Commissions" were paid to the purchasing agent for Importer B. All sales to Importer B, $707,461, were guaranteed under the GSM Program. While the accounting records did not link the payment to a specific sale, the "returns" did involve sales that were guaranteed under the GSM Program. Commissions were paid to the owner of Importer C. Sales to Importer C totaled $1,649,869 of which $1,299,994, or 79 percent, was guaranteed under the GSM Program. All non-GSM sales were cash transactions and it is likely that any "benefits" returned would have been in the form of reduced per-unit sales prices. Since the owner received the 15,992, it appears this was a "return" on one or more GSM sales. We also noted that Company 18 made $21,908 in payments to agents of three other importers as follows: ... DRAFT 336 07001-2-Hy NUMBER OF FIRM PAYMENTS AMOUNI PAID IMPORTER D (1) l $ 12,458 IMPORTER E (1) l 5,450 IMPORTER F (2) l 4,000 TOTALS 3 $ 21,908 Notes: (1) At the time the payments were made, the general manager said that these payments were commissions for the importers bringing new customers to the company. However, he could not identify who the new customers were. (2) At the time the payment was made, the general manager said the payment was for bringing in a new customer who he named. However, we could not find evidence that Company 18 made any sales to the new customer. Company 18's current general manager stated that in his first 2 months on the job, Mexican importers and/or their purchasing agents had made about six requests for loan payoffs (paybacks). While he had not complied with any of the requests, he offered the following explanation and example of how it worked. The importer requested the exporter to overstate the sales price by $5 per MT. When the exporter drewdown on the letter of credit, $2.50 per MT would be returned to the importer or the agent. He believed his predecessor had complied with these requests. All "commissions" paid by Company 18 were considered questionable since none of the payments were made to persons identified as agents of Company 18. Two similar instances had been reported earlier to USDA by Company 4. Company 4 reported that it had made cash payments back to the purchasers, or the purchasers’ agent in Mexico, totaling $250,000. The money was obtained by reporting a purchase price to FAS that exceeded the actual selling price to enable larger letter of credit drawdowns. This has been reviewed and confirmed by 0IG and FAS has taken appropriate corrective action. It should be noted that the after sales services we found in Company 18 closely parallels the condition reported and confirmed in Company 4. In addition to the above instances of after sales services, 0IG recently issued a report (audit number 07099-2-At) disclosing that seven U.S. tobacco companies provided over $1.5 million in after sales service payments to the Iraq State Enterprise for Tobacco and Cigarettes (ISETC). These tobacco companies had loan guarantees of $12.5 million. In violation of criminal statutes and CCC ... DRAFT 337 07001-2-hy regulations, the companies concealed the payments in the port values of tobacco exports on documents submitted to CCC to obtain loan guarantees. The payments were transferred to foreign corporations for purchases directed by ISETC. The purchases included foreign machinery parts, supplies, and other items which the auditors could not identify. Six of the companies pled guilty in a U.S. District Court to making false, fraudulent, and fictitious statements to CCC. A certification by the seller or exporter of record that all program requirements have been met may help eliminate problems of overstated port value. This has been recognized by Congress in that they have required FAS to obtain certification from the seller or exporter of record, that there were no corrupt payments or extra sales services, or other items extraneous to the transaction provided, financed, or guaranteed in connection with the transaction, and that the transaction complied with applicable U.S. law in Section 401(a)(2) of the "Food, Agriculture, Conservation, and Trade Act of 1990." Recomendations to the Administrator, FAS: la. Establish clear criteria as to what items need to be excluded from GSM port values. lb. Notify exporters that included any after sales services in their reported port value, they will be held liable for any and all losses to CCC in the case of a loan default. lc. Initiate suspension and/or debarment procedures in those instances were it is warranted. ld. Require all exporters to submit certification for each GSM loan guarantee at the time they report shipment of the commodity, that they have not violated any program requirements on that particular transaction (i.e., have not provided after sales services, have not included freight and/or insurance unless authorized, and have maintained proper export records). • Freight Charges Inflated Payment Guarantee Exporters overestimated freight costs on C&F sales. In calculating costs on C&F sales, expo, Jr.'s estimated a higher amount for freight than what they actually were charged. (; ºnsequently, CCC's risk on GSM sales was increased by at least $1.2 million. (See exhibit K.) On May 11, 1987, FAS announced that a regulatory change was made that would permit guarantee coverage for freight costs and marine and war risk insurance under both the GSM 102 and 103 Programs at the GSM's discretion. Therefore, sales made on a C&F basis or a commodity, insurance, and freight basis would also be eligible. Neither freight nor insurance costs would be covered in f.o.b. or free-sailing side- vessel basis. Marine freight charges prior to May 11, 1987, were ineligible for coverage. T - 14 - DR AF 338 07.001-2-Hy We were able to evaluate freight charges at only three of the nine exporters that had C&F guaranteed sales. Those three exporters were estimating higher freight costs than they actually incurred on C&F sales. We found that estimated freight costs exceeded actual freight charges from between $1.00 to $11.47 per MT. These differences ranged from 4 to 43 percent over actual freight costs. In total, we found these differences approximated $1.5 million for 19 agreements at the 3 companies where we detected the problem. It would be advantageous for exporters to inflate their estimated freight costs on C&F sales. At one exporter, we were informed that if they could obtain freight at a lower rate than they estimated, it provided an extra profit on the sale. Recommendation to the Administrator, FAS: le. Require exporters approved for C&F loan guarantees to submit both the f.o.b. commodity price and estimated or actual freight costs to the Export Credit Division so they can include an evaluation of freight costs in their pricing review. c. Insurance Costs Included in Port Value Company 3 included insurance costs in the port value of 5 of 12 sales we examined. This resulted in the port value of 5 sales being overstated by $54,658. The five sales we examined had a total port value of about $29 million. Listed below are the specific GSM agreements which contained insurance costs. GSM PORT INSURANCE PORT WALUE N0. VALUE INCLUDED LESS INSURANCE 60265 $ 6,617,550 $ 12,656 $ 6,604,894 60266 6,758,850 12,926 6,745,924 63805 4,232,500 8,097 4,224,405 59.752 4,414,500 8,443 4,406,057 60486 6,555,000 12,536 6,542, 464 TOTAL $ 28,578,400 $ 54,658 $ 28,523,744 We found that insurance costs for uvérage vessels were included in the commodity export value listed on the associa: id evidences of export. However, these insurance costs were deducted from the commercial invoice submitted to the importer and were not paid by the U.S. bank. Even though the exporter did not receive the funds for insurance costs out of the letter of credit, the export value was overstated to FAS and CCC and it is possible the banks could claim and receive the added funds in the case of a loan default. All but one of the sales examined were made on a CAF basis; that sale was made on a f.o.b. basis. Since none of these shipments were made on a commodity, insurance, and freight basis, and these costs were not borne by the importer, they should not be included in the ... DRAFT 341 07001-2-Hy In the same notice, CCC also announced that, effective October 1, 1988, it would decline to approve credit guarantees for any export sales in which the value of imported agricultural products comprised more than 25 percent of the port value of the sale. CCC informed exporters that it reserved the right, pursuant to provisions of 7 CFR, part 1493, to annual coverage or to hold the exporter liable for any amount paid by CCC under a payment guarantee if the value of imported agricultural products represented more than 25 percent of the total port value of an export sale made in connection with a GSM 102 or GSM 103 credit guarantee. Beginning in February 1989, FAS informed exporters that under the GSM programs the entire commodity presented for loan guarantees must be of U.S. origin. a. Fur Company 19 is operated as a cooperative and buys furs from U.S. and Canadian fur ranchers. We examined 13 GSM agreements at Company 19 with a total port value of $3,611,286. Eight of the 13 with total GSM guarantees of $2,060,253 contained Canadian furs. We found that 38,865 furs were exported in connection with these 8 agreements of which 1,421 furs, with a dollar value of $68,773, were of Canadian (foreign) origin. The percentage of foreign furs exported under these GSM agreements ranged from .02 to 24.59 percent. On the average, the percentage of foreign furs exported under these eight agreements was 3.7 percent. For details, see the following table: - DOLLAR TOTAL TOTAL PERCENTAGE WALUE OF GSM SHIPMENT FURS FOREIGN OF FOREIGN FOREIGN NUMBER YEAR PER UNIT FURS FURS COMMODITY 57776 1987 1,486 l 0.07 $ 64.74 57777 1987 4,092 1 0.02 65.26 57778 1987 1,661 10 0.60 574.80 11876 1987 5,516 3 0.05 208.41 64429 1989 1,972 485 24.59 29,381.30 62529 1989 4,305 5 0.12 289.80 631.78 1989 7,563 244 3.24 12,007.24 59.031 1988 12,270 672 5.48 —26, 18l. 12 TOTALS 38,865 1,421 3.66 $ 68,772.67 Company 19 personnel stated that they have no controls to prevent foreign furs being exported under the GSM Program. Prior to the furs being shipped to Company 19, they are gathered at receiving stations at various locations. The furs are divided into straight and odd lots. Exporter personnel explained that straight lots are those where the furs all come from one rancher. In these cases the origin could be identified. In the case of odd lots, the furs come from many different ranchers and, once combined, lose their identity. In these instances origin could not be determined. Company 19 provided no certifications regarding commodity origin. "T" WRAFT 342 07001-2-Hy b. Cattle We reviewed nine GSM agreements at Company 2 with a port value of $48,025,304.50. Eight of the nine agreements with a port value of $36,368,742 (guaranteed value of $35,641,366) contained cattle imported as feeders from Mexico. To determine the extent of foreign cattle exported under the GSM Program by Company 2, we examined weigh tickets from purchases, written lot files, and invoices from outside feed yards. We found that Company 2 sent a Certification of Origin to CCC certifying zero percent of the cattle shipped for GSM 12251 were from outside the U.S. From the sample of lot records reviewed, 187 Mexican cattle (4 percent) were positively identified as being shipped to Mexico under this agreement. We sampled 27 days covering all GSM contracts to see if Mexican cattle were shipped within each sale. No other Certifications of Origins were found in Company 2 records indicating the percentage of foreign cattle that Company 2 acknowledged shipping. The following table provides the details: TOTAL CATTLE SOLD NUMBER PERCENTAGE GSM PER EVIDENCE OF MEXICAN OF MEXICAN NUMBER OF EXPORL CATILE SOLD – CATILE PORI VALUE 60511 l / 13,747. 197 1.43 $ 10,935,000 12066 1 / 8,239 518 6.29 5,852,977 12214 1 / 4,494 415 9.23 3,910,424 12251 l / 4,680 187 4.00 3,394,601 12106 2 / 4,233 543 12.83 3,537,918 3 / 12321 2 / 9,461 587 7.46 6,681,706 12363 2 / 1, 133 110 10.58 945,060 60471 2 / 1,500 174 11.60 l, lll .056 TOTALS 47,487 2,731 5.75 $ 36,368,742 L/ Audit verified origin of all cattle shipped under these GSM numbers. 2_/ Audit only verified origin of cattle on a sample basis. Therefore, the percentage of Mexican cattle could be higher. 3_/ $1.4 million of this port value was reported in our prior audit number 07099-21-Hy. These GSM agreements were made during FY's 1988 and 1989. At that time exporters were required to certify if the sales contained commodities of foreign origin. The percentage of foreign commodities were subtracted from the total to arrive at the U.S. commodity value on which the guarantee was to be made. Company 2 did not certify that any of the cattle it shipped under the GSM guarantee were of foreign origin. This violated rules in effect at that time, and allowed CCC to provide guarantees on cattle of foreign origin. ... DRAFT 343 07001-2-Hy We issued a previous report (OIG audit number 07099-21-Hy) detailing deficiencies in FAS’ procedures to detect and prevent foreign commodities from receiving loan guarantees under the GSM Programs. FAS took action to address the audit's recommendations including a system to periodically review participants' records to ensure their compliance. Part of this systems involves FAS’ Compliance Review Staff making on-site visits to exporters to determine compliance through record reviews. We are reporting the individual program §: in this report so that FAS can act on the individual V10 I at 10n S. Recommendations to the Administrator, FAS: 2a. Notify exporters that included foreign content in their GSM shipments, that they will be held liable for any and all losses to CCC in the case of a loan default. 