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Mr. John Hull who had worked for Mr. Moody in the RAF Ferry Command in Montreal during the war as a ferry pilot. Mr. Moody was the civilian superintendent of the ferry command and Hull was on of many Americans who flew in that ferry command. That was my meeting with Mr. Hull.
Mr. Blum. And you then invested sometime after that in -
Mr. Siple. During that month that we were there.
Mr. Blum. You invested during that month. How much money did you put up?
Mr. Siple. Initially about $15,000 each, Moody and I.
Mr. Blum. You each put up $15,000. Did Mr. Hull put up any money?
Mr. Siple. Well, I think I should explain that one a little so that I won't appear completely stupid in business. When the $15,000 was called for I suggested to Moody that we get a lawyer and put our moneys into escrow, and then when Mr. Hull completed the deal the moneys would be turned over. And Moody was most adamant that Hull was an old friend and didn't need that kind of protection, so we gave the $30,000 to Mr. Hull.
And if I could go on to say that during the 2 or 3 months that it took to finalize the deal and we were back in Costa Rica, Mr. Hull informed us that he had some good news and he had some bad news. The good news was that the transaction was now complete, and the bad news was that it wasn't 900 acres we got. The other 300 acres across the river he was unable to buy. And in essence what that meant was that our money had bought the whole package and Mr. Hull became one-third owner of Canio Siego S.A. for nothing.
Mr. Blum. Now, he then continued to manage Canio Siego S.A. Is that correct?
Mr. Siple. Yes, with his land management company, the San Carlos Land Management Co.
Mr. Blum. Did you ever see a return on the investment that you and Mr. Moody made.
Mr. Siple. Not a nickel.
Mr. Blum. And what did he tell you the problems were? And did he ask you how much money or ask you to put up more money?
Mr. Siple. Oh, yes. We did put up some more money through the years, up until about 1981, and that was where we terminated it. His excuse for not making any money was well, the first year we inherited 99 head of cattle on the one farm. So, Mr. Hull elected to cull the cattle and bring in new young stock from one of his own farms, of course. And he pointed out to us that he would quickly catch up his share of the investment by this sort of routine.
And then the next year it rained too much and the year after that it didn't rain enough and the next year he had squatter problems and then the Contras came. So ---
Mr. Blum. There was never a return on the investment.
Mr. Siple. No.
Mr. Blum. You furnished the committee with a number of letters. And I would ask, Mr. Chairman, that they be made part of the record at this point.
Senator Kerry. So ordered.
[The letters referred to appear in the appendix.]

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Mr. Blum. When did you finally reach a point of deciding that Mr. Hull was not going to pay you back for any of the investment or give you any return on the investment?
Mr. Siple. I decided that in about 1981 when I quit putting any more money in there.
Mr. Blum. You just refused to make any more contributions when he asked you for more money.
Mr. Siple. I told him, "Not another dime."
Mr. Blum. Did there come a time when you tried to get out of this investment?
Mr. Siple. Well, not really. When Mr. Moody died in early 1986 we had an agreement signed in 1974 by Hull, Moody, and myself, where we agreed to buy out the shares of any partner who passed away. And it was at that point that I called Hull and asked him what he wanted to do about this agreement and about Moody's shares.
Mr. Blum. And what did he say? What happened?
Mr. Siple. He said he had a man there in Costa Rica that was ready to buy the shares.
Mr. Blum. Did he in fact buy them?
Mr. Siple. I beg your pardon?
Mr. Blum. Did he in fact buy those shares?
Mr. Siple. Yes.
Mr. Blum. Did he ever tell you that his facility was being used to support Contra operations?
Mr. Siple. No.
Mr. Blum. Your first awareness of any of this then was the television program in Miami. Is that correct?
Mr. Siple. That's right.
Mr. Blum. I'd like to now turn to you, Mrs. Hood, and ask you how it came to pass that you met John Hull.
Mrs. Hood. First of all, our son, our late son went to Costa Rica. We had a mutual friend who is a doctor in western Florida who had been in Costa Rica and served there in the hospital 5 months teaching something about ophthalmology to the doctors there.
He became very interested in Costa Rica. He was a friend of John Hull because the man who works for him and manages his cattle ranch in Manatee County was a war buddy of John Hull. So, it was more or less a natural thing for Dr. King to meet John Hull and for John Hull to put together a piece of land to sell to Dr. King and to about I think maybe 17 other doctors. I really can't be sure of the number.
The doctors - there came a point during their ownership when they found that they wanted to sell. So, they approached my husband. They knew that we had a son in Costa Rica who wanted to live there. And so we thought that it would be a good thing to do. So, we went down, and that was I think the first time we'd ever met John Hull.
Senator Kerry. Mrs. Hood, can I just interrupt you for 1 minute. I apologize profusely but the hearing, as a result of some information we came across, took much longer than I anticipated.
Now I, unfortunately, have to be somewhere else. What we're going to do is this. Counsel is going to continue to ask these questions, which are very important to the record. I wanted to just in

