Law enforcement authorities and others close to the aborted investigation said the State Department pressed federal officials to pull agents off the previously undisclosed probe after the charities were targeted in the diversion of cash to groups that fund terrorism.
Former federal prosecutor John J. Loftus said four interrelated Islamic foundations, institutes and charities in Virginia with more than a billion dollars in assets donated by or through the Saudi Arabian government were allowed to continue under "a veil of secrecy."
"If federal agents had been allowed to conduct the investigation they wanted in 1995, they would have made the connection between the Saudi government and those charities," said Mr. Loftus, now a St. Petersburg, Fla., lawyer who filed a lawsuit last week accusing a Florida charity of fraud.
"Had the charities been shut down, they would have been unable to raise the millions that since have been used by terrorists in hundreds of suicide attacks," he said.
Federal agents last week began a new investigation, known as "Operation Green Quest," into the funding by charities of suspected terrorists, raiding 14 Islamic businesses in Virginia. Agents from the U.S. Customs Service, Internal Revenue Service, Immigration and Naturalization Service and FBI, coordinated by a Treasury Department counterterrorism task force, seized two dozen computers, along with hundreds of bank statements and other documents.
Records in the case have been sealed and no arrests have been announced, although the probe is continuing.
The Loftus suit, filed March 20 under the Florida Consumer Protection Act, accuses the Saudi government in a massive scheme involving charities in Virginia and Florida that routed cash to terrorists.
The suit's main target is Sami Al-Arian, a former University of South Florida professor who created or was associated with several Florida charities or think tanks, including the International Committee for Palestine, Islamic Concern Project and the now-defunct World and Islam Studies Enterprise.
Warrants served by agents in the Virginia raids last week targeted, among others, the International Institute of Islamic Thought in Herndon, a major source of funding for Mr. Al-Arian's World and Islam Studies Institute.
The warrants sought information on Islamic Jihad, Hamas, the Islamic Concern Project, the World and Islam Studies Enterprise, and Mr. Al-Arian. They also sought information on the SAAR Foundation, an educational and health charity founded by the Al-Rajihi family of Saudi Arabia.
The Islamic Concern Project and the World and Islam Studies Enterprise have been named by the State Department as front organizations that raised funds for militant Islamic-Palestinian groups such as Islamic Jihad and Hamas. They have been tied to the diversion of millions of dollars to terrorists for weapons, safe haven, training and equipment.
Nail Al-Jubeir, spokesman for the Saudi information office in Washington, called the accusations "simply nonsense," adding that Saudi Arabia has cracked down on terrorists and those who fund them.
"There is not one iota of evidence to support these accusations," Mr. Al-Jubeir said. "It is nothing more than an effort to smear our name. If there is any proof, I would suggest it be taken directly to the U.S. government."
Mr. Al-Arian and Mazen Al-Najjar, director of the Islamic Concern Project, have been the focus of federal investigations since the mid-1990s. No criminal charges have been filed against the two, although the government shut down the World and Islam Studies Enterprise.
Mr. Al-Najjar, who is Mr. Al-Arian's brother-in-law, was detained and ordered deported by the INS on visa violations after the September 11 attacks on America. He is being held at a federal detention center in Florida pending appeal.
In the aborted 1995 investigation, the FBI said in a sealed affidavit that the Islamic Concern Project and World and Islam Studies Enterprise — working with charities in Virginia — committed fraud and "served as a vehicle by which [Islamic Jihad] raised funds to support terrorist activities in the occupied territories."
In that probe, investigators found that checks drawn on a bank account of the International Committee for Palestine had been cashed by people in the Middle East. They said the checks had been signed by Mr. Al-Arian.
Mr. Loftus is seeking an injunction blocking Florida charities, including those headed by Mr. Al-Arian, from transferring "money, weapons, equipment or communications gear" to terrorists.
Mr. Al-Arian has vigorously denied any wrongdoing, calling the Loftus lawsuit a "publicity stunt." His attorney, Robert McKee, did not return calls to his office for comment.
Julie Payne, spokeswoman for former President Bill Clinton, did not repond to inquiries about State Department policy in 1995 during his administration.
Accusations that the Saudi government used charities as front organizations to fund international terrorism are long-standing, first surfacing 20 years ago when U.S. intelligence officials warned Congress that the Saudis had taken over the direct funding of terrorist groups such as Islamic Jihad and Hamas.
One former and three current federal law enforcement officials said the new probe began after U.S. officials learned that intelligence agents in India had wiretapped the telephone of a Pakistani charity funded by the Saudi government and discovered the transfer of $100,000 to Mohamed Atta, one of the 19 al Qaeda hijackers in the September 11 attacks.
That information helped U.S. officials identify the 19 hijackers, 15 of whom were from Saudi Arabia, the officials said.
After the suicide strikes on the World Trade Center and the Pentagon, the officials said Treasury's interagency task force was created to investigate ties between charitable organizations in this country and international terrorist groups.
That ongoing probe, according to the officials, has focused on accusations that several tax-exempt and nonprofit charities operating from Virginia to Florida have contributed millions of dollars to international groups that support terrorism, including Islamic Jihad and Hamas.