2b. Consider suspension or debarment of companies that have been identified as exporting foreign origin commodities under the GSM Program. 3. PRICING DIFFERENCES CCC issues guarantees under the GSM Program based on the selling prices reported by the exporter. To evaluate the reasonableness of the selling prices reported, and CCC's resulting liability for the loan guarantee, we compared 48 sales' selling prices for wood pulp, rice, and sugar, as reported by exporters, to the commodity futures prices or prevailing world prices for the same commodities. We reviewed sales made in FY's 1987, and 1988, and in FY 1989 prior to December 1989, when FAS instituted pricing reviews. We found 39 instances where the per-unit price the exporter reported materially exceeded (more than 15 percent) the prices we used for comparison purposes. In turn this increased CCC’s liability unnecessarily. a. Wood Pulp The per-unit selling price for one exporter of wood pulp exceeded the fair market value for the five sales we examined. For other purposes of this review we examined 7 of Company 15's sales. However, we only had market data available for the transaction date for 5 of the 7 sales. Company 15's per-unit f.o.b. selling price exceeded market price data by 19.74 percent to 37.16 percent. (See exhibit M for details.) We obtained the market price data used in this comparison from a trade publication, "Pulp and Paper Magazine." Quarterly price information was reported in this publication by wood pulp type for the U.S., Northern Europe, and Japan. In our calculations, we compared the f.o.b. selling price to the U.S. quarterly average price for the specific grade of wood pulp exported. The sales we examined were C&F sales to Iraq. We computed the f.o.b. selling price by deducting ocean freight from the C&F sell Pºlc - 20 - D | ſ 344 b. 07001-2-Hy Of the five Company 15 pulp sales reviewed, it purchased four from one supplier. Its purchase price for these five GSM sales exceeded the quarterly price information from between 2.4 percent to 11.1 percent, even after a $10 per MT discount on two of the purchases. The high prices charged by suppliers could also indicate excessive supplier prices for sales to Iraq. The excessive nature of supplier prices and sale prices for sales to Iraq was substantiated by prices charged to Mexico for four wood pulp GSM sales in 1987 through 1989 by Company 12. The actual selling price to Mexico for these four sales were equal to, or less than, the quarterly price information contained in the "Pulp and Paper Magazine." Company 15 and Company 12 have different methods for conducting sales. Company 12 acts as an agent for the supplier and is paid about 3 percent commission of the commodity cost at the mill for arranging the sale to Mexico. Whereas, Company 15 purchases the commodity from the supplier and adds to that price to cover their expenses (including commissions to other Company 15 entities) and profit. FAS personnel stated that unlike commodities such as sugar, where public price information is available on a weekly or daily basis, timely wood pulp prices are difficult to obtain. The quarterly price information used in our report may bear little relationship to actual sale prices. However, FAS personnel did admit there is not another good source of price information available for wood pulp. We believe the reliability of the pricing data is supported by the fact that Company 12's f.o.b. selling price is comparable to the published information. It should also be noted that Company 15's C&F price to Iraq is much higher than other companies' prices to Iraq. Other wood pulp exporters to Iraq were not reviewed to determine relationships of f.o.b. values to available market price data. Company 15 also provided Iraq with after sales services. Rice The per-unit selling price for rice exported under the GSM Program exceeded the prevailing world price in all 16 exports under the ll GSM agreements we reviewed. The per-unit f.o.b. selling price exceeded prevailing world prices from 56 percent to as much as 124 percent at the time of sale, and by 19 percent to 113 percent at the time of export. For example, Company 8 exported 19,716,792 MTs on February 1, 1987, and 11,776,940 MTs on April 7, 1987, under GSM agreement number 54923. The rice was sold at $219 per MT for a port value of $6,897, 127. However, the world price was about $125.63 per MT on February 1, 1987, and $124.97 on April 7, 1987. Therefore, the port value for GSM agreement number 54923 could have been about $3,948,784 ($2,477,020 + $1,471,764) or $2,948,343 less than the port value guaranteed under the GSM Program. (For details see exhibits N and 0.) - During our review of FY 1988 GSM transactions, FAS personnel informed us that they had not maintained historical price information for rice. We then obtained world market price ... JRAF'ſ $45 07001-2-Hy information for rice obtained from the Agricultural Stabilization and Conservation Service (ASCS) for each of our 11 sampled rice agreements at the time of sale and at the time of export, and compared it to the contract price. The ASCS price data is developed for the marketing loan provision of the rice price support program. It is calculated using f.o.b. prices from various world market locations for number two long grain, milled rice, bagged. In most instances the Company 8 price was twice or more the prevailing world market price. It should be noted that the price data we used was for long grain milled rice. The Iraqis required No. 2 or better long grain rice with four percent broken kernels. The world market price is calculated based upon No. 2 rice. However, U.S. rice may be of higher quality. The world market price calculation also excludes the value of U.S. exports, which could also lower the ASCS world price. However, this price is computed for, and used by, CCC's rice price support program. This price is used in calculating the repayment rate for price support loans. These loans can be repaid at the lower of the loan rate or the calculated world price. This was intended to keep the U.S. competitive in the world rice market by reducing the cost of rice for export. However, the large differences (up to 113 percent) between export values and world prices indicate this program is not reducing prices or that exporters are taking advantage of the GSM Program by marking up export sales values. FAS personnel stated that the "world rice price" calculated weekly by USDA is not an indication of the "...proper absolute level of U.S. export prices." They stated that it is a problem of comparing distinctly different items in that the definition of the two prices is quite different. The ASCS calculated world price might be based on a different location or a different type of rice or other terms of a different nature. We agree that the ASCS calculated price is not an indication of the absolute level of U.S. export prices. We also agree that adjustments for such items as location, type of rice, and sales terms might be needed to the calculated world price to reflect a reasonable U.S. export price for an individual sale. However, we also believe that export sales prices exceeding the world price by as much as 113 percent may be an indication of t ...cessive sales prices. - As stated above, the world price is based upon f.o.b., No. 2 long grain rice, around the world excluding the U.S. The exclusion of U.S. rice sales from the world price may distort, or lower, the actual average world price. Also, No. 2 long grain rice sold in other parts of the world may be of a lower quality. However, exporters informed us that Thail and produces a quality of rice that approximates U.S. quality. Since Thailand is one of the leading exporters of rice, their inclusion in the world price calculation would help offset the quality differential. Also, the use of f.o.b. DRAFT 346 07001-2-Hy selling prices should help offset the locational differential. Therefore, with FAS' inability to provide us with a better method for determining a fair market value of No. 2, 4 percent broken, long grain milled rice, we believe the ASCS calculated world price, even with its weaknesses, is the best information available. It is used to determine the repayment rate for rice under CCC loans needed to make U.S. rice prices competitive in the world market. . Sugar The per-unit selling price for sugar exceeded the sugar futures price in all 17 sales we reviewed for two exporters. The per-unit f.o.b. selling price exceeded the sugar futures price by 0.52 percent to 36.84 percent. The sales price exceeded 15 percent of the futures price in 10 out of the 17 GSM agreements. (See exhibit P for details.) The sugar futures prices for this evaluation were obtained from the FAS Horticultural and Tropical Products Division. We compared the futures price information to the f.o.b. per-unit price obtained from the two sugar exporters we reviewed, Company 3 and Company 22. Both companies' sales were C&F to Iraq. We computed the f.o.b. value by deducting actual ocean freight cost from the CAF selling price. We attempted to determine what factors might account for the price differences we encountered. We found that all sugar exported under the GSM Program was obtained from one supplier. We were informed that this was the result of the GSM requirement that only U.S. produced products be eligible for guarantee. Exporters stated that this was the only supplier that would guarantee supplying only U.S. produced sugar. The sugar supplier did not directly export any sugar. We reviewed the prices charged U.S. exporters by the supplier and found these prices were about the same prices at which foreign exporters were willing to sell. (It is reasonable to conclude that these prices included such costs as commissions, stevedoring, and profit.) U.S. exporters would also have to add to their product costs for commissions, GSM fees, stevedoring, and profit. While all of these factors would contribute to price differences, the expectation is that the prices and associated a-ºkups would be reasonable. Given that 10 of the 17 sales exceeded 15 perce:, , of the futures price, this may indicate that the supplier's and exporters' prices may be excessive. FAS officials generally agreed with our observations about discrepancies between market and sales prices. They believed the methodology we employed, per their recommendations, was the only practical one to use. However, they also stated since only one U.S. refiner was willing to take the necessary and costly precautions to ensure that its sugar destined to Iraq was not commingled with sugar originating from other countries, the market interactions had little to do with price discovery. Rather, the sales price was the outcome a DRAFT 347 07001-2-Hy of negotiations between the supplier and the Iraqi government. This may help explain why sales prices for many of the contracts were out of line with the London and Paris market prices. They also stated that U.S. sugar supplies were tight in 1989, due to the effect of drought. The tight supply was reflected in the unusually high premium attached to the number 14 nearby future contracts, which indicates the domestic price of raw sugar. Therefore, it is also plausible that short supplies could have been an underlying factor in some of the high sale prices charged to the Iraqi government. We realize the above factors could increase the selling price of U.S. sugar under the GSM Program. That is the reason our comments dealt primarily with those transactions with a 15 percent, or over, difference between the quoted market price and the actual selling price. The 15 percent was selected because it appeared to afford a reasonable markup when compared to the 3 or 4 percent markup for other commodities. This 15 percent margin was not intended to be "...sacrocanct..." (as stated by FAS), or unyielding, as we are aware that margins for commodities depend upon such factors as supply, demand, volume of exports, etc. However, we believe the information provided is the best available and fairly presents the potential for overstated sugar prices. The supplier also qualified for a duty "draw back" on these sales in addition to the selling price. - - This condition was identified as a weakness in the agency's FMFIA report, and FAS instituted a pricing review system in December 1989. (See exhibit B.) Recommendation to the Administrator, FAS 3a. Ensure that current price review procedures address conditions noted in our review. 