In the spring of 1989, a CIA officer approached the president of a small engineering firm in Alabama and quizzed him about a carbide-tool manufacturing facility the company was building at an Iraqi government installation southwest of Baghdad.
In the fall of that year, a Customs Service agent and an Agriculture Department criminal investigator visited the firm, XYZ Options Inc. in Tuscaloosa, and posed a similar set of questions to its president, William H. Muscarella.
"In both instances, I told the government what we were doing," said Muscarella. "I gave them blueprints and told them everything about the plant. They knew everything."
By the fall of 1989, U.S. authorities suspected that Iraq intended to use the plant as part of its ambitious weapons program, according to newly obtained records. Yet, while the government blocked the export of a key piece of machinery, it apparently did nothing to discourage construction of the $14-million plant by withholding export licenses for other components, which were shipped to Iraq.
When Iraq invaded Kuwait in August, 1990, the plant was virtually complete and capable of turning out military goods as well as consumer products, according to Muscarella.
After the Gulf War, the military use was confirmed. U.N. inspectors hunting for Iraqi weapons facilities discovered the carbide factory was part of Iraq's main nuclear-weapons complex. After determining that the factory had been used in the effort to develop a bomb, the inspectors blew up the plant, U.N. documents show.
Iraq's ability to obtain the carbide facility with U.S. knowledge illustrates again how Saddam Hussein was able to engage in a massive prewar military buildup by exploiting the Bush Administration's attempts to influence him by allowing Baghdad to acquire U.S. technology.
"The Bush Administration supplied hardware and equipment to Iraq by applying the least-stringent-possible evaluation of whether the real purpose was military instead of civilian," says Peter D. Zimmerman, a senior fellow at the Center for Strategic International Studies here who has been studying Iraq's attempt to develop a nuclear weapon.
An internal White House document prepared after earlier Times stories and obtained by the newspaper Thursday asserts that the Administration maintained strict controls over exports of technology to Iraq. The memo blamed Democrats in Congress for loosening export controls to Iraq and similar countries.
"There is no substance to the reports that U.S. technology contributed in any significant way to Iraq's military capabilities," said the July 2 memo for Brent Scowcroft, the President's national security adviser.
The Times reported previously that U.S. intelligence agencies warned high-level Administration officials as early as June, 1989, that a company outside Cleveland named Matrix Churchill was a front in Iraq's worldwide arms-procurement network. However, the Administration rejected efforts to restrict sales of U.S. technology to Baghdad as late as May, 1990.
The XYZ Options deal is a clear example of how the Iraqi network operated. Described as a commercial transaction, the arrangement was set up by Matrix Churchill and financed by the Atlanta branch of Italy's Banca Nazionale del Lavoro.
On Thursday, the House Banking, Finance and Urban Affairs Committee approved subpoenas for the records of XYZ Options and 18 other companies in its expanding investigation of BNL and Iraq's network. The committee also approved subpoenas for records at the CIA, the National Security Agency and the Pentagon's Defense Intelligence Agency.
There is no evidence that XYZ Options violated U.S. export laws, and Muscarella says the plant was designed to produce commercial products. However, the company remains part of an ongoing investigation by the Customs Service, according to an agency spokeswoman.
Muscarella says he has tried to assist investigators and believes he is a victim in the case. He says BNL and the Iraqi government owe him millions for work on the plant.
Muscarella says the Commerce Department assured him the plant was a proper export and he said individual suppliers were required to obtain export licenses for specific equipment. A Commerce Department spokeswoman said regulations prohibit discussing specific export licenses.
High-precision carbide tools are used in cutting and machining items ranging from soda cans and artificial limbs to artillery shells and valves for nuclear weapons. When controlled by a computer, the systems execute cuts within one-thousandth of an inch.
Iraq started shopping for a carbide plant in early 1988, while it was devoting virtually all of its resources to the war with Iran, which did not end until August, 1988. Still, the Iraqis said they wanted the plant to produce an array of commercial items.
Muscarella said he negotiated the deal with Matrix Churchill president Safa al-Habobi, later identified in intelligence reports as an Iraqi intelligence officer and top official in the procurement network, and Iraqi military officers. It was the Iraqis who arranged the financing through BNL in Atlanta, he said.
The contract called for XYZ to obtain advanced equipment from suppliers, set up the plant and train Iraqi workers to run it. Muscarella said the plant was designed for commercial products, but he acknowledged that other uses were possible.
"You can make anything," he said, "including weapons."
During several trips to Iraq, Muscarella said he and his associates worked on the plant inside a complex guarded by soldiers. He said he saw commercial products being made, but some areas of the complex were off-limits.
In the spring of 1989, with work well under way, Muscarella said he was visited in Tuscaloosa by a CIA officer. Later that summer, two other CIA officers visited the facility in Topeka, Ind., where 36 Iraqis were being trained to run the plant.
"They wanted to know what was going on," said Muscarella. "We gave them a tour of the plant in Indiana and provided them with blueprints for the operation in Iraq."
A CIA spokesman refused to confirm or deny the visits, saying the agency does not comment on contacts with individuals.
About the same time, XYZ ran into trouble obtaining a precision jig grinder essential to the carbide facility. The Commerce Department turned down a Connecticut manufacturer's request for an export license because the device was advanced enough to machine missile parts and nuclear-related components.
Investigators now believe Iraq secured a grinder from a foreign company and U.N. inspection documents show a foreign grinder was destroyed along with the Iraqi factory.
On Aug. 4, 1989, federal agents raided BNL's Atlanta branch and seized records of $5 billion worth of concealed loans to Iraq. The raid closed the branch and cut off funding for numerous Iraqi projects, including XYZ's factory.
But the carbide plant apparently was vital to Baghdad. In a highly unusual move, Iraq arranged new financing through its embassy in Washington, according to internal XYZ records and Muscarella. From then on, invoices were sent directly to the embassy for payment.
On Sept. 21, 1989, federal prosecutors on the BNL case met with other federal officials and said they were investigating allegations that "XYZ sold missile technology to Iraq," according to a copy of a report on the meeting.
Muscarella denied providing missile technology to Iraq.
In October, 1989, two investigators assigned to the BNL case visited Muscarella. He says he answered their questions about the plant. Federal officials confirmed only that the meeting occurred.
The plant was nearly complete by Aug. 2, 1990, when Iraq invaded Kuwait. In mid-August, Muscarella says, the Iraqis wanted him to bring employees to Amman, Jordan.
"They said they would bring us across the border into Iraq," said Muscarella, adding that he refused because of the post-invasion embargo on dealings with Iraq imposed by President Bush.
After the war ended, U.N. inspectors examined Iraqi facilities to identify and destroy nuclear, chemical and biological weapons as part of the cease-fire agreement. They found that the nuclear effort was centered at a complex southwest of Baghdad. There, the inspectors used 3.5 tons of dynamite to destroy eight buildings--including the carbide factory in building 55--deemed part of the effort to build a bomb.
Frantz is a Times staff writer and Waas is a special correspondent.