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terrupt to thank you both for taking the time to come here. I know you both feel a little bit like you've been led down the path and taken to the cleaners and whatever. And I can assure you that we're very interested in trying to see what can be done, how something can be rectified, and how if there is anyway for people to be made whole, that there is some manageable way to do that.
But I just wanted to thank you on behalf of the committee and the process for taking the time to come in. We are very appreciative to you. And if you would be patient enough to continue with counsel, that would serve our efforts here very, very well. And I thank you very, very much.
Mrs. Hood. May I just say one thing to you, sir?
Senator Kerry. Yes, indeed.
Mrs. Hood. I appreciate being here. And if there is anything that my husband or I can do to perhaps make clear the situation between our two countries, we'd like to do it because our personal losses and so forth we have set aside as you do sometimes in business. But nevertheless, I'm here today because perhaps we can help someone else.
Senator Kerry. Well, I very much appreciate that. Thank you very, very much.
So, the hearing will continue with counsel until such time. And the record will remain open, as I stated earlier, for the further submission of questions in writing and for further testimony. Thank you.
Mr. Blum [presiding]. Mrs. Hood, you son managed the farm that you purchased for a period of time. Is that correct?
Mrs. Hood. Yes.
Mr. Blum. And is it also correct that he was a pilot?
Mrs. Hood. Yes, it is.
Mr. Blum. And that he worked as a contract pilot for the Drug Enforcement Administration?
Mrs. Hood. That's true. He was, they told us, an agent under contract.
Mr. Blum. An agent under contract for Drug Enforcement. And I think the record should show that we talked to the DEA and they said he had a very distinguished flying record and a very distinguished record with them.
He died, as I understand it, in a plane crash in Costa Rica. Is that correct?
Mrs. Hood. That's correct, on March 4, 1982.
Mr. Blum. And after he died, who took over the management of the farm?
Mrs. Hood. My husband and I went down there 2 weeks after our son died. And because of the friendship between Dr. King and John Hull, and also Everett Jordan - and I might add that both Everett Jordan and Dr. King do own a small portion of the farm. Everett 5 percent and Dr. King 10.
So, it was, my husband feels, a lack of not knowing the Spanish language and the Spanish customs. And so feeling that Mr. Everett Jordan was part of the situation, he went ahead and hired him without looking for further credentials or checking into it.
Mr. Blum. So, Mr. Hull became the manager of the farm.

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Mrs. Hood. He was what they call in Costa Rica an administrator. And I might be able to help you some and tell you what Costa Ricans expect and also the powers they give to administrators there if you give them the legal power.
Mr. Blum. So, they have tremendous power over the farm.
Mrs. Hood. They do if you give it to them. If you, through your attorney, arrange to make them administrator and they draw up the papers and have them registered in the public registry, they then are able to do by law as I understand it, they can sell and mortgage lands. Now, this you might follow through. But in our case my husband did not do this. He gave a limited power.
However, I learned just this last year that it really had never been registered. Evidently, the attorney did not do it. We have a different attorney now.
Mr. Blum. So, apparently OPIC is not the only organization that's had difficulty with Costa Rican counsel.
Mrs. Hood. I have sympathy for OPIC. I can understand completely what their problems would be.
Mr. Blum. Now, what happened on your farm when you turned it over to Hull to manage?
Mrs. Hood. I think you'll find in all these letters that the witnesses have that there is a pattern this man followed. He always asked for money as soon as possible. Extra money. And then if he didn't get it he came up with stories of - really with a lot of contrast and looking for your sympathy and this sort of thing.
Then he would in addition write letters saying, this is what you said you were going to do, whether it was true or not. He did. We have such a letter. My husband agreed to the amount of $500 per month to manage the farm. Actually, the farm should have been self-sustaining. But nevertheless, he did that. John Hull wanted $1,000 a month instead of $500.
And he kept asking for money. My husband did send quite a bit. I can't really tell you the amount because I don't have that at my fingertips. But nevertheless, this was the pattern. He worked for us not much longer than a year. I can't tell you exactly how many months. But nevertheless, he began to tell us stories about how no one would buy our farm because there were bodies floating in the river because of the Contra war, and it was just so bad down there nobody would be interested in buying our farm.
So, would my husband please rent it or lease it to his bookkeeper, who was also the bookkeeper at that time for our Hacienda Amigos. My husband, as he usually does, said "Well, if you want to present whatever offer you have or offers, please put it in a letter and I will consider it." And I was there when he said it.
We also sent a letter to John Hull stating what we had said on the telephone. Put it in writing, we will consider it. After that I really don't remember exactly how we became a bit alarmed about it. But at any rate, I had met a Dr. Zaglu at the University of Florida while my husband and I were there one time. And he at that time had gone from the university and become the director of the Institute of Technology in Costa Rica.
He dealt somewhat with farmlands. He spoke good English. So, I called Dr. Zaglu and I told him we had a bit of a problem and was there anyway he could help us find out what it was. He did. He

