The United States has made the payments to honor U.S. loan guarantees extended in the 1980s and early 1990 to entice banks to advance Iraq money for agricultural purchases. In the 18 months since Iraq's default, the United States has gone ahead with restitution to this creditor, despite its ownership and a presidential order forbidding all direct or indirect business with Baghdad.

The payments are reflected in 1992 Agriculture Department records obtained by The Times. Department spokesmen did not respond to repeated requests for an explanation of whether any safeguards were imposed to prevent Iraq from profiting.

The loan guarantee payments are part of the fallout from an ill-fated secret effort by the Ronald Reagan and Bush administrations during a seven-year period to improve ties with the regime of Saddam Hussein through intelligence sharing, political support and financial aid.

In all, the U.S. government guaranteed $5 billion in credits to finance Iraqi purchases of American farm products. Since the invasion of Kuwait, Iraq has defaulted on $2 billion.

Records show that the Gulf International Bank, which has headquarters in Bahrain and branches stretching from New York to Singapore, was one of 10 banks receiving restitution from the first $1 billion in payments from the Commodity Credit Corp., an agency of the Agriculture Department.

The bank is jointly owned by seven Gulf countries -- Iraq, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Its share of $360.7 million was more than twice as much as that of any other single bank.

A bank official insisted that although the Baghdad government retains its one-seventh ownership interest, it has not received any cash from the U.S. payments. However, the value of its investment has been substantially enhanced by the restitution and it could be in a position eventually to profit twice from the loan policy and default.

President Bush's executive order prohibiting commerce with Iraq, issued shortly after the Kuwait invasion, bans "any commitment or transfer, direct or indirect, of funds or other financial resources . . . by any United States person to the government of Iraq . . . its agencies, instrumentalities, and controlled entities, and the Central Bank of Iraq."

Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Agriculture Committee, said he questions the justification for the payments to Gulf International.

"You have to wonder who made the decision to send millions of dollars to an Iraqi-owned bank at the same time the Administration is rattling sabers and complaining about an outlaw regime in Iraq," Leahy said.

Abdel-Fattah Tahoun, an official of Gulf International Bank in New York, insisted that the bank was scrupulous in its adherence to Bush's executive order banning payments to Iraq.

"Iraq has not received a single penny from this money we are receiving from the CCC," Tahoun said in a telephone interview. "They (the owners) don't all get one-seventh of the gross receipts; anything they get would be in dividends. If we declare dividends, they each get one-seventh of the dividend, but we haven't declared dividends for four years."

Tahoun said that any money owed to Iraq would be retained to pay off the 2% of the loans that were not covered by the U.S. payments. The agricultural credit program provided backing for 98% of the loan total.

A congressional staff member conceded that the payments to the bank may not have violated the letter of the executive order but he added: "There is no doubt that Iraq is indirectly benefiting from this."

Leahy's Agriculture Committee and the House Banking Committee both are planning investigations of the Administration's action in extending the loan guarantees at a time when Iraq was engaged in a massive arms buildup. Critics say that the U.S.-backed loans permitted Iraq to buy needed food on credit while keeping its scarce supply of hard currency for the purchase of weapons.

According to documents reported upon by The Times last month, the Administration went ahead with loans to Iraq even though some officials complained that it was unlikely the money would ever be repaid. Administration policy-makers have acknowledged that they were seeking to bolster Iraq as a strategic counterweight to Iran and also hoped through closer ties to steer the Hussein regime away from its brutal policies.

For instance, a Treasury Department official, Robert Emery, warned in September, 1989, that Iraq was trying to borrow additional money to pay off earlier loans, much as a confidence artist pyramids loan on top of loan with no way of eventually paying them off. He is quoted as cautioning, "As money was fungible, new bank letters of credit could be used to pay old debts in a Ponzi-type scheme."

A confidential State Department cable, dated July 9, 1990, noted that Iraq threatened to stop all loan payments if Washington refused to extend additional credits. It said, "The GOI (government of Iraq) has officially informed us, in the spirit of 'clarity and fairness,' that if the USG (U.S. government) makes the decision to terminate the 'agricultural loan' . . . a change in the Iraqi method of payment definitely will be made. . . . Since Iraq will no longer be receiving new credit guarantees, the United States will no longer receive special repayment consideration."

Kempster is a Times staff writer and Waas is a special correspondent.  

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