The loan requirements of the Overseas Private Investment Corp. read like those of any bank in the United States. The only difference is that OPIC is a government agency and if a borrower doesn't pay back a loan, American taxpayers are the losers.

Under the circumstances, one would expect OPIC to be tight with its money. But one would be disappointed. In recent years OPIC, which lends money for business ventures in developing countries, has come under increasing scrutiny for risky loan practices. Now an investigation into an arms deal threatens to resurrect one loan that OPIC would just as soon keep buried.

Last spring, U.S. authorities found out that a huge shipment of Israeli arms -- bound inexplicably for the tiny Caribbean island of Antigua -- ended up in the hands of Colombia's Medellin drug cartel. The Antiguan investigators now claim that Maurice Sarfati, an Antiguan melon farmer and former Israeli soldier, brokered the deal along with other middlemen.

Sarfati's melon business was bankrolled by $1.3 million in loans from OPIC in 1985 and 1986. But OPIC later suspected that not all of the money ended up in melons. In 1988, OPIC sued Sarfati for defaulting on the loans.

OPIC has recovered $1.1 million from Sarfati, but OPIC officials told us that it was impossible to trace where the original funds had ended up if not in the melon business.

Our associate Dean Boyd has learned that the Antiguan probe into the arms deal turned up a $24,000 check written to another Israeli suspected of helping to arrange the arms deal. The check appears to be drawn on the bank account in which Sarfati kept the farm funds. The date on the check is illegible and the reason for payment is unclear.

Although there is no evidence that Sarfati was involved in arms trafficking at the time the loans were made, court documents from OPIC's 1988 lawsuit when Sarfati defaulted indicate he was a risky loan. OPIC did a marginal job in checking out Sarfati before handing him $1.3 million.

For example, in 1983 Sarfati had the Bank of Credit and Commerce in Miami send OPIC a letter of recommendation. The bank called Sarfati "one of our valued customers" and said he had five companies with accounts at the bank. Sarfati later testified in the lawsuit that three of the companies either had no assets or never got off the ground.

In 1988, the General Accounting Office looked into Sarfati and found that if OPIC had looked closely enough, it would have found that the melon business was showing a loss before OPIC gave Sarfati a second loan.

Even when OPIC was warned something might be amiss, it didn't react quickly. In March 1987, someone connected with the melon farm complained to Rep. John P. Murtha (D-Pa.) that Sarfati might be misusing OPIC money. Murtha informed OPIC, which disregarded recommendations that Sarfati's accounts be frozen. Four months later a shareholder in the farm warned OPIC that Sarfati may have been ruining the farm. OPIC concluded the farm's problems were "not unusual for new agricultural projects in developing countries." It was almost a year before OPIC foreclosed.