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OVERSEAS PRIVATE INVESTMENT CORPORATION'S LENDING PRACTICES AND MIDEAST PIPELINE PROPOSAL

Friday, October 30, 1987

U.S. SENATE, SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY, TRADE, OCEANS AND ENVIRONMENT AND SUBCOMMITTEE ON TERRORISM, NARCOTICS AND INTERNATIONAL OPERATIONS OF THE COMMITTEE ON FOREIGN RELATIONS,
Washington, DC.

The committee met at 10:08 a.m. in room SD-419, Dirksen Senate Office Building, Hon. Terry Sanford presiding.
Present: Senator Sanford, Kerry, Helms, and McConnell.
Also present: Jack A. Blum, special counsel.
Senator Sanford. The meeting will please come to order. This is a joint meeting of the Subcommittee on International Economic Policy and the Subcommittee on Terrorism, Narcotics and International Operations.
I thank the witnesses for being here. I would like in a moment for you to identify yourselves and then I would like to administer the oath in advance of your testimony.
This meeting is to obtain facts concerning a loan made by OPIC to John Hull, a Costa Rican rancher who was involved in the so-called Contra private aid network, and on a proposal made by a Swiss businessman that OPIC insure an Iraqi oil pipeline project strongly supported by the National Security Counsel against a hostile Israeli action.
Now, I understand that the president of OPIC is not here. He is tied up, but we do have several others. And I will ask you just for the record if you will identify yourselves from left to right giving us your titles. And I ask you please to talk into the microphone.
Mr. Garfinkel. Mr. Chairman, my name is Eric Garfinkel, and I will be delivering our testimony. I'm OPIC's vice president and general counsel.
Ms. Osowski. My name is Mildred Osowski. I'm a senior counsel at OPIC.
Ms. Chalmers. I'm Jane Chalmers. I'm the deputy general counsel.
Mr. Draggon. My name is Robert Draggon. I'm vice president of finance.
Mr. Johnston. My name is Felton Johnston, and I'm the vice president for insurance of OPIC.

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Senator Sanford. Now, I would ask you if you would take the oath as witnesses. If you would raise your right hand.
[Witnesses sworn.]
Senator Sanford. Thank you. Now, Senator Kerry, who is the chairman of the Subcommittee on Terrorism, Narcotics and International Operations, has an opening statement. Senator Kerry.

OPENING STATEMENT OF SENATOR KERRY

Senator Kerry. Thank you very much, Mr. Chairman. I appreciate that, and I appreciate your cochairing this hearing with me.
In the course of the Narcotics, Terrorism Subcommittee investigations into the impact of both the private aid network run by Oliver North, as well as the drug trafficking that has taken place, as we examine the impact on American foreign policy, a number of witnesses made allegations about the activities of an American rancher in Costa Rica by the name of John Hull. On the basis of those allegations, the Foreign Relations Committee unanimously voted to subpoena Mr. Hull to obtain financial and travel records which would make it possible to evaluate the things that had been said. Mr. Hull has chosen to remain in Costa Rica where a congressional subpoena cannot be served.
As the committee investigation of the allegations proceeded, the committee became aware that the Overseas Private Investment Corporation made a $375,000 loan to a Costa Rican corporation partly owned and apparently controlled by Mr. Hull, and that that loan was in default. It was at that time that we requested and received the complete file on the loan to that corporation known as Maderas Tropicales, S.A. The file raised serious questions about OPIC's lending practices, and we therefore invited OPIC's management here today to explain these practices as they applied to this loan.
The questions frankly are many. They are whether or not the loan was properly underwritten; whether the money was disbursed before OPIC itself had been assured that the conditions of the loan were met; whether the business that received the loan was properly monitored; and whether OPIC has made every effort to collect on the loan once it realized it was in default. Obviously, a central question - and it is not one we should duck - was whether the loan was made on its merits in furtherance of the development of Costa Rican economy or whether it was the behest of another agency or other individuals in furtherance of Mr. Hull's activities.
Underscoring the importance of this question was the recent disclosure that OPIC was asked by the NSC staff to become involved in insuring an oil pipeline form Iraq to the Jordanian port of Aqaba, and that OPIC, indeed, had attempted to be responsive to the NSC. We requested the entire pipeline file from OPIC. It has been delivered, and we asked OPIC to explain its involvement in the pipeline matter and how that involvement was, in fact, related to the general mission of OPIC.
Before this hearing begins, I would like to say for the record that the staff of OPIC has been extremely cooperative, forthcoming. There has been no effort to delay. They have promptly responded

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to the committee's requests, and they have been frank and forthcoming in the meetings between staff. And we are very appreciative of that.
The committee will also hearing testimony this morning from two individuals who have had personal dealings with Mr. Hull relating to investments in land in Costa Rica. Their experiences are pertinent to both the OPIC loan issue, as well as to questions about the nature of Mr. Hull's activities in Costa Rica.
As we begin this hearing, I want to make it clear also that the committee would like to hear Mr. Hull's story. We welcome Mr. Hull here to answer a number of questions pertaining to a number of different activities and the committee would at any time be willing to proceed to hear Mr. Hull.
If I could just ask, there are some important individuals with respect to this loan matter that aren't at this table. And I just want to understand. Is Mr. Tom Clegg here?
Mr. Garfinkel. Yes, he is.
Senator Kerry. He is here, all right. And Margaret Walsh?
Mr. Garfinkel. She is not here. She had a medical emergency this morning, and she is not here. But we do have Ms. Osowski who worked directly with Ms. Walsh on this project available this morning.
Senator Kerry. And are there others who worked on the project analysis who are here? Vanessa Burgess?
Mr. Garfinkel. No. She is no longer with OPIC, Mr. Chairman, and we did not bring her with us. We have Robert O'Sullivan with us who worked on the Aqaba matter. He is also sitting behind me right now, and of course, Mr. Johnston who was working on the Aqaba matter as well.
Senator Kerry. Let me also say that we have one extra witness that we didn't anticipate having until last evening, and that is Mr. Crone who was a partner in the sawmill with Mr. Hull. And he will be a witness also this morning.
Well, needless to say, I think it is going to be difficult to get answers to certain questions without the presence of Mr. Walsh and, indeed, even Ms. Burgess. It was my understanding that they would be here. And I certainly think that at some point we want to talk to them. But we will proceed notwithstanding their absence.
It is my understanding you have an opening statement.