4. WEAKNESSES AFFECTING FAS GSM PRICE REVIEW Weaknesses exist in the FAS GSM pricing review system. Our review disclosed that: (1) units of measure used by FAS do not correspond to units of measure used by industry; and (2) exporters did not always have a firm fixed price contract at the time of registration. Consequently, the accuracy and usefulness of the pricing reviews performed by FAS could be diminished. d. i f Measure Were Different Than Those U ndustr We found that the per-unit price received by exporters for shipments under a GSM agreement did not always equal the sales price contained in the GSM agreement for cotton, cattle and furskins. This occurred because units of measure used by FAS on the payment guarantee did not correspond with the standard industry measure. Our initial sample of 178 FY 1988 GSM transactions represented 167 individual agreements. Of these 167 agreements, 43 (26 percent) ... DRAFT 348 07001-2-Hy had at least a (+/-) $5.00 difference between the agreement per-unit price and the selling price, and 27 (16 percent) had at least a (+/-) 5 percent difference between the two amounts. During our reviews at selected exporters, we found that the main reason for these pricing differences was that exporters used different units of measure in price calculations than FAS. For example, FAS requires exporters to report the number of head of cattle they export. Cattle exporters we reviewed stated that they sell cattle on a per-pound basis since the weight of individual cows fluctuate. FAS has cotton exporters report the amount of cotton they intend to export on a per-bale basis, even though there is no standard weight for a bale of cotton. Ihe Dictionary of International Agricultural Irade, published by FAS defines the term bale as "a large, compressed, bound and often wrapped bundle of a commodity, such as cotton, hops, and hay." Cotton exporters reviewed during our audit also stated that their sales contracts are negotiated on a per-pound basis since bale weight can fluctuate. When the per-pound contract rate was compared to the per-pound export rate, the price fluctuations were eliminated. This condition was not identified as a weakness in the agency's FMFIA report, and as such, was not formally subjected to a particular planned action. However, FAS has identified the need for a fixed contract price, or a means to establish one, at the time of application for loan guarantees. (See exhibit B.) Recommendations to the Administrator, FAS 4a. Revise commodity measurements used under the GSM Program to reflect industry standard measurements. 4b. List the agreed per-unit cost on the payment registration and GSM agreement. . Guarantees Approved Based on Estimated Sales We found that three exporters of wood pulp, tallow, and furskins received block approval for a total year of GSM participation based on an estimated quantity and price. The exporter would negotiate a contract wi ... the importer at the time of each shipment based on the prevailing world price. Consequently, price and quality data supplied to FAS at the time of registration was an estimate with little or no value to conduct a pricing review. As an example, we examined 10 sales of tallow at Company 17. We found that this exporter had secured guarantees worth close to $18.5 million to export approximately 56,000 MT's of tallow. We found that Company 17 only exported about $10.2 million dollars of tallow or about 27,000 MT’s, a difference of about $8.2 million, or 29,000 MT's. Further, in 7 of the 10 agreements the per-unit price at ... DRAFT 352 07001-2-Hy possessions, and has someone on whom service of judicial process may be had within the United States." Company 6's parent company negotiates the sales contract with the buyer, purchases the commodity from U.S. suppliers and arranges ocean transportation of the commodity to the importer. Company 6 is then notified by their parent company that they (Company 6) made a "sale" which is to be registered under the GSM Program. Company 6 then "purchases" the commodity at a C&F value from the parent company. Company 6 arranges for needed reports for FAS, Customs, etc. After the commodity is shipped, Company 6 prepares the evidence of export and submits billing documents to the U.S. bank for payment. When payment is received from the U.S. bank, the U.S. company transmits the funds to the parent company and retains approximately 60 cents per MT to cover their expenses. In essence, Company 6 functions as an agent of its foreign firm and in return receives 60 cents per MT as commission. During our review at Company 6, we noted that they maintained limited information concerning the 12 GSM agreements we had selected for review. Company 6 personnel only had contracts with their parent company on file for each sale. Documents such as bid computations, freight charter party agreements, freight invoices, and purchase invoices from suppliers were all maintained by their parent company in Paris, France. These documents had to be mailed to us for review by the parent company. However, we never received correspondence regarding contract negotiations between the parent company and the buyer bid information and cash transaction information to determine amounts paid to whom and for what. Therefore, we have no assurance that after sales services, or discounts, were not provided. Company 6 had no direct contact with the importer, all such access was through their parent company. Company 6 personnel provided a copy of their unaudited financial statements for the year ended July 31, 1988. Our review of this document showed that Company 6 had assets of only $2.1 million, 89 percent of which ($1.9 million) were accounts receivable. Further, Company 6 had less than $200,000 in capital and retained earnings. Company 6 sales under the GSM Program in FY's 1987, 1988, and 1989 were $84 million, $165 million, and $186 million, respectively. £ompany 6's sales under the GSM Program were 88 times larger than its $2.1 million in assets in FY 1988. In the event of default, and CCC holding the exporter liable for the loan guaranteed amount, Company 6 would not have assets to pay even a small portion of the amount in default. Company 6's parent company has more assets than its branch, but in the event of default it is likely that Company 6 would declare bankruptcy and cease operations with nothing being collected from the parent firm. 353 07001-2-Hy An audit of export sales reporting requirements (audit number 07080-l-Hy) identified two firms in the Washington, D.C., area that were established in order for the companies to participate in the GSM Program. These firms were headquartered in London, England, with the U.S. branches chartered in Delaware and located in Washington, D.C. All negotiations and shipping arrangements were handled out of the London headquarters of both firms. One individual represented both of these firms in the U.S. His duties were to prepare the required paperwork and submit evidences of export to FAS for which he received a commission payment. Another audit (audit number 07099-2-At) identified seven affiliates of foreign firms participating in the GSM Program. The owners or parent companies were headquartered in foreign countries. These affiliates used U.S. companies to process and package tobacco for export. In some cases, U.S. processors completed applications and/or reports of export submitted to FAS and shipping documents provided to assignee banks. It should be further noted that four of the seven foreign-owned firms participating in the GSM 102/103 Programs shipped approximately 680,000 pounds of foreign tobacco. These seven firms shipped approximately 12.4 million pounds of tobacco with guarantees of $32 million dollars. In three instances it was questioned whether tobacco company owners maintained bona fide offices as required by 7 CFR 1493.2(g), as stated above. In two cases the addresses of the exporters were post Office box numbers in the United States. In One case, the Owner resided in Cairo, Egypt, and in the other case, the owner was located in Amsterdam, the Netherlands. The officials who prepared and signed documents submitted to FAS/CCC were employees of the U.S. firm that processed the tobacco. In the remaining case, the owner resided in Canada. A visit to the firm disclosed that the address was the office of the company's attorney, and no company employees worked at the Office. Rather, the Office was used to receive the company's mail. Although the owner signed the application, an officer with the firm that processed and sold the tobacco prepared the report of export and submitted it to FAS. These firms are nothing more than a conduit for foreign companies to participate in U.S. agricultural programs. In exchange for preparing paperwork related to the program, they receive a commissio. . Recomendations to the Administrator, FAS: Sc. Establish criteria that clearly defines eligibility requirements for exporter participation. Particular attention needs to be applied to what is intended by financially responsible and maintaining a bona fide office in the U.S. for buying and selling commodities for export. ... DRAFT 354 07001-2-Hy 5d. Require exporters to provide financial statements and a description of operating procedures prior to approval for participation in the GSM Program. 5e. Require a written determination for the eligibility of all exporters approved to participate in the GSM Programs. 6. AGENIS AND COMMISSIONS Commissions paid to agents acting on the behalf of exporters may be excessive in some instances. Further, these commissions paid to agents are large amounts of money and may be a means by which the exporter can transfer company profits out of the country to avoid U.S. taxes, make after sales services, or other types of payments, to the importer or other persons. The commissions paid by three exporters to agents and tºº,” from .024 to 5.43 percent of gross sales. (See exhibits R and S. GSM regulations do not contain guidelines addressing the reasonableness or limitation of commissions. We did find that at least one other FAS administered program does contain guidelines on commissions. Under the P.L. 480 Program, guidelines are in place which detail who is eligible to receive commissions and in the case of ocean brokerage commissions a rate of 2 1/2 percent of the freight financed has been set. Also, all commissions paid are to be reported to the Secretary. Similar guidelines do not exist under the GSM Program. Exporters transferred monies out of the U.S. to pay what appeared to be questionable commissions. For example, Company 15 paid commissions on one GSM contract to its main office in Tokyo, and its offices in Iraq and Europe. Only Company 15's European branch appeared to provide any service associated with this contract by acting as the intervening purchaser that negotiated the contract with the importer. The commissions totaled $669,550 out of $16,565,298 in sales to Iraq. This represented between 2.8 percent and 4.8 percent of the export value of the individual shipments. (See exhibit R for details.) When an exporter pays commissions to agents/firms outside of the U.S., there is no way under present record requirements and regulations to determine if the monies are used for legitimate uses, such as agent fees, or if these commissions were shifted to a foreign affiliate to deliver after sales se, vices to an importer. This same condition would also apply to commissivms paid to agents within the U.S. Access by USDA officials is limited to review of exporter records. Provisions have not been made that permit access to records of affiliated companies that may have played a role in the transaction, but are not the U.S. exporter of record. Two examples where exporters paid large sums of money in commissions to agents follow. Company 11 paid it’s agent a $241,303 commission for an egg sale of $4,441,723, or 5.43 percent, and $653,356 on a frozen chicken sale of $19,939,375, or about 3.28 percent. Also, Company 2 paid about $1.5 million (about 3 percent of total) in commissions to its ... DRAFT 355 §§§1.4.1, agent on total sales of about $49.3 million during 1988 and 1989. We were unable to verify the use of these funds. Also, commissions paid by the exporter to agents, in some instances, may have been excessive. For example, at Company 3, we found that commissions paid to their agent, located in Cyprus, for sales to Iraq ranged from $1 to $5 per MT. Commissions paid to the same agent for sales to other countries were only 50 cents per MT. According to officials at Company 3, the reason that commissions for sales to Iraq were high was because of the costs incurred by the agent in making the sale. When the agent deals with Iraq, his commission is higher because of costs incurred with the negotiation process. We asked why the agent's commission fluctuated from between $1 to $5 per MT. According to Company 3 officials, their price for the commodity is a firm price and the only room for negotiation was in the agent's commission. The amount of commission the agent received depended on how badly the agent needed the money at the time of negotiation. Company 3 paid commissions of $462,203 to its agent on exports of $59,545,586, or an average of 0.78 percent. Costs for negotiation by the agent should remain relatively constant. These fluctuations may point out that the agent was earning excessive commissions or his commissions may have been a means to provide after sales services to the buyer. This condition was not identified as a weakness in the agency's FMFIA report, and as such, was not formally subjected to a particular planned action. (See exhibit 8.) Recomendations to the Administrator, FAS: 6a. Require the exporter to maintain records regarding the use of funds by their agents or require access to records maintained by their agents. 