Global Policy Forum

By David Leigh and Brian Whitaker

Every day since he was secretly spirited into Iraq by the US military just over a week ago, Ahmad Chalabi, the man favoured by the Pentagon to succeed Saddam Hussein, has been holding court with local dignitaries in Nassiriya. But allegations of financial impropriety linger over Mr Chalabi, head of the Iraqi National Congress, the most important of which concern a $200m (£127m) banking scandal in Jordan.

In 1992, Mr Chalabi was tried in his absence and sentenced by a Jordanian court to 22 years' jail on 31 charges of embezzlement, theft, misuse of depositor funds and currency speculation. Mr Chalabi has always maintained the charges were politically motivated. The exact nature of the charges surrounding the collapse of his Petra Bank in Jordan was known only to a few people, but details have now been obtained by the Guardian.

Reports compiled at the time by investigators in London and Jordan, including investigations by the accountants Arthur Andersen, describe how millions of dollars of depositors' money was transferred to other parts of the Chalabi family empire in Switzerland, Lebanon and London, and not repaid.

From relatively modest beginnings when he co-founded Petra Bank in 1977, Mr Chalabi became one of the most powerful and influential businessmen in Jordan. He even acquired the licence from the US to issue Visa cards in Jordan and became well connected in the royal court. London banking sources say Mr Chalabi's financial empire originally thrived thanks to support from Crown Prince Hassan of Jordan, which enabled Petra to open a string of branches for the first time in the Israeli-occupied West Bank.

Boast

Petra also acquired a reputation for currency exchange manipulation. The board minutes, subsequently seized by investigators, recorded a boast by Mr Chalabi that there were no problems in circumventing Jordan's restrictive exchange controls. One London banking source said: "He boasted that there was nothing to worry about. He said he had just transferred $20,000 for the wife of a top member of the [Jordanian] regime so she could buy underwear."

Members of Mr Chalabi's family also ran a gold dealing company, SCF, in London; an investment company, Socofi, in Geneva; and another bank, Mebco, in Geneva and Beirut, as well as a Washington arm, Petra International. The documents record that Mr Chalabi's interests also included companies in Jordan - Al Rimal and Abhara.

By the time of its crash, Petra was the third-largest bank in Jordan, and the poverty stricken Jordanian government was forced to pay out $200m to depositors who would otherwise have lost their savings, and to avert a possible collapse of the country's entire banking system.

Mr Chalabi left the country and subsequently re-emerged living in style in a London apartment off Park Lane.

The trigger for the bank's failure, according to documents seen by the Guardian, was a decision by the central bank governor, Mohammed Said Nabulsi, to enforce regulations on liquidity ratios, and to tighten up on the outflow of foreign exchange from Jordan.

Mr Nabulsi ordered banks to deposit 30% of their foreign exchange holdings with the central bank as part of his efforts to prop up the currency. Petra, apparently alone among the 20 banks asked to make these deposits, was unable to comply. The central bank then replaced Petra's board of directors and investigations began. Two weeks later, in August 1989, Mr Chalabi left Jordan.

The report by Arthur Andersen subsequently found that the bank's assets had been overstated by $200m. In three main areas, there were huge bad debts (about $80m); "unsupported foreign currency balances at counter-party banks" (about $20m); and money purportedly due to the bank which could not be found (about $60m).

Many of the bank's bad loans were to Chalabi-linked companies. The Swiss and Lebanese firms, Mebco and Socofi, were subsequently put into liquidation too.

A much more detailed 500-page Technical Committee Report was subsequently compiled in Arabic on behalf of the Jordanian military attorney-general, and completed on June 10 1990. It accused Mr Chalabi of being the man directly responsible for "fictitious deposits and entries to make the income ... appear larger; losses on shares and investments; bad debts ... to Abhara company and Al Rimal company".

The technical report contains 106 "chapters", each dealing with different specific irregularities or irregular activities. In most of these, Mr Chalabi is clearly named as the person on whose authority the irregular transactions were carried out. As Mr Chalabi was eventually tried in a military state security court, he cannot be extradited, though if he became Iraqi leader he would be unable to visit Jordan.

Mr Chalabi has recently told the press that the late King Hussein of Jordan twice offered him unconditional royal pardons, but he turned them down because he did not believe he had done anything wrong.

Although he has support in the Pentagon, Mr Chalabi is regarded with suspicion by the CIA and the US state department. Last week he announced plans for a meeting of prominent Iraqis in Nassiriya but the state department objected, describing it as Mr Chalabi's "coronation". The meeting will go ahead tomorrow but under US auspices and probably without Mr Chalabi.

"I will send a representative to this meeting," he said in an interview on Breakfast With Frost on BBC1 yesterday. "There will be no decisions taken."

Media silence

Despite this controversy in Mr Chalabi's past, there has been a marked reluctance to dwell on it in sections of the British media. The Daily Telegraph, owned by Conrad Black, who has on one of his boards the prominent Pentagon hawk and Chalabi supporter Richard Perle, published a flattering profile of Mr Chalabi last year, characterising him as "the de Gaulle of Iraq". The article did not refer to his conviction or the collapse of Petra Bank at all.

The London Evening Standard last week quoted Mr Chalabi's claim that the bank crash had been caused by intrigue between Saddam and Jordanian officials, and added: "But even the doubters admit his intellect - his knowledge of ... medieval Japanese history is exceptional."

Mr Chalabi could not be contacted for comment yesterday. An aide said he was meeting tribal leaders.

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