Illegal arms to Iran: how the banks broke the rules

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Later this year 50 people will go on trial in Venice charged with complicity in illegal arms trafficking to Iran. Among the defendants will be leading figures, past and present, from the world of Italian finance as well as senior government officials. Evidence amassed over several years strongly suggests that banks in a number of European countries have been involved.

Meanwhile in the United States, a grand jury investigation has been looking at a huge portfolio of lucrative but unauthorised credits granted to Iraq by the Atlanta branch of Banca Nazionale del Lavoro (BNC). Prosecutions are expected.

In both cases bankers say poor internal organisation was largely to blame for the business being sanctioned. Investigators say senior management knew what was happening and was more concerned about protecting existing assets and boosting profits than observing the law.

Philip Sington obtained an interview with the examining magistrate in Venice who is guarded round the clock because of his investigations into the Iranian affair. Sington also discussed the cases with senior banking officials.

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In May 1972, in the small Italian town of Peteano, fifty miles from Venice, three Carabinieri were killed when a bomb went off under their Fiat 500. The murders were eventually linked to an extreme right-wing organisation. Of the three men believed to be directly responsible for the bomb only one, Vicenzo Vinciguerra, was ever captured.

However, the investigations that the murders set in train were to lead to the discovery of an arms smuggling network that included manufacturers, financial institutions and government agencies on three continents. The Italian components of this network will come under the scrutiny of the courts within a few months. Prosecutions in other countries may follow.

The case threatens to raise some embarrassing questions about the integrity — or at the very least the efficiency — of the institutions involved, adding force to calls for tighter supervision of international trade and finance.

A connection between the extreme right and Iran was not discovered until more than a decade after the Peteano murders. By this time Iran and Iraq were at war. Italy, in common with most European countries, had passed legislation banning the export of arms or munitions to either of the belligerents (the law was passed in 1983). The ban on arms sales to Iran was almost universal, although several leading arms exporters, most notably France, decided against an embargo on Iraq.

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Now a potential terrorist
target, Felice Casson has
shadowed Iranian
activity since the mid-80s 

Close observation by the Italian secret service (SISMI) of neo-fascist sympathisers known to Vinciguerra revealed frequent contacts with a group of ten pro-Khomeini Iranian students based in the Venice area. There seemed to be nothing material in the relationship beyond political sympathy – the extreme right in Italy has a history of support for militant. Nevertheless, in January 1988 telephone taps revealed links between the students, who were led by a Mohammed Abedi Tari, and the Iranian shipping company, Islamic Republic of Iran Shipping Lines (IRISL).

Abedi Tari, who was also discovered to have links with the Lebanese organisation Hizbollah, visited a number of Iranian merchant ships in the Venetian port of Marghera. Telephone conversations between his group and IRISL talked of explosives arriving from France, and of the need to prepare fake export licences. As a result, the offices of IRISL in Genoa were searched in January 1988, and documents relating to arms shipments seized.

The man who led the operation was a young investigating magistrate, Felice Casson. Casson, now 36, took up his post in Venice when the full fury of the Red Brigades was being directed at the judiciary. The nearby university of Padua was one of the main recruiting grounds for the brigades, and vacancies for magistrates in Venice were becoming very hard to fill. The danger from the extreme left has now receded, but Casson's investigations have made him a potential target of pro-Iranian terrorist groups, and today he is protected round the clock. Euromoney's interviews with Casson took place with an armed bodyguard outside the door.

The cargo documents taken from IRISL showed that the company had taken delivery of numerous shipments of war materiel, primarily medium-technology ordnance and artillery, ostensibly for destinations as diverse as Portugal, France, Yugoslavia, Brazil, Peru, Singapore and Thailand. Documentation relevant to letters of credit (LCs) was also examined.