STATEMENT OF ERIC GARFINKEL, VICE PRESIDENT AND GENERAL COUNSEL, OVERSEAS PRIVATE INVESTMENT CORPORATION; ACCOMPANIED BY: MILDRED OSOWSKI, SENIOR COUNSEL, JANE CHALMERS, DEPUTY GENERAL COUNSEL, ROBERT DRAGGON, VICE PRESIDENT OF FINANCE, FELTON JOHNSTON, VICE PRESIDENT OF INSURANCE, THOMAS CLEGG, DEPUTY TREASURER, AND ROBERT O'SULLIVAN, ASSISTANT GENERAL COUNSEL FOR CLAIMS.

Mr. Garfinkel. Yes, Mr. Chairman. And we would be pleased to have Ms. Walsh respond to any questions that you or the staff might have in the future.
Let me also add that Mr. Nalen regrets that he can't be here this morning, and he too would be pleased to provide whatever re-

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sponses you might need in regard to specific questions. And he would also be prepared to provide the committee with an affidavit with regard to his own actions in connection with the Maderas and Aqaba matters.
We, Mr. Chairman, welcome the opportunity to appear before you this morning because we too would like to put behind us these two projects and in particular the allegations regarding OPIC's purported role in the Contra resupply effort, which I might add is simply false. We sought to cooperate fully with this committee. We have supplied you with our complete files and records. And we have sat down on more than one occasions with Mr. Blum to provide him with answers to the questions that are obviously before this committee. We want to do nothing but cooperate and get the full and complete story out because we feel we have nothing to hide.
Let me state at the outset that we internally conducted an investigation of both the Maderas and Aqaba projects to learn how the projects were handled, and our testimony today reflects what we have uncovered.
First, let me say that with regard to the Maderas project, management and staff of OPIC received absolutely no requests or pressure from any U.S. Government agencies, including the National Security Counsel. And our president, Mr. Nalen, as I indicated, is prepared to submit an affidavit indicating that he personally had no contact with NSC staff or any White House officials. OPIC's only contact with other agencies was in connection with routine consultations with the Departments of Commerce and State, as required for every OPIC project.
From our records that we supplied the committee, it is clear that OPIC management was simply unaware of any direct connection between John Hull or his representative, Robert Owen, and the Contra resupply effort until pressure reports on this issue emerged in December 1986. I can also report that we have contacted all the former OPIC employees who worked on the project but are no longer with us, and that to a person they were not aware of any such connection.
The Maderas project was handled as any other OPIC finance project, and again was not influenced directly or indirectly by the sponsor's alleged connections with the Contras, the National Security Council, or the Central Intelligence Agency.
In Contrast, Mr. Chairman, OPIC did receive advice from the National Security Council regarding the importance of the Aqaba project from a national security perspective. However, as the files presented to this committee bear out, notwithstanding this quite unusual occurrence, OPIC's management was adamant in its adherence to its statutory mandates as well as prudent commercial underwriting standards. The record amply demonstrates that even with the expression of support from the NSC, OPIC steadfastly refused to consider any proposal which did not satisfy its congressional mandates or those commercial standards.
Mr. Chairman, our written statement that we submitted to the committee goes into great detail in the Maderas and Aqaba projects, and I will in the interest of time attempt to summarize

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that statement. But I would ask that the full statement be submitted for the record with our approval.
Senator Kerry. So ordered.
Mr. Garfinkel. As this committee knows, OPIC's mandate from the Congress is to assist the economic development of the world's less-developed countries by providing political risk insurance, loans and loans guarantees to American investors who are prepared to invest in projects in eligible developing countries. OPIC's statute requires it to operate on a self-sustaining basis, however, taking into account the economic and financial soundness of the projects it financed.
However, within that framework, OPIC's primary role is as a development agency, not as a bank. As a development agency, OPIC must accept some risk that commercial banks cannot accept, and its procedures cannot be identical to those of commercial banks.
Furthermore, because OPIC operates exclusively in developing countries, the legal systems and other types of infrastructure with which we must operate are often very different from what we find here in the United States. In many of the countries where OPIC operates, including Costa Rica, legal procedures are cumbersome, time consuming and ill-defined. Legal requirements that can be satisfied in a matter of hours in the United States can take weeks to satisfy in a developing country.
Moreover, there is a very limited field of local lawyers who are equipped to work in the English language. Lawyers familiar with domestic legal systems are often unfamiliar with international lending, and local accounting practices may be very different from the practices that are accepted in the United States.
Finally and importantly, OPIC's legislation requires a special emphasis on small business and often the projects that we support lack sophisticated legal and financial expertise. Nevertheless, because of its limited size and staff, we must rely on local lawyers and accountants to do most of the hands-on legal and accounting work required within the host country.
In this environment OPIC's credit record is an excellent one. I am proud to say that our historical loan loss record of about 6 percent of our total credit portfolio compares favorably with the loss level common to domestic banks. OPIC's finance program is self-sustaining and its credit policies are clearly consistent with OPIC's congressional mandate to operate on a self-sustaining basis.
Now, every lender, Mr. Chairman, has some troubled loans. And I am going to stand here before you and tell you that the Maderas loan was one of those. However, the circumstances that combined here were ones that no lender could have foreseen or averted. This case involved not only borrowers who may have purposely defrauded the U.S. Government, but also a dishonest accountant and a lawyer with whom OPIC had a long history of favorable dealings who apparently, quite independently, not only misled us by claiming falsely to have registered our mortgage, but absconded with the registration fees. If the mortgage had been fully perfected when the borrower's fraud was discovered, OPIC could have proceeded against the collateral. By the same token, if the project had been established as represented by the sponsors, the problem with the collateral itself would have been insignificant.

