Recently, the Justice Department denied a congressional request for a special counsel to investigate questionable U.S. government credits to Iraq.
Subsidies from the Agriculture Department and the Export-import Bank facilitated. Baghdad's military buildup in the late 1980s, legislators charge. Many of the funds were routed through the Atlanta branch of Italy's Banca Nazionale del Lavoro; the branch manager faces a trial for diverting them for weapons purchases.
By its own admission, the Italian government, which controls the bank, regularly promoted arms deals with Iraq through Lavoro's worldwide network. However, the U.S. Agriculture, State, and Treasury departments handled the bank separately and lacked a clear policy toward it.
The Cost of Disarray
Protecting the financial system from manipulation is essential to national security, and current executive branch incoherence invites repeated danger.
The Bush administration has consistently opposed limiting foreign bank operations on "economic security" grounds. It has resisted attempts in the House and Senate to subject international bank takeovers to screening by the interagency Committee on Foreign Investments in the United States and has spurned recent legislation to punish violation of export control laws.
The administration's stance ignores the findings of a bipartisan House task force, which concluded that foreign financial institutions pay little consideration to U.S. government objectives that conflict with their own.
Federal investigators are exploring the links between Lavoro's Atlanta branch and Bank of Credit and Commerce International. The Italian government has complied with inquiries but has left open a defense of "sovereign immunity" to requests for sensitive information.
In future cases, foreign governments may not cooperate readily. And as international banking networks continue to grow in this country, schemes will prove ever more complex and difficult to detect.
In addition to their branches and subsidiaries throughout the country, overseas interests control many leading domestic institutions. Japanese institutions own some of California's biggest banks, a Saudi prince holds a 15% equity stake in Citicorp, and Holland's ABN Amro has been growing rapidly in the Illinois market.
The current haphazard framework for repelling foreign penetration requires evidence of egregious behavior to provoke a response.
Even after the Lavoro and BCCI affairs, a recent offering of so-called whitener bonds by the State Bank of Pakistan went virtually unnoticed by U.S. authorities until the bank took out advertisements in major newspapers to publicize the sale.
The high-yield instruments, whose withdrawal from the market was forced by regulators, were promoted with a "no questions asked" pitch that aimed for dollars generated by illegal activities.
To preempt similar breaches Washington should buttress the international economic affair capability of the National Security Council to monitor acquisitions, funds movements, an institutional and executive conduct that could compromise the integrity of the banking system.
The effort should draw on existing resources and personnel throughout the executive branch to offer a unified response under NSC auspices. This mechanism would tackle the overlapping complexities of banking and diplomatic competition that fostered the Lavoro diversion.
Mr. Kleiman is president of Kleiman International Consultants Inc., Washington.