Attorney general leans toward backing a special prosecutor in Iraq loan case

WASHINGTON — WASHINGTON -- The Justice Department has taken the first step toward appointing an independent counsel to investigate the government's handling of a politically sensitive bank-fraud case involving Iraq, the official leading the department's internal inquiry said yesterday.

The official, Frederick B. Lacey, a former federal judge, was appointed by Attorney General William P. Barr last month to help him decide whether to recommend appointing an independent counsel. Mr. Lacey said in an interview that allegations of wrongdoing by U.S. officials were serious enough to move on to the next phase of the investigation.


Mr. Barr accepted that recommendation, Mr. Lacey said, and directed him to complete his inquiry by Dec. 8 and give him a final recommendation on whether the attorney general should seek the appointment of a special prosecutor. An independent counsel would be named by a panel of federal Appeals Court judges.

Mr. Lacey made his recommendation to Mr. Barr on Oct. 26. He said that he was making his disclosure in response to news-organization inquiries about the status of his investigation.


Mr. Lacey's recommendation is a further embarrassment for Mr. Barr, who has resisted appointing a special counsel in the bank-fraud case.

By accepting Mr. Lacey's recommendation, Mr. Barr, in effect, acknowledged for the first time the possibility of criminal wrongdoing by Bush administration officials in the scandal involving the Atlanta branch of the Banca Nazionale del Lavoro.

While the escalation of the inquiry will not guarantee the appointment of an independent prosecutor, it was a significant procedural hurdle.

In August, in his response to the House Judiciary Committee's demands for an independent counsel, the attorney general refused to begin a broader inquiry on the ground that the allegations of wrongdoing were not specific enough to warrant further investigation.

Mr. Barr appointed Mr. Lacey, a retired federal judge from New Jersey, last month under increasing pressure from Congress and from a ferocious struggle over the government's handling of the multibillion-dollar bank-fraud case among the Justice Department, the Central Intelligence Agency and the Federal Bureau of Investigation.

From the moment he was named, Democratic lawmakers said that only a judicially-appointed prosecutor would have the independence to conduct a credible investigation of accusations that the Justice Department stifled the fraud inquiry to cover up an administration policy of aiding Iraq before the Persian Gulf War.

In a letter to Mr. Barr on Oct. 26, Mr. Lacey said he had not determined whether any American government officials had broken the law, but suggested that the case had progressed considerably since August.

He said accusations made by Sen. David L. Boren, the Oklahoma Democrat who is chairman of the Senate Select Committee on Intelligence, had convinced him that there was "sufficient and credible evidence" to move to the next stage in the process of appointing an independent counsel.


"I gave the attorney general my letter recommending that under the independent counsel statute the response to Senator Boren warranted in my judgment that a preliminary investigation be commenced," he said.

The next day, Mr. Barr authorized Mr. Lacey to begin the process, he said. The attorney general also told him to make his recommendation by Dec. 8, seven days before the expiration of the Ethics in Government Act, which authorizes the appointment of independent counsels.

Justice Department officials would not comment on Mr. Lacey's letter or Mr. Barr's decision to accept the judge's recommendation.

Senator Boren said Mr. Lacey's recommendation did not go far enough.

"While this is a useful step, I continue to believe that the attorney general must act immediately to appoint an independent counsel," he said in a statement through his spokesman, Dan Webber. "It is the only way we can hope to get an aggressive resolution of the many disturbing questions surrounding the bank case."

The case involves charges against Christopher P. Drogoul, a banker accused of masterminding a scheme to extend billions of dollars in loans and credits to Iraq from the Atlanta branch of an Italian government-owned bank in violation of the bank's regulations.


Some of the loans were used to finance Saddam Hussein's weapons programs. At issue is whether the CIA fully cooperated with the Justice Department and prosecutors in the case, and whether the Justice Department bungled the prosecution.