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is listed as the owner where Maderas Tropicales should be the owner. I did not understand a fee of" whatever. "Not only do I not have a copy of the policy, after talking with several people, including Mr. James Watt, it is not the policy of Hancock to furnish policies upon request. Therefore, I am exercising my right of cancellation. I further request all premiums paid be returned to Maderas Tropicales."
So, effective that date there is no insurance policy to your knowledge.
Mr. Chalmers. No, I'm sorry. That is incorrect. We have in our files - and we provided to the committee - a policy issued by IDS dated February 19, 1985, the day before the date of this letter.
Senator Kerry. And which number is that? Can you draw that to my attention?
Ms. Chalmers. I don't know that it is in this book.
Senator Kerry. Well, those are the only documents we were provided with.
Ms. Osowski. I don't think that's correct.
Senator Kerry. Do you have it? And what is the date on that document?
Ms. Chalmers. February 19, 1985.
Senator Kerry. And that is from which company?
Ms. Chalmers. That is from IDS.
Senator Kerry. OK. And that held until what date?
Ms. Chalmers. That, as far as we know, is still in effect. It was certainly - we have confirmation in our file that it was in effect as of January 1986.
Senator Kerry. And after January? Was that the second or third just for my own clarification?
Ms. Chalmers. That's the third policy.
Senator Kerry. That's the third policy, all right. And the third policy is the one that you believe is still in effect. Is that correct?
Ms. Chalmers. That's correct. We have no indication that it is not in effect, and we have an indication that we would be so notified were it canceled.
Senator Kerry. OK. Now, through 1985, Hull continued to ask for more money. So, you had an ongoing relationship with him at that point. There was a site visit in 1985 at some point time?
Ms. Osowski. I think you were talking about the second request for a loan, and my records show that that loan request was rejected in February. So, it was not throughout 1985 that a loan request was pending.
Senator Kerry. Well, there was a prior request that he wrote. The loan was issued on the - what? I guess you'd say November 30. Is that correct? What is your actual date? You had two dates: One on the date that the forms were signed, and another date when the OPIC agreement was entered into.
Ms. Osowski. Are you talking about when the loan was disbursed. That was March 1984, March 30, 1984.
Ms. Chalmers. That was the same date of the signature of the document.
Senator Kerry. Now, at that point in time he said that if he didn't get that money for the second loan, he would be unable to pay back the money from the first loan. Correct?

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Ms. Osowski. I don't have a recollection of that.
Mr. Draggon. I have no knowledge of that.
Ms. Osowski. You may have found something in the documents. I don't recall that statement, but it may be there. I'm sure he made many claims about why he needed the money. My recollection was that there was certainly some discussion about needing additional equipment. A kiln I think was one thing that was mentioned.
Senator Kerry. Well, let me read you - this is frm Tom Clegg. This is 1985. This is from Hull, and he says, summarizing it:

After receiving a letter stating I would have to wait on a new loan, I wrote requesting a loan for a smaller amount for a dryer. The request was subsequently rejected.

He went on why he would need it.

The compound problems, startup production of the wheelbarrow handles was much slower than expected while the price of wood, labor, social benefits, * * *

And he went on to describe serious problems.

Maderas Tropicales now loses money for every pair of handles it exports to the States. On top of this Maderas Tropicales sent two container loads to a Korean company, that has yet to be paid. In short, Maderas Tropicales is in a hell of a mess.

This is from the guy who runs it.
Ms. Osowski. Right. And that is what date?
Senator Kerry. This is July 31, 1985.
Ms. Osowski. OK. So, that was after the second loan request had been denied.
Ms. Chalmers. And I could point out, we did make a site visit within a month of that date in order precisely to look into these questions.
Senator Kerry. In that same letter he says, "Rob Owen travels fairly frequently to Costa Rica, and as you know, is based in Washington. He is knowledgeable about the situation and has agreed to act as my representative in Washington.
Was that your first introduction to Rob Owen?
Ms. Chalmers. No. I believe the records show that we had had some contact with him in March 1985 in connection with the substitution of collater, and that he had visited with OPIC's staff in July 1985 and I think August also.
Senator Kerry. And do you happen to know how Rob Owen first was introduced to you? Was it through John Hull?
Ms. Chalmers. Yes, it was.
Senator Kerry. You do know that.
Ms. Chalmers. That's what I gather from the documents.
Mr. Garfinkel. He was working with Gray and company at the time, and apparently came in as Hull's representative, which didn't strike us as odd in the least.
Senator Kerry. I'm just trying to establish the sequence here for the record purposes.
Ms. Osowski. We've had no dealings with him other than in connection with this project. So, he would have had to come in as - you know, on John Hull's request or whatever.
Senator Kerry. Now, what was your reaction at this point when Tom Clegg received this information. What was the reaction of OPIC to this loan?

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Mr. Garfinkel. We knew the project was in trouble, and we decided to see if there was any way we could save it because that's our initial response to these kinds of situations. And so, we went about trying to contact other potential investors and set in place a new series of procedures which we wanted Hull to follow.
Ms. Osowski. Two visits were made, August and September, following up on what was reported in that letter to see if we could get a better handle on it.
Senator Kerry. And this is 1985.
Ms. Osowski. Right.
Senator Kerry. OK. Now, who made those visits?
Mr. Garfinkel. Mr. Clegg.
Senator Kerry. What did Mr. Clegg find in the course of those visits?
Mr. Garfinkel. Tom, would you like to come up here?
Senator Kerry. Mr. Clegg, if we could just swear you for the record also. State your name for the record.
Mr. Clegg. Tom Clegg.
[Witness sworn.]
Senator Kerry. What did you find when you went down to Costa Rica and examined ---
Mr. Clegg. The project had not been - was not in operation. It had been originally ---
Senator Kerry. Could you pull that close to you?
Mr. Clegg. The project was not set up as it had been originally envisioned in the loan paper.
Senator Kerry. Would you not say it is fair to say it wasn't operational?
Mr. Clegg. That's correct.
Senator Kerry. It wasn't operational. All right.
Let me come back here for a second. I'll come back to you.
Is there any reason why you didn't take action against the law firm in Costa Rica?
Ms. Osowski. Actually, I can answer that. As I said before, first of all, the first step was to make sure that in fact it had not been recorded because our lawyer was still telling us conflicting things from what we were hearing from other sources. When that was determined ---
Senator Kerry. When did you do that? When did you make certain of it?
Ms. Osowski. Well, I don't know exactly the date? Do you have a date on that, Jane, for any ---
Ms. Chalmers. It was certainly either before or during Tom's visit in August.
Ms. Osowski. Yes. Yes, so that's some time during that period. And what we did - also what had happened at that time is that Mr. Carballo had split off from the firm that OPIC had had the dealings with over the years, and had begun his own practice. And so, what we immediately did was go back to the senior partner, Mr. Pacheco, with whom we had originally started our dealings with that firm, and asked him to check into it, to find out what he could, and to take corrective action. And he did that. He came to Washington, as I recall. We empowered him through a power of attorney that we went through all the legal steps consularizing with