The companies responsible for the consignments were two small Italian subsidiaries of the major French arms manfuacturer Luchaire: SEA, based near Turin, and Consar (Consorzio Armamenti), based in Rome. The offices of these companies were also searched. The documents recovered revealed the names of the Italian arms manufacturers involved, the banks that underwrote the trade, and the names of the final customers. Those customers were the Iranian Ministry of Defence, operating through Bank Melli Iran or the Iranian central bank.

Casson also began enquiries with customs authorities in the countries named on the export documents. These investigations revealed that the arms in question never reached their stated destinations. Fake import documents had been prepared at many of the ports in question — officers of the Royal Thai Navy were one group implicated — but, with the help of Interpol, Casson ran these to ground, uncovering the real routes taken by the Iranian vessels.

"The ships would sail west to the Canary Islands," Casson explains, "and then go round the horn of Africa to Bandar Abbas in the south of Iran . . . They couldn't use the Suez Canal because from 1982 onwards Egypt wouldn't approve the passage of arms into the region. They would have checked properly. In 1982 they stopped an Iranian ship carrying arms from Greece . . . Las Palmas was the last port on the southern route to Iran which they could use safely."

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Banque Worms has close connections with Luchaire. It might have been anxious to protect the volume of the company's exports.

Meanwhile a thorough investigation of SEA's and Consar's business was conducted. It revealed that the two companies were acting as contractors between the Iranians and Italian arms companies, most importantly Erber of Turin; Remie, based near Vicenza (both part of the Bertoldo group); Defarm: and Junghans of Venice. Senior executives from all these companies appear on the list of the indicted.

The man primarily responsible for negotiating the contracts was Mario Appiano, the sales director of Consar. A series of statements by Appiano to the Venetian authorities in 1988 and 1989, together with contracts and trade finance documents recovered from the Luchaire subsidiaries and their Italian sub-contractors, enabled Casson to piece together the development of the trade and the financing that accompanied it.

In France, Luchaire had already been linked to Iran. In March 1986 a consignment of shells bound for Iran was identified by a local newspaper at Cherbourg. The affair turned into a major political scandal when further investigation revealed that Luchaire had supplied about 500,000 shells to Iran between 1983 and 1985. An enquiry in 1987 by Armed Forces Inspector-General Jean-Francois Barba reported that defence ministry officials had helped to organise the sales. There were also persistent allegations that the Socialist Party had profited from the trade. The chairman of Luchaire, Daniel Dewarvin, was charged with offences relating to the trade, including the forging of end-user certificates, in December 1987.

Just when the affair seemed about to blow over, further allegations appeared in LeMonde that Luchaire, together with another company, SNPE, had continued the illegal trade with Iran, sending shipments of shells, detonators, propellant powder and TNT through a Portuguese company based in Lisbon. Congressional investigations in Washington DC into the "Iran-Contra" affair later discovered that the same company, called Defex, had been used by Col Oliver North as a vehicle for supplying arms to Iran. The management of Luchaire and SNPE denied Le Monde’s allegations.

Further investigation of the affair then unexpectedly ceased, with everyone, ineluding Dewarvin, being acquitted. The reason given initially was lack of evidence, but the magistrate in charge of the investigation later told the weekly Nouvel Observateur that he had been ordered to stop by the government in order to protect "political-military secrets".

The embargo on further investigation in France makes the exact financial arrangements hard to uncover. However, Venice's public prosecutor, Ivano Nelson Salvarini, interviewed Dewarvin and Luchaire's commercial director, Joseph Abello, in October last year at Versailles, obtaining important information on the development of the trade and on how Italian banks became involved. Documents taken from the offices of these banks enabled Casson to reconstruct the decision-making processes.

According to Casson's findings, the trade clearly began in France, and was financed by two pools of banks. The more important, at least as far as the Italian authorities are concerned, was headed by Banque Worms. This group included some of the biggest and most international of French banks. Banks located in Liechtenstein and Luxembourg are also alleged to have taken part. In the Grand Duchy, International Bankers Incorporated (IBI) is currently being investigated in connection with a large volume of LCs issued by the bank in favour of Luchaire affiliates (SEA and Consar in Italy, Seaconsar in Hong Kong and Apremont in Panama) and a range of European arms producers sub-contracted by those affiliates. These LCs were issued in 1987 and 1988 during the latter stages of the Iran-Iraq war.