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In addition, we can now see with the benefit of hindsight that additional steps might have been taken in the Maderas case by OPIC staff particularly in connection with the credit decision and the predisbursement procedures.
As part of ongoing efforts to improve our policies and procedures and to learn from our experiences, both good and bad, our procedures continue to be refined to strengthen our credit, disbursement and workout operations. While no lending institution can claim to protect itself fully against bad loans or collection problems, we believe that OPIC's current procedures significantly reduce the risks in both areas.
Let me now turn to how OPIC became aware of the Maderas project. Because we have no overseas office, OPIC routinely relies upon the economic and commercial sections of our Embassies abroad for information regarding potential projects that might benefit from OPIC support. In September 1982 the economic section of the United States Embassy in Costa Rica gave an OPIC officer, who had previously been in Costa Rica, such information regarding the Maderas project. This information was further developed, and OPIC proceeded to process the loan application.
The project was to be a consolidation of three existing operations: a timber operation owned by Mr. Hull; a sawmill owned by Mr. Crone; and a wood products manufacturing facility owned by Mr. Arroyo. Each of the project sponsors would own one-third of the consolidated company. Maderas' request for the loan from OPIC was to provide for additional building, purchase equipment, and for working capital.
The initial contacts in 1982 were followed by a loan processing period of more than a year during which OPIC requested, received, and analyzed detailed information from the borrower and other commercial sources regarding the existing facilities, the proposed project, the sponsors and the projected developmental and U.S. economic effects of the proposal.
In addition to the initial contact with the U.S. Embassy alerting OPIC to the project, OPIC had routine consultations with the Embassy which indicated that it was supportive of the proposed project, and that it had no adverse information about Mr. Hull or the other sponsors. The only other consultations with U.S. Government officials prior to disbursement of the loan were with industry experts at the Commerce Department in connection with a sectoral analysis of the project to assure that there would be no adverse impact on the U.S. economy.
From 1982 through May 1983, OPIC's finance department reviewed the information about the three companies' historical operations. General background information and financial statements for 2 prior years were provided for each company. Backgrounds of each of the sponsors and their track records were presented in resumes and personal finance statements. The sponsors provided projections of the project cost, its financial plan, including the use of the loan proceeds, its capital structure and its current status. The sponsors visited our offices in July 1983 and a site visit was made by an OPIC officer in August 1983. Following that site visit, the finance department agreed to proceed with the loan.

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OPIC then went about verifying the information provided by the sponsors. We sat down with the prospective customers and the company's U.S. distributor. We talked with Paswok, a Seattle-based manufacturer of wheelbarrows, which committed to buy handles from the company to displace those supplied from Korea. We also spoke to the representative from Kelly Co., a wheelbarrow manufacturer in Mississippi, and he indicated an interest in Mr. Hull's products. We also contacted Ames Co. in West Virginia, the largest shovel manufacturer in the world, and their representatives stated that they were impressed with the quality of the company's products and indicated that if the company chose to switch suppliers, they would have no difficulty purchasing from Mr. Hull.
Also in October 1983, OPIC received positive references from the company's U.S. sales distributor and two personal references from the project sponsor and his representative. OPIC also contacted the First National Bank in Evansville, IN and Crone Lumber, one of the sponsor's companies, and received satisfactory credit reports. In addition, OPIC received letters in support of the U.S. sponsors from their long-time associates, and a Dun & Bradstreet report was also obtained on the U.S. sponsors and related companies.
In December 1983, the company's loan was approved by OPIC's investment committee, a body composed of all of OPIC's departmental vice presidents. Throughout the first quarter of 1984, OPIC worked with the sponsors to finalize the loan documentation. As collateral, OPIC accepted land, including timber and improvements, and equipment. Also, OPIC required keyman life insurance on Mr. Hull's life.
At the time the loan was closed, the company did not own any land. Instead, Mr. Hull provided evidence that he had been given full power of attorney by the owners of the land to utilize it for the project and to use it as collateral for the loan. This authority was confirmed by the mortgage document and opinions of our Costa Rican counsel. Several weeks prior to disbursement, the borrowers signed all of the required collateral security documents and left them with OPIC's Costa Rican lawyer for registration. Because OPIC's lawyer represented the documents at the registry merely awaiting final stamping, which was purely ministerial, OPIC decided not to hold up disbursement of the loan while waiting for registration to be complete.
The project appeared to be proceeding as planned after disbursement. An OPIC officer visited the project in 1984 and observed it in operation. All the payments due under the loan agreement were kept current until the end of 1985. At that time, however, it became apparent that not only was the project experiencing serious problems, but also our collateral, which we had been told by our lawyers had been properly registered, was not, in fact, in the registry. At that point, we undertook to salvage the project by seeking new equity investors while at the same time taking all possible steps to register the mortgage.
Once the mortgage was in place, we commenced foreclosure proceedings in Costa Rica. We also referred the matter to the Justice Department in April 1987. Both the foreclosure proceeding and the Justice Department investigation are underway and are directed toward recovering our $375,000 loan.