6b. Publish regulations which address the reasonableness or limitations of commissions similar to those outlined under the P.L. 480 program. , DRAFT 356 FINDI la le 07001-2-Hy SUMMARY OF MONETARY RESULI QUESTIONED LOAN GUARANIEES AMOUNT RECOVERY RECOVERY NOT NG_NO. DESCRIPTION RECOMMENDED RECOMMENDED Companies with after sales service payments. (1) $42,135,279 $48,222,720 Companies including Iraq Stamp Tax in GSM port . value and not already included in Finding la total. (2) 9, 125,262 14,768,215 Companies exporting foreign commodities. (3) 12,625,097 23,635,319 Total Monetary Results $63,885,638 $86,626,254 (1) All 1988 sales of Company 8 with a total loan guarantee value of (2) (3) NOTE: $54,778,205 were part of after sales service arrangements. This amount also includes loan guarantees of $16,661,768 by company 14, $14,831,621 by Company 15, and $4,086,405 by Company 18. Company 11 and Company 14 included the Iraqi stamp tax in the payment guarantee. Sales of $8,608,932 for Company 14 were already included under Finding la. Total loan guarantee value of agreements with foreign content at Company 2 was $35,641,368. Foreign content totaling $1.4 million was reported in report number 07099-21-Hy and has been deducted from the questioned loans, recovery not recommended. Company 19 had loan guarantees of $2,019,048 which involved foreign content. Information on GSM Program loan repayments :as obtained from Report MJJ720-IZ provided by ASCS’s Fiscal Divisioi. The report detailing Iraqi repayments was dated for the period after June 30, 1990, and before January 1, 1998. While the report detailing Mexican repayments was dated after January 1, 1991. Loan gu arantees for Company 19, which sold commodity or foreign-origin under the GSM Program, had been paid in full. EXHIBIT A ... DRAFT 357 07001-2-Hy SUMMARY OF MATERIAL INTERNAL CONTROL WEAKNESSES CAUSAL FACTOR INCLUDED FINDING IN AGENCY NUMBER - INTERNAL CONTROL l 2 3 FMFIA l Payment guarantees not always based on port value - X NO 3 GSM guarantees exceed fair market value. X Yes 4c Units of measure used by FAS do not correspond to units of measure used by industry X No 4b Exporters do not have a firm fixed price contract at the time of . registration - X Yes 5,6 Lack of assessibility to exporter and associates records to conduct a pricing review X No CAUSAL FACTORS 1. Not Prescribed 2. Not Adequate as Prescribed 3. Adequate but not Functioning as Prescribed EXHIBIT 8 ... DRAFT 358 Q7001-2-Hy osM 102/103 QuARANTEEAPPROVALs FYez THROUGH FY so KOREA KOREA MEXICO 17.3% 12.0% 25.2% OTHERS 36.3% IRAQ IRAQ :/oTHERS 24.7% 22.7% 34.7% MEXICO 27.0% 24.2% EXHIBIT C - 35 - 35} 07001-2-Hy WALUE OF GSM LOAN GUARANT REVIEWED BY COUNTRY AND FISCAL Y COUNTRY FY 1987 FY 1988 FY 1989 TOTAL Iraq $ 109,956,958 $ 143,564,148 $ 134,915,603 $ 388,436,709 Korea 17,056,624 44,082,935 22,818,646 83,958,205 Mexico 34,801,422 112,431,854 79,122,864 226,356, 140 Other —24,438,486 —60,047,571 — 15.021,534 – 153.521,591 Total $ 186,273,490 $ 360,126,508 $ 311,878,747 $ 858,278,745 EXHIBIT 0 - 36 - š * i FY 1988 SAMPLE SELECTION CRITERIA (1) (2) (4) DIFFERENCE DIFFERENCE FAS COMMODITY BETMEEN BETWEEN DIVISION AGREEMENT FAS COMMODITY (3) PRICE (5) (7) PRICE AND DiVISON PRICE COMBINATION INFORMATION MISSING (6) NUMBER SAMPLE ExPORT AND AGREED/ OF CRITERIA WAS NOT GSM TOTAL OF SELECTION PRICE ExPORT PRICE 1 AND 2 AVAILABLE AGREEMENT SHIPMENTS ExPORTERS INITIAL 3 16 11 17 3 (1) 50 25 SELECTION UNDER/PENDING 2 3 3 10 3 21 7 INVESTIGATION REMAINING 1 13 8 7 0 29 18 FOR REVIEW (1) FAS personnel had located two of the three missing files during the course of our review. DRAFT 364 07.001-2-Hy EXPORTERS SELECTED FOR REVIEW Company 4 62.111 1989 Mexico Soybeans $ 2,608,335 621.12 1989 Mexico Soybeans 3,369,872 6.2537 1989 Mexico Soybeans 4,097,993 Company 5 54995 1987 Egypt Wheat 1,543,500 56614 1987 Egypt Wheat 1,749,300 57453 1987 Korea Wheat 281,971 56624 1987 Mexico Soybean Meal 964,379 56625 1987 Mexico Soybean Meal 644,694 60251 1988 Egypt Wheat 3,827,880 58843 1988 Pakistan Soybean Oil 14,511,370 60500 1988 Korea Soybean Oil 18,562,799 61041 1989 Egypt Wheat 7,666,050 63663 1989 Egypt Wheat 9,454,864 70238 1989 Sri Lanka Wheat 8,980,083 61793 1989 Mexico Soybean Meal 1,275,290 Company 6 56220 1987 Algeria Wheat 2,000,729 55477 1987 Brazil Yellow Corn 3, 175,803 56300 1987 Algeria Dry Beans 2,675,400 58344 1988 Algeria Soybean Meal 5,217,030 58735 1988 Algeria Wheat 2,263,800 58854 1988 Algeria Yellow Corn 2,411,780 11990 1988 Algeria Yellow Corn 4,980,850 60813 1988 Algeria Dry Beans 9,663,898 12308 1989 Algeria Soybean Meal 5,016,375 64077 1989 Algeria Wheat 9,961,700 63257 1989 Algeria Yellow Corn 7,563,028 63019 1989 Algeria Soybean Meal 4,568,760 Company 7 57.157 1987 Ecuador Wheat 1,480,000 54.950 1987 Mexico Yellow Corn 382,760 55324 1987 Mexico Yellow Corn 1, 146,938 55696 1987 Mexico Yellow Corn 1,359,309 56663 1987 Mexico Soybeans 3,837,062 58431 1988 Mexico Yellow Corn 590,543 59307 1988 Mexico Grain Sorghum 525,305 59466 1988 Mexico Soybeans 4,047,846 599.21 1988 Mexico Soybeans 5,574,093 60366 1988 Mexico Soybeans 3,288, 170 58250 1988 Mexico Sunflower Seed 557,375 61893 1989 Ecuador Wheat 2,704,964 12283 1989 Mexico Yellow Corn 769,538 61899 1989 Mexico Grain Sorghum 2,625,577 62085 1989 Mexico Soybeans 2,653,668 63089 1989 Mexico Yellow Corn 4,357,459 633.42 1989 Mexico Soybeans 3,707,458 EXHIBIT H PAGE 2 OF 6 JäArT 366 Company 13 Company 14 Company 15 11498 58885 60293 60294 60663 60987 60988 62485 63.407 63664 64233 55295 55296 56696 57474 551.45 551.46 56708 573.11 55824 55147 11811 12088 121.21 12042 60783 60824 60826 58911 60.123 60815 61410 62254 64177 641.78 61875 63.913 64388 61753 11427 56851 57231 57476 58846 60205 12368 EXPORTERS SELECTED FOR REVIEW 1987 1988 1988 1988 1988 1988 1988 1989 1989 1989 1989 1987 1987 1987 1987 1987 1987 1987 1987 1987 1987 1988 1988 1988 1988 1988 1988 1988 1988 1988 1988 1989 1989 1989 1989 1989 1989 1989 1982 1987 1987 1987 1987 1988 1988 1989 Korea Korea Korea Korea Korea Korea Korea Korea Korea Korea Korea Iraq Iraq Iraq Iraq Iraq Iraq Iraq Iraq Iraq Iraq Iraq Korea Iraq Iraq Iraq Iraq Iraq Iraq Mexico Mexico Iraq Egypt Iraq Iraq Mexico Mexico Iraq Mexico Iraq Iraq Iraq Iraq Iraq Iraq Iraq - 43 - Furskins Furskins Furskins Furskins Furskins Furskins Furskins Furskins Furskins Furskins Furskins Rice Rice Rice Barley. Yellow Corn Yellow Corn Wheat Wheat Yellow Corn Yellow Corn Wheat Wheat Wheat Rice Rice Rice Rice Barley Yellow Corn Soybeans Wheat Wheat Wheat Wheat Rice Rice Barley Grain Sorghum Wood Wood Wood Wood Wood Wood Wood Pulp Pulp Pulp Pulp Pulp Pulp Pulp DRAF 1,028,739 1,413,553 129,705 432,795 1,851,691 530,311 121,943 2,301,616 2,217,997 1,151,416 173,401 3,371,445 3,347, 190 4,042,500 1,697,850 2, 160,900 4,321,800 5,970,773 5,659,500 382,200 2, 160,900 5,999,070 9,281,580 9,790,935 8,004, 150 5,785,626 5,821, 200 1,913,450 4,476, 150 2,334,517 7,089, 193 10,017,315 4,373,250 10,611,563 10,611,563 741, 163 992,407 7,572,950 2,464,955 07001-2-Hy 1,571,920 1,571,920 1,470,000 1,607,200 3,559,360 1,891,400 4,625,600 EXH §§§ IBIT H OF 6 367 Company 16 Company 17 Company 18 Company 19 57197 57833 58141 58142 55946 56184 56450 57021 58548 62035 62792 63673 64242 54728 54729 54730 58.481 58.482 58.483 60213 12425 12432 63575 63911 12304 11228 54719 55731 56077 59827 59459 59.430 593.90 59392 62773 62920 62921 63117 57775 57776 57777 57778 11876 EXPORTERS SELECTED FOR REVIEW 1987 1987 1987 1987 1987 1987 1987 1987 1988 1989 1989 1989 1989 1987 1987 1987 1988 1988 1988 1988 1989 1989 1989 1989 1989 1987 1987 1987 1987 1988 1988 1988 1988 1988 1989 1989 1989 1989 1987 1987 1987 1987 1988 Brazil Korea Korea Korea Mexico Korea Korea Korea Korea Korea Korea Korea Brazil Guatemala Guatemala Guatemala Guatemala Guatemala Guatemala Jamaica Turkey Guatemala El Salvador Guatemala Jamaica Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Korea Korea Korea Korea Korea Wheat Wheat Wheat Wheat Corn Wheat Wheat Wheat Wheat Wheat Wheat Wheat Wheat Tallow Tallow Tallow Tallow Tallow Tallow Tallow Corn Oil Tallow Tallow Tallow Soybean Oil Grain Sorghum Grain Sorghum Grain Sorghum Grain Sorghum Grain Sorghum Grain Sorghum Grain Sorghum Grain Sorghum Yellow Corn Grain Sorghum Grain Sorghum Grain Sorghum Grain Sorghum Furskins Furskins Furskins Furskins Furskins - 44 - 07001-2-Hy $ 2,887,024 2,884,782 2,384,644 329,412 2,414,034 2,654,419 3,480,075 2,757,696 3,074,354 4,040,721 4,299,517 3,452,618 5,809,703 3,439,800 2,028,600 1,764,000 1,978,019 3,857, 138 2,274,721 222,661 913, 135 858,662 686,000 980,000 586,530 348, 194 1,266,993 258,720 204,918 564,480 539,784 617,400 509,355 244,388 974,943 1,449,890 604, 121 673,750 455,298 94,278 254,628 93,565 457,556 EXHIBIT H PAGE 5 OF 6 DRAFT 369 EXPORTER Company Company Company Company Company Company Company Company Company Company Company Company Company 13 Company Company Company Company 17 Company 18 Company 19 Company 20 Company 21 Company 22 i i i : TOTAL 07001-2-Hy WALUE OF GSM LOAN GUARANTEES REVIEWED AL SELECTED EXPORTERS FY 1987 FY 1988 FY 1989 TOTAL $ 0 $ 2,617,017 $ 0 $ 2,617,017 0 31,977,401 17,660,000 49,637,401 10,359,588 24, 111,528 26,054,354 60,525,470 7,607,644 14,620,994 17,215, 150 39,443,788 5, 183,844 36,902,049 27,376,287 69,462, 180 7,851,932 24,537,358 27, 109,863 59,499,153 8,206,069 14,583,332 16,818,664 39,608,065 20,998,215 54,800, 130 50,450,400 126,248,745 5,009,932 14, 281, 127 14,287,651 33,578,710 9,759,777 14, 174,810 5,569,535 29,504,122 23,960,995 O 0 23,960,995 4,606,000 13,720,000 5,880,000 24, 206,000 1,028,739 4,479,998 5,844,430 11,353, 167 33, 115,058 60,495,871 47,385, 166 140,996,095 6,221,040 5,450,760 4,625,600 16,297,400 19,792,086 3,074,354 17,602,559 40,468,999 7,232,400 8,332,539 4,024,327 19,589,266 2,078,825 2,475,407 3,702,704 8, 256,936 897,769 1,695,264 907,830 3,500,863 0 11,456,200 9,507,960 20,964, 160 2,071,447 4,836,002 6,223,897 13, 131,346 10 130 11,504,367 3,632,370 —25,428,861 $ 186,273,490 $ 360, 126,508 - 46 - $ 311,878,747 $ 858,278,745 ... EXHIBIT uniãr I š t&I : l GSM EXPORTER MO. COMPANY 14 55.145 55147 55.284 55146 COMPANY 11 56981 70070 COMPANY 18 SCHEDULE OF AFTER SALES SERVICES AND STAMP TAYES GUARANTEE WALUE AFTER SALES STAMP AFTER SALES TAFTERTSNIES Y SERVICES PROVIDED TAX SERVICE SERVICE STAMP TAX LABORATORY EQUIPMENT $ 4,463 $ 5,250 $ 2,160,900 LABORATORY EQUIPMENT 4,463 5,250 2,160,900 LABORATORY EQUIPMENT 0 1,000 382,200 LABORATORY EQUIPMENT 8,258 9,716 4,287,132 Fumiga's 12,47s (2) 7,670,636 (3) COMPANY 14 TOTAL $ 17.184 $ 33,690 $ 16,661,768 $ 18,000 $ 4,352,889 9,711 __19,540,587 COMPANY 11: TOTAL $ 27,711 $ 23,893,476 Total for RAQ $ 44,895 : 379,674 $ 86,271,595 § 23,893,476 MExiCO - PAYMENTS TO THREE SHAREHOLDERS 0F IMPORTER A $ 40,033 (4) $ 2,120,040 PAYMENYS TO IMPORTER B's PURCHASING AGENT 23,580 (4) 693,312 PAYMENTS TO OMNER OF _15,992 (4) 1,273,053 iMPORTER C COMPANY 18 TOTAL $_79,605 & 4,086,405 DR |AF | TOTAL FOR MEXICO $ 4,086,405 $ 44,895 $ 459,279 $ 90,358,000 $ 23,893,476 IOIAL AFTER SALES SERVICES AND SIAMP TAXES * TOTAL QUESTIONED LOAN GUARANTEED WALUES - $ 114,251,476 --------------- ------------- § : SCHEDULE OF AFTER SALES SERVICES AND STAMP TAXES (1) Comprises 7 GSM agreements with a total port value of $15,134,308. (2) (3) (4) (5) Not shown as part of c.i.f. to f.o.b. calculation. Was requested by Iraq about 11/23/87 to be shipped by Company 14 on January whº at bid sheet dated 11/13/87. Port value per export report was $6,004,189.80, when EEP bonus of $1,693,068.24 and sale of EEP cerificates of $93,461.44 are added, the actual port value becomes $7,790,719.48. None of the payments were identified to GSM agreements. All sales to Importer B were GSM transactions; 79% of sales to Importer C were GSM transactions; and 62% of sales to Importer A were GSM transactions. The prior general majºger of the exporter admitted that $31,500 of payments to Importer C were for a repayment on a GSM agreement as requested by the purchaser. The current general manager of the exporter stated during his first few months with the exporter, he had about 6 requests for pay offs by importers and purchasing agents. This would be done by increasing the commodity purchase price by $5.00/MT and returning $2.50/MT when the exporter drew down on the letter of credit. There was also $21,908.37 paid to 3 exporters for bringing in new customers. The former general manager could not recall what customers that two of the importers had brought in, nor was there a record of sales to the company the the third importer referred. It appears unlikely that such payments would be made on cash sales and all non-GSM sales were cash sales. It would appear a reduction in the selling price would be in effect for cash sales. This amount includes 1/3 of the purchase cost for seven pickup trucks, one landcruiser, calculators, telephones, gifts, car expenses, document legalization fees, custom clearance fees, and travel expenses. nRAFT § s : INFLATION OF GUARANTEE WALUE BY ESTIMATING FREIGHT IN EXCESS OF ACTUAL FRIEGHT 1 2 3 4 5 6 7 FREIGHT COSTS ACTUAL INFLATION PERCENTAGE OF TOTAL INFLATION GSM PER BID FREIGHT OF C&F COST INFLATION QUANTITY 0F COMMODITY EXPORTER NUMBER COMPUTATION COSTS (2 LESS 3) (4 divided by 3) ExPORTED C0ST (4x6) COMPANY 3 56153 $ 29.00 $ 21.00 $ 8.00 38.10 15,400 $ 123,200 (A) 56433 35.00 24.66 10.34 41.93 15,400 159,236 56853 38.00 26.53 11.47 43.23 12,091 138,684 59.752 48.00 44.53 3.47 7.79 13,500 46,845 60266 49.00 47.00 2.00 4.26 14,350 28,700 61845 52.00 49.60 2.40 4.84 15,400 36,960 62310 54.00 60.75 3.25 5.35 10,800 35,100 62309 64.00 60.75 3.25 5.35 10,800 35,100 63805 74.00 70.37 3.63 5.16 10,000 36,300 60265 49.00 47.00 2.00 4.26 14,050 28,100 $ 668,225 COMPANY 14 57474 19.50 18.00 1.50 8.33 23,924 35,886 58911 22.00 20.00 2.00 10.00 51,588 103,176 12042 49.00 40.00 9.00 22.50 16,469 148,221 60.123 22.50 21.50 1.00 4.65 18,000 18,000 61753 1.09 20,000 21,800 (B) 64388 19.75 18.25 1.50 8.22 54,060 81,090 64177 21.00 17.00 4.00 23.53 57,635 230,540 60783 46.00 42.50 3.50 8.24 13,499 47.247 $ 685,960 COMPANY 22 57.913 47.06 37.00 10.00 27.03 12,277 $ 122,770 (A) f.o.b. Sale - $29.00 Estimated for Freight $ 1,476.955 Actual cost Only $21.00 - Commodity Cost Inflated by $8.00 ----------- (B) f.o.b. Sale – f.o.b. price per contract $113.24; f.o.b. per export report $114.33 a difference of $1.09/MT noiſ : Exhibit prepared using Lotus Symphony Software Release 2.0. The percentage of cost inflation was rounded to two decimal places. The quantity exported was rounded to the nearest "if RT ! É COMPARISON OF WOOD PULP f.o.b. PRICES CHARGED UNDER THE GSM PROGRAM TO AVERAGE QUARTERLY U.S. MARKET PRICE DATA FOR COMPANY 15 1 -- 2 3 4. QUARTER PERCENTT GSM ExPORT USA f.o.b. AVERAGE DIFFERENCE OWER (UNIDER) NUMBER DATE coºdin. Type PRICE U.S. PRICE(*) (1 less 2) (3 divided by 2) 11427 (1) 08/22/87 DISSOLVING - SOFT W000 $ 735.70 $ 580 $ 155.70 26.84 57231 ? 