Banque Worms was a major shareholder in Luchaire, owning about 23% until mid-1984. This presents a possible explanation for its role. By the mid-1980s, Luchaire, the last private arms manufacturer of any size in France, was widely rumoured to be in a difficult financial position. The trade with Iran had been an important source of earnings, because the Iranians were prepared to pay well for arms. Banque Worms would have been most reluctant to see Luchaire face liquidation. As things turned out, the bank was able sell off the bulk of its holding in June 1984, retaining 10%. Luchaire has since returned to a sound financial health.

By the end of 1984 Italian arms manufacturers were being brought in to fulfil procurement contracts. Italian financial support was also sought. This may have been a result of mounting resistance in French government circles to the trade. According to his relatives, the then director of international affairs at the Ministry of Defence's procurement agency, General René Audran, was vehemently opposed to a number of contracts which he had uncovered, although their exact nature remains unknown. Audran was shot dead in January of 1985, with the terrorist organisation Action Directe claiming responsibility. His killer was never found.

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BNL was approached in
1984 by Banque Worms
to underwrite the
Italian end of the Iranian
trade

Perhaps equally important, French arms manufacturers would have been extremely anxious to conceal from the Iraqis, who were bigger and mote important customers, the fact that they were also supplying Iran.

State-owned Banca Nazionale del Lavoro (BNL) was the institution to which Banque Worms turned to underwrite the Italian end of the Iranian trade. Some of the French banks in the pool had branches in Italy, and had helped finance arms contracts with Iran before. According to Appiano, the most active of these was Crédit Commercial de France (CCF) in Turin. But as foreign banks their resources were limited: CCF had already reached its credit ceiling as imposed by the Bank of Italy. The local strength of an Italian institution was required, and BNL was a bank with which Banque Worms had worked successfully in the past.

In the spring of 1984 the Paris office of BNL passed a proposal on to the Turin branch that the bank take a share in the Worms pool. This would involve the financing of arms supplies to the value of $131.4 million, the contract being placed through Consar.

Maurizio Petranca, the deputy director of the Paris branch, told the authorities on December 4, 1989: "From Paris we worked out a proposal for participation in the pool of banks with a quota of 10%. This was a proposal for credit which overtly referred to a supply of munitions by Luchaire . . . From the outset it was clear that the contract for $131.4 million was destined for Iran."

The telexes relating to this proposal have been recovered. It was acknowledged by the senior executives in Turin and passed on for approval by the bank's executive committee in Rome on May 24, 1984, where it was approved. Further discussions related to the pool are alleged to have taken place during six subsequent committee meetings between then and July 1986.

Luchaire's Italian affiliates were used for five major contracts, SEA in three cases and Consar in two. Within the Luchaire organisation they were given the titles "Greece", "Far East" and "Peru", "Europe", "Far East" and "Compensation". BNL helped to support the last two.

According to Casson's evidence, BNL performed two complementary roles. First it acted as a channel for Iranian payments to the Italian arms producers. After a supply contract had been signed by SEA or Consar with an Iranian defence procurement official (Mario Appiano's most important contact in Teheran was Colonel Azizi) an Iranian bank, either Bank Melli or Bank Markazi Jomhouri Islami, would issue letters of credit in favour of the Italian manufacturer through its correspondent bank in Italy. (The destination of the goods concerned would not have been specified on the LCs themselves.) The LCs would then be given to BNL, which would then issue letters of credit for the equivalent amount to the same manufacturer.

