Some of the world’s most sophisticated banks and investment firms rushed to do business with Moammar Gaddafi’s government in Libya after the United States rescinded the country’s designation as a state sponsor of terrorism five years ago, according to an internal financial document obtained by The Washington Post.

HSBC, Goldman Sachs and other top banks took on hundreds of millions in cash deposits. Hedge funds and private investment firms, including the Washington-based Carlyle Group, sold Libya’s investment authority complex financial products. The Libyan sovereign wealth fund bought more than $1 billion in U.S. Treasury bills, effectively giving Libya a chance to underwrite U.S. debt.

By last year, Libya’s fund recorded about $56 billion in assets around the world, the internal document shows.

The document, created for the Tripoli-based Libyan Investment Authority by management consulting firm KPMG, provides the most detailed accounting yet of how Libya invested its oil revenue in the years between its removal from the international blacklist in 2006 and the resumption of sanctions after a deadly crackdown on protesters earlier this year.

The report underscores that just months after Gaddafi’s government was cleared for international business deals, leading financial institutions were courting Gaddafi officials for access to a huge new reservoir of capital — more than $40 billion at the time.

The gold rush in Libya occurred with encouragement from U.S. officials, who wanted to reward Gaddafi for pledging to honor international law, disavow terrorism and compensate relatives of victims of the Pan Am Flight 103 bombing.

“Sanctions are powerful because of our ability to leverage the U.S. financial system. Immediate access to the U.S. and Western investment upon the removal of sanctions is the ultimate carrot,” said one senior U.S. official, who declined to be named because he was not authorized to speak about the matter. “That carrot is what compels sanctioned narcotics traffickers, proliferators and supporters of terrorism to change their behavior and stop engaging in the illicit conduct that got them cut off from the United States.”

But the sudden embrace of Gaddafi became a source of embarrassment once his government — long known for its ruthlessness in suppressing dissent — used massive force to attempt to squelch a civilian uprising in February. Since then, government forces and rebels have been locked in a stalemate, with NATO warplanes regularly striking loyalist targets.

“It’s amazing how many big banks were prepared to do business with the Gaddafi regime given the obvious concerns over corruption and brutality in Libya,” said Corinna Gilfillan, head of the U.S. office of Global Witness, a nonprofit watchdog group that first obtained the document.

The Post independently confirmed that the document was produced by the London office of KPMG, which worked as a consultant to help the investment authority better track its assets in 2009 and 2010. KPMG spokesman Gavin Houlgate declined to comment on the report.

Officials at the Libyan Investment Authority could not be reached for comment. Officials at Goldman Sachs, HSBC and the Carlyle Group all declined to comment.

U.S. action

In the United States, Treasury officials have frozen about $37 billion of Libyan funds. A U.S. government official said most of the assets described in the KPMG report have been frozen either in the United States or overseas.

Treasury officials have said that the majority of $29 billion in Libyan funds identified in an initial sweep by U.S. investigators were located in a single bank. The KPMG report does not provide enough specific information to identify the institution, which officials have declined to name.

In Britain, which also imposed sanctions, the head of the London School of Economics resigned after it became public that he served as an informal adviser to the Libyan government and that the school had accepted a donation from the investment authority.

In Italy, the investment fund’s holdings in UniCredit, the nation’s top bank, and other companies have stirred national debate about the propriety of doing business with Gaddafi.

The Libyan Investment Authority was a risky entity to do business with because its operations were opaque. The lack of transparency made the authority prone to corruption — an allegation that has dogged it from the beginning.

Edwin Truman, a former Treasury official in the Clinton administration and a senior fellow at the Peterson Institute for International Economics, said he reviewed Libya’s fund and effectively rated it a zero in transparency because of insufficient reporting on its holdings and activities. Details about the fund’s holdings were supposed to be available from the International Forum of Sovereign Wealth Funds. “Go on that Web site, click on Libya and you will learn nothing — which is why I can’t score them,” Truman said.

After examining the document provided by The Post, he noted that about one-third of the investments are in “subsidiaries,” which is “where there is the potential for mischief of various types.”

“The LIA was at least well-enough run a year ago to have such a presentation,” Truman said. “But they did not tell their public or our public much about what they were doing.”

The Libyan Investment Authority was created to help the country leverage the wealth generated from oil revenue. Known by its Arabic name as “the mother of all funds,” it was run by managers who were purportedly independent of Gaddafi. But the fund was closely tied to Gaddafi’s powerful son, Saif al-Islam Gaddafi.

Saif Gaddafi, who has a doctorate from the London School of Economics, portrayed himself as a reformer who was trying to push Libya in a new direction. He helped choose the leadership of the investment authority and routinely met with financiers in the United States and Europe in search of new investments. After the crackdown began, Saif Gaddafi became his father’s most public supporter, brandishing weapons and urging citizens to fight the rebels.

Western emphasis

The KPMG report, dated June 30, 2010, shows a wide array of investments across the globe, with an emphasis on the West. In the first quarter of 2010, the fund had $315 million in cash spread across accounts at HSBC, the Arab Banking Corp., Goldman Sachs, the Central Bank of Libya and other institutions. It owned $6 billion in equities, including shares of General Electric, AT&T, Citigroup and Telefonica. Its biggest stock holdings were in Italy, where the investment authority owned almost $600 million worth of stock in UniCredit, the Italian-based bank with operations across Europe.

The report shows that a quarter of Libya’s $6 billion in stock holdings are in Italian companies, with 15 percent in U.S. firms. But most of the $3.2 billion in bonds — 65 percent — are held in U.S. bonds, including Treasuries.

An adviser to rebel Finance Minister Ali Tarhouni said the rebels should be given access to the investments, although they do not expect that to happen.

“We believe these are the Libyan people’s assets and it’s ours,” the official said, speaking on the condition of anonymity because he is not authorized to be named. “We are in immediate need of cash. It’s the Libyan’s people’s money, and they have a right to it.”

Correspondents Sudarsan Raghavan in Benghazi, Libya, and Michael Birnbaum in Tripoli contributed to this report.