In September of 1990, Customs Service agents padlocked the doors of an Iraqi front company in a Cleveland suburb and, in response to a presidential order, froze its $2 million in assets.
Customs Commissioner Carol Hallett said the action against Matrix Churchill Corp. came after agents learned that Iraq, which had invaded Kuwait one month earlier, had bought the firm "for the specific purpose of illegally acquiring critical weapons technology."
But, unknown to Customs officials, government intelligence agencies had been aware of Matrix Churchill's role in Baghdad's arms procurement network for more than a year and had warned Bush Administration policy-makers, according to newly obtained documents and sources interviewed by The Times.
The Administration, however, allowed Matrix Churchill to continue operations, in keeping with President Bush's decision to try to influence Iraqi President Saddam Hussein through favorable policy on high-tech exports and economic incentives.
Administration officials maintain that any military assistance to Iraq was an inadvertent consequence of the attempt to moderate Iraqi actions. They said that they were unaware of the extent of the network's operations in this country and that top officials were distracted by other foreign policy concerns.
But Rep. Henry B. Gonzalez (D-Tex.), whose House Banking, Finance and Urban Affairs Committee has been investigating Matrix Churchill and the Administration's policies toward Iraq, said: "The Administration knew a great deal about Saddam Hussein's military procurement program and made a conscious decision to tolerate it, and in many cases facilitated the effort."
As early as June, 1989, a top-secret U.S. intelligence report had identified Matrix Churchill's British parent company as a key component of the Iraqi network, according to a newly disclosed document.
And two months later, Defense Department analysts discovered that the Cleveland operation had funneled tens of millions of dollars worth of U.S. technology to Iraq's nuclear weapons and ballistic missile programs, according to sources.
Recently declassified State Department documents show that after Iraq's invasion of Kuwait, Administration officials calculated that the Iraqi regime spent $10 billion to $20 billion acquiring nuclear weapons and missile technology in the 1980s. Most of the buying took place through a series of front companies and shadowy agents operating in Europe, but some occurred in the United States.
The Iraqi network here depended heavily on financing from the now-notorious Atlanta branch of Italy's Banca Nazionale del Lavoro. The branch provided Iraq with $5 billion in illicit loans, much of it used to buy military goods and technology, congressional and federal investigators say.
The contact point between BNL and the network was Safa Haji al-Habobi, who has been named in intelligence reports as the person who ran the daily operations of the procurement network worldwide. Court records identify him as the director of one of Iraq's top military facilities and an officer of numerous commercial front companies set up by Iraq to buy technology.
Habobi was one of four Iraqi government officials indicted along with three BNL employees at the end of the Persian Gulf War in the bank case. They were charged with conspiring to defraud BNL and U.S. regulators by concealing the Iraqi loans. Authorities believe that Habobi is now in Iraq.
Among the front companies he headed were Matrix Churchill and its British parent, Matrix Churchill Ltd., the indictment says. The British company was a leading manufacturer of high-technology lathes with commercial and military uses.
Habobi appears to have used the Ohio subsidiary to try to procure U.S. items from an ambitious shopping list. Court records and other intelligence reports allege that the Cleveland firm helped Iraq obtain U.S. technology for such projects as the development of a nuclear-capable ballistic missile, enhancement of Scud missiles and construction of the famous "super-gun" by Gerald Bull, a renegade military designer from Canada.
"Materials were exported to Iraq through Matrix Churchill that we believe had military uses," said Steve Hartkop, a Customs supervisor in Cleveland, who declined to provide additional information because the investigation is continuing.
Among the technology and equipment listed in court records was a $14-million carbide-tool manufacturing plant able to cut precise parts for nuclear weapons and aircraft, a $40-million brass-casting factory and a $26-million ductile-pipe plant. Iraq did receive some of the equipment.
In each case, financing came from BNL in Atlanta. And, federal investigators say, many of the contracts required the sellers to pay kickbacks to Matrix Churchill of up to 10% of the project's price. Some investigators suspect that the fee was demanded by the Iraqi government, demonstrating the government's role in the network.
For instance, a contract with SerVaas Inc. for the brass plant called for Matrix Churchill to receive a 5% fee on all payments for the $40-million facility, according to court records.