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the Embassy of Costa Rica, and authorized him to take whatever steps were necessary, including to denounce Mr. Carballo to the Supreme Court of Costa Rica if required to get correction action taken. And if he refused to take corrective action, then to have the Supreme Court of Costa Rica as the, I guess, authorizing body for the lawyers down there to take whatever action they felt appropriate.
Senator Kerry. Does he have malpractice insurance or not?
Ms. Osowski. I have no idea.
Senator Kerry. Would that not be one source of recovery for OPIC in this matter?
Ms. Osowski. I doubt that that is a very practical alternative. First of all, I don't know whether he does or doesn't, don't know what the malpractice rules might be in Costa Rica. That was never suggested to us by Mr. Pacheco as a course of action. He suggested the denouncement to the Supreme Court.
Senator Kerry. Well, isn't he associated with him. Wasn't he?
Ms. Osowski. Not at that point in time. They had split off.
Senator Kerry. Does it surprise you if they were a part a same firm that he didn't recommend going for a malpractice suit?
Ms. Osowski. Pardon me?
Senator Kerry. Weren't they part of the same firm?
Ms. Osowski. No, not at that point in time. As I said, Mr. Carballo had split off his practice from Mr. Pacheco after the loan was disbursed. I'm not sure if that ---
Senator Kerry. But it was after the nonrecording that they split.
Ms. Osowski. Yes, oh, absolutely, yes.
Senator Kerry. So, at the time of the recording, they were jointly liable.
Ms. Osowski. I suspect that's true. I mean, I don't ---
Senator Kerry. So, why would he recommend a malpractice suit?
Ms. Osowski. We have no information about ---
Senator Kerry. Do you think that is worth exploring?
Ms. Osowski. Possibly.
Senator Kerry. Whether he has insurance?
Ms. Osowski. Yes, it is certainly worth exploring, and we could do that.
Senator Kerry. Why hasn't John Hull been sued?
Ms. Osowski. We have instituted foreclosure proceedings in Costa Rica, and in addition, we have referred the matter to the Justice Department for whatever action ---
Senator Kerry. When did you institute foreclosure proceedings?
Ms. Osowski. That was only done a few weeks ago, and that was because it was only at that point in time that the final legal steps had been taken the record the substitute mortgage.
Senator Kerry. How long ago did you refer this matter to the Justice Department?
Ms. Osowski. April 1987.
Senator Kerry. Do you know what, if any, action between then and now?
Ms. Osowski. I know the matter is under investigation and nothing further ---
Senator Kerry. Do you know who is handling the matter at the Justice Department?

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Ms. Osowski. Yes. We have had contact with individual lawyers there.
Senator Kerry. Who did you refer it to specifically?
Ms. Osowski. Do you have that letter, Jane?
Ms. Chalmers. I believe the letter is in the documents. I think it was referred to
the head of the Civil Division.
Ms. Osowski. The head of the Civil Division.
Senator Kerry. Now, you saw this matter - are you positive of that?
Ms. Osowski. Yes.
Senator Kerry. I just want to be certain for the record. Is that who it went to? The head of the Civil Division.
Ms. Chalmers. The letter is in the documents. I don't have it in front of me, but I ---
Mr. Garfinkel. We can identify that.
Ms. Chalmers [continuing]. Am sure we can confirm that.
Senator Kerry. OK. Now, with respect to the - the letter that I read you from John Hull to Tom Clegg was in 1985.
Ms. Osowski. Right.
Senator Kerry. There were clear indicators of problems throughout 1985 - serious problems. Mr. Clegg goes down to Costa Rica. Mr. Clegg finds a nonoperational entity. You have had jockeying around with insurance. You've got indicators that - well, before I ask that question, let me ask you this.
What happened to the money that you paid to Mr. Hull?
Mr. Clegg. Based on my review, which I think we have submitted to you ---
Senator Kerry. Again, could you speak in closely?
Mr. Clegg. I'm sorry. Based on my review, we've submitted to you the detail that they provided us of where the money went. We reviewed a list of all the ---
Senator Kerry. Excuse me. I'm just looking at the bells, and I think we have something going on that I have to - but go ahead.
Mr. Clegg. I reviewed all the local expenditures down there, looked at the local invoices - the term that they use down there is "facturas" - that supported those expenditures. They were reasonably well supported. And you could tell within reasonable limits of where the money went. The problem was that there was no bank account in Costa Rica, and in an auditing sense, without a bank account it is sort of hard to ---
Senator Kerry. Well, let me be more specific. Wasn't the money converted to cash?
Mr. Clegg. Some of the money was, yes, sir.
Senator Kerry. Do you know how much money was converted to cash?
Mr. Clegg. I think we have it in those records that we have submitted to you.
Senator Kerry. Would you refer to the records because the records don't speak, and we are being verbal here. So, I would like to get the amount of money on the record.
Ms. Osowski. Unfortunately, we don't have an index for you book. I don't know if we can locate that easily.
Senator Kerry. There's an index in the front there.