10/28/87 BLEACHED HARDW000 KRAFT {} t;80.30 565 115.30 20.41 56851 (1) 11/06/87 BLEACHED HARDWOOD XRAFT (S 735.50 565 170.50 30.18 57476 (3) 12/23/87 DISSOLVING SULPHITE W000 PULP 736.40 615 121.40 19.74 12368 (1) 03/07/89 DISSOLVING SULPHITE WOOD PULP 1111.00 810 301.00 37.16 (*) Per ton value delivered in U.S. market. This included normal freight allowance for delivery to consuming paper mill. Prices are the best estimate of actual transaction prices. (1) f.o.b. Sawannah, GA (2) f.o.b. Mobile, Al (3) f.o.b. Wictoria, B.C., Canada -- DRAFT º i 376 07001-2-Hy 1:\]\[] * sapeld letupap ową oſ paņem nº leº 3.mara sø6e4u32mºd *O*z eseø løſ º aueſa, jos KuoŲduºs snąon 6u , sn pºuedaud 4 ſqļųx3 : 310N oppxaw go Junº º sºn ºun wouy ºue sºoļud ‘q’0’ y llw w6* 1169”）.99*0169/92/0102*8266°Cglºt，vlººt69/90/90 GM299 89*0996°9tºlº 1169/02/6010*0929°911* 1169* 1169/92/90 19209 11* 1290* 8.Iſtwº w I69/01/1019. * 9962*911* 119， 1169/92/1，0 699€9 l l º £v92* 902° 2169/11/9019. * 9962*911* 119′′ 1169/92/90 0C9C9 1， * 0.1£1*999°689/09/2190*0986°90£” 0192*9109/12/60 €ZIZI 6€* 899.1* 9(18°699/01/1190°6961*9£®*0129°9189/c1/60 £2009 99° 1661* 01£1* 1189/91/10£®* '989.1*699° 1120.^ 1209/12/00 90/69 29°CII10* 2189*0188/12/9096°069.1*01£8* 1169* 2289/90/00 16969 99’680，0109* 1188/61/2092* w：2161° 2110^600* 2219/01/11 91089 80*9681*0122* 1188/02/1092* ſwz161° 2118*600* 2219/01/11 9 1089 Iwº O/9.1* ，9.1*918/19/80|（9°881， *911* 929* 1119/11/90 99699 19° 21twy” ºIl ‘918/10/9060*9.8Gººt，01*999*0119/92/10 ſºlº99 81* 2896“ v86*918/91/909：1* 16£2*901°9£6* 0119/92/10 WL999 91°08º 1” w18° 9’18/w?/！0w1*9816” º01*919*0119/02/10 W/999 £1* 18196^{ſ}19°918/60/90w1* 9816” º01*919* 0118/92/10 W/999 El * 9./92* ſy19* 918/10/19029* w/tºz” tº69”9£6*699/10/21 CZ609 lzº wae£2” w $ 0.1° G $ 18/10/2029* w/*2* tº $69 ºg 3 £6*6 $ 98/10/21 €2699 ( 8 Aq (8 ssºl C) 1800x331W0( w /ſq(w ssºl £) 10W MIN0030I\ld31W0*0N Pºp!A!p 6) 30N3833310 30 XE3A180dx3 pºp! Aſp 9) 30N 383331030 XR33 A 10MM1N00 10W MIN00（SR) off';301\ld3，01'dd301， \!3^00TNOM 1N3083duſ;}}UTOA 0168l99�£21 (IM) NI ) 8 ANW&W00 S3018d 13XNW OTNOM ONI TIWA3\ld 01 WW890Nd WS$ 83 UNI, 1135 niwſiº S3018 d. 3018 30 ROS1 №wdwOO EXHIBIT N - 53 - 379 07001-2-Hy MJøa į į30 km į polinio) .... squæuſed use0 - - • Januodu, aun un ļa sa les eųn fiuņeļņobºu /ſqsnopjąU00 s3 10S uo , qopsupjų aun sºnuensJaspųojnd6uļuøaj 84u1:310N0N 393 T EXHIBIT Q | – \，\！ •£ ©ae (---) # | BETT.ddnS - "Sºn SEHITYCE （OOH， ĐNLIVłEkſO 8,9 ANVdWOO \!EISVHOHT\d|9|N|NEAHELINI |- - RR - § º : COMMISSIONS PAID BY COMPANY 15 UNDER THE GSM PROGRAM For January 1, 1987, through December 21, 1989 PERCENT OF COMPAN'ſ 15 COMPANY 15 COMPANY 15 (1) COMMISSIONS GSM WALUE EURO ºf BAGHDAſ) TOKYO AGENT HIKIATEXIM TOTAL T0 WALUE NUMBER EXPORTED COMMISSION COMMISSION COMMISSION COMMISSION COMMISSION COMMISSION ExPORTEn 11427 $ 1,603,475 § 11,996 $ 19,234 $ 13,995 § 0 $ 0 & 45,225 2.82 57231 1,488,266 4,961 14,883 4,961 14,883 29,765 69,453 4.67 56851 1,603,124 11,933 19,229 13,992 0 32,063 77,217 4.82 57476 1,626,858 11,904 19,522 13,888 0 32,537 77,851 4.79 58846 3,613,170 15,280 30,601 24,234 0 36,320 106,435 2.95 60205 1,922,076 9,610 19,221 43,247 0 0 72,078 3.75 12368 4,708,330 47,083 47,083 127,125 0 0 221,291 4.70 TOTAL $ 16,565,299 $ 112,767 $ 169,773 $ 241,442 $ 14,883 $ 130,685 § 669,550 4.04 (1) DECLARED A RESERVE ACCOUNT BY COMPANY 15 OFFICALS NOTE: Exhibit prepared using Lotus Symphony Software, Release 2.0. Percentages were rounded to two decimal places. DRAFT ! É GSM EXPORTER MO. COMPANY 3 (1) - 56853 60486 62309 56433 63887 56153 60265 60266 63805 59.752 62310 61845 TOTAL COMMISSION COMPANY 11 70070 56981 TOTAL COMMISSION GSM PRICING REVIEW COMMISSIONS PAID TO EXPORTERS (1) Commision on non-GSM sales was $0.50/MT PORT QUANTITY PER UNIT TOTAL WALUE EXPORTED COMMISSION COMMISSION EXPORTED PERCENT 12091 ; 4.60 $ 55,619 $ 2,938,528 1.89 15000 5.00 75,000 6,555, 1.14 10800 1.00 10,800 4,233,600 0.26 15400 4.71 72,534 3,846,208 1.89 14150 1.00 14,150 5,801,500 0.24 15400 1.00 15,400 3,765,300 0.41 14050 5.00 70,250 6,617,550 1.06 14350 5.00 71.750 6,758,850 1.06 10000 1.00 10,000 4,232,500 0.24 13500 3.00 40,500 4,414,500 0.92 10800 1.00 10,800 4,233,600 0.26 15400 1.00 15,400 6,148,450 0.25 $ 462,203 $ 59,545,586 0.78 241303 $ 1.00 $ 241,303 $ 4,441,723 5.43 2098.9 33.13 653, 19,939,375 3.28 $ 894,659 $ 24,381,098 3.67 * * * 4 º: 383 EXECUTIVE SUMMARY REPORT: USDA ADMINISTRATIVE REVIEW OF IRAQ GSM-102 PROGRAM In October, 1989, the U.S. Department of Agriculture and the Commodity Credit Corporation (hereinafter "USDA") initiated an administrative review of certain aspects of the Export Credit Guarantee (GSM-102) program for Iraq. This administrative review was undertaken in response to allegations that surfaced as a result of the investigations of the Atlanta, Georgia agency of Banca Nazionale del Lavoro (BNL), about possible irregularities in the GSM-102 program for Iraq. This review focused on certain transactions and issues that were identified as a result the BNL investigation in Atlanta. Iraq began participating in the GSM-102 program in 1983 during which approximately $214.7 million in sales of agricultural commodities were guaranteed by CCC. Program levels increased each year thereafter, reaching a high of $1.051 billion in FY 1989. For FY 1990, program levels were set at $500 million, and to date, nearly all of that line has been registered for guarantees with CCC. Review of the Iraq GSM-102 program began last fall after USDA learned of allegations that approximately $720 million of CCC- guaranteed loans were part of a loan portfolio being investigated by the Office of the United States Attorney for the Northern District of Georgia. Allegedly, the CCC-guaranteed loans were part of a clandestine loan operation in which officials of the Atlanta branch of Banca Nazionale del Lavoro (BNL) had booked more than $2 billion in unauthorized and unreported loans to Iraq. As a result of its initial inquiries into these loans, USDA initiated an administrative review focusing on the following issues: o unusually high FOB prices obtained by exporters in connection with GSM-guaranteed sales to Iraq financed through BNL; o the arrival in Iraq of agricultural commodities shipped under the GSM program. o provision of additional goods or monetary rebates, as so-called "after sales service", in connection with GSM-guaranteed export sales to Iraq. o payment of certain Iraqi domestic taxes in conjunction with GSM-guaranteed sales. 384 The USDA administrative review has involved review of BNL records of GSM-102 transactions; review of CCC records; review of a certain exporter records; telephone interviews with several companies involved in the agricultural export trade; and discussion with officials of the Government of Iraq and its various state purchasing enterprises, and review of Iraqi records, during a visit to Baghdad on April 18-22, 1990. As a result of its administrative review, and its analysis of bank, exporter and Iraqi records, USDA has reached some initial conclusions about past conduct of the Iraq GSM-102 program. They are as follows: (1) . USDA analysis indicates that during the period 1985- 1987, sale prices to Iraq for corn, rice and sugar under the GSM- 102 program were much higher than price levels in other markets. Price levels paid by Iraq appear to be at least $10/MT higher than benchmark world prices for rice and corn, and $15-40/MT higher for sugar. It appears that these price levels may have resulted in part from supplier perceptions that Iraq was a very high risk market due to wartime conditions; because of the limited number of U.S. suppliers who were willing to participate in this high risk market; and, Iraq's policy of seeking freight financing which only a limited number of suppliers able or willing to provide. - (2) In some of the higher priced transactions reviewed, it appeared that a portion of the high FOB prices reported to CCC -- approximately $8-10/MT -- represented an allocation by the exporter of what should have been considered either freight costs or freight financing charges. It appears, therefore, that some this "allocation" technique may have been used to shift some of the freight financing of a C&F sale to the loan guaranteed by CCC during a time period in which CCC did not permit financing of freight under its guarantees, and that Iraq agreed to these allocations. This practice may have constituted violations by certain exporters of program regulations. While these allocations did not result in any losses to CCC or the U.S. Government, they did result in a diminution of guarantee amounts available under the program. (3) The USDA administrative review uncovered no evidence to suggest that there has been diversion of commodities sold to Iraq. The lack of "proof of arrival" in either bank or exporter records appears to be linked to the complexity of overland shipment system that Iraq had to develop after its Basra port was closed during the height of the Iran-Iraq war. It appears, based on a review of sample records, that Iraq maintains records to establish proof of arrival for its GSM purchases. 385 3 (4) On several occasions during the period 1987-1989, state enterprises of the Government of Iraq appear to have requested "after sales services" from U.S. exporters, either in the form of requests for additional agricultural products, for non- agricultural products (e.g., truck parts or tires), for cash rebates or 'discounts, or for use of designated Iraqi shipping companies. Iraq has identified several exporters who apparently provided after sales service in response. That information has been turned over to USDA’s Office of Inspector General for further investigation. Iraq’s Deputy Minister of Trade has provided CCC with a letter confirming that the Government of Iraq has instructed all of its state enterprises not to request or accept after sales services in connection with any future GSM Contracts. (5) Iraq has also requested some exporters to assume responsibility for paying a domestic Iraqi "stamp tax" in connection with GSM transactions. Iraq's Deputy Minister of Trade has confirmed in a letter to CCC that Iraq has changed its policy and will, in the future, specifically exempt GSM transactions from application of this tax. 388 3 In the case of a payment default under the foreign bank letter of credit, CCC will pay the exporter or its assignee 98 percent of the principal amount due, and up to 4 and 1/2 percent interest. When it makes payment under a guarantee, CCC takes rights of subrogation, thus permitting it to pursue the claim against the defaulting bank or against the foreign country. Iraq began participating in the GSM-102 program in 1983, shortly before formal diplomatic relations with Iraq, which had been severed in 1967, were reestablished. In the first year in which Iraq received guarantee allocations under GSM-102 program, approximately $214.7 million in sales of agricultural commodities to Iraq were guaranteed by CCC. Program levels increased each year thereafter, reaching a high of $1.051 billion in FY 1989. For FY 1990, program levels were set at $500 million and, to date, nearly all of that line has been registered for guarantees with CCC. For the first four years of the program, CCC registered the value of sales of Iraq under the GSM program on the basis of the commodity value, FOB U.S. port. In late 1987, in response to requests by exporters serving that market to accommodate the need for freight financing of agricultural sales, USDA changed its policy to permit exporters to register their sales to Iraq on the basis of the C&F values. The GSM regulations were amended to reflect this change in policy. The BNL Investigation In August, 1989, the Office of the United States Attorney for the Northern District of Georgia was told that officials at the Atlanta branch of Banca Nazionale del Lavoro (BNL) allegedly had been conducting a clandestine "greybook" loan operation, and had booked more than $2 billion in unauthorized and unreported loans to Iraq. This information led to the issuance of search warrants, FBI inspection of BNL bank records and initiation of a grand jury investigation under the auspices of the Office of the United States Attorney. USDA became involved in the investigation when federal investigators and banking officials determined that approximately $750 million of the greybook loans resulted from assignments of . letter of credit proceeds for agricultural sales in conjunction with export credit guarantees issued by the Commodity Credit Corporation (CCC) under its GSM-102/103 programs. Investigators with USDA’s Office of the Inspector General (USDA-OIG) began assisting the U.S. Attorney’s investigation in early September, and have continued to work on the case since that time. The BNL investigation has proceeded in the grand jury since that time. Indictments have yet to be returned. The specific 389 theories being pursued by the United States Attorney, the identity of targets of that investigation, and the evidence clºveloped are protected by the rules pertaining to grand jury secrecy and that information has not been available to USDA. In late September, 1989, questions were raised about possible irregularities in connection with the GSM-102 program for Iraq. These questions were apparently motivated by the large- amount of CCC business that was conducted by BNL-Atlanta, as well as allegations that Atlanta-branch BNL officials may have received payments from exporters who export sales included some - agricultural financed with the assistance of CCC export loan guarantees. Upon learning of these rumors, USDA officials sought additional information, and consulted with USDA-OIG officials in Atlanta. USDA ADMINISTRATIVE REVIEW Initial Information Received: Review of BNL Bank Records On Thursday, October 5, 1989, USDA officials in Washington were briefed on the current status of the BNL investigation by a USDA- OIG investigator from