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went to our farm. He came back - rather, he called me back and he said, "Mrs. Hood, you better get down here quickly. I went to your farm and they tell me the cows have all been sold. They tell me that the farm has been sold."
So, my husband said, "Well, this cannot be because he did not have the legal right to sell our farm or our cows." So, it can't be.
Mr. Blum. So, you're saying that the cows were sold.
Mrs. Hood. They really weren't sold, but this was what the story was when Dr. Zaglu went down to check on our farm. He looked all over the farm and checked it, and they told him no, the farm had been sold and the cows had all been sold, which was not true.
Mr. Blum. So, the cows were not there and ---
Mrs. Hood. No, they were there.
Mr. Blum. They were.
Mrs. Hood. But they just told him they had been sold. OK?
Mr. Blum. Oh, I see.
Mrs. Hood. They were there. So, we immediately went down and - oh. In the meantime, I failed to tell you, John Hull decided that he didn't want to fool around with our farm anymore, I guess. He wasn't getting the money anymore. That's supposition. I shouldn't have said that.
But at any rate, he said that he quit us. He quit as administrator. And he said, "I have a war to fight and I don't have time to do your farm, but I'm sending Vegilia. Vegilia was the bookkeeper.
So, for a small period of time, she went down to look after the farm for us. There were cattle deals which are questionable even now, which I don't think you want to hear about. But nevertheless, there were many little worrisome details. And as far as records were concerned, we did not get the kind of records that you would expect or get in the United States in a business.
So, then my husband hired a new administrator at that point. So, then we took, things went better from then on.
Mr. Blum. Would it be fair to say that you felt that you had been cheated by John Hull?
Mrs. Hood. Yes. There's no doubt about that. And I also will say that the largest part probably of our loss came from before we bought the farm. And I'm sure the doctors in good faith thought they sold us the amount of land that we thought we bought.
It looks as though now with our most recent survey that possibly we might be left to maybe 2,000 acres less than what we bought. So, he is the one who put the farms together. And we found out the reason. The reason I have for saying this is because when John Hull first put the farm together for the doctors, I think there were five farms originally. And he put them all together.
But in one area there were three farms, and one was superimposed upon the other. One survey was superimposed on the other. That particular half, which is on one side of the river, was never registered although a survey had been made by the doctors and paid for. The other side was surveyed and registered.
We have since that time paid taxes on land we didn't own. That's part of our loss. We'll never regain any of that. But at least we found it out. We have an excellent attorney now.
Mr. Blum. It's now working correctly.
Mrs. Hood. It's what?

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Mr. Blum. It's now being properly managed.
Mrs. Hood. Yes. It is being properly managed.
Mr. Blum. I'd like to go back to you, Mr. Siple. In the records you furnished us there were collective letters to perhaps 15 or more landowners in Costa Rica. I recall one that said, times are terrible here. Were there other landowners in your situation who were not receiving returns? Is that your understanding?
Mr. Siple. Yes. There were quite a number of them. I met some of them down there in those days. I met Dr. King that Mrs. Hood is speaking of along with many other people who were in the same position with Mr. Hull managing their farms.
There was one particular man who I just refreshed on his name this morning, a Mr. Talbott. He finally took Mr. Hull to court and I believe that he won his lawsuit in Costa Rica. But I understand from information I just received today that even though he won the lawsuit, he never did get any money out of him.
Mr. Blum. He wasn't able to collect anything on it.
Mr. Siple. That's right.
Mr. Blum. Was the story with the other investors to your knowledge roughly the same? That is, they would keep putting money up, get no return?
Mr. Siple. He always had to have more money right away.
Mr. Blum. And was the cattle that was supposed to be on the property in fact on the property, or was the cattle that was supposed to be yours not there? What did he do with respect to cattle on these farms?
Mr. Siple. Well, as I mentioned earlier, when we bought the one farm it had 99 head on it. And they were culled out and new young stock put in. Then in a matter of a year or 2 we had 222 head I believe it was. So, at that point we hired or we bought three new bulls and sent up there, and there were already two there.
But our head count in the next 10 years never did get over 222 head at any time.
Mr. Blum. Even with the extra bulls on the property.
Mr. Siple. Even with the extra bulls.
Mr. Blum. Then you had difficulty with the cattle as well, Mrs. Hood. Isn't that correct?
Mrs. Hood. Yes.
Mr. Blum. What was this, cattle that was sold to you by Mr. Hull or cattle that he bought from you? What were the problems?
Mrs. Hood. Well, as I recall - my husband can give you more fact about this. But as I recall, he bought, he was given money to buy some new bulls. And there was some sort of an exchange of animals. The ones we bought from his farm. And my husband felt that the animals were not right for the amount of money that he gave. That's the bottomline.
Mr. Blum. I would guess that both of you would agree that trying to manage a farm long distance in Costa Rica based on your experience now is very difficult. Would that be fair?
Mr. Siple. That would be fair. Yes.
Mrs. Hood. May I tell you something?
Mr. Blum. Yes, Mrs. Hood.
Mrs. Hood. I just wanted to tell you a story. We are acquainted with a man from the Embassy there, the United States Embassy in

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Costa Rica. And he's from Holland. And we were telling him a little bit about our problem. And he said "Well, that's the way of it."
He said, when I first came, he said, "I didn't think I could deal with the Costa Ricans, so I dealt with members of my own country." And he said, "It took three times, I was bilked three times before I realized that perhaps I could do all right with the Costa Rican people." I thought that was rather interesting.
Mr. Blum. So, your experience has been that you've had more success dealing with the Costa Ricans than with your own countrymen as managers down there. Is that right?
Mrs. Hood. Well, the one that we dealt with; yes. That was not ---
Mr. Blum. Your own experience being Mr. Hull.
Mrs. Hood. That's true.
Mr. Blum. Now, Mr. Hull was a rather prolific letter writer. Is that a fair way to summarize it?
Mr. Siple. Yes. He grinds them out pretty religiously.
Mr. Blum. And all of this would be telling you freshly how there were either bodies floating in the river or there were not cattle on the ranch or the timber had been cut?
Mr. Siple. Some of them would.
Mr. Blum. Did any of these letters talk about squatters?
Mr. Siple. Oh, yes. Oh, yes. That was a big issue for about a year.
Mr. Blum. What did he tell you about squatters?
Mr. Siple. Oh, they were just moving in on the farms all over the place and it took two or three men on the go all the time to keep running them out.
Mr. Blum. And he of course wanted you to pay for the two or three men?
Mr. Siple. Oh, yes. That was a very expense operation, running the squatters off.
Mr. Blum. And did you hear about squatters, Mrs. Hood?
Mrs. Hood. Yes. Of course, you hear about squatters. But in our particular case, the squatters were supposed to have come onto the property after we got it, possibly after the doctors bought it also. But in reality - and this came out just recently in February when we had our new survey made - there were two families who actually lived on it and owned the land when John Hull sold it to the doctors.
Mr. Blum. In other words, he sold land he didn't own.
Well, at this point I have no further questions. I'd like to thank you both for coming. And we will stand in recess until 2:20, at which time we'll resume in closed session.
[Whereupon, at 1:45 p.m., the subcommittee hearing recessed, to reconvene in closed session at 2:20 p.m., October 30, 1987.]