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Mr. Clegg. Senator, you can see - what exhibit is this? The exhibit 64 - they have a listing that they ---
Senator Kerry. Let me interrupt you for a minute. I'm on the back end of a vote here. I've just got to run over and vote, and I will be right back. So, we'll recess just for a few minutes, and I'll be right back.
[Recess.]
Senator Kerry. Thank you very much for your patience, and I apologize for the interruption.
Mr. Clegg, you were telling me where the money went. And I'd like to try to pin that down a little bit if we can on the public.
Mr. Clegg. They provided us with information which is part of exhibit 64.
Senator Kerry. Correct. "They" being?
Mr. Clegg. The office, the staff at Mr. Hull's business.
Senator Kerry. OK, and what does that show?
Mr. Clegg. I had a worksheet where I worked it up in detail, pulled it off, and I just made a rough calculation here. And it's approximately $200,000 for which checks were written and cashed in Costa Rica for colones - based on what I was told.
Senator Kerry. Did you see the cashed checks?
Mr. Clegg. No, I did not. They're available I'm sure if anybody wants to look at them at the bank in Indiana.
Senator Kerry. Well, how do you know that's valid?
Mr. Clegg. I don't. That's what they represented to me. That's what I said.
Senator Kerry. So, you have no idea whether those checks were spent on this business or not, do you?
Mr. Clegg. Even if I saw the checks I wouldn't because they represented that they were - that they had the cash. This was ---
Senator Kerry. And from what you saw - let me just ask you from your judgment and experience. From what you saw down there, do you think money was spent on it?
Mr. Clegg. As I think has been said, there's money spent - there's a lot of money that appeared to be wasted, a lot of trips to San Jose, a lot of just incidental buying single parts that didn't make sense in a commercial sense. So, the question is whether it appeared that it could be spent on the ---
Senator Kerry. At the very moment that you were there looking at where he said checks had been spent, was the factory in operation as set forth when you visited there?
Mr. Clegg. No, sir. No, Senator, it was not. As I said earlier, it was not in operation.
Senator Kerry. Did you ever see the product of the factory?
Mr. Clegg. No, Senator, I did not.
Ms. Osowski. One of our other officers who ---
Senator Kerry. Did you talk to the other partners, Mr. Clegg? Did you talk to the other partners?
Mr. Clegg. Yes, Senator, I did.
Senator Kerry. What did they say?
Mr. Clegg. Well, I hate to characterize exactly. They seemed to be frustrated with the situation. I think that they felt that they had made a bad business venture, it was communicated to me. All

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the problems were blamed on Mr. Arroyo who it was allerged had done a poor job of managing.
Senator Kerry. Wasn't some of the money deposited in cash into a bank in Indiana.
Mr. Clegg. Senator, the original check was deposited in a bank in Indiana. These checks that we're ---
Senator Kerry. From Costa Rica.
Mr. Clegg. Not to my knowledge.
Senator Kerry. I believe there's a reference in the same document that we're just referring ---
Mr. Clegg. That would have been inconsistent with the way they were operating if that was done.
Senator Kerry. I beg your pardon?
Mr. Clegg. That would have been inconsistent with the way they were operating if that had been done.
Senator Kerry. Well, let me come back to that. I think that there is some record to that effect, but I will come back to it.
Mr. Garfinkel. Just to make sure the record is clear, we are only aware of one amount of money being deposited in this Indiana bank, and that was the original disbursement that we made to Mr. Hull.
Senator Kerry. On the document that we were just referring to, No. 64 - do you have that? On the third line down it says, "Patoka, 4/2/84" - that's Patoka, IN - $25,000/ John Hull's account." Is that accurate?
Mr. Clegg. What do you mean? This was a check ---
Senator Kerry. The date of a withdrawal on that money or a check paid on that amount.
Mr. Clegg. That's correct.
Senator Kerry. So, a check would have been drawn from the loan amount or the business to $25,000 to John Hull's account in Patoka.
Mr. Clegg. That's correct.
Senator Kerry. So, that is cash deposited into an Indiana bank.
Mr. Clegg. Yes, sir. That's correct. But I thought you meant into the account of Maderas Tropicales.
Senator Kerry. No. I'm talking about into John Hull's account.
Mr. Clegg. Yes, sir. That's correct.
Senator Kerry. So, that correct.
Mr. Clegg. That is correct.
Senator Kerry. Well, did you ask why $25,000 was going into John Hull's account in Indiana.
Mr. Clegg. Yes, I did. The answer that I got was that he was writing checks to buy colones in Costa Rica. He was writing U.S. dollar checks to buy colones in Costa Rica.
Senator Kerry. He was writing checks to convert to colones?
Mr. Clegg. Convert the dollars. He was taking a U.S. dollar check to Costa Rica.
Senator Kerry. Why wouldn't he do that through a bank in Costa Rica?
Mr. Clegg. Why didn't he? That's the question.
Senator Kerry. You didn't ask him that.
Mr. Clegg. I did ask him that.
Senator Kerry. And why did he say?