Atlanta who was assigned to that case. USDA officials learned that the investigation centered on possible bank fraud in the arrangement of large amounts of undisclosed loans, and bank reporting violations. The investigation was also looking into possible kickback payments, questionable "consultant payments", and other irregularities. While the investigator was not aware of any specific irregularities affecting the GSM program, he cautioned that the investigation was at a very early stage and noted the large amount of GSM loans in the BNL portfolio. USDA personnel from the Foreign Agricultural Service (FAS) and the Office of the General Counsel (OGC) were dispatched to Atlanta to gather additional information. On the afternoon of October 11, 1989, and a week later on October 18-19, USDA personnel also visited the BNL offices in Atlanta and reviewed records of GSM guaranteed transactions in the BNL files. This review was conducted pursuant to USDA's regulatory authority to review exporter and assignee records, in accordance with the provisions of 7 CFR Part 1493. They were able to review approximately 50 GSM files and associated letter-of-credit files, and spoke with both USDA-OIG investigators and with bank examiners from the Federal Reserve. In this initial review, USDA officials focused on several potential problem areas: 390 o possibilities that GSM exporters that made sales to Iraq may have made personal payments in cash to officials of the BNL Atlanta branch. o apparent lack of documentation in the BNL files demonstrating that agricultural commodities shipped to Iraq under the GSM program arrived in Iraq. o suspicions that exporters doing business with Iraq through BNL might have received high prices and made unusually high profits; o possibilities that GSM exporters were being required to provide additional goods or to rebate money, as so- called "after sales service", in connection with their export sales to Iraq. During the same time period, USDA attorneys also interviewed officials of one exporter who had complained, independent of the BNL matter, about requests from Iraq for so-called "after sales service" in connection with GSM sales. As a result of those discussions, interviews and document reviews, USDA attorneys made the following evaluations about the evidence then available regarding possible irregularities in connection with the GSM credit guarantee programs: (1) "Exporter Payments to Bank Officials." There was no evidence of any payments to bank officials in the GSM files examined. (2) "Arrival of Commodities at Destination." There was no specific evidence of any GSM shipment having been diverted prior to reaching Iraq. The concerns about arrival at destination appeared to have stemmed from the lack of shipping documents, bills of lading, or landing certificates in the BNL files that would have demonstrated conclusively that the commodities entered Iraq. Indeed, it appeared at first that many files were missing any bill of lading documents whatsoever. While the USDA attorneys were in Atlanta, however, they were able to determine, along with the OIG investigators, that the lack of ocean bills of lading in the files being reviewed had resulted from a misunderstanding on the part of a paralegal who was xeroxing requested files. After discovering this problem, USDA attorneys were able to obtain copies of the original document files for a number of GSM-guaranteed trades and found that those files uniformly contained ocean bills of lading for shipment either to Aqaba, Jordan or to ports in southern Turkey. Because the Iraqi gulf port of Basra has been closed by war damage, all of the GSM shipments were being delivered to either Jordanian or Turkish ports, and then to be trucked overland by the Iraqi Ministry of Transportation to Iraq. From review of the files, it 393 - - - continue to monitor closely developments in Atlanta, as well as continuing its own administrative review. Review of Exporter Records Able to obtain only limited information about the investigation in Atlanta, USDA officials decided to pursue additional information under USDA’s regulatory authority. USDA attorneys conducted a preliminary analysis of some sales reviewed in the BNL bank records, and had determined that price levels for some commodities appeared to be higher than would be expected in light of market levels prevailing at the time of those sales. Based on its examination of the BNL records, USDA had identified a number of the apparently high priced sales as having been made by a New York-based exporter, Entrade, Inc. After conferring with the Office of the U.S. Attorney to insure that any USDA administrative review would not conflict with the work of the Atlanta investigation, USDA sought access to Entrade's records, again under its own regulatory authority as set forth at 7 CFR 1493. 14. Shortly thereafter, specific allegations were made public regarding payments to BNL bank officials. In an article in its November 29 edition, the Wall Street Journal reported on an Internal Revenue Service (IRS) lawsuit in Atlanta in which the IRS was attempting to freeze the assets of one of BNL's former directors, alleging that he had not reported in his tax return $280, 000 he had received from Entrade. During December, 1989, USDA attorneys conducted a review of all records of GSM-guaranteed sales made by Entrade at the company offices in New York City, comparing the information in those records with data submitted to CCC Operations Divisions at the time when the GSM guarantees had been requested. In total, USDA attorneys reviewed the records for fifty-two sales to Iraq for which credit guarantees were issued: 16 wheat, 14 sugar, 11 rice, 3 dry beans, 2 barley, 2 yellow corn, and one sale each of lentils, dry peas, corn oil and sunflower oil. The records made available with respect to each sale were sufficiently complete to permit USDA attorneys to perform a reasonably comprehensive analysis of those fifty transactions. In general, the files contained the initial request for guarantees, export reports, shipping documents, including bills of lading, * inspection and survey documentation, letters of * In almost every case, the bills of lading indicated shipment by ocean going vessel to either the port of Aqaba, Jordan or Iskenderun, Turkey. In a few limited cases, the files contained documents indicating some mode of overland 394 9 credit, drafts drawn on letters of credit, commercial invoices to Iraq for goods and freight, and commercial invoices from commodity suppliers or freight companies. The files also included numerous other documents including telex traffic and other communications surrounding the sale. CCC records indicated that it had issued guarantees to Entrade for fourteen (14) sugar sales to Iraq. USDA was able to find files which appeared to document all aspects of those fourteen sales. Based on the information in the exporter’s files, USDA was able to make an approximate calculation of the profit margin which the exporter had obtained on each sale * by comparing the revenue obtained (based on the invoiced value of the transaction, either FOB or C&F basis) with the exporter’s basic costs for commodity and freight (based on invoices from suppliers). USDA was able to link these invoices, in most cases, to supplier contracts or confirmations which coincided, within a day or two, of the date of sale to the Iraqi customer reported by the exporter in its application for credit guarantee. In almost all cases, sales were matched with purchases on the same day or with a few days. USDA reviewed fourteen sugar sales to Iraq which occurred during the period July, 1985 through October, 1987, and répresented about one-half (14 of 29) of all GSM-guaranteed sugar transactions during the period. For each of those sales, the exporter enjoyed margins ranging between $2.77 and $37.50 per metric ton, based on a comparison of the sale price with the exporter’s replacement cost. Between April 1986 and February 1987, the sales resulted in very high margins of approximately transportation to Iraq, or that the shipment had been consigned to an agent of the Iraqi Land Transport Ministry for overland shipment. However, in most cases, the files did not contain overland bills of lading to any Iraqi destination. * The term "approximate margin of profit" means the difference between the transaction price and replacement cost. These were verified for each sale through contract/sales confirmation documents and commercial invoices. In all the transactions reviewed, both the sale of the commodity to Iraq and the purchase of the same commodity from the supplier occurred at the same time, or within a few days (commonly referred to as "back-to-back" or matched trades) . Where the transaction included freight, the price charged Iraq for the freight component and the shipping company’s invoiced price for the freight service were similarly verified. The profit calculation was "approximate" because it did not, for example, include any adjustments for various demurrage claims, inspection costs, or overhead, etc. Thus, it is a reasonably close, although not exact, assessment of profit or loss for each sale. 395 10 $15–$37.50 per metric ton. During this time period, sale prices ranged between $162 and $281 per metric ton, on a C&F delivered basis. These approximate profit levels appeared to be much higher than those generally experienced by the export businesses in commodity trading. USDA analyzed both these sale prices, and sale prices reported by other exporters in the same market during the July 1985 to October 1987 period with some common world benchmark price -- the London daily spot price for white refined sugar and the "French Whites" price quoted in the Paris market. ” In the latter case, USDA used the French Whites closing futures contract prices for the month of shipment, as quoted on the date of sale. Based on those prices, USDA concluded that almost all GSM refined sugar sale prices to Iraq during the period were at similar levels, substantially above benchmark world prices. USDA also reviewed in detail eleven rice sales made by Entrade to Iraq under the GSM-102 program during the period, and found the pattern similar to that observed for sugar sales, although the approximate profit margins were not quite so dramatic. Between December 1985 and November 1986 exporters enjoyed approximate margins of profit of $7 to $20 per metric ton, although between January and April 1987, its approximate margins of profit dropped to $1 to $3 per metric ton. With the aid of specialists in FAS’ Grain and Feed Division, a series of approximate weekly market prices for No. 2 rice, FOB Gulf, was developed for the period June 1986 through June 1987 and used in the analysis. It appeared that both the prices for the specific transactions reviewed, as well as the sale prices for other rice sales to Iraq during this period, were approximately $10-20 per MT above this benchmark world price. USDA attorneys also reviewed two sales of corn to Iraq under the GSM program during the period, both of which involved very significant volumes. Its first sale in September 1986 was for * There is, unfortunately, no quoted futures market for U.S. refined sugar, FOB. Gulf. Specialists in USDA’s Sugar Group advised that the only consistently quoted world prices for refined sugar are in the London and Paris markets. In the London market, the price for refined sugar -- the London No. 5 contract price -- were reported only on a spot basis. The "French Whites" series, quoted from the Paris market, provided both daily spot and future contract closing prices for refined white sugar. Both series were published in the weekly International Sugar Report by F.O. Licht, a West German commodity information service. Use of either price series -- London or Paris -- is necessarily imperfect due to differences from FOB Gulf prices because of relative freight advantages to many destinations. 