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APPENDIX

PREPARED STATEMENT OF THE OVERSEAS PRIVATE INVESTMENT CORPORATION

I appreciate the opportunity to appear before you to answer your questions with regard to OPIC's loan of $375,000 to Maderas Tropicales San Carlos, S.A., a woodworking project in Costa Rica. We understand that the Committee is also interested in OPIC's role with respect to the proposed oil pipeline across Iraq and Jordan to the Port of Aqaba.

As requested by the Committee's staff, my testimony this morning addressed the question of whether there are any parallels between the Maderas project and the Aqaba Pipeline matter, specifically, whether OPIC's actions regarding these projects were influenced by other U.S. Government agencies. Accompanying me this morning are a number of the OPIC officials who worked on the Maderas and Aqaba projects. They are available to answer any specific questions the Committee may have with regard to these two projects.

Let me state at the outset that, with regard to the Maderas project, OPIC received absolutely no requests or pressure from any U.S. Government agencies, including the National Security Council. OPIC's only contact with other agencies was in connection with routine consultation with the Departments of Commerce and State that are required for every OPIC project. We provided the Committee with our complete file with respect to the project, and it is unequivocally clear from our records and internal correspondence that OPIC management was simply unaware of any direct connection between John Hull or his representative, Robert Owen, and the Contra resupply effort, until press reports on this issue emerged about December 1986. The Maderas project was handled in the same manner as any other OPIC finance project and was not influenced, directly or indirectly, by the project sponsor's alleged connection with

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the Contras, the National Security Council, or the Central Intelligence Agency.

In contrast, OPIC did receive advice from the National Security Council regarding the importance of the Aqaba project to U.S. national security. However, as the files provided this Committee bear out, notwithstanding this highly unusual occurrence, OPIC's management was adamant in its adherence to its statutory standards. The record amply demonstrates that even with expressions of support from the NSC, OPIC steadfastly refused to consider any proposal which did not satisfy those standards.

What is apparent from OPIC's handling of the Aqaba matter is that even when urged by another agency to support a project, OPIC management was unwilling to depart from its well-established internal policies and statutory mandates.

Finally, let me add that OPIC is an agency of the executive branch and is required by statute not only to operate under the policy guidance of the Secretary of State, but also to be governed by a Board of Directors that includes representatives of the Departments of State, Commerce, Treasury and Labor, the Office of the U.S. Trade Representative and the Agency for International Development. Thus, not only does OPIC routinely seek the views of other agencies; it does not proceed on projects that must go to its Board without the support of those agencies.

Let me now turn to the circumstances of OPIC's loan to Maderas Tropicales San Carlos, S.A., the Costa Rican project, including the credit decision, the procedures followed prior to disbursement and the steps OPIC has taken to collect on the

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loan. I would also like to discuss improvements OPIC has made since that time in its credit policies. I will conclude my testimony by addressing the Aqaba pipeline project, particularly with respect to OPIC's contacts with members of the National Security Council staff.

OPIC's Loan to Maderas Tropicales San Carlos, S.A.

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 loan guaranties 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, taking into account the economic and financial soundness of the projects it finances. Within that framework, however, OPIC's primary role is that of a development agency, not a bank. This means, first of all, that to fulfill the role established for it by the Congress, OPIC must operate in countries where commercial banks might not be prepared to land; that it must accept some risk that commercial banks might find unacceptable; and that its procedures must differ in some respects from those of commercial banks. In particular, it is important to note that OPIC does "project" financing, not asset-based financing. OPIC's projects are always structured so that the primary source of repayment is the project's own earnings, whereas commercial banks often lend primarily on the basis of the collateral by which they are secured. Because banks doing asset-based lending expect to look only to that collateral, their procedures are somewhat different than OPIC's. Moreover, unlike commercial banks, OPIC normally attempts to restructure and save troubled projects, where that

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appears possible, rather than put them out of business, when faced with a choice between restructuring and foreclosing.

Lending in less developed countries often means working in a difficult environment. Legal requirements that can be satisfied in a matter of hours in a U.S. jurisdiction can take weeks or months to satisfy in a developing country. Moreover, the field of local lawyers who are equipped to work on international financial transactions is extremely limited. Lawyers familiar with the domestic legal system are often unfamiliar with international lending. Local accounting standards may be very different from those that are accepted in the United States. Finally, because OPIC's legislation requires a special emphasis on small business, sponsors of the projects OPIC supports often lack sophisticated legal and financial expertise. And, because of the limited size of its staff, OPIC must rely on local lawyers and accountants to do most of the hands-on legal and accounting work required within the host country to complete its transactions.

In spite of these difficulties, OPIC's credit record compares favorably with that of most domestic banks. OPIC's historical loan loss record is about 6% of its overall credit portfolio. OPIC's outside auditors, who review loss reserves annually, have consistently found OPIC's loan loss reserves well within reasonable levels. OPIC's finance program is self-sustaining; thus its credit policies comport with OPIC's statutory mandate to operate on a self-sustaining basis.