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Mr. Clegg. Because they cashed it with other people. That was one of the things that was on my memo where I said they did not establish a bank account.
Senator Kerry. Well, did it not strike you as very bizarre?
Mr. Clegg. Of course, it did. And I asked - that was one of the things that I asked him to correct.
Senator Kerry. Well, what did OPIC do about it at that point?
Mr. Clegg. We made a list of items, which we furnished to you in the record, and we asked them to correct it. I went back in January to see if they had taken those items and corrected them. In fact, the bank account was established subsequent to my visit.
Senator Kerry. This would be in 1986. Is that correct?
Mr. Clegg. Yes.
Senator Kerry. They weren't doing much business by then, were they?
Mr. Clegg. That's correct.
Senator Kerry. Was there any money flowing through this new bank account?
Mr. Clegg. There was a modest amount. I've forgotten exactly. There was a small amount.
Senator Kerry. So, from the time the loan was approved in 1983 through 1986, there was no bank account.
Mr. Clegg. In the host country, in Costa Rica. I'm not sure exactly what date the bank account was established. It might have been established subsequent to my visit in 1985.
Ms. Chalmers. I believe the records show that it was in October 1985 that the bank account in Costa Rica was ---
Senator Kerry. The bank account was opened in 1985.
Ms. Chalmers. Right.
Senator Kerry. I apologize for that. OK.
Now, let me come back to the question I started to ask before, and I interrupted it to ask about the money. Here there are irregularities in the money, to say the least, serious questions about the processing of the loan, questions about legal questions to which you didn't have the answers, questions about assets to which there was no real investigation, startup company, site visit, nothing happening, to say the least, partners with whom you had conversations who raised very serious questions about what was going on.
Why was it that fraud proceedings or a criminal investigation or some sort of stop-the-process effort didn't take place sooner. And I think that's a question on all of our minds.
Mr. Garfinkel. From a commercial standpoint, we wanted to make sure we had a mortgage in place. And so, we wouldn't begin a foreclosure proceeding until everything was duly registered. And obviously, we had some problems ---
Senator Kerry. But should you do that before you issue the loan?
Mr. Garfinkel. Well, clearly ---
Senator Kerry. I mean, you are putting - now, that's an astounding comment. Before you foreclose, you want to make sure the mortgage is in effect, which it is supposed to be, before you give him the money.
Ms. Osowski. Right. We explained to you the problem with the lawyer who did not register the mortgage. Now, obviously, if he

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had not defrauded us, we wouldn't have been in this situation. Given the situation we were in, our lawyer in Costa Rica, Mr. Pacheco, advised us that we might still need Mr. Hull's cooperation. He wasn't sure whether additional signatures might be required. And so, he advised us to hold off on a foreclosure proceeding until we had completed all the necessary steps. In the meantime, Mr. Clegg was working to try and see if there were a possibility of getting additional equity participants involved in the project.
Mr. Garfinkel. I can assure you, Senator, that this is quite an unusual circumstance, and that 99 percent of our loans, indeed, our mortgages are duly registered, and we are not in this kind of a position.
Senator Kerry. What made this unusual? I mean, what was so special about this loan to some farmer down in Costa Rica, no special - why did this loan sort of dribble through like that?
Ms. Osowski. It's basically a combination of dealing with small businesses and dealing with developing countries and the problems that we have cited before with lengthy legal procedures and so on. We tried to first look to make sure that the project is going to be getting off on a good footing and not being put at a disadvantage. And when it appears that there may be delays, sometimes we have to make changes or decisions that might otherwise not be what we would prefer. I think, you know, along the processing, these things occur, and in order to keep the transaction moving and not to put the project at a disadvantage, sometimes this is necessary.
Now, obviously ---
Senator Kerry. You know, I listen - I mean, I hear what you are saying, but I've got to tell you, as I look through the records here - I mean, you didn't even find out how much the property there was really worth.
Ms. Osowski. We had appraisals, both for the original property and the substitute property that were obtained by an appraiser.
Senator Kerry. What is it worth?
Ms. Osowski. I think those records are in the file. I know for a fact that they did exceed the value of the loan. I'm sure we could locate ---
Senator Kerry. According to whose appraisal?
Ms. Osowski. The independent appraiser or the certified appraiser in Costa Rica.
Senator Kerry. Did you pay for the independent appraiser?
Ms. Osowski. We have a clause that expenses have to be reimbursed under our loan agreement. Now, I suspect that ---
Senator Kerry. Who hired the independent appraiser?
Ms. Osowski. I'm sure that Maderas gave us a recommendation. Both of our lawyers were aware of who the appraiser was and his qualifications.
Senator Kerry. Well, why is that independent? What's independent about that? John Hull wants the money. John Hull gives you an appraiser, and you take his word for it?
Ms. Osowski. Well, we have to, obviously, rely on our contacts down there.
Senator Kerry. And if your contact is only the person asking for the loan, do you go along with that?

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Ms. Osowski. No. I mean, our local lawyers are involved. If they thought that the appraiser had no qualifications to be giving his appraisal ---
Senator Kerry. Let me ask you in real terms. The fact is you can't really tell me today what the land is really worth.
Ms. Osowski. That's absolutely correct. And I don't think anyone can in any transaction.
Senator Kerry. How can you make a loan? How can you make a loan then? How can you sit there and tell me that the collateral covers?
Ms. Osowski. Because I think as Mr. Draggon explained before, we do project financing. We look to the project cashflow primarily for ---.
Senator Kerry. There was no cashflow.
Ms. Osowski. But that obviously is something we can see with hindsight and not something that one could see when the projections were being put together when the loan committee was processing the loan. I don't know if Mr. Draggon has anything else he would like to add on that point.
Mr. Draggon. Let me just emphasize again that our approach is to work with sponsors to build a strong project in the host country. Collateral, insurance, key man life insurance, and other security is secondary to our effort to structure a strong project. That's our approach. I would say overall we are very successful when you look at our entire portfolio. I said earlier our losses ---
Senator Kerry. Well, are all ---
Mr. Draggon [continuing]. There were only 6 percent of everything disbursed. I think that overall we are meeting our congressional mandate in that regard.
Mr. Garfinkel. Could I just add? There's also a certain element of good faith required in going into these projects. And to some degree, we looked upon Mr. Hull with a degree of good faith assurance, and obviously we were wrong in this case.
But if you look at our program overall, Senator, you'll find, No. 1, that our loss rate is roughly 6 percent of our total portfolio. We had over 6,000 project inquiries since 1983, over 1,000 applications. We have rejected 500 of those projects because they didn't meet our credit criteria.
Senator Kerry. You know what strikes me here and the thing that I'm trying to get at is I'll bet you that if I looked at those 500 that you rejected - and we may look at some of those you rejected - that they were stronger than this one at the outset. And I'll lay you odds that if I looked at some of those that you've approved, I'm going to find a pattern of approval requirement that is stronger than what you required here. I would hope so. Is this the standard operating procedure for the approach to loans?
Mr. Garfinkel. No. As we mentioned ---
Senator Kerry. Was it the standard operating procedure at the time?
Mr. Draggon. Senator, I went back ---
Senator Kerry. Could you answer that? Was it the standard operating procedure at the time, or is this something of an aberration? If it isn't an aberration, maybe we ought to ask what OPIC is doing? Is it an aberration?