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I know you are interested in Rob Owen's role. So, let me address that briefly. He was introduced to OPIC by Mr. Hull as a friend whom Mr. Hull had asked to speak on his behalf to OPIC. Mr. Owen's connection - later connection I should add - with the NSC or any of its employees was unknown to OPIC until the press reports less than a year ago. He met with OPIC staffers on several occasions in 1985, and discussed Mr. Hull's request for a new loan which OPIC denied and the substitution of different collateral for the original property covered by the mortgage.
Any connection Mr. Owen may have had with other agencies of the Government was, I repeat, unknown to OPIC and had no possible effect, Mr. Chairman, on OPIC's handling of this loan.
Now, let me turn, if I could, to our current credit management practices. As part of our ongoing efforts to improve our policies, we have not only refined our credit policies, but we have begun a thorough review of the adequacy of our security throughout our loan portfolio. As a result, our current credit policies both prior to and post disbursement are considerably tighter than those in existence when the Maderas loan was made.
Specifically our finance department now requires audited financial statements on the sponsors going back at least 3 years; more stringent credit and reference checks, including TRW checks of all project sponsors, bank references from all banks with which the sponsors do business, and independent verification of the material assets; in-depth marketing studies, plus evidence of actual purchase commitments, are requested to support the marketing projections. Disbursements are made in tranches as the project passes agreed milestones rather than a single, lump-sum disbursement as was the case in the Maderas project. We also now seek independent certification of the sponsors' equity contributions prior to disbursement. We make additional site visits to confirm valuation of the property offered as primary collateral and, as appropriate, make independent appraisals of secondary collateral. Finally, we insure that mortgages are registered prior to disbursement.
Mr. Chairman, application of these policies to current finance applications at project has, we are confident, reduced our credit risks significantly. As I mentioned, we felt at the time we went through the Maderas project application that we had been very careful. This process has evolved. We have made some changes and we think we are even better prepared, obviously, than we were then to handle these projects.
Let me now turn, if I could, to the Aqaba pipeline project. It is not unusual for OPIC to work closely with investors to help fashion insurance coverage that will help solve specific political risk problems that they face. And that is what we did in the case of Aqaba.
Because of the unusual aspects of the project and its magnitude, as well as the sensitive foreign policy aspects of the project, before we went forward in considering this project, we wanted to satisfy ourselves that this project was consistent with U.S. national security interest. And we obtained such assurances from the National Security Council in contact with the Assistant to the President for National Security Affairs Robert McFarlane and other NSC staffers. However, even with the indications of support from the NSC, the record very clearly shows, Mr. Chairman, that we were not pre-

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pared to go forward except on the soundest of underwriting bases, that is with a secure salvage package that would pay back OPIC in the event of a claim.
One proposal for fulfilling this requirement, which was not our idea I should add, but was proposed by the investors, would have involved assignment of United States foreign aid to Israel as such a salvage fund.
In our request to the Justice Department for advice on the legality of such arrangement, we were careful to point out its flaws. We received no response from Justice, and ultimately due to the lack of interest in the project, the project died on its own.
In conclusion, Mr. Chairman, it should be apparent from the Maderas and Aqaba projects that, far from a common pattern, these projects could hardly be more different. In the Aqaba project OPIC obtained clear indications of NSC support for a project that promised very substantial benefits to the U.S. participants and to the developing countries involved. OPIC, nevertheless, insisted on adhering to its statutory mandate to offer insurance only on a sound underwriting basis. And it is evident, as I mentioned earlier, that even though at times OPIC's insistence on a sound salvage package threatened to unravel the project, OPIC would not have offered insurance except on such a sound commercial basis.
On the other hand, in the Maderas case there was no indication of any interest from the National Security Council or any other Government agency. OPIC's management and staff were simply unaware of the alleged connections between on of the project's sponsors and any agency of the U.S. Government. And the project was processed without any outside influence.
The Maderas project is significant, however, insofar as it illustrates the problems facing any developmental agency such as OPIC in lending to the developing world. As a development agency, OPIC's primary goal is to see that it's projects successfully surmount these and other difficulties. Thus, in its initial response to a project showing signs of trouble, our instinct is not to foreclose on the project, but to seek to save the project by bringing in new investors and new management or by restructuring the project to take into account unforeseen conditions. We, after all, are in these projects to help bring them off where the commercial marketplace would not be able to do so on its own. So, we work with the local investors, and in the small business area particularly, to try and restructure these projects and keep them afloat.
Now, OPIC also, as I mentioned, seeks to improve the ways in which it satisfies its congressional mandates to provide this development assistance while operating on a self-sustaining basis. Thus, we have continued to try and improve our credit procedures. And as I mentioned, we believe that our new procedures in these areas have significantly improved the security of our portfolio.
Finally, with regard to OPIC's relationship with other Government agencies, let me point out that our board or directors includes representatives of six other agencies, and that our top officials all serve at the request of the President. Thus, from time to time we can only expect to be subject to requests from other parts of the executive branch, as we were in the Aqaba case. And I should add that we also receive expressions of interest on a routine basis from

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Members of Congress in particular projects. But we don't view that as inappropriate. We feel that the contacts that we receive both from sources within the administration, as well as those from the Congress, enable us to learn about projects tht may be suitable and developmental.
The important question, Mr. Chairman, is not whether such requests or expressions of interest are made either by the administration or by the Congress, but how these expressions of interest are handled by OPIC and, most importantly, whether OPIC's management or staff deviates from existing policies and statutory requirements and prudent underwriting principles.
Clearly the Aquaba project and the prudence with which we handled it demonstrates that even in the face of clear indications of support from the National Security Council, we continued to operate as Congress intended in that we refused to go forward unless our statutory mandates were satisfied. I am pleased to say that we can find no fault with the way OPIC handled the Aqaba project, and am confident that we will continue to adhere to our mandates should similar circumstances arise in the future.
Thank you.
[The prepared statement of the Overseas Private Investment Corporation may be found in the appendix.]
Senator Sanford. Senator Kerry, do you want to pursue a line of questions now? Or I will leave that to you.
Senator Kerry. Do you want to start off?
Senator Sanford. No, I'd rather defer to you.
Senator Kerry. Thank you very much, Mr. Chairman. I have a number of questions, and we'll just begin with this first round, if I can.
I listened with interest to your opening, Mr. Garfinkel, and I guess if I had to summarize it, I'd say that you said there were legal difficulties in Costa Rica, a different legal system which created some problems, but that essentially - I want you to tell me if I am characterizing correctly. Essentially I think you said the credit policy clearly kept with the self-sustaining policy, procedures, goals of OPIC, and that while the loan went bad, you're essentially telling us that no procedures were, in effect, out of order or nothing was done that was wrong. Am I hearing you correctly?
Mr. Garfinkel. Well, I'm not going to tell you that what was done in that case was perfect. I think we have made some significant improvements.
Senator Kerry. I'm not asking about perfect. Wrong. Was anything done that was wrong? Was there bad procedure?
Mr. Garfinkel. No. I think we followed our internal procedures. I think there were some unforeseen developments that in retrospect could have been avoided had our procedures been more extensive at that time.
Senator Kerry. Well, let's begin from there then as a starting point. Now, when John Hull applied for the loan, he provided you with personal histories, financial statements for each of the partners in the business, as well as financial statements for the business listing its assets. Is that accurate?
Mr. Garfinkel. Correct.

