A federal grand jury in New Orleans indicted 14 persons and 13 businesses yesterday in the first phase of a nationwide U.S. Customs Service investigation of the sugar industry that officials said could eventually lead to $1 billion in fines and restitution payments.

Customs officials said the investigation, code-named Operation Bittersweet, has found widespread evidence of a double-barreled scam by sugar dealers: evading sugar import quotas while simultaneously defrauding the government of import duties.

The investigation comes at an inopportune time for the U.S. sugar industry. Congress is considering this year whether to continue sugar price supports established in 1982. Proponents say that the price supports protect U.S. producers and consumers from wide price fluctuations. Opponents say that the price supports produce higher costs to consumers.

Customs officials said that as much as 250,000 tons of sugar per year has been illegally entering the U.S. market under the scheme disclosed yesterday. Lost import duties over the past several years were estimated to be $50 million.

A 1983 change in Agriculture Department rules allows specially licensed importers to bring foreign sugar into the United States for refining, then to export it within 90 days for sale abroad. Importers pay duties of 2.8 cents a pound when the sugar comes into the United States, but, since it never enters the U.S. market, they receive a "drawback" -- or refund -- of 99 percent of the duties when the refined product is exported.

The dealers indicted yesterday allegedly imported the sugar, paid the proper duties and then filed fraudulent forms to indicate that the refined sugar had been exported. The false export forms allegedly allowed them not only to claim the drawback but to sell the sugar illegally on the lucrative U.S. market.

"This is only the beginning of Operation Bittersweet," U.S. Customs Commissioner William von Raab said yesterday. "We are unraveling what looks like the largest commercial-fraud conspiracy Customs has ever investigated."

The indictments, announced by U.S. Attorney John Volz, included 32 charges -- among them: customs fraud, smuggling, false statements and false drawback claims -- in the alleged diversion of 88 million pounds of sugar into the U.S. domestic market in the ports of New Orleans, Miami, Baltimore and New York.

One customs investigator said yesterday that the initial probe was limited to five U.S. refineries because "it got so big that we had to limit it." None of the refineries was named in the indictments, but the investigator said, "We will go after them if we can prove they knew about it."

Those named in the indictments included sugar brokerage, storage and transportation companies and their owners and officials.

Customs sources said that all but one of the defendants are expected to enter into a plea-bargaining arrangement, pleading guilty to charges that could lead up to 27 years in prison and fines of $65,000 as well as restitution to the government.

The remaining defendant, Jose Miguel Arago, 38, a Miami sugar dealer, was described by investigators as the "kingpin" of the operation. Customs officials said Arago, who was born in Cuba and became a U.S. citizen in 1971, is believed to be vacationing in the Bahamas.

Arago was charged in Miami with six counts related to illegal drawbacks and was also named in a seven-count indictment handed down in Baltimore yesterday charging him with illegal drawbacks and false statements.

Customs investigators said the American price-support system created the temptation to illegally smuggle foreign sugar into the U.S. market. "We practically handed it to them," one federal agent said.

The alleged diversions were highly profitable because of the great difference between world and U.S. sugar prices. Raw sugar sells on the world market for about 3 cents a pound, but the U.S. support program sets the price of raw sugar sold to domestic refineries at 22 cents. The refined sugar is then sold for 27 to 28 cents a pound.

The other part of the alleged fraud involves illegal drawbacks. To claim a drawback, a dealer must have a bill of lading showing that the refined sugar was loaded for export. However, federal investigators have found that in many cases the bills of lading were fake.

Probers said one company is alleged to have submitted copies of the same bill of lading to two refineries, allowing each to claim a drawback. The company allegedly gave the refiners forms to prove that it was reexporting 1.2 million pounds of sugar. But, instead, investigators found documents indicating that the cargo was actually flour.

The firms indicted included Transcontinental Shipping; South River Terminal Co.; Gulf Stream Terminals Co.; Lunaber Corp.; Traders Express Inc.; Nationwide International Forwarders and Brokers Inc., and Worldwide Terminals and Distribution Inc., all of Miami. Also indicted were Cari-Cargo International Inc., Coral Gables, Fla.; Harold French Co., New York; Lobo Kane Inc., Linden, N.J.; Representaciones Morsilea Ltd., Turks and Caicos Islands; Concord International Sales, South Miami, and Suffolk American Corp., Panama.