Every lender has some troubled loans and it is clear now that OPIC's loan to Maderas Tropicales San Carlos, S.A. was one of those. However, the circumstances that combined here included many that no lender could have foreseen or averted. This case involved not only borrowers who may have purposely

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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 OPIC by claiming, falsely, to have registered OPIC's mortgage, but also 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 would have been insignificant.

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 in 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 strength 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 turn to the details of OPIC's loan to Maderas.

Because OPIC has no overseas offices, it routinely relies on the economic or 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 U.S. Embassy in Costa Rica gave an OPIC officer who had previously been in Costa Rica such information regarding a proposed woodworking project to be sponsored by a U.S. businessman. This information was further developed and OPIC proceeded to process a loan application for Maderas Tropicales

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San Carlos, S.A. for the expansion of a wood products facility in Costa Rica for the manufacture of wooden tool handles and other wooden implements (the "Project").

The Project was to be the consolidation of three existing operations: a timber operation owned by U.S. citizen John Hull; a saw mill owned by U.S. citizen William Crone; and a wood products manufacturing facility owned by a Costa Rican citizen, Alvaro Arroyo. Each of the Project sponsors would own one-third of the consolidated company, Maderas Tropicales San Carlos, S.A., (the "Company" or "Maderas"), which was established in January 1983. The Company applied for an OPIC loan of $375,000 to consolidate and expand its operations. Maderas requested the financing in order to acquire an additional building, to 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 John 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, and

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with the State Department regarding the required human rights clearance.

From November 1982 through May 1983, OPIC's Finance Department reviewed information about the three companies' historical operations. General background information and financial statements for two prior years were provided for each company. Backgrounds of each of the sponsors and their track records were presented in resumes and personal financial statements. The sponsors provided projections of the Project costs, its financial plan (including use of loan proceeds), its capital structure (including planned ownership and equity contributions) and its current status.

The sponsors visited OPIC's offices in July 1983, and a site visit was made by an OPIC officer in August 1983. Following the site visit, a Finance Department Credit Committee met on September 9, 1983, and agreed to proceed with the loan.

OPIC verified the marketing information provided by the sponsors through discussions with prospective U.S. customers and the Company's U.S. distributor. In October 1983 OPIC checked with Paswok, a Seattle-based manufacturer of wheelbarrows, which orally committed to buy handles from the Company to displace those supplied from Korea. OPIC also spoke with a representative from Kelly Company, a wheelbarrow manufacturer in Mississippi; he indicated his company's interest in the products, especially since the delivery time would be much shorter than for products which he was purchasing from Malaysia. OPIC also contacted the Ames Company in West Virginia, the largest shovel manufacturer in the world; its representative stated that he was very impressed with the quality of the Company's product and he indicated that even if his company did not choose to switch suppliers at that time,

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the company would have no difficulty selling to smaller manufacturers.

Also in October 1983, OPIC received positive references from Maurizio Balboni, the Company's U.S. sales distributor, and two personal references for the project sponsor (John Hull) and his representative (Rudy Stieler). OPIC also contacted the First National Bank in Evansville, Indiana, and concluded that Crone Lumber, one of the sponsor's companies, had a satisfactory credit record. In addition, OPIC received letters in support of the U.S. sponsors from some of their long-time associates. Dun & Bradstreet reports were also obtained on the U.S. sponsors and related companies.

At about the same time, OPIC received clearance from the U.S. Embassy in Costa Rica to proceed with the project. OPIC's Development Department cleared the project for U.S. economic effects and Costa Rican developmental effects in November 1983. Human rights clearance was also obtained from the State Department at about the same time.

A loan paper was prepared, detailing the above information as well as the Company's proposed management and work force; its operation - location, supplies, environment, marketing; its proposed product lines; existing market; projected supply and demand; pricing; competition; strategy; and a financial analysis of projected costs, including sensitivity analyses and a risk assessment.

On December 20, 1983, the Company's loan was approved by OPIC's Investment Committee, a body composed of all of OPIC's departmental vice presidents. There is no evidence of any attempts by representatives of the NSC or any other agency of the Government to influence the decision of the Investment

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Committee, and I am convinced that there was no such attempt. A commitment letter was signed on the same day that the Investment Committee approved the loan.

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. OPIC also required key man life insurance on John Hull's life.

At the time the loan was closed, the company itself did not own any land. Instead John Hull provided evidence that he had been given full power and authority 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 the opinions of Costa Rican counsel upon which OPIC relied. 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 that the documents were at the registry merely awaiting final stamping, which, while purely ministerial, was known to be a lengthy process, OPIC decided not to hold up disbursement of the loan while waiting for registration to be completed.

After receiving other closing documents (including information on insurance, corporate resolutions, an accountants' certificate, appointment of agents for service of process and various certifications), the loan agreement, note, and project completion agreement were signed on March 30, 1984. The loan was disbursed on the same date and deposited Maderas' bank account in Indiana. Funds were disbursed from this account and used to pay interest and other dollar expenditures, as well as to forward checks to John Hull who

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exchanged these checks into Costa Rican colones ostensibly for use in the Project.

At John Hull's request, an OPIC finance officer visited the Project in May 1984 and observed the Project operations. She saw an operating sawmill and woodworking machinery, workers cutting wheel barrow handles, and pallets of handles ready to be shipped. The site visit indicated that the Project was in production as of May 1984.