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Senator Kerry. And his original list of assets and liabilities, for example, listed him as a 60-percent owner of Floyd Investments of Patoka, IN. Correct?
Mr. Garfinkel. That's correct.
Senator Kerry. It listed him as having other assets including producing oil wells in Indiana, totaling $3.35 million. Is that correct?
Mr. Garfinkel. That's correct.
Senator Kerry. Now, prior to making the loan, did OPIC run any form of credit check to determine whether the assets listed by John Hull existed?
Mr. Garfinkel. I would like our finance vice president to speak directly to this.
Mr. Draggon. Yes. I was not involved in the loan personally, but I have reviewed the file. And no checks were made prior to disbursement.
Senator Kerry. In what form were they made? Can you show me in the documentation?
Mr. Draggon. They were not made, sir. I said they were not made.
Senator Kerry. They were not made.
Mr. Draggon. That's correct.
Now, let me point out that form of lending that we engage in, generically called project finance, where were are looking primarily to the cashflow of the project itself for repayment, therefore, the focus was on the project in Costa Rica, not on the secondary collateral.
I want to point out, however, that our today's procedures in place would require us to look at the valuation of the assets behind the guarantees before disbursement.
Senator Kerry. Well, now you are going to tell me that on a startup business, which this was - correct?
Mr. Draggon. That's correct.
Senator Kerry. There was no record history of this business, no profit-loss statements. Correct?
Mr. Draggon. It was a consolidation of three businesses in Costa Rica.
Senator Kerry. And the project was a new project, new concept. Correct?
Mr. Draggon. Yes.
Senator Kerry. A startup project. So, you had no financials which give you any indication as to - you know, record, so to speak, in this particular market. That's a fairly risky loan on its face; isn't it?
Mr. Draggon. Generally yes.
Senator Kerry. So, you are going to say that you just didn't look to see whether someone that you didn't know applying for a loan stating their liabilities and assets, whether they were real.
Mr. Draggon. I would say again that procedure we follow is to concentrate on putting together a solid project in the host country. We realize that in promoting small business investment in LDC's and enticing them into undertaking these projects that we often have to rely primarily on the assets and the cashflow of the project itself because they don't have the resources or they can't - they

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don't have sufficient resources to do both their domestic operations and their host-county operations-
Senator Kerry. But at this point in time you didn't know whether there was any cashflow, and you didn't know anything about the assets. Correct?
Mr. Draggon. My review showed that there were projections. The projections were analyzed by the finance team.
Senator Kerry. Well, I think we can get into that later. Let me say that I have in front of me the first memorandum by Peg Walsh. And I do, indeed, wish she was here, and we would want to pursue things with her. But she says, "In my opinion the following information is needed before a decision can be made: One, general historic background on the Costa Rican firm; two, historic financials on Costa Rican firm - Tom Clegg thinks that they might not be readily available. Three, a more definite set of projections. The numbers only focus on sales. No mention is made of profit or anything else. And four, background on equity" - I can't even read the words there - "equity investors. Experience in the area, their associations with Costa Rica company, et cetera."
Now, is it your feeling that those were adequately provided for at some later date?
Mr. Draggon. Senator, I was not involved in the project. I reviewed it. I can say that they generally followed the procedures in place. With the benefit of hindsight, there were of course some improvements that could have been made in the investigative process at that time.
My concern as the vice president of finance today is to make sure those procedures have been strengthened, and I feel that they have been.
Senator Kerry. Well, I appreciate that, and I think everybody here does. But I still think that this loan raises very serious questions about the process and about ---
Mr. Draggon. Let me add one other thing. I think generally our approach to supporting projects supported by U.S. small businesses is to get in with the sponsor and help them put the project together. We recognize that many of these sponsors are unsophisticated. They don't keep good records or records as complete as we would like to see. But generally, our approach is to be helpful and take a positive approach to putting the project together.
Senator Kerry. Let me just - you know, we are not talking about Third World country developers here. We are talking about American investors. Correct?
Mr. Draggon. That's correct, sir.
Senator Kerry. So, it is not as though these folks don't speak English or aren't - I mean, this is an American businessman with an Indiana bank, with other American businessmen, with American business financial resources.
Mr. Draggon. The investor is in a foreign country trying to put projects together and sometimes he does not have all the financial professional services needed to do that.
Senator Kerry. Well, let me just ask this. When did OPIC run a check on Mr. Hull? You did run a check at some point. Correct?
Mr. Draggon. There were checks run. Again, I wasn't involved in the project, and I can't address that.