396 11 more than 100,000 metric tons; a second sale, three months later, was for 75,000 tons. Both sales were on an FOB Gulf basis for No. 2 yellow corn in bulk. Based on confirmations/contracts and commercial invoices for both purchase and sale contained in the exporter records under review, USDA was able to estimate approximate margin of $16 to $20 per MT these sales. These sale prices were also compared with benchmark world prices -- based on Chicago Board of Trade closing prices for No. 2 corn, FOB U.S. Gulf, during the period -- and that comparison indicated the sale prices to be $15-20 per MT above world bench mark prices. USDA also compared these prices with other FOB sale prices registered under GSM during the period, and determined the transactions under review to be as much as $10-12/MT higher than prices obtained by other exporters. However, the analysis indicated that all exporters were obtaining prices at least $8-10 per MT above indicative world price levels. The review of Entrade’s records also included thirteen wheat sales made to Iraq under the GSM program. Of those thirteen sales, eleven sales also involved the award of bonus certificates under the Export Enhancement Program (EEP). The files appeared to contain complete documentation of each sale including the confirmations and/or contracts and commercial invoices for both the sale and purchase of the commodity. In the eleven cases where EEP bonuses had been awarded, the files also contained records of the income obtained by the exporter through sale of the bonus certificates. USDA analysis of these sales revealed that profit margins for wheat sales averaged about $2 per metric ton -- in line with expected margins for the bulk commodity business -- and well below the margins apparent in the sugar, rice and corn transactions. The records indicated the same approximate margins for both EEP and non-EEP sales. Meetings in Baqhdad and Review of Iraqi Records In January, 1990, USDA reported to the NAC that its administrative review of the Iraq GSM-102 program had, thus far, revealed a pattern of unexpectedly high pricing for certain commodities -- corn, sugar and rice -- sold to Iraq during the period 1985-1987. USDA had focused initially on one particular exporter -- Entrade, Inc. -- because there had been allegations made in the Internal Revenue Service litigation linking that exporter with unreported payments to BNL officials. Although the USDA review had determined that Entrade had received very high prices, and enjoyed high approximate profit margins for its sales to Iraq, review of sales by other exporters revealed prices that were also high by comparison with benchmark world prices. USDA 402 17 higher than the Entrade bid, and because it offered no financing for freight. The Intradevoo bid was accepted on an FOB basis, and shipment was arranged through Aqaba, Jordan using shipment services which had been contracted with a Geerbulk-led joint venture on a fixed-price annual basis. Subsequently, both the Entrade sale and the Intradevco (Dreyfus) sales were registered for GSM guarantees. - GSM-102-551.90 SEF announced a tender for 300,000 MT of yellow corn in its Notice No. (13) 1986, published on or about August 1, 1986. The Notice was published in the Baghdad Observer and in other Arabic- language newspapers, and specific terms and conditions of the tender were made available through SEF's offices. The tender required bidders to submit a 3% bid bond, and announced a closing date of August 13, 1986. The tender was for No. 2 U.S. yellow corn for Oct/Nov./Dec, 1986 shipment. The tender permitted bids on FOB or C&F bases, and anticipated deferred payment for the FOB portion under the GSM credit guarantee program, as well as 720 day deferred payment for the freight and shipping costs. - In response to this tender, SEF received seven bids. Again, four bids were rejected for failure of the bidder to submit the 3% bid bond required in the tender specifications. The three qualifying bids were: Company FOB US Gulf C&f Aqaba/Isken. C&F Baqh' d Arab Finagrain $178.00 Entrade $190. 00 Intradev.co $80.50 $120.00 $158.50 (Dreyfus) The bids were submitted to a committee of SEF's Board of Directors, which confirmed the rejection of the four bids without bond, and which directed SEF staff to invite the remaining three bidders to submit alternative bids and to direct their local representatives in Baghdad to visit SEF's offices for further negotiations. When USDA requested any documents relating to these negotiations, GOI officials asserted that negotiations had been conducted orally and that their files contained no additional documents. According to GOI officials, after negotiations a contract was awarded to Entrade which had reduced its offer first to $175.00/MT, C&F Baghdad, and finally to $171.50/MT, C&F Baghdad. Entrade agreed to deferred payment terms for the entire C&F 404 19 GSM-102-54977 On November 12, 1986, GFS announced a tender for 30,000 MT of No. 2-4 U. S. rice in two cargoes for Jan. /Feb. 1987. GFS records indicate that the tender was transmitted by telex message to 34 potential suppliers. Companies were asked to submit bids for up to 30,000 MT. GFS requested C&F bids (Iskenderun or Aqaba) on deferred payment terms, with FOB financing guaranteed under the GSM program, and deferred payment of one year for freight. By close of the tender, GFS had received eight responses, seven with specific bids and one from a company (American Rice) indicating that it would not participate. GFS received no response from the other 26 companies. The bids of the seven participating companies were as follows: Company FOB US Gulf C&F Isken. C&F Aqaba Balfour-McL. (Jan) $226.00 $257.00 $259.00 (Feb) $228.00 $257.00 $259.00 Benjar Trank (Jan) $224.53 $254. 53 $263.53 (Feb) $224.53 $254. 53 $263.53 Continental (Jan) $226.00 (Feb) $225.00 Comet Rice (Jan) $229.00 (Feb) $230. OO Entrade (Jan) $254.00 Euro Maghrib (Jan) $238.96 $257.09 $261.96 (Feb) $238.96 $257. 09 $261.96 Riceland (Jan) $221.28 $245.28 $250. 28 (Feb) $221.28 $245. 28 $250. 28 GFS provided a competitive analysis of these bids to its committee, and was directed to counteroffer to all seven companies for 15,000 MT at price terms of either $243.50 C&F, Iskenderun, or $248.50, C&F Aqaba. This counteroffer | contemplated an FOB, U. S. Gulf price of $220.50, and freight costs of $23 to Iskenderun and $28 to Aqaba. GFS received replies from five companies accepting its counteroffer. Due to the price levels, which GFS deemed favorable, it executed purchases from those five companies of 105,000 MT for delivery in the January–March, 1987 period, despite the fact that its original tender had been for only 30,000 MT. Contracts were awarded to Comet Rice (30,000 MT), 405 20 Continental (15,000 MT), Euro Maghrib (15,000 MT), Entrade (15,000 MT), Riceland (30,000 MT). All sales were made at the price levels in the counteroffer, with the FOB value financed pursuant to the GSM program, and with freight on a cash basis. All sales were eventually registered with the GSM program on an FOB basis of $220.00/MT. USDA analysis indicates the FOB prices offered by all participants in the tender were well above apparent replacement costs for rice in the U.S. market. For example, the FOB portion ($220/MT) of the final contract price was approximately $9 higher than the supplier invoice price paid by Entrade for the rice shipped, and approximately $8-10/MT above the USDA estimated FOB price for the period. It should be noted, however, that the FOB price reported for this sale was not an actual transaction price, but rather an allocation of the FOB portion of a C&F contract price. GSM-102-54.464. On September 7, 1986, GFS issued a notice of tender for 45,000 MT of U.S. No. 2-4 rice, to be shipped in three cargoes for Oct/Nov./Dec 1986 delivery. The request asked for bids on a C&F Iskenderun, Turkey or Yenbu, Saudi Arabia basis. Payment was to be on 3-year deferred terms under GSM for the FOB portion, and deferred payment of at least one year for freight. By its terms, the tender closed September 12, 1986. GFS records indicate that the notice of tender was telexed to a list of 33 potential suppliers. By the close of the tender, GFS had received responses from 10 suppliers, three of which indicated that they would not participate. The other nine companies submitted bids as follows: Company FOB US Gulf C&F Isken. /Yenbu C&F Baghdad Al-Haddad $274.00 Balfour (Oct.) $267. 00 / $273.00 (Nov.) $268.00 / $274.00 (Dec) $270.00 / $276.00 Comet $235.00 Continental $226.00 Entrade $219.85 $254 .85 $299.85 Euro Maghrib $233.00 $253. 60 Riceland $221.28 $243. 29 / $249.88 406 21 GSF counteroffered to all participants at the following price levels: $220/MT, FOB U.S. Gulf, $243.28 C&F Iskenderun or $248.78 C&F Aqaba. This counteroffer was accepted by a number of the participants, and GSF concluded contracts with Comet (15,000 MT), Entrade (30,000 MT), Euro Maghrib (15,000 MT) and Riceland (30,000 MT). Subsequently, GSF asked Entrade to provide an additional cargo of 15,000 MT on the same terms, and Entrade agreed. - Note that Entrade concluded its sales of all three cargoes on a C&F basis, in which negotiations clearly identified the FOB value of the sale as $220/MT. The FOB portion of the sales were to be financed under the GSM program, and those three cargoes were subsequently registered with the GSM program under three different guarantee numbers. Entrade also agreed to arrange for freight financing for two of the three cargoes through the Turkish Central Bank in accordance with the Iraqi-Turkish transportation protocol; freight for the third shipment was paid on a cash basis. It should be noted that in the two cases where Entrade agreed to payment of freight on a deferred payment basis, it later asked GFS to open letters of credit for the FOB portions of the sales at $228/MT, an increase of $8/MT above the amount previously bid and agree to. GFS agreed to this request. Thus, where Entrade agreed to deferred payment terms for freight, it subsequently increased the FOB portion of the price which it reported to CCC in its GSM registration. In the case where GFS paid freight on a cash basis, there was no increase FOB price ($220/MT) registered with CCC. GSM-102-530.30 & GSM-102-53031 On March 26, 1986, GFS issued a notice of its intent to purchase 30,000 MT of No. 2-4 U. S. rice in two cargoes for May/June 1986 shipment. The conditions of the tender were for GSM guaranteed financing for the FOB portion of the sale; freight was to be paid on a cash basis. GFS file documents contains a list of 29 prospective suppliers to whom the notice was sent. The notice established a closing date of April 4, 1986 for initial bid responses. GFS documents indicate that GFS received responses from twelve suppliers. Entrade was among the twelve responding suppliers, and initially offered to supply 30,000 MT at the following prices: - C&F Aqaba C&F Isken. C&F, Yenbu $323.95 $3.17. 4.5 $323.95 Other suppliers participating included Woodward & Dickerson, Riceland, Euro Maghrib, Comet Rice, Continental, Genpro, American Rice, Haddad Bros., and Trans Ocean. After evaluating the offers, GFS issued its counteroffer to all participants asking 407 22 for revised bids. GFS records contain an exchange of numerous telexes between GFs and Entrade between April 14, 1986 and April 18, 1986 during which the price was gradually Ilºgotiated to contract prices of $270.98, C&F Aqaba, and $264. 46, C&F Iskenderun. The final payment terms remained as originally proposed -- GSM guaranteed financing for the FOB portion of the sale, and cash for the freight portion. During the entire bid and negotiation process, Entrade's bids were always on a C&F basis; no FOB prices were quoted. As in the other cases, GFS eventually purchased a much greater amount -- 105,000 MT -- than the 30, 000 MT it has announced in its original notice. GFS entered into contracts for purchase with five different companies -- Entrade (30,000 MT), Euro Maghrib (15,000 MT), Riceland (15,000 MT), Trans Ocean (30,000 MT) and Woodward & Dickerson (15,000 MT) -- all at almost identical prices. The FOB prices registered for these sales all ranged between $241.48 and $244.00 per MT. c. Sugar Sales The State Establishment for Foodstuffs and Trading Co., Baghdad, ("F&T") is the entity within the GOI responsible for purchasing and importing foreign sugar. Similar to the practice of GFs in rice tenders, F&T maintained a list of potential suppliers -- about 15–20 companies -- which are notified of its tenders through telex messages. Typically, the closing date of a tender was within a week of the day of notice. Sugar tenders differed from rice tenders in a number of respects. Most significantly, F&T bought its sugar on an "any origin" basis. While tenders for rice and corn were for U.S. product to be financed under the GSM program, F&T did not limit its purchases to U.S. origin. During the period under review -- 1986-1988, U.S. export sugar was trading at a significant premium to the world market. F&T was clearly aware of this price premium; evaluation documents reviewed uniformly contained a reference to the prevailing London spot price for refined sugar which F&T said that it constantly monitored. F&T bought U.S. sugar only where it determined that the premium that it had to pay for U.S. sugar was justified by the advantages associated with GSM-guaranteed credit. Where, in the evaluation of F&T, the U.S. price was too high even, it would purchase on a cash basis from other origins. Another difference in the tenders was that F&T typically purchased only the amounts for which it had originally tendered. Unlike the case of rice -- where GFS would purchase amounts well in excess of those originally announced in the tender notice -- F&T tendered for and purchased much smaller quantities. Oftentimes, it purchased for next month delivery and, therefore, 408 23 was operating in the equivalent of the spot market. Indeed, as mentioned above, when determining the level of premium it was paying for U.S. sugar, F&T analysts appear to have gauged U.S. bids against the daily spot price in the London market. Finally, the sugar tenders differed from the rice tenders in that there were generally very few U.S. participants. Although the F&T supplier list contained a number of U.S. suppliers; in the cases we reviewed F&T received bids from only one or two companies offering to supply U.S. sugar. As a result, F&T’s decision to purchase was often a choice not between different U.S. offers, but between a higher U.S. price offer on deferred payment terms and a lower third country price on cash payment terms. In some cases, F&T received only one responsive bid to its tender. When that occurred, and if F&T felt that its supply requirements made it urgent that it purchase anyway, the tender changed into a price negotiation with the single bidder. Even where there was more than one bidder, F&T appears to have counteroffered or asked for a revised bid from participants almost as a matter of course. As a result, participants in the tenders aware of this practice could have bid very high prices initially, knowing that they would invariably get another chance to obtain the business. - GSM-102-10735 & GSM-102-10736 On April 21, 1986, F&T issued a notice of its intention to purchase 12,000-14,000 MT of white refined sugar for May 1986 shipment. F&T records indicate that approximately 16 potential suppliers were informed by telex message. Two different versions of the invitation were sent. U.S. companies were asked to tender offers with payment financed under the GSM program; non-U. S. companies were asked to tender on deferred payment terms of at least one year. Closing date for the tender was April 23, 1986. Two U. S. companies and four European companies responded with bids; five other companies responded that they would not participate. The following bids were received and considered: 409 24 Company Cash Price/MT Credit Price/MT Credit Terms Alrahba $238 (Aqaba) $295 (Aqaba) 360 days FOB Cash freight SCOA Int’l $228 (Isken.) $285 (Isken.) 