Indianapolis City Council President Beurt R. SerVaas, the owner of the company, told a congressional committee last year that the plant was being designed solely for commercial uses and he had no reason to be suspicious of Matrix Churchill.
Weapons experts and law enforcement officials suspect that Iraq intended to use the $26-million ductile-pipe factory to build barrels for Bull's super-gun. The Canadian ballistics expert had already sold Iraq advanced howitzers, according to classified records, but the super-gun was Baghdad's dream weapon.
The gun was expected to bring Israel within range of nuclear shells. Pieces of the super-gun were seized by authorities in London in the spring of 1990, and Bull was assassinated outside his Brussels apartment a short time later. The killing remains unsolved.
Internal Matrix Churchill records also indicate that the company was buying technology for the Condor II, a joint Iraqi-Egyptian-Argentinian project to develop a missile to deliver nuclear warheads. Sources said the missile project was code-named "Project 395" and purchases for it were disguised as going to a dam construction site.
The British parent company also was busy on behalf of Iraq, according to court records and classified documents. Matrix supplied millions of dollars' worth of computer-controlled lathes to Iraq with BNL financing, and an affiliate was engaged in a joint venture with Bull to buy an aircraft factory in Ireland when he was killed.
U.S. intelligence agents were aware of Matrix Churchill's activities on behalf of Iraq in Europe at least by June, 1989.
In an analysis that month classified "top secret," the Pentagon's Defense Intelligence Agency warned that Iraq was obtaining weapons technology through a covert network.
"Iraq has developed a major European military procurement network for its defense industries," the report said. "The network connects Iraq to suppliers of precision machine tools . . . centrifuges, chemical and biological precursors (and) missile components."
The report identified Matrix Churchill in Britain as secretly owned by Iraq and said its lathes had been used by Iraq to produce weapons. The report also warned that Iraq was developing a mid-range ballistic missile under the code name "Project 395."
Knowledge of the network was widespread. It was described in an intelligence report prepared that summer by the CIA and distributed to 38 Administration officials, including seven at the National Security Council and 10 at the State Department.
Domestic elements of the network were uncovered by other Defense Department analysts when they examined records seized by the FBI in a raid on BNL's branch in Atlanta on Aug. 4, 1989.
When officials from the Pentagon's Defense Technology Security Agency, which had fought exports of U.S. technology to Iraq for years, arrived in Atlanta a few days after the raid, they discovered that BNL had been funding large parts of the Iraqi arms network, Gonzalez said.
Sources outside Congress said the analysts found that Matrix Churchill and BNL had worked together to acquire and finance technology for the Condor II missile, Bull's super-gun and nuclear weapons.
Word of Matrix Churchill's role went to the State Department in an Oct. 11, 1989, memo. It said the company had been demanding a "consulting fee" on exports to Iraq under orders from the Iraqi government. The memo added: "Some information has been developed that Churchill Matrix (sic) has been involved in supplying military hardware to Iraq."
In November, 1989, a CIA report linked BNL to financing for the Condor II and identified companies suspected of being part of the Iraqi network. Among them were Matrix Churchill and Bull's Space Research Corp.
"We believe Iraqi intelligence is directly involved in the activities of many holding companies funneling technology to Iraq," the Nov. 6 CIA analysis said.
Despite such warnings, the Bush Administration continued to provide loan guarantees to Iraq in the fall of 1989 and resisted efforts to restrict sales of sensitive U.S. technology to Baghdad as late as May, 1990, according to records.
Internal Matrix Churchill documents show that U.S. Customs agents first interviewed company officials in Cleveland on April 30, 1990, about 10 months after the first Defense Intelligence Agency report.
Customs, which has front-line responsibility for enforcing export laws, developed its own investigation, and for unknown reasons intelligence reports on Matrix Churchill were not provided to Customs until after the invasion of Kuwait, one high-ranking federal law enforcement official said.
The effectiveness of Matrix Churchill's efforts on behalf of Iraq remains unclear. Some of the exports were blocked when the United Nations imposed sanctions on Iraq after the invasion of Kuwait. However, authorities discovered that Iraq was far closer to producing a nuclear weapon than had been suspected.
Further, when U.N. inspectors went into Iraq after the end of the war in 1991, they discovered a massive prototype of Bull's super-gun concealed on a small mountain in the northern part of the country.
Frantz is a Times staff writer and Waas is a special correspondent.