When the goods were loaded on board ship, the bill of lading would be presented to BNL. Having paid the manufacturer, BNL would then present the same bill of lading to the Iranians' correspondent bank for settlement. Effectively, BNL was being used to make less transparent the transfer of funds from Iran.

"The Iranians couldn't have acted on their own [with only a correspondent]," says Casson, "because Italian companies would only have been prepared to do business with Italian or European banks. It was also important to cover up as much as possible the name of Iran [which would have been on the first set of LCs]."

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BNL ex-president Nerio Nesi, indicted with ten other senior figures at the bank, said in a statement that "BNL has always worked with the Iranian state".

BNL also performed a second important function. At Consar's request it issued advanced payment and good performance bonds on behalf of the Iranian customers and Italian suppliers respectively. Luchaire's Italian affiliates had very small capital (being only administrative, and having no production facilities of their own) so Luchaire itself helped provide collateral for the good performance bonds. Communication with other banks in the pool was carried out via the Paris branch, and the actual commercial operations through the BNL branch in Turin.

According to Casson's indictment, the Turin branch also attempted to conceal the nature of the trade it was financing by indicating on invoices and delivery notes a level of export tariff inappropriate for military materiel. The executives concerned deny that this was deliberate. Virtually all the documents relating to BNL's activities in this area are now in the hands of the authorities.

Eleven BNL or ex-BNL executives have been indicted. They include the president of BNL until last year, Nerio Nesi; Giacomo Pedde, director-general until the same month and a cousin of Francesco Cossiga, the president of Italy. Alongside them are six other members of the executive committee, including Pedde's predecessor Francesco Bignardi, now president of Credito Romagnolo; and Ettore Bentsik, now president of Cassa di Risparmio de Padova e Rovigo. Three senior managers at the Turin branch complete the list.

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BNL's Giacomo Pedde
claimed not to know what
the goods being supplied
to Iran were.
The BNL executives have defended themselves in different ways. Most members of the executive committee have claimed that they were ignorant of the exact nature of the operations involved. Nesi pointed out to the authorities that he missed the May 24 meeting at which participation in the bank pool was agreed. Questioned on June 14, 1989, Pedde claimed that he did not know the nature of the goods being supplied to Iran, while acknowledging his signature on a series of telexes which named Luchaire, Consar (both arms companies) and the $131 million arms contract. "We sign a lot of documents without looking at what we're signing," he said.

Others, including Bignardi, said they were fully aware of the nature and destination of the supplies, but that they had assumed approval for export had already been obtained. The executive committee's function was to take account of the credit risk alone. "It was normal that every question of legitimacy and regularity was referred to the head of the pool [Banque Worms]," he said. "I'm not aware that within BNL there had been any problem with the legality of the supplies in question . . . It is true that at BNL it was accepted that the contract in question had to do with the supply of arms for the Iranian state. It is entirely new to me that authorisation for the export was neither requested nor given. It was up to customs to check the legal conformity and real nature of the exported material."

The argument was also advanced that people lower down in the organisation of the bank were responsible for ensuring that everything was legal and that authorisation had been obtained.

Casson rejects these arguments. In the indictment he writes: "The executive committee must be responsible not only for the evaluation of credit risk, but also for the execution of the political line (in the wide sense) of the institution . . . The committee is a direct expression of the consiglio d'amministrazione [administrative board of the bank]. For these reasons it is unthinkable that the president and entire committee were not aware of the real issues . . . One should think of the situation that would come about if the executive committee was asked to take part in a pool of banks with the aim of dealing in drugs, and if the committee agreed, only asking itself questions about the financial risks involved. No one would fail to see a decision such as this as criminal. The same argument has to be applied to war materiel."

He continues: "The executive committee had to decide whether to take part in the operation, and it had to make sure of the legitimacy of the same. There is no regulation in the statute of the bank which allows the delegation of the duty of checking on legality. No [relevant] decision by the executive committee was ever made saying 'upon condition that the appropriate licences or permission are granted'. On the contrary, members of the commission say they never asked themselves such a question. This cannot be considered in any way as deincriminating."