Three semi-annual interest payments on the OPIC loan were made in a timely fashion. In October and November 1984, and again in January 1985, Hull had requested additional funding from OPIC in order to purchase additional equipment and expand its plant. The requests were forwarded to OPIC's Finance Department for consideration. The request for additional funding was denied on February 12, 1985, because the Project did not have the required 12- to 18-month record of successful operations. Hull also offered at that time to substitute different land for the land that had been mortgaged to OPIC, because, he claimed, the Costa Rican government intended to acquire the original property as part of its land reform program. OPIC requested additional information in order to be able to consider the substitution. Hull made another request for additional funds in March 1985, but OPIC did not receive that letter until July 1985.

Although the loan payments were still current in the summer of 1985, in July, OPIC received a letter from Hull indicating that the Project was in trouble. He also mentioned that his friend, Robert Owen, would be in Washington and would contact OPIC with regard to the Project. Owen, who had also spoken to OPIC officers in March 1985 on Hull's behalf with regard to the substitution of the collateral, met with OPIC officers on

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several occasions in July and August 1985. He introduced himself as John Hull's representative, and provided a business card identifying himself as an employee of Gray & Company. Owen did not disclose any relationship with any government agency, and no one at OPIC had any reason to, or did, think he had any connection with the Government.

Hull, and later Owen, stated that the mortgage on the original property, which OPIC believed had been registered, was not in fact in the registry. OPIC immediately contacted its lawyer, who reassured us that the mortgage had been properly registered, and we began efforts to transfer the mortgage to the new property.

On August 20, 1985, an OPIC officer visited the Project to determine the extent of the problems referred to in Hull's July letter. It was immediately apparent to the OPIC officer that the Project had not proceeded according to plan. Hull blamed the Project's failures on his Costa Rican partner, Alvaro Arroyo. Hull complained that Arroyo was not a good manager and had run the business into the ground. Because of the extent of the problems, a return trip was made on September 25, 1985.

These two trips revealed a number of problems. It appeared that in addition to other problems with the Company's legal and accounting records, the contributions of cash, timber and the lumber mill were not reflected in the Company's books; Mr. Arroyo had abandoned the Project and left the country; and certain equipment was not suitable for the Project.

The Company had some accounting records, and most disbursements were supported by invoices. However, the records were inadequate to permit verification of the use of the funds. A review of the invoices offered to support the working

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capital entries indicated numerous small expenditures, e.g., small parts, trips to San Jose, labor, etc. These items appeared to indicate a pattern of waste. Hull agreed with this assessment, claiming to have been victimized by his former Costa Rican partner, Arroyo, to whom he had entrusted the operation.

As a result of this meeting, OPIC requested that a number of steps be taken to get the Project back on track. As a development agency, OPIC's first reaction is to try to save troubled projects, not to put them out of business, and that is what OPIC attempted to do in this case. In any event, because it was by then evident that the mortgage had not in fact been registered, OPIC was not in a position to foreclose.

The OPIC officer, therefore, returned to Washington and began to work to try to find new equity participants. OPIC spent several months contacting possible participants in the Project. Discussions with two potential new investors followed; however, OPIC's efforts to salvage the Project were unsuccessful and no agreement with new equity partners was reached.

On January 26, 1986, OPIC's officer returned once more to Costa Rica and learned that, while Hull had taken some of the steps he had agreed to, no progress had been made toward resolving many other problems.

Meanwhile, OPIC arranged to transfer its mortgage to the new property Hull offered as collateral in lieu of the original land that was to become part of the land reform program. Mr. Hull provided an appraisal by an independent appraiser showing that the value of the substitute property exceeded the amount of the loan. Mr. Hull's lawyer, Diana Chavarria, recorded the

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new mortgage in her protocol book. OPIC's original lawyer, Luis Carballo, tried to explain the failure to register the original mortgage by claiming that an employee of his firm had misappropriated the registration fees. Subsequently, it was alleged that Mr. Carballo himself had misappropriated the money. Mr. Carballo ultimately took his own life in September 1986.

Mr. Pacheco, Mr. Carballo's former law partner, undertook to register the new mortgage, at no cost to OPIC. However, because of improper recordation of the deed and because of delays in receiving a necessary government approval, he was unable to do so for over a year. Finally, on September 27, 1987, the approval was obtained. In the meantime, OPIC's Costa Rican attorney strongly recommended that OPIC not begin any legal action against Hull or the Company prior to obtaining the final approval, because he believed Hull's cooperation was important in registering the new mortgage. For that reason, OPIC did not consider Costa Rican criminal proceedings or begin formal foreclosure proceedings in Costa Rica until October 1987, after the new mortgage was finally registered.

However, on April 7, 1987, OPIC referred the Maderas matter to the Justice Department for appropriate action both in collecting on the loan and in investigating the possibility of fraud by the Project's sponsors. That investigation is still under way.

Let me now turn to our current credit policies. As part of our ongoing efforts to improve our policies and procedures, we have not only continued to refine our credit policies; we have also 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

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tighter than those in existence when the Maderas loan was made.

Specifically, except where explicit exceptions are approved by management, current finance department policies require:

o Audited financial statements on project sponsors' companies going back at least three years;
o More stringent credit and reference checks, including credit reports of all U.S. project sponsors, bank references from all principal banks with which the sponsors do business and independent verification of material assets;
o In-depth marketing studies, plus evidence of actual purchase commitments, or in appropriate cases letters of intent, to support sales projections;
o Disbursement in tranches, as the project satisfies agreed milestones, rather than in a single lump-sum disbursement;
o Independent certification of sponsors' equity contributions prior to disbursement;
o Site visits to confirm valuation of property offered as primary collateral and, as appropriate, independent appraisals of secondary collateral; and
o Mortgage registration prior to disbursement.