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Senator Kerry. Well, let me help you out. In late 1986 - this process began in 1982, first application. In late 1986 and early 1987, more than 1 year after John Hull stopped making interest payments, you made a check on John Hull. Does that ring a bell?
Ms. Osowski. Yes, but the consolidated companies did provide all the financials before the loan was disbursed, and that was what was analyzed in making the project loan to three existing enterprises. And those financials and profit-and-loss statements and so on I think are all in the documents that ---
Senator Kerry. We will go through those a little later. But what did OPIC find out when you then for the first time checked the assets that he laid out to you in 1982?
Ms. Osowski. Well, I certainly can't say that our efforts are all-inclusive because we had to go on what information we had in terms of what likely counties his properties may have been located in. But what we did learn at that point was that the majority of Mr. Hull's holdings appeared to be in the names of family members rather than himself.
Senator Kerry. So, you learned that in fact - well, further than that. Was there any property under the name of Floyd Investments?
Ms. Osowski. I don't recall that, but I'm not certain that all those names were checked. I would have to go back and look at - I mean, I think you have the documents there of the checks that ---
Senator Kerry. Well, who has reviewed those documents in preparation for this hearing? Anybody? I mean, I can answer the question. The answer is "No." there was no Floyd Investments that you found. No Floyd Investments.
What about producing oil wells in Indiana? Were there any producing oil wells?
Ms. Osowski. I know those documents are also in the record.
Senator Kerry. Can anybody answer that? Were there any producing oil wells?
Ms. Chalmers. I believe the documents who that we weren't able to find any producing oil wells that were registered ---
Senator Kerry. Can you speak up into the microphone? Thank you.
Ms. Chalmers. I believe the records show that we were not able to find evidence of producing oil wells in his name.
Senator Kerry. So, in effect, a man, who came to you asking for a loan in 1982 who stated as his assets producing oil wells and Floyd properties, didn't hold those properties. Is that correct?
Ms. Chalmers. That's the conclusion we're reaching; yes.
Senator Kerry. Is that fraud as you understand it under the law?
Ms. Chalmers. That is one of the reasons we have referred this matter to the Justice Department.
Senator Kerry. When did you first refer it to the Justice Department?
Ms. Chalmers. In April 1987.
Senator Kerry. No, do you want to ---
Ms. Chalmers. I would point out that the preliminary checks that we did in 1986 are by no means all-inclusive, and we have no reason as this point to now whether or not Justice has done fur-

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ther investigations. And I think, as you may be aware, things such as oil records are done on a county-by-county basis. You know, every State has things recorded differently. I think a more in-detail check would need to be made before we could conclude that, in fact, there are no assets in his name or the companies' names.
Senator Kerry. Now, you now require audited financial statements. Is that correct?
Mr. Garfinkel. Yes, we do.
Senator Kerry. As a matter of policy?
Mr. Garfinkel. That's correct, sir.
Senator Kerry. When did you implement that policy?
Mr. Garfinkel. Go ahead, Bob.
Mr. Draggon. Yes. First of all, historically we have always asked for audited financial statements, and for the most part we receive them for a large percentage of our loans. However, we have found that in working with small businesses, that oftentimes they do not have audited statements, one, because of the expense of preparing these and, two, that often their domestic banks do not require them.
Now, the purpose in asking for audited statements is simply to qualify the sponsor and his track record. Faced with unaudited statements, we also require credit, reference checks, domestic site visits as well as visiting the project site itself and other information to verify and qualify the sponsor.
Now, despite this and in a continued effort to strengthen our procedures in July 1987, I implemented a policy requiring financial statements, audited financial statements, for all projects regardless of size. Exceptions must be submitted to me for approval.
Senator Kerry. The proposal and recommendation for approval by the OPIC, by your approval committee - I'm referring to document 36 in the book, page 5 thereof, which is reproduced here. Stated as the basis for the recommendation: "Although the unsophisticated financial records of the company and the sponsor's sole proprietorships have made OPIC's standard credit analysis more difficult, a site visit by OPIC as well as in-depth marketing and individual sponsor checks support the commercial strength of this project."
Now, can you tell me who made that site visit that justified approval?
Mr. Draggon. It' s my understanding that the investment officer on the case at the time was Vanessa Burgess who made that visit.
Senator Kerry. And you are telling me that prior to the recommendation time - prior to the recommendation time - she made a site visit there?
Mr. Draggon. That's correct.
Senator Kerry. And what about the individual sponsor checks? I mean, you've just said you didn't check into the individual sponsors at all.
Mr. Draggon. As I recall from my review, there were references provided by associates and businesses connected with the project. There were credit checks.
Senator Kerry. Well, the record that I've looked through - and I've seen every document that you've supplied us with - shows that the fullest extent of any check was a cursory phone call. We have

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contacted every single one of the people that you talked to that supposedly were checked. And the full extent of a check amounted to a telephone call with the comment from them, "Oh yeah, if they can provide cheaper goods, sure, we may buy them."
Now, can you point to any proper, normal procedural credit check as credit checks are known with a credit report? I don't see any credit reports in here.
Mr. Draggon. I believe there is a Dun & Bradstreet report.
Senator Kerry. Can you show that to me in the records that you provided us?
Ms. Osowski. There were also checks made with the bank. That may also have been done by telephone, but with the First National Bank of Evansville - that check was also made, and the three companies that were potential customers or a current distributor. There were personal references and then D&B's were checked on a couple of companies. And I think we can probably locate those for you.
Senator Kerry. What was the date of Ms. Burgess' trip?
Ms. Osowski. Let's see. I have a record here that she made that in August, 1983. So, that was prior to the loan committee meeting and prior to committing.
Senator Kerry. And did she report on the result of that trip?
Ms. Osowski. I don't think that the file reflects ---
Senator Kerry. Because we don't have a file report on that.
Ms. Osowski. I don't think that there is a written document. I think what normally occurs is that the results of those trips get incorporated into the loan paper that is prepared for the committee. But basically all the information she gathered on how the project was going to be put together and structured would have been incorporated in the loan paper which you do have a copy of.
Senator Kerry. Can you refer ---
Ms. Osowski. The investment committee papers ---
Senator Kerry. Oh, the investment committee papers themselves.
Ms. Osowski [continuing]. I think it is formally called.
Senator Kerry. OK.
Now, I have looked through the documents submitted by the company that you titled as being unsophisticated financial records. I have to tell you that I think unsophisticated is being charitable. There are cross outs. There are mistakes. The assets are sort of casually listed without any checking into them, et cetera.
Would you say that you were satisfied that those, as they are represented to us, are the full extent of the financial records of this company.
Mr. Draggon. I would say from my review there was certainly room for improvement. And our standards are much higher today.
Senator Kerry. Now, can you give me any other - what else was part of this so-called in-depth individual sponsor check?
Mr. Draggon. Senator, again ---
Senator Kerry. First of all, could you tell me whose characterization is that? Who write this report?
Mr. Draggon. It's a collective effort of this group here.
Ms. Chalmers. Which report are you referring to, Senator?
Senator Kerry. I am referring to the direct ---