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Ms. Osowski. Certainly the confluence of all these events is an aberration.
Senator Kerry. Well, what was so special about this loan that it kind of made its way through? How did a loan with so little financials, so little checking, so little input, and so little fundamental financial, sound backing get approval from you folks?
Mr. Garfinkel. If you go back to our program back at that time, I don't think our finance program was as extensive as it is today. And I don't think our money was in as much demand. I think we were obviously eager to do something in the Caribbean. We were supportive of the Caribbean Basin initiative. And obviously, we looked upon those projects, particularly of the small business dimension, with a great degree of favor. And we continue today to emphasize projects in the Caribbean, in Africa, and other regions of the world that we feel are of need of development. So, that might explain to some degree why a project like this slipped through.
Mr. Draggon. On top of that ---
Senator Kerry. Can I ask ---
Mr. Draggon [continuing]. To have problems with the accountants and the attorneys is a very, very unusual situation. We simply haven't run into it in other cases.
Senator Kerry. Mr. Clegg, let me ask you something because you had an initial contact in this. You were in Costa Rica. Correct?
Mr. Clegg. When?
Senator Kerry. In 1983 when you initially had breakfast with John Hull.
Mr. Clegg. That's correct.
Senator Kerry. How did you come to be in Costa Rica at that point in time?
Mr. Clegg. I was down working on some other projects that we had in Costa Rica.
Senator Kerry. Who were you working with?
Mr. Clegg. I'm sorry. You mean ---
Senator Kerry. On these projects, who were you working with?
Mr. Clegg. Our attorney. Our attorney, Mr. Carballo.
Senator Kerry. And how many projects were you working on at that point in time?
Mr. Clegg. One.
Senator Kerry. One project?
Mr. Clegg. Yes, sir.
Senator Kerry. Now, who suggested to you that you meet with John Hull?
Mr. Clegg. Mr. Curry at the U.S. Embassy, the economic officer at the Embassy.
Senator Kerry. What did he say to you at the time?
Mr. Clegg. They were words to the effect - I'm paraphrasing, but there are two people here at the Embassy that have expressed an interest in getting some OPIC financing for some projects in Costa Rica, and could you meet with them for a few minutes and tell them something about the OPIC program.
Senator Kerry. Who was the other person?
Mr. Clegg. I don't remember his name. He was a person that was interested in establishing a shoe factory in Cartago, which is right outside of San Jose.

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Senator Kerry. And that was the basis of your introduction to John Hull.
Mr. Clegg. It was the basis of my introduction?
Senator Kerry. Introduction to John Hull.
Mr. Clegg. Introduction, yes, sir.
Senator Kerry. Did you personally have subsequent conversations with him prior to the loan being approved?
Mr. Clegg. Only incidentally if at all, but certainly nothing substantive.
Senator Kerry. And were you dealing with Margaret Walsh on this?
Mr. Clegg. Well, I referred - oh, excuse me. Go ahead.
I referred the loan to the finance department, as is our standard procedure, and I had asked them to deal with them. And basically any dealings with Mr. Hull at that time were between our finance department and Mr. Hull.
Senator Kerry. OK. So, the two principal people who would have sort of nursed this loan along, processed it, and made the original judgments are both not here. That's Margaret Walsh and Vanessa Burgess. Is that correct?
Mr. Garfinkel. That's correct.
Mr. Draggon. Vanessa Burgess has resigned from OPIC, and is working in New York as an investment banker at this time.
Let me just add, Senator, that Margaret Walsh is in for a medical test for a life-threatening illness today.
Senator Kerry. No, I've never raised a question here about why she wasn't here. I accepted the medical emergency, and nobody has asked you what kind of emergency it was or anything. I want to establish that they're the people who really were dealing with this on a day-to-day basis, and obviously leave some things open. That's all. Nobody is questioning anything else. I assure you.
Mr. Garfinkel. Let me just add, Senator, that Ms. Osowski did have conversations with both of these parties, and maybe she could add their recollections about this part of the transaction.
Ms. Osowski. You know, the questions - obviously, we knew what your committee was interested in terms of if there were any undue pressure or anything of that nature that was brought to bear. And they obviously had no information or recollection of that respect. It came in as a very routine project, as far as they were concerned.
Senator Kerry. Well, now, that sort of raises a second issue, and then I want to hear Mr. Crone if we can. Somebody has got to wake up. [Laughter.}
It's a nice tune. What are we playing? [Laughter.]
At least I'm not getting so old that I can't pick that one up. [Laughter.]
The question of sort of outside input has arisen because of the pipeline issue. And I guess that raises a lot of questions. I mean, I got to tell you. As a member of the Foreign Relations Committee I am astounded to sit here and learn that OPIC was negotiating a non-Israeli attack pact against a pipeline.
Can I ask you? Who drafted that a document that suggests that Israel would be approached and sign a document actually agreeing not to attack a pipeline in Iraq?