Application of these policies to current finance application has, we are confident,
reduced OPIC's credit risks significantly.

In addition, as OPIC's portfolio has grown in recent years, its post-disbursement procedures have been significantly improved. Our loan monitoring staff has been expanded and its caliber improved, and new procedures for administering troubled

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loans have been adopted. Moreover, for the past two years our books have been subject to audit by a big-eight accounting firm, which has sampled our loans for adequacy of collateral and other documentation.

Finally, our General Counsel's office has begun a case-by-case review of our security on each outstanding loan and loan guaranty. Preliminary results indicate that the problems we experienced in Maderas are highly unusual, and that overall our collateral position is sound.

Let me now turn to the facts surrounding OPIC's role in the Aqaba pipeline project.

The Aqaba Pipeline Project

In February 1984 Bechtel Corporation approached OPIC with preliminary requests for insurance and financing in connection with a project to build an oil pipeline from Iraq through Jordan to a terminal at the port of Aqaba. As a result of closure of the port of Basra due to war damage and Syria's refusal to permit Iraq to use an existing pipeline through its territory, Iraq needed to expand its capacity to export oil through new pipelines and was considering several possibilities, including the Aqaba pipeline.

The project was a large one ($1.1 billion) and entailed substantial U.S. procurement from Bechtel's suppliers and subcontractors, including U.S. Steel, General Electric, and Chicago Bridge & Iron, as well as Bechtel's services as general contractor. OPIC has a specialized insurance program for contractors and exporters and is experienced in insuring and financing pipeline projects. The project would also confer substantial economic benefits upon Jordan in the form of jobs

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created during both the construction and operational stages of the project, tariffs to the pipeline company, and enhancement of the port facilities at Aqaba. Discussions with Bechtel continued through the summer of 1984.

In general, such a project would be of particular interest to OPIC because of the substantial benefits that would accrue to both the U.S. and the project countries. However, there were also some special problems associated with the Aqaba Pipeline. One of the problems, which then seemed insurmountable, was that OPIC had no agreement with Iraq permitting operation of OPIC's programs there, and no prospect of obtaining one because the U.S. and Iraq had no diplomatic relations.

In November 1984, the U.S. and Iraq restored diplomatic relations, and there was almost immediate speculation about the prospect that OPIC programs would become available there. In January 1985 Bechtel renewed discussions with OPIC about support for the pipeline. In February 1985 OPIC's Board gave the approval necessary to begin negotiating an agreement with Iraq, subject to the condition that, if an agreement were reached, each Iraqi project would have to be approved by the Board. The text of a standard OPIC agreement was presented to the Iraqi Government by the U.S. Embassy n Baghdad in the spring of 1985.

In the course of the negotiations on the bilateral agreement, OPIC also gained more specific information about the nature of the political risk that was holding up the project. Evidently, Iraqi interest in the Aqaba pipeline was conditioned upon relief from debt service on the project's financing during any period when its operation might be disrupted by hostile Israeli action.

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This was an unusually specific risk but one that clearly fell within OPIC's statutory authority to insure against war risk. The objective likelihood of an Israeli attack on the pipeline was never determined and was probably indeterminable. Whether paranoid or prudent, the Iraqis' perception of this risk was central to their approach to the Aqaba pipeline project. The contractor, subcontractors and suppliers evidently were favored because they were U.S. firms. The Iraqis also sought U.S. lenders and U.S. Government guaranties. However, as no lender would agree to relieve a borrower of debt service in the event of war damage, the project was stalemated by the Iraqi perception of war risk and their demand for unconventional relief from debt service if Israeli action affected the pipeline.

In May of 1985 OPIC was approached by Mr. Bruce Rappaport, a Swiss citizen whom Bechtel had authorized to address the political risk problem, with a specific proposal to provide this relief. Mr. Rappaport presented himself as a financier with close ties to Israeli leaders. Mr. Rappaport and his attorney, Mr. Julius Kaplan, indicated that the project also had support at high levels in the U.S. Government. They proposed that OPIC fashion a special contract of war risk insurance to provide protection for project lenders which would permit the lenders to finance the project in spite of the peculiar terms demanded by Iraq. OPIC's exposure was to be mitigated by a salvage fund provided by the contractors, the oil lifters, and the Government of Israel. Because of the delicate foreign relations issues that the project raised, but also because the proposal was so unusual and the amount of insurance so large ($350 to $400 million exposure was contemplated), we were not inclined to respond without indications of support to do so from high levels of the U.S. Government.

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Support for OPIC's involvement eventually materialized and was confirmed in a meeting in late June 1985 with the Assistant to the President for National Security Affairs, Robert McFarlane. However, despite this indication of support for an OPIC role in the Aqaba pipeline project, on numerous occasions in communications with Mr. Rappaport and his representatives, Bechtel and the National Security Council, OPIC specifically identified the conditions that would have to be met before OPIC would issue insurance for the project.

The coverage requested for the Aqaba pipeline project was unusual in several respects. Availability of OPIC insurance is often an important factor in an investment decision, but the Aqaba project's of going forward hinged very explicitly upon OPIC's ability to provide insurance, and the coverage requested was against a specific act of war that could be contemplated from the outset.