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Ms. Chalmers. The investment committee paper?
Senator Kerry. Yes, to the December 1983 direct investment - approval investment committee report.
Mr. Draggon. That would be the investment officer and other support staff.
Senator Kerry. And that is who?
Mr. Draggon. In this case, Vanessa Burgess.
Senator Kerry. Vanessa Burgess would have written that.
Mr. Draggon. That's correct.
Senator Kerry. Now, isn't it a practice in those meetings - generally most people aren't too familiar with the case. Correct? You sit and they report to the committee. And they say, "Well, on this particular loan there are some financial problems here and there." But you essentially take the word of the investment officer, don't you?
Mr. Garfinkel. Except the steps that that person went through in compiling the paper would be made known to all the folks sitting around the table, and as I mentioned in this particular case we contacted three of the customers that indicated an interest in buying the product, talked to a distributor. We talked to a number of personal references, talking to the bank, and we got D&B's on five individuals associated with the project.
Senator Kerry. But that was all Vanessa Burgess. Correct?
Ms. Osowski. I'm sure she had other staffers working with her.
Senator Kerry. And she would have reported that information to you. Is that correct?
Mr. Garfinkel. That's right.
Senator Kerry. So, it would have been her judgment that essentially all signals are go, green light on this.
Mr. Draggon. And reviewed with her supervisors as well.
Senator Kerry. And who was her direct supervisor on this case?
Mr. Draggon. I believe at the time it was a gentleman by the name of Mr. Brown.
Senator Kerry. And is he still with OPIC?
Mr. Draggon. No, he's not.
Senator Kerry. Do you know where he can be located now?
Mr. Draggon. I believe he resides in Washington.
Senator Kerry. Now, so we have already established that no in-depth check of John Hull was made here. Isn't that correct?
Ms. Osowski. Of his personal assets. But in terms of the individual companies that were going to be consolidated, that was definitely investigated. And those financials were obtained, and those are in the record. And in terms of - you know, we did have Hull's own statement of his assets.
Senator Kerry. Now, before OPIC would loan the money, you insisted on certain preconditions, including life insurance on John Hull as the keyman and a security agreement on the property being used in the project. Correct?
Ms. Osowski. Correct.
Senator Kerry. Ultimately it turned out that his life insurance policy was never paid for. Correct?
Ms. Osowski. That's not correct, sir.
Ms. Chalmers. That just is not what the records demonstrate.

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Senator Kerry. OK, tell me what they do demonstrate.
Ms. Chalmers. They demonstrate that as of the closing date we had received a binder from the insurance company, the first company which issued a policy on Mr. Hull - that was Security Connecticut - which was to become effective upon payment of $2,000 which was, indeed, paid at the closing. A policy was issued on April 13, effective as of April 9. That was well within the terms on which we disbursed the loan where we required that the policy be in effect within 60 days of the closing.
Mr. Hull apparently changed companies in September 1984. There is a policy in the file. It is dated September 11 ---
Senator Kerry. Did he notify you when he changed?
Ms. Chalmers. Well, we have a copy of the policy in our files. I'm not sure whether there was any telephone contact in that connection.
Senator Kerry. He paid $2,000 at the time of the closing. Correct?
Ms. Chalmers. That's correct.
Senator Kerry. And there was one binder.
Ms. Chalmers. That's correct.
Senator Kerry. He then changed companies.
Ms. Chalmers. That's right.
Senator Kerry. Did you receive another binder?
Ms. Chalmers. We received a copy of the policy that John Hancock had issued.
Senator Kerry. That was the first one.
Ms. Chalmers. No, this was the second one. We had the first policy which was issued in April by Security Connecticut. We also have the second policy which was issued in September by John Hancock, and which was canceled in February 1985, the day after a policy had been issued by IDS Co.
Senator Kerry. Do you have any idea why it was canceled?
Ms. Chalmers. Well, there's a letter in the file which I believe you have ---
Senator Kerry. Yes.
Ms. Chalmers [continuing]. Which indicates that Ms. Stiehler who was Mr. Hull's representative had indicated all sorts of dissatisfaction with it. I don't know the details of that or the underlying facts.
Senator Kerry. Wasn't it that he wasn't going to pay the premium?
Ms. Chalmers. Well, there is some indication that there was an automatic premium payment arrangement in effect, and I frankly don't know what underlay the correspondence that we had about that. But it may have had something to do with the premium.
In any event, a new policy was issued in February 1985, and the files record the fact that at least as of January 1986, that policy was in effect and remains in effect so far as we know.
Senator Kerry. Have you checked it?
Ms. Chalmers. No, sir, we haven't.
Senator Kerry. So, you don't know.
Ms. Chalmers. The last indication in our files on that point is a record of a telephone conversation in which we were assured that that policy was in effect in 1986, and that if there were to be a can-

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cellation that we would be notified of that fact, which we have not been.
Senator Kerry. Now, the security agreement was not registered in Costa Rica. Correct?
Ms. Osowski. Are you speaking of the mortgage? Yes, that's right. It had not yet been registered at the time of the closing.
Senator Kerry. So, in effect, at the time you closed the loan, you had no security agreement.
Ms. Osowski. No, that's incorrect. All the documents were signed. They were legally binding on the sponsors. They were merely not finally registered with the registry in Costa Rica.
Senator Kerry. How is it possible for you to accept other people's land as security on an agreement like this?
Ms. Osowski. That would obviously be a matter of Costa Rican law with respect to whether or not Mr. Hull or his company had a sufficient power of attorney to grant that mortgage. We received opinions from both his lawyer - Mr. Hull's, the Maderas' lawyer - and our own that a sufficient power of attorney had been granted. And that is obviously a matter of Costa Rican law and something we had no reason to question.
Senator Kerry. Did you ever think of asking the people whose land was being put up for security whether or not they consented to that?
Ms. Osowski. Again, that's obviously a matter of Costa Rican law and something that ---
Senator Kerry. Well, no. Isn't it a matter of their choice?
Ms. Osowski. Well, it's a matter of whether someone had a legal right to do it. We were informed by the lawyers that, in fact, that was the case.
Senator Kerry. You were informed specifically by the lawyer in Costa Rica.
Ms. Osowski. In the mortgage document is a representation approved by Hull and reviewed and opined upon by both our lawyers that sufficient power of attorney did exist to grant the mortgage. We had no reason to question that.
Senator Kerry. So, that if in fact that wasn't true, you would assert that you are an innocent victim while Mr. Hull would have known what he was doing, and ---
Ms. Osowski. Absolutely.
Senator Kerry. Now, you would say then that you had received the documents that were the preconditions to your making this loan at that point in time. Is that accurate?
Mr. Garfinkel. That's correct
Senator Kerry. Were these documents certified true copies?
Ms. Osowski. Yes. I think the record shows that.
Senator Kerry. Now, his original loan request was referred by the commercial attaché of the Embassy in Costa Rica. Correct?
Mr. Garfinkel. That's correct.
Senator Kerry. And a year later you asked the Embassy in Costa Rica to comment on the reputations. What did they say at that point in time - the Embassy?
Mr. Garfinkel. They had no adverse information.
Senator Kerry. Weren't they, in fact, a little more positive than saying no adverse?