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Mr. Garfinkel. That was drafted by Mr. Rappaport's attorney I believe, Jay Kaplan.
Senator Kerry. And he presented it to you folks?
Mr. Garfinkel. That's right. This was their scheme. We had insisted on a commercial scheme, and they backed away from putting dollars up as salvage. They proposed this wild scheme, and we of course went ahead to the Justice Department to find out if they thought this was legal because we certainly had our serious doubts about the legality of it.
Senator Kerry. Apart from the legality of it, didn't the feasibility of it simply strike you as so absurd that it was beyond even worth going to the Justice Department about?
Mr. Garfinkel. Go ahead, Mac.
Mr. Johnston. We certainly thought that it was infeasible. Going to the Justice Department, frankly, was a convenient way of disposing of it.
Senator Kerry. Why couldn't you just say "No"? What made it difficult to say "No"?
Mr. Johnston. It wasn't difficult to say "No." We said we didn't think it would work.
Senator Kerry. Why couldn't you just say "No, this is not feasible"? Why did you have to send something to the Justice Department to get rid of it?
Mr. Garfinkel. There was interest, Senator, in this project, as the record demonstrates, from the NSC. The State Department was also very interested in this project. And in order to dispose of this in the context of this interagency interest, it was advantageous to have an independent entity like the Justice Department come back and basically take a position which we supported. And that was that we thought this wasn't viable or legal.
Senator Kerry. Did you know at the time that Mr. Wallach was involved both with Mr. Meese, as well as witht his project?
Mr. Garfinkel. Mac?
Mr. Johnston. Well, first of all, it was certainly no secret in town that Mr. Wallach was an associate of Mr. Meese. We certainly didn't know of any connection with Mr. Meese and this project.
Senator Kerry. No, that's not my question. But you knew of Mr. Wallach's connection to Mr. Meese and to the project at the time. Correct?
Mr. Johnston. I'm sorry. We knew of Mr. Wallach's association with Mr. Meese at the time he was representing Mr. Rappaport on the project; yes.
Senator Kerry. Would not, therefore, it be fair to assume that sending something to Mr. Meese for potential adjudication - or not adjudication, but for potential opinion which Mr. Wallach had an ability conceivably to impact might be a way not of getting rid of it, but of approving it?
Mr. Johnston. I think we were quite confident that the inquiry, No. 1, could only be answered in one way. No. 2, copies of the inquiry were delivered elsewhere in the Department of Justice. And we felt that it would be disposed of in proper channels and that the matter would come to an end.
Senator Kerry. How did the State Department feel about this project?

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Mr. Johnston. The State Department was supportive of the project. This project was one that would have involved not only some very substantial benefits for United States contractors, but was beneficial for Iraq and for Jordan. And that's why we were particularly interested in cooperating and supporting this project ourselves.
Mr. Garfinkel. In fact, the State Department brought the project to our attention initially, and they signed off on every cable that went out with regard to this entire matter.
Now, I would add that they did ask for a low profile on this project, and we understood that had to do with the fact that Bechtel was a big player in the project, and the Secretary of State obviously had connections with Bechtel having been employed by the company prior to joining the Government.
Senator Kerry. Do you know whether or not the NSC staff was talked to by Mr. Wallach?
Mr. Garfinkel. We are pretty sure they were.
Mr. Johnston. Whether the NSC staff was talked to by Mr. Wallach?
Senator Kerry. Regarding a push to take an interest in this?
Mr. Johnston. I know that he spoke to people on the NSC staff about the project; yes.
Senator Kerry. Did you know at thetime of Wallach's financial interest in it?
Mr. Johnston. No. Only in the most indirect way, if you like, in that my understanding was that he was representing Mr. Rappaport and presumably not gratis.
Senator Kerry. Presumably? I'm sorry.
Mr. Johnston. Not gratis. In other words, I expected that in that representation, he would be paid for his services.
Senator Kerry. Did you know of his financial interest in the line itself?
Mr. Johnson. Absolutely not, nor do I have any particular knowledge now.
Senator Kerry. Didn't you characterize to staff here the feelings of the State Department as cool?
Mr. Johnston. No.
Senator Kerry. Interested, but cool?
Mr. Johnston. That may have been their understanding. The State Department, as I perceived it, because of the Secretary of State's former association with Bechtel, was not embracing the project in a terribly active way. But we had every reason to think that the State Department was encouraging and supportive of the project.
Mr. Garfinkel. They were aware of what was going on every step of the way, and if they wanted to let it be known that they disagreed with our course of action, they could have done so by simply not approving our cables, which is the natural approach that State takes with these issues.
Senator Kerry. Where would you say the real push for this was coming from?
Mr. Garfinkel. Well, it was clear that the people who were behind this thing from a business standpoint, whether it was Rappaport or Wallach or Bechtel, had tried to get the National Securi

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ty Council to be supportive of this project. And we did hear actually on our own initiative from the National Security Council that they did, indeed, see this project as important.
Senator Kerry. Were there any other projects that you can think of that come to mind where the NSC expressed that kind of interest to you?
Mr. Garfinkel. No.
Mr. Johnston. Not to me.
Senator Kerry. To any of you?
Mr. Draggon. No, Senator.
Senator Kerry. Did you find it unusual that the NSC was involved in pushing this?
Mr. Johnston. Under the circumstances, not really, again because, as I mentioned before, of the Secretary of State's recusal. So, while we found it to be an unusual event, we didn't find it suspicious or inappropriate.
Mr. Garfinkel. As I mentioned earlier, we are routinely asked to look at projects by different agencies in the government, as well as the Congress. And so, we as a practical matter will take these referrals into account on a regular basis.
Senator Kerry. Had you not had prior dealings with Mr. Rappaport in some way?
Mr. Johnston. No.
Senator Kerry. Did OPIC not have information regarding Mr. Rappaport that might have raised questions about wanting to do business with him?
Mr. Johnston. We sought to obtain some information about Mr. Rappaport, and we did receive a report from the CIA. I'd like to make the observation that we were talking about here an undertaking or an exposure that OPIC might undertake, which would be very large, and we were not relying on the good faith of Mr. Rappaport nor of an6y other individual, and that's why we were insisting on this very strong security package to compensate and protect ourselves in the event of a loss.
Senator Kerry. Well, I understand the degree to which you went - the security package. I read through the information, and I see that there were a lot of trips, you know, London discussions and so forth and so on, and people meeting here and there to try to pull together a security arrangement.
I must say that I find the mere pursuit of this somewhat astonishing. I mean, the notion that as much energy went into negotiating it, and as much interest was expressed by various parties to it so that you are saying to me, "Well, we kind of wanted to dump it on the Justice Department" - rather remarkable. I mean, I can't see how you thought you would have had a legitimate security which guaranteed a pipeline against a potential attack or somehow was going to indemnify you and permit adequate salvage in a situation should there be a pipeline and some interruption of it.
Mr. Johnston. Sir, we would have had appropriate and adequate security under the formulation that we were prepared to go forward with.
Senator Kerry. And what would that have been?
Mr. Johnston. It is described in several exhibits, and it was memorialized in an agreement.

