Probe of Arms Sales to Iraq Moves Ahead : Weapons: L.A.-based firm, Chile manufacturer may face charges. Inquiry was delayed by release of CIA papers on U.S. policy toward Baghdad.

The Justice Department has decided to proceed with its investigation of a Los Angeles-based defense contractor and a Chilean arms manufacturer despite potentially embarrassing intelligence information about U.S. policy toward Iraq.

According to lawyers involved in the case, a decision is expected in the next two weeks on whether criminal charges will be filed against a division of Teledyne Inc., the Los Angeles defense firm, and Carlos Cardoen, a major Chilean arms manufacturer.

The inquiry was delayed earlier this year when the CIA surprised investigators by giving them data indicating the agency was told as early as 1984 that zirconium sold by Teledyne to Cardoen was likely to be used in cluster bombs for Iraq, according to the sources.

But after weeks of examining classified papers, prosecutors and Justice Department officials have told defense lawyers that the information does not indicate that there was a U.S. policy to assist Iraq during the 1980s.

Defense attorneys have objected strenuously. They claim that the sales were approved by the U.S. government as part of its assistance to Iraq under former presidents Ronald Reagan and George Bush.

Attempts to reach the U.S. attorney’s office in Miami, which is handling the case, were unsuccessful on Sunday. In the past, prosecutors and the Justice Department have refused to comment on the investigation.

Teledyne and Cardoen have denied any wrongdoing. A Teledyne spokesman said earlier that the sales to Cardoen were licensed by the Commerce Department and that the company had no knowledge the material would be used for military purposes.

Cardoen told The Times in an interview earlier that he operated with the full knowledge of U.S. officials.

The Miami case is similar to the highly publicized trial in London late last year of three former executives of Matrix Churchill Ltd., a British machine tool company.

The company sold machinery to Iraq in the 1980s that was used to manufacture components for artillery shells and fuses. Some of the machinery was sold to Cardoen for an artillery-fuse manufacturing plant outside Baghdad.

However, a major scandal erupted when the businessmen were acquitted after disclosures that the British government knew the machinery was bound for military factories and approved the sales anyway.

A former high-ranking official admitted that Matrix Churchill had been encouraged to disguise the military purposes of the machinery.

An independent judicial inquiry into Britain’s quiet assistance to Iraq in the 1980s opened earlier this month in London.

Zirconium, the material at the heart the U.S. case, has hundreds of uses, ranging from deodorant to explosives. Between 1984 and 1988, Teledyne Wah Chang sold 100 tons of zirconium to companies controlled by Cardoen. The U.S. export applications said the material was to be used in mining explosives.

But prosecutors contend that Cardoen used the material to produce $200 million worth of cluster bombs for Iraq. They argue that Teledyne knew of the military uses all along and violated export laws.

Teledyne’s lawyers contend that the company was unaware of the military uses of the zirconium and that it was not suitable for cluster bombs.

They have also argued that federal officials approved the sales despite government knowledge that Cardoen was supplying cluster bombs and other arms to Iraq.

Earlier this year, the defense seemed to get a break. Prosecutors and investigators handling the case in Miami received classified material from the CIA showing that the agency had been told in 1984 that the zirconium was probably being used for cluster bombs destined for Iraq.

Prosecutors initially indicated the material was so potent they might be forced to drop the investigation. However, in recent days, they decided to proceed and a decision is expected before June 1.

Prosecutors have told defense lawyers that they have concluded the intelligence documents were isolated warnings that did not raise the proper level of concern among federal officials. The prosecutors also have contended that there was no official American policy of allowing the sale to Iraq of technology with military uses.