WASHINGTON — WASHINGTON -- Bit by bit, the Bush administration's prewar effort to bring Iraq "into the family of nations" is assuming the familiar dimensions of a full-blown Washington scandal:
A policy blunder, developed largely in secret, ran afoul of publicly stated administration priorities. In carrying it out, high officials brushed aside signs of criminal fraud. And in investigating its own conduct, the government has become mired in what critics charge is a cover-up.
The affair, in some respects reminiscent of Iran-contra and previous administrations' handling of Panamanian dictator Manuel Antonio Noriega, has failed to connect with American voters despite strenuous Democratic efforts.
President Bush has denounced allegations of official wrongdoing a "phony charade" and "pure partisanship." But they almost certainly would cast a shadow over a second Bush term, as criminal and congressional probes move forward.
The controversy already has undercut the president's claims to foreign-policy competence.
From available evidence, the story began with the Reagan administration's tilt toward Iraq during its 1980-1988 war with Iran. While publicly neutral, the administration supplied sophisticated intelligence and avoided discouraging other countries from selling weapons to Baghdad.
For a while, the goal of preventing an Iranian victory clashed with the Reagan administration's arms-for-hostages trade with figures in the Iranian government.
But by 1989, when the Bush administration was sworn in, the move to improve ties with Iraq was under way again despite the end of the Iran-Iraq war.
"Our purpose, broadly understood and supported at the time, was to convince Iraq that moderate international and domestic behavior would be rewarded," President Bush's national security adviser, Brent Scowcroft, has written.
A secret national security directive signed by President Bush in October of that year solidified the policy and pushed its implementation to top levels of government.
Unlike the Iran initiative, the Iraq policy lacked a single driving force comparable to Ronald Reagan's determination to free American hostages.
Rather, as with many Middle East policy choices, it was seen as the best of a bad deal: Iraq had vast oil wealth and the world's fourth-largest army, was a potentially lucrative trading partner, was not aligned with Muslim extremists and was seen as potentially helpful in the Arab-Israeli peace process.
The policy, backed by America's Arab world friends, appears similar to early U.S. dealings with the dictator of another strategically placed nation, Panama.
Documents show U.S. officials had no illusions about Saddam Hussein's brutality. The president's directive states that renewed chemical weapons use would bring political and economic sanctions.
It also says that any breach of anti-nuclear safeguards would bring a similar response, and adds: "Human rights considerations should continue to be an important element in our policy toward Iraq."
In practice, however, the move toward friendship overrode other, publicly stated policy priorities. Despite strong evidence, the administration resisted congressional efforts to brand Iraq as a consistent human-rights violator and to list it as a state sponsor of terrorism.
A drive to export U.S. technology led to friction between Pentagon officials determined to keep items with potential military uses out of Iraqi hands and Commerce and State Department officials anxious to improve trade and the relationship as a whole.
Some of the items sold are believed to have ended up in Iraq's extensive program to develop weapons of mass destruction.
Strong misgivings about Iraq's credit-worthiness failed to prevent the administration from pushing ahead with a two-stage, billion-dollar program of agricultural credits. In fact, Iraq implicitly threatened to stall on repayment of previous loans if the U.S. didn't come through with new credits.
Italian bank connected
More significantly, the loan program moved forward despite charges that Iraq had misused previous U.S.-backed loans, provided through the Atlanta branch of Banca Nazionale del Lavoro (BNL), an Italian bank, and that senior Iraqi officials may have been criminally implicated.
A mid-level State Department official warned in a memo about a potential "four-alarm blaze" as the scandal progressed. He wrote that in addition to bank fraud, investigators were exploring the possibility that commodities were traded for military hardware and that payments may have been diverted to "sensitive nuclear technologies."
A separate memo to Secretary of State James Baker noted that the department's legal adviser "believes the investigation is largely focused on widespread, systematic banking fraud by persons working for BNL or under consulting relationships with BNL. It may also involve several high Iraqi officials, though this is unclear."
The document goes on to suggest that a pledge of cooperation from Iraq in a probe then under way by the U.S. attorney in Atlanta, and in new Agriculture Department safeguards, would be enough to "wall off" a new loan program from the scandal. Attached Baker "talking points" show just how fine a line he had to tread in lobbying Agriculture Secretary Clayton Yeutter to approve the credits:
"Obviously we should not go forward with the program if we have substantial evidence of a pattern of serious violations of U.S. law by high-ranking Iraqi officials. Our information about the investigation indicates that the prosecutor does not now intend to indict Iraqi officials."
Announcing approval of the credits in a diplomatic message to Iraqi Foreign Minister Tariq Aziz, Mr. Baker sought to extract cooperation on the Middle East peace process.
A lengthy delay in bringing indictments in the BNL case has prompted congressional charges of a cover-up by Justice Department officials. The charge was reinforced during a hearing before an Atlanta federal judge who at the time was weighing a sentence for the head of BNL's Atlanta branch.
The charge focuses on two issues: whether the delay stemmed from policy makers' determination not to disrupt U.S.-Iraqi relations, and whether the prosecution failed to pursue thoroughly indications of involvement by BNL headquarters in Rome or the Italian government, which controls BNL. An overarching suspicion among some congressional probers, as yet unsupported by evidence, is that U.S. officials tolerated back-door lending by BNL as a boost to Iraq.
What the government knew about Rome's involvement has enveloped the Central Intelligence Agency in the scandal and pitted CIA officials against decision-makers in the Justice Department.
This interagency conflict, on the eve of an election, was the final trigger prompting Attorney General William P. Barr to appoint a widely respected jurist, Frederick B. Lacey of New Jersey, to investigate.
But he lacks the independence of an outside special prosecutor.
The administration has turned over thousands of documents to congressional investigators. "The charge of a cover-up is outrageous and irresponsible," Mr. Scowcroft wrote in a recent op-ed article in the Washington Post.
The most relentless of the probers, Rep. Henry B. Gonzalez, a Texas Democrat who is the House banking committee chairman, has repeatedly charged that his efforts have been thwarted by the National Security Council. And a Commerce Department approval document was altered in a way that disguised the military application of the goods involved.
Bush administration officials, from President Bush on down, have admitted that the prewar effort to enlist Iraq in the "family of nations" was a failure. But they insist that when Saddam Hussein's aggressive tendencies revealed themselves, Mr. Bush acted with masterful skill and decisiveness in driving Iraq from Kuwait and protecting the West's vital source of oil in the Persian Gulf.
Mr. Scowcroft and others argue that had they not made the effort, it would have been much harder to enlist Arab states in the anti-Iraq coalition.
Democrats argue the opposite: Prewar "coddling," they say, led Mr. Hussein to think he could get away with invading Kuwait and, therefore, led to a war that otherwise would have been unnecessary.