Furthermore, while OPIC's usual underwriting standards allow insurance against direct damage losses in smaller amounts without the prospect of salvage, where we were dealing with potentially very large consequential losses associated with a strategic asset in a country whose hostile neighbor had previously attacked other strategic assets, special care and a means to salvage any loss were required. In this case, Mr. Rappaport's proposal envisioned creation of salvage funds from which OPIC could recoup payments made under the insurance contract.

As Mr. Rappaport described the Iraqi demand and his own commitment, OPIC would bear no risk of attacks on the pipeline from any source other than Israel. Further, loss due to Israeli attack would not only be offset by recourse to the salvage funds but further minimized both by assurances that

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Rappaport would obtain from Israel, and by the Israeli government's participation in the salvage fund, which Mr. Rappaport also undertook to arrange. On balance, it seemed that OPIC would be taking an unusual but acceptable risk.

Finally, the magnitude of the exposure was far beyond what OPIC had assumed in the past, or expected to assume in the future, without a sharing of that exposure with others.

Through the spring and summer of 1985, OPIC staff worked closely with Mr. Rappaport's representatives, Julius Kaplan and E. Robert Wallach, to try to fashion an insurance policy to respond to the requirements of the situation in a manner that would be consistent with OPIC's policies and its mandate to operate in a prudent, self-sustaining manner. This was approached on two fronts: OPIC would reduce its exposure to loss by sharing the risk with private institutions; and the "salvage" arrangements, which Mr. Rappaport undertook to provide, would relieve OPIC of loss in the event that it had to pay a claim.

The project promised to require the development of unique insurance arrangements that would take account of the complex and peculiar problems that had to be solved. The project involved not only Bechtel and its U.S. subcontractors and suppliers but also foreign suppliers, a consortium of U.S. and foreign banks, Eximbank and European export credit agencies, the Governments of Iraq and Jordan, a pipeline company and a terminal company with government and private shareholders, the oil lifters, OPIC and the private entities with which it would share the risk and the participants in the salvage package.

OPIC's efforts to formulate appropriate coverage assumed that the risk could be narrowly defined and that Bechtel and

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the Iraqis could agree on its scope. We learned several months later that the circumstances in which the Iraqis expected relief from debt service may have been broader than those described by Mr. Rappaport. In any event, no arrangement was ever agreed on to cover the narrow risk of overt Israeli action causing damage to the pipeline, because the commercial conditions that OPIC and the others sharing the risk considered essential were never satisfied.

In the final stages of discussion, Mr. Rappaport's representatives began backing away from his commitments to arrange collateral for the salvage fund. At the end of August 1985, we were informed that Mr. Rappaport himself would not adhere to the terms of a memorandum of understanding countersigned by Mr. Kaplan, his attorney, which set forth a salvage package that would have been acceptable to OPIC. In September 1985, Mr. Kaplan than proposed a form of "comfort letter" to be provided by the Israeli government and, in October, Mr. Wallach proposed that at least part of the salvage protection consist of an assignment of the proceeds of U.S. foreign assistance to Israel. Mr. Rappaport had long spoken of a comfort letter, but OPIC never considered it a substitute for collateral. The concept of an assignment of foreign aid had obvious conceptual flaws. As a means of disposing of that proposal, we wrote to the Justice Department to obtain an opinion as to the legality and enforceability of such an arrangement. The request outlined the problems and we did not anticipate a favorable opinion. We received no response to this inquiry.

By the end of 1985, Bechtel itself conceded that the project was moribund owing to a lack of interest on the part of Iraq, which had in the interim proceeded with other pipeline

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projects with capacity more than sufficient to meet its export needs and provide strategic excess capacity.

Conclusion

It should be apparent that the Maderas and Aqaba projects, far from illustrating a common pattern, could hardly be more different. In the Aqaba project, OPIC obtained clear indications of NSC support for a project that promised benefits both to the U.S. economy 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 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 basis.

In the Maderas case, on the other hand, there was no indication of any interest from the NSC or any other government agency. OPIC's management and staff were simply unaware of the alleged connections between one of the project's sponsors and any agency or employees 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 faced by an development agency lending to projects in the developing world. These problems include the time required to perfect security, the shortage of experienced local counsel, the expense of site visits and monitoring, and the lack of what could be considered basic legal and accounting infrastructure. In addition, as a development agency, OPIC's primary goal is to see its projects

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successfully surmount these and other difficulties; thus, its initial response to a project showing signs of trouble is not to foreclose, but to seek to save the project by bringing in new investors or new management or by restructuring the project to take account of unforeseen conditions.

OPIC continuously seeks to improve the ways in which it satisfies its Congressional mandates to provide development assistance while operating on a self-sustaining basis. Thus, we have implemented new procedures designed to better safeguard our financial interests and the integrity of the projects we support, without imposing undue burdens on the project sponsors, burdens which could in themselves constitute barriers to the very investment that Congress has directed us to promote. We believe that our current credit and workout policies outlined above have significantly improved the security of our portfolio.

Finally, with regard to OPIC's relationship with other government agencies, let me again point out that our Board of 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.

The important question is not whether such requests are made, but how they are handled by OPIC, and, most importantly, whether OPIC's management or staff deviates from existing policies, statutory requirements and prudent underwriting principles; or whether OPIC adheres to those standards. The Aqaba project demonstrates that even in the face of clear indications of NSC support, OPIC continued to operate as Congress intended. I am pleased to say that I can find no fault with the way my staff handled the Aqaba project, and I am confident that OPIC will continue to adhere to its mandate should similar circumstances arise in the future.

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