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In spite of international boycotts, Iran secured a steady supply of military hardware from the West.

If, for whatever reason, the executive committee of BNL did not hesitate to participate in the pool, the question remains: why not? Statements by Nesi and Bignardi provide a clue.

"BNL has always worked with the Iranian state," said Nesi, "even before the regime of Khomeini. Recently we carried out an evaluation of our volume of business with Iran, and it reveals that BNL has a share of around 30% . . . of the total volume of business by Italian banks with Iran. We have put limits upon our business with Chile and South Africa, in compliance with the explicit intervention of the Italian government. We have never had problems of this kind as far as Iran is concerned."

Bignardi elaborated: ". . . we have always worked extensively with Iran, and in relation to arms supplies as well. Among other things we were interested in protecting our credits in relation to finances we had advanced for the construction of the port and steel works at Bandar Abbas. We've always maintained good relations with administrative representatives of the Iranian state (not politicians) for this very reason."

Casson points to another of Bignardi's remarks, one that is echoed in other statements from other bankers from BNL and elsewhere: "If BNL hadn't participated, some Other banking institution would have done." The evidence seems to support his view. At least two other Italian banks showed a strong interest in helping to finance operations by Luchaire or its sub-contractors. Eight middle-ranking executives from Banca Commerciale d'ltalia, most of them from branches in Turin or the Veneto region, have been indicted for taking part in pre-contractual negotiations for arms exports by Erber and Remie, allegedly while knowing the real destination of the cargoes. For a variety of reasons the Erber contracts never materialised, but fees of L50 million were paid. Casson also mentions at least one other bank that tendered for the business but was not awarded it.

"[Bignardi's words] throw light on the entire affair," writes Casson, "in that they show that criminal law was never part of the worries or concerns of the banks, at least not when it came to foreign business."

Such an attitude could only be encouraged if the relevant government departments seem unwilling or unable to intervene. In Italy, approval for arms exports is granted by an inter-ministerial committee (known as the "special committee"), manned by representatives from the ministries of trade, finance (specifically the director-general of customs), defence, foreign affairs, industry, and the interior, together with the secret service, SISMI.

Eight people who sat on this committee have been indicted on charges of complicity: three officials from SISMI; four from the Ministry of Defence; and the president of the committee from 1984-1987, Umberto Toffano, currently the permanent representative for Italy at the Council of Europe in Strasbourg. The committee approved the exports organised by Luchaire affiliates at eight meetings between June 1984 and March 1987.

The applications which the committee approved were of course for export to countries with which it was legal to trade (France, Portugal and Malaysia), and never for Iran. The men indicted are from those ministries whose job it was, in the view of the Venice authorities, to check that the destinations were authentic. Questioned in June last year, representatives from the various departments and ministries on the special committee each argued that the responsibility for checking on applications did not belong to them.

Casson pointed out that a simple reference to The Military Balance, (a freely available yearbook which lists in detail the military equipment of almost every army in the world) would have revealed that the military supplies being shipped from Italy were incompatible with the equipment used in the countries for which they were ostensibly destined. SISMI admitted possessing this book. One of the indicted, Vittorio Zardo, head of research and development at the Ministry of Defence, answered this point by saying that the arms in question might have been sent to France or Portugal to be made up into finished products and then sent on to other NATO countries.

The possibility that the trade from Italy did receive some form of support in political circles is suggested by documents and statements obtained from the chief executive of one of the Italian sub-contractors, Defarm. In Nicola Dubbini's office was found a note which made reference to payments to politicians which were to be refunded by Iranians. Dubbini told investigators that he had visited certain senior politicians in 1984 with a view to speeding up authorisations for export. He also spoke of a "giro delle sette chiese" [a tour of seven churches] among politicians, civil servants and the military, necessary to secure official protection without which, he said, the export of arms would be practically impossible.