360 days FOB Cash freight $232 (Aqaba) $290 (Aqaba) 360 days FOB Cash freight $305 (Isken.) 540 days FOB Cash freight $312 (Aqaba) 540 days FOB Cash freight Duffus $231 (Isken.) Cargill $303 (Isken.) 360 days FOB Cash freight $327 (Isken.) 720 days Cash freight Int'l Farmers $282 (Any Port) 3 yrs (GSM) FOB Cash freight 3 yrs (GSM) FOB 1 yr freight Entrade $262.45 (Isken.) F&T officials provided us with a copy of the competitive study that was conducted and presented to its committee for decision. The committee directed F&T to seek: negotiations with Entrade for a lower price. Through a series of telex offers and counteroffers over the following five days, a final contract price of $259.00/MT, C&F Iskenderun was achieved and agreed upon. Essentially, Entrade's offer of $259.00/MT, C&F Iskenderun on three years deferred payment terms represented an FOB price of $229.05/MT, and freight at $29.95/MT on one year deferred payment terms . As such, Entrade's offer represented not only the lowest C&F offer, but an FOB price that was lower than any of the cash FOB prices quoted by other participants in the tender. In addition, the credit terms offered by Entrade -- 3 years FOB financing under GSM, and on year freight financing -- was clearly the most attractive financing package offered. USDA analysis indicates that the Entrade offer was approximately $16/MT higher than its replacement cost, FOB basis (as indicated by its supplier invoice), and approximately $12-14/MT higher than a benchmark world price. F&T documents indicate that their competitive analysis, at the time of the purchase, also indicated that the Entrade price was $12/MT above a benchmark world price (based on the London spot priced of $217 / MT on April 23, 1986, the day of tender closing). 410 25 Nonetheless, F&T officials told us that they felt the Entrade offer was very advantageous in that market for a number of reasons: (1) it was a deferred payment offer lower than the cash offers in hand; (2) they had been receiving bids for U.S. sugar at $50-70/MT above the London spot price, while the Entrade offer was only $12/MT above that price; and, (3) the offer contained freight financing. As a result, F&T inquired with Entrade about providing a second cargo of 12,000-14,000 MT at the same price, and Entrade accommodated. These two cargoes were registered with CCC under guarantees GSM-102-10735 and GSM-102-10736. GSM-102-55.245 On December 14, 1986, F&T issued an invitation to its list of 16 potential suppliers to bid on the supply of 12,000 to 14,000 MT of white refined sugar, with a shipment for Jan/Feb 1987. The request was sent in two forms: U.S. suppliers were asked to bid payment terms under the GSM program; non-U.S. suppliers were asked to bid on deferred payment of at least one year. Closing date for bids was December 17, 1986. F&T received only three bids from the trade, two of which were from U.S. suppliers proposing sales guaranteed under GSM. The bids were as follows: Company FOB Price/MT C&F Price/MT Payment Terms SLOL $189 (Isken.) Cash $19.4 (Aqaba) Cash Cargill $240 (Isken.) 3 yrs. (GSM) FOB 1 yr. freight Entrade $254 (Isken.) yrs. (GSM) FOB yr. freight : $260 (Aqaba) 3 yrs. (GSM) FOB 1 yr. freight F&T rejected SLOL's offer because it failed to provide any financing whatsoever. It attempted to negotiate a more favorable price with Cargill, but Cargill refused to lower its offer. Cargill, whose original bid indicated April/May shipment, did make one concession by agreeing to move shipment date to February. F&T then booked one cargo at $240/MT, C&F Iskenderun, which represented allocations of $220/MT FOB and $20/MT freight. This sale was eventually registered by Cargill with CCC under the GSM program and assigned guarantee GSM-102-55051. Cargill registered the port value as $218. 03/MT. 412 27 (2) Arrival at Destination The second topic of discussion between the delegations was the issue of proof of arrival at destination. USDA noted that, as a result of the investigation in Atlanta, there had been questions raised as to whether the commodities purchased by Iraq under the GSM program had arrived at their intended final destination in Iraq. USDA explained that it had two goals in the discussions: first, to document whether shipments made in the past, in fact, had arrived at destination in Iraq; second, to understand how Iraq’s overland shipment system worked so that a system could be implemented if documentary "proof of arrival" were made a program requirement for all transactions in the future. Geographically, Iraq is almost entirely landlocked with the exception of a narrow landlink to the Persian Gulf in the south of Iraq near the city of Basra. During the Iraq-Iran conflict, the Basra area was the center of some of the most intense fighting, and the port facilities around Basra were effectively closed to international shipping. As a result, Iraq was forced to make arrangements to operate through foreign ports on the Mediterranean or Red Sea in Turkey, Jordan and Saudi Arabia, and to bring commodities overland by truck to Iraq. Shipments were made primarily through the ports of Aqaba, Jordan, and Mersin and Iskenderun Turkey, with a small volume imported through Yenbu, Saudi Arabia. USDA noted that, in the course of its administrative review of the program, it had inspected both bank and exporter files for a number of GSM-guaranteed transactions where shipment had been made to Iraq through those foreign ports. In almost every case, the records documented shipment as far as the ocean port, but contained little or no record of the overland portion of the shipments to Iraq. GOI officials expressed surprise that proof of arrival was an issue. They explained that Iraq maintains a very rigorous system of tracking shipment of agricultural commodities from the foreign ports to their destination in government stores in Iraq, and offered to provide whatever documentation was required to satisfy USDA’s inquiry. According to GOI officials, the transportation and accounting system works as follows: Agricultural commodities purchased from the United States are off-loaded at the ports and consigned to representatives of the Iraqi Ministry of Transportation (IMT). The IMT has arrangements in each of the ports for unloading and transportation overland to Iraq. - 413 28 In Jordan, Iraq has entered into annual contracts with several companies, but most often with a European-Jordanian joint venture headed by Gearbulk. That joint venture operates a floating pier operation which unloads the contents of ships into a floating vessel, and then off-loads the contents into a fleet of trucks, with capacity of 30-50 MT each, operated by IMT. As the trucks are loaded, a trucking manifest is prepared identifying the type of commodity, quantity, ship, date of unloading, name of driver, and truck number. The trucks then proceed through Jordan, and are checked through Iraqi customs at the Al-Rabhat customs entry point. At Al-Rahbat, lists are maintained by shipload. As each truck clears through customs, a copy of the truck manifest is collected, and the truck’s entry is recorded on a list maintained for the particular shipload. The original copy of the truck manifest is endorsed by customs officials, and the truck then proceeds to a government clearing house on the outskirts of Baghdad. At that point, the trucking manifest information is recorded on a second list of shipments received from the particular vessel. The truck is then assigned to a government store or storage facility. When the truck arrives at the storage facility, the manifest is again endorsed by the facility operator to indicate final arrival at destination. This manifest then serves as a record of arrival at final destination. While in Baghdad, the USDA team also met with representatives of the Gearbulk-led joint venture who told us that they kept computerized records of each shipment received, and of the trucks that were loaded from each ship. These records are maintained in their offices in Amman, Jordan, and they offered to make these records available to USDA at its request. The system operated in much the same fashion in the Turkish ports, except that the trucking services were provided by private Turkish truckers under contract. The Turkish program operated according to the provisions of the Iraqi-Turkish transportation protocol under which Iraq was provided credit facilities for the inland freight portion of the transactions through the Turkish Central Bank. On of the features of this arrangements was to permit Turkish carriers to obtain the trucking portion of the business. Trucks proceeding from the ports at Mersin or Iskenderun entered Iraq at the customs post in the north of the country, and either were directed to government stores in the north of Iraq, or proceeded to the government clearing station near Baghdad. GOI officials explained that documentation to establish the arrival of all shipments into Iraq was available, but that it involved literally thousand of documents due to the fact that very large commodity shipments (10,000-25,000 MT per vessel) had to be transported inland by trucks with capacities of 30-50 MT each. Thus, each shipment would involve truck manifests and Customs documents for hundreds of truckloads. Because of the 414 29 inability of the USDA team to attempt to check and audit this huge number of documents (all of which are in Arabic or Turkish), USDA requested GOI to provide samples for specific shipments of the truck manifests, the customs clearance documents, and the custom ship/truck lists. Those samples were provided and will be translated and reviewed. 3. After-Sales Service - The USDA team also raised the issue of so-called "after-sales service" with GOI officials. As background, USDA noted that, due to some complaints that had been received from exporters, USDA had initially raised this issue with GOI initially during discussions in November 1988. At that time, USDA had been informed that at least one Iraqi state trading enterprise had been routinely requesting that exporters provide either cash rebates or goods, either in the form of additional commodities or non-agricultural items, as so-called "after-sales service" in connection with GSM-guaranteed transactions. At the time, USDA noted its objection to this practice and asked GOI to take action to stop such requests. In the summer of 1989, USDA received information from several exporters that they were continuing to receive requests for "after-sales" service. That information indicated that the requests were either that successful bidders utilize designated Iraqi shipping companies, or that the company provide additional goods in connection with the sale. In one case, USDA obtained a copy of a "broadcast" telex, apparently sent to a number of companies doing GSM business with Iraq, requesting after-sales service in the form of trucks and truck parts. USDA immediately issued a notice to exporters clearly restating USDA policy on this issue, and notified GOI of its objection to this practice. During consultations in November, 1989, USDA sought a firm commitment from GOI that it would end the practice. At the conclusion of those meetings, Deputy Minister of Trade Al- Obaidi gave assurances that all Iraqi enterprises would be instructed not to request or accept after-sales service in connection with GSM transactions. At the meetings in Baghdad, USDA informed GOI representatives that, although it had received no additional complaints or information that requests for after-sales services had been made by Iraq since the November meeting, it wished to obtain: (1) formal assurances that the practice had been eliminated with respect to CCC transactions; (2) information about any instances in the past in which after-sales services had been requested by Iraq and provided by exporters. With respect to the first request, Deputy Minister Al-Obaidi stated that the Ministry of Trade had issued a directive to all 416 31 requirements. USDA asked GOI to intervene immediately to put an end to this practice. In the discussions in Baghdad, representatives of GOI provided USDA with an Arabic-language copy of the decree imposing the stamp tax in question. GOI representatives insisted that the tax was a legitimate tax, and was levied even in cases where government enterprises were involved. They noted that the law imposing the tax did not stipulate precisely who was responsible for the tax, only that a tax should be imposed on certain transactions. They did agree, however, that the tax was an internal tax, and that the responsibility for payment would normally fall upon the purchasing entity opening the letter of credit. Deputy Minister Al-Obaidi stated that the GOI had considered the objections of USDA, and a decision had been made by GOI to exempt GSM transactions from the application of the tax. He stated that officials of the GOI were still working on the precise legal mechanism for creating the exemption, but that all government purchasing entities had been instructed not to request or require the payment of the tax in cases of GSM transactions. In the letter to Mr. Dickerson, Mr. Al-Obaidi formalized this commitment. At the conclusion of the meetings, GOI officials provided USDA with copies of the documents that had been requested in the meetings, and a final copy of the letter of commitment signed by Mr. Al-Obaidi.