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Senator Kerry. Let's look at that. Why don't you show me what you would have considered adequate security for a pipeline guaranteed against attack by some third party?
Mr. Johnston. The security arrangements that we were prepared to accept were memoralized in a letter to Mr. Kaplan dated August 29, 1985.
Senator Kerry. Which is that in the book? Can you refer me to it?
Mr. Chalmers. I don't think it is in your book, but it was among the documents that we submitted to your staff.
Mr. Garfinkel. I think Mr. Blum is familiar with that document.
Senator Kerry. I beg your pardon?
Mr. Garfinkel. I say I believe Mr. Blum is very familiar with that document.
Senator Kerry. Would you describe it please?
Mr. Johnston. The document itself is a letter to Mr. Kaplan who represented Mr. Rappaport, and it describes in principle the arrangmenets which at that time they indicated or he indicated on behalf of Mr. Rappaport that Mr. Rappaport would be willing to arrange and to accept as the security package which would compensate OPIC in the event that it sustained a loss in respect of its undertakings with respect to the project.
The security package or salvage package consisted of several elements constituted of both cash and letters of credit. In turn, letters of credit in some cases would back up the establishment of funds over time. The letters of credit were there so that if those funds didn't arise that the moneys would be there.
Senator Kerry. Give me the sort of layperson's English, bottomline version of what the conditions were. What was the quid pro quo here?
Mr. Johnston. What the conditions were?
Senator Kerry. Yes, of your suggestions in the letter, which I have in front of me. Is this the August 29, 1985, letter?
Mr. Johnston. Yes, sir.
The letter speaks of salvage in the amount of $340 million which, of course, was to correspond to the outside liability which we and the other insurers would undertake. And that would consist of, in the first part, $75 million which in turn would involve a letter of credit for up to $50 million, the $50 million which is described in another part of this letter as ---
Senator Kerry. OK. Let me try to facilitate this process a little bit if I can.
Paragraph 3, a letter of indemnity from the State of Israel in a form satisfactory to the insurers in the amount of $150 million of which $50 million is in immediately available funds. Correct?
Mr. Johnston. Yes.
Senator Kerry. So, you contemplated an indemnity from Israel in what you say was an adequate security package.
Mr. Johnston. Yes.
Senator Kerry. How do you suppose you would have been able to get that?
Mr. Johnston. Well, that was Mr. Rappaport's problem. Mr. Rappaport ---

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Senator Kerry. OK, it was his problem, but you accepted that as something that was worth even talking about - negotiating. Here's a letter. Correct?
Mr. Johnston. It's not a letter, but it's a letter of indemnity which is a ---
Senator Kerry. How would you envision an arbitrator deciding whether or not Israel blew up a pipeline or not?
Mr. Johnston. Under the arrangements that were described to us andof which I think there is a draft proposal, there would be an arbitral panel which would make a finding and would evaluate whether that event, in fact, had taken place and the extent of the loss that was sustained as a result.
Senator Kerry. What do you think the implications of that would be for U.S. foreign policy?
Mr. Johnston. I beg your pardon?
Senator Kerry. Do you see any implications in terms of United States foreign policy in that kind of decision being made in Israel? Do you contemplate a situation in which Israel would be willing to effectively make peace with an Arab country and say we're not going to blow up anything there ad infinitum in interest of this? That's essentially what you're saying.
Mr. Johnston. Well ---
Senator Kerry. I don't understand ---
Mr. Johnston. This is not a determination that we would make.
Senator Kerry. Well, I understand, but aren't you supposed to make some preliminary determinations about what's worth pursuing and spending your time on and what isn't?
Mr. Garfinkel. This project had a lot of developmental benefit. I just don't want you to think that we were pursuing this for some foreign policy reason. There was over $1 billion in equipment that was going to be procured from companies ---
Senator Kerry. It is obvious to me you were pursuing it with no foreign policy reason. That's clear.
Mr. Garfinkel. Right.
Senator Kerry. I don't think that for one instant. That's what concerns me.
I want to know how you thought you would be able to implement this.
Mr. Garfinkel. Before we'd go forward, this thing would have to go to our board, No. 1. The State Department was going to have to sit there and look at all these implications. So would other agencies. So, what we were looking at was this thing from a commercial standpoint. The policy issue as to whether or not this made sense from a policy standpoint was going to be addressed by our board. And our insurance department was preparing the necessary commercial package so that it would be ripe for consideration by the board.
Mr. O'Sullivan. Excuse me. I haven't been sworn. I don't feel that I should speak unless I have been. My name is Robert O'Sullivan. I was the lawyer who worked on the insurance project.
Senator Sanford. Well, raise you right hand.
[Witness sworn.]
Mr. O'Sullivan. There's a whole parallel line of discussion with the State Department on this project, and it begins with the 1984