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Ms. Osowki. I'm sure the cable is in the file. I don't know if we have a readily available copy of that. Obviously our concern is whether or not anything adverse comes to light, and I know for a fact that it did not. Perhaps that document could be located.
Mr. Garfinkel. The embassy said:

John Hull is personally well known to several Embassy personnel, and the Embassy finds no particular political risk associated with the project's location. Costa Rican law does not prohibit United States citizens from owning timberland, while the new regulations on timber are designed to reduce the export of timber and logs and promote the export of semiprocessed, finished wood products such as those produced by Maderas Tropicales.

Senator Kerry. So, the Embassy in fact was very positive about this. They encouraged it. The Embassy was the first contact in this loan.
Ms. Osowski. And that's the standard procedure, and if the Embassy were to come back with an extremely negative or even a slightly negative response, we would think very carefully before moving forward.
Mr. Garfinkel. The Embassy's concern was the development aspects of this, and as the last line of the cable says, "If the project will strengthen Costa Rica's promotion of nontraditional exports, the Embassy approves of OPIC financing of the project." So, they were more concerned about the developmental benefits than about Mr. Hull.
Senator Kerry. This is October 1983. Correct?
Mr. Garfinkel. That's correct.
Senator Kerry. And while you may not be aware of it, this is for the record at the same period of time as the ranch and the airstrip on the ranch were being used as a depot for supply and resupply of Contras who were flying in and out of the Hull ranch at the time. I'm just stating that for the record ---
Mr. Garfinkel. We were certainly unaware of that, sir.
Senator Kerry [continuing]. So that the time dates are in coordination here.
Now, how did OPIC - what was the relationship - strike that question.
What was the record of your involvement up until that point with any other businesses in Costa Rica?
Mr. Garfinkel. Bob, did we have other projects that you're aware of?
Mr. Draggon. We have other projects in Costa Rica. I'd have to go back and check the record to determine what projects we were working with at that time.
Senator Kerry. Could you recall how many perhaps?
Mr. Draggon. I cannot; no.
Senator Kerry. In each of those projects, did you work through the Embassy?
Mr. Draggon. It would be normal procedures to check with the Embassy to check on project sponsors; yes.
Ms. Osowski. And doing site visits. It is routine for the OPIC official to stop in at the Embassy, to inform the Embassy in advance before they come.
Senator Kerry. So, working in Costa Rica was not something that was new to OPIC.

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Mr. Draggon. That's correct.
Senator Kerry. Did you have a lawyer in Costa Rica that you used on prior occasions?
Ms. Osowski. Yes. Yes, we did.
Senator Kerry. Was that the same lawyer that you used on this occasion?
Ms. Osowski. That's right. OPIC's dealings go back some 15 years I understand. We'd had very good experiences with this particular lawyer, as well as the other members of his firm.
Senator Kerry. Did you deal with other members of that firm or with that lawyer alone?
Ms. Osowski. No. We did deal with the senior partner of the firm, Mr. Pacheco, who is now still OPIC's lawyer.
Senator Kerry. And at what point in time did you find out that the mortgage had not been filed, had not been recorded?
Ms. Osowski. That's a somewhat difficult question because our lawyer was still maintaining that it had been filed for quite some time after Mr. Hull told us that in his opinion or his checking that it was not. And so, I would say it was some time around the second loan request. Jane, is that correct? Do you have the ---
Ms. Chalmers. Well, I think that we didn't confirm that absolutely until the visit to the project in August 1985.
Senator Kerry. Were you not suspicious when you knew that the recording had not taken place?
Ms. Osowski. Oh, when we learned that the recording had not taken place, yes, we were suspicious. Our lawyer gave us a story that seemed somewhat plausible given our good relationship with him in the past, and that was that one of the employees had taken the fees and not recorded it. We later learned that that was probably not the case and that it was our lawyer himself who had committed this act and defrauded us.
Senator Kerry. What about the level of suspicion that arose when you found out that land wasn't owned by him?
Ms. Osowski. It was not suspicious. We felt we had legal justification, legal support. There was no suspicion in terms of the land that was taken as part of the first mortgage.
Senator Kerry. And you didn't feel it was necessary to get the legal consent of the owners in order to feel that your security was properly covered.
Ms. Osowski. We felt that we had to rely on our counsel and that that point had been covered.
Senator Kerry. Now, as little as 6 months after the first loan was issued, Mr. Hull wrote to you to ask for more money. Correct?
Ms. Osowski. Yes.
Senator Kerry. In the meantime, his insurance policy I believe at that point had, in fact, been canceled. Am I correct?
Mr. Chalmers. I don't believe that there was a lapse, or if there was, that there was any significant period of time.
Senator Kerry. Well, if you turn to document 52, this is the Stiehler letter. Because of all the items listed above - "I list below several items with which I am unhappy. One, an unsigned bank authorization was sent to my bank without permission and payments made. Two, it was my understanding the cost to me was" blank. "However, I find the annual premium is" blank. "John Hull

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