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approach as to whether the project could be done. One the time line, it then resumed very strongly in the beginning of 1985, because in parallel with discussion of this project with Bechtel and General Electric and the subcontractors, OPIC had been asked to try to negotiate an agreement with the Government of Iraq to make its programs available there. And there is a lot of cable traffic to and from Baghdad describing those negotiations and how the coverage would be used. And one of the risks identified was the Israeli risk to this pipeline.
So, Embassy officers were quite aware that this might be a possible use of OPIC insurance, and so was the State Department from the start, from - well, my first trip to Iraq was February 1985, and it was extensively reported that the oil ministry was not interested in a possible OPIC agreement. Other ministries were not, and there has never been an OPIC agreement signed.
Senator Kerry. But you see there is a certain contradiction in the flow of what I'm hearing. Your testifying to the legitimacy of this to the sort of immediate interest of the State Department, to the effort to work out agreements with Iraq and how this was all part of a State Department approved concept and NSC approved concept. But then I am hearing from Mr. Johnston that we sent it over to Justice really to get rid of it, not to get it approved. Now, there's a dichotomy here.
Mr. Johnston. In that case, sir, we haven't been ---
Senator Kerry. Am I misinterpreting you?
Mr. Johnston. You were speaking about the salvage package that we were prepared to accept and which we thought, if it could be assembled, would provide a prudent basis for us to go forward and to support this project which had many benefits for the United States and which we had indications of high-level Government support for.
When Mr. Rappaport and his representatives indicated that they were not prepared to proceed on the basis of this arrangement and offered an alternative suggestion which was that, in essence, some sort of aid funds would be reserved and used to pledge as our security in lieu of this package. That is what we sent to the Justice Department because No. 1, as we've indicated, we didn't believe that it was viable or legal, and it was appropriate to send it to the Justice Department to dispose of it there.
Senator Kerry. All right. So, I accept that. Your testimony is essentially then that it was the escrowing of U.S. aid funds that was more of the flag to you for which you thought the Justice Department ought to rule rather than the commercial interest or enterprise itself per se, and that the commercial aspects of this remained viable and were still of interest to all those parties and should have been pursued. Is that correct?
Mr. Johnston. I think that's correct.
Senator Kerry. It was the form of indemnification ---
Mr. Johnston. Yes.
Senator Kerry. [continuing]. That troubled you ---
Mr. Johnston. Yes.
Senator Kerry. [continuing]. Not the notion of it.
Mr. Johnston. That's correct.
Senator Kerry. I will accept that.

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We have a couple of other panels and one person in particular I want to have testify with respect - or all of whom I want to have testify with respect to the loan aspect of the John Hull piece.
I would like to leave the record open so that we can follow up if there are any additional questions, which I already know there are to some degree.
I know that none of you were part of the decision process with the exception of Mr. Clegg and perhaps distantly Mr. Garfinkel in terms of the actual sort of legal process, et cetera. And the record should reflect that you are trying to reconstruct. Your coming here and recognizing that this loan was made as part of the normal course of business and you didn't specifically - any of you - initiate it or assume final responsibility for the passage of it. And I understand that. And I appreciate the effort you have made here today to try to help us to understand it and reconstruct it. We are particularly appreciative with the work you have done with staff to do that.
There still are, I have to tell you, some questions that are outstanding simply by virtue of not being able to talk to some of the folks who were part of the process. But I think the record has now grown much clearer and there is a much better sense of what may or may not have transpired here.
There still are - and I have to tell you truthfully, there still are real issues as to why it took so long and where we're going now in terms of both the recoupment process of the losses as well as the investigative criminal aspects of this in terms of potential fraud and so forth. And I hope that as we go on in the next days, we are going to get to the bottom of this.
I know that it is beating a dead horse a little bit, but this isn't pretty. This isn't the way in which we have been told it's supposed to work. And I don't think many people take pleasure in seeing good dollars go out the window in this form. And I am delighted to hear that procedures have changed. I suppose - well, I think it is unfair to ask more questions as to why not sooner, and I won't do that. But I want to thank you for coming up here, and I know you didn't look forward to it.
And let me just turn to my chairman, the other chairman, and ask if he has any questions.
Senator Sanford. Well, time is running out, but I would like to just ask one short line of questions to Mr. Garfinkel.
Now, this project like many others originated with the Embassy in the particular country, in this case Costa Rica.
Mr. Garfinkel. That's correct.
Senator Sanford. They presumably were approached by the promoters, the investors, the businessmen inquiring about the possibility of OPIC aid I assume.
Mr. Garfinkel. That's correct.
Senator Sanford. So, then they forwarded that to you ---
Mr. Garfinkel. That's right.
Senator Sanford [continuing]. With the recommendation they thought it was a good idea.
Mr. Garfinkel. Well, they looked at the project and the sponsors after we asked them for some background checks, and they came back ---

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Senator Sanford. Going back to the original purpose of the organization, who decides that if this particular project that was first presented to an embassy - who decides if that fits into an overall development strategy that ultimately does lasting good for the country where it is? Or is there such a broad strategy that you try to fit it into? Or is it just that if this produces jobs, it must be all right?
Mr. Garfinkel. We have definite interests in promoting development in certain regions of the world. And there is no question that we have concentrated our programs on the Caribbean and in Africa. We also have ---
Senator Sanford. What I'm really getting at what is OPIC's view of development, and what have you done to decide whether this is just an investment that creates jobs or whether there is an overall development pattern.
Mr. Garfinkel. We have a development department that analyzes every project before it goes forward to see if it fits into that scheme, and that department analyzes what the developmental benefits are to the project, whether there are adverse effects, and make sure it's consistent with our statutory mandate, Senator.
Mr. Draggon. Let me add in the context of the project in Costa Rica, from a development standpoint, first of all, it was an export project that would generate foreign exchange for the country of Costa Rica.
Second, it was taking lumber and turning it into higher value goods for export value on that and therefore, maximizing the value of the country's natural resources.
Senator Sanford. Well, I don't doubt that it may have been beneficial in a limited way had it come forward as a running business. I'm really trying to ask whether you can demonstrate that OPIC has done any good over the years.
Mr. Garfinkel. I think we can.
Senator Sanford. Can you demonstrate - and this is a serious question. Obviously you have done no harm, and you have helped here and there, but what I am concerned with is the long-range development of the region. We have been concerned with the long-range development of Central America for many years, yet we have not been successful and have never proceeded to the point where we have a strong, underlying economy. And I am simply asking, Are you relating to such a long-range plan. Or can you relate to it? And do you have any report that shows the overall effectiveness of OPIC?
Mr. Garfinkel. Senator, I'm glad you asked that question. Indeed, such a development report does exist, and we make it available to the Congress on an annual basis. And we'd be pleased to sit down with your staff. A copy of it has been provided to me. But we would be pleased to sit down with your staff and go over what we think our contribution has been. We are pretty proud of the projects we have put ---
Senator Sanford. I'm a strong supporter of the organization. I'm simply trying to see if we are using the assets in a way that carry over into the long range for the best possible degree. And I don't want to take any more time now, but I would like to pursue that, and